Today’s stakeholders and consumers care more than ever before about climate change and sustainability. In fact, 63% of consumers across 17 countries say climate change is “very serious,” and 57% are willing to pay more for products and brands that positively impact both society and the environment.1
It’s well documented that as much as 80% of a “buying” organization’s impact on air, land, water, biodiversity, and geological resources is not from its own internal operations but from those of its supply chain.2 (We define buying organizations as typically large multinationals that serve as “Tier 0” in the value chain.) However, most of these organizations are struggling just to assess their top-tier (Tier 1) suppliers’ activity.
The fifth edition of the “EcoVadis Business Sustainability Risk and Performance Index” gives a view on sustainability performance in global supply chains—including this multi-tier challenge.3 The Index is based on data derived from over 72,000 ratings conducted by EcoVadis on more than 46,000 companies between 2016–2020. EcoVadis scores organizations on 21 sustainability criteria across four themes: environment, labor and human rights, ethics, and sustainable procurement (SP). Sustainable procurement is defined as the adoption and integration of environmental and ethical principles into the procurement process. The SP theme is critical in determining a rated company’s overall score and is fundamental to unlocking the potential of a supply chain sustainability program. The scores for each of the themes range from zero to 100, with a score below 25 representing a high risk of environmental, human rights, or ethical violations; 25–44 representing medium risk; above 45 representing good performance; and above 64 is advanced.
The report reveals that there is generally steady progress by Tier 1 (and a few Tier 2) suppliers on their own environmental and social performance. However, scores in the sustainable procurement theme (which measures how well suppliers are monitoring their own supply base) for all tiers are either stagnant or declining, varying across regions and industries. This is concerning, as it means we are not making progress in monitoring a significant portion of the social and environmental impacts “upstream” in Tiers 2, 3, 4, and beyond.
Although sustainable procurement scores are stagnant or declining, executives continue to recognize the importance and emphasized need of sustainable procurement practices, particularly as they face global supply chain disruptions caused by the COVID-19 pandemic and an increased regulatory focus on supply chain due diligence. For example, the European Commission has proposed a new law that would hold large companies operating in the European Union accountable for environmental violations or human rights abuses committed by their suppliers. Under the proposed law, victims could sue companies for damages for violations done by their suppliers.
In order to get a fuller picture on their value chain sustainability performance and meet rising stakeholder and consumer expectations, companies must expand their visibility into deeper tiers of the supply base and measure what suppliers are doing across their own supply base. Cascading sustainable practices up the supply chain is key to unlocking the full potential of any sustainability program.
Sustainable procurement snapshot
In general, the Index report uncovers many positive findings. Most encouraging is that the overall sustainability performance of rated companies reached an average of 47.7 points in 2020 (up from 46.6 in 2019). This means global sustainability performance continues to improve and is a clear priority for businesses around the world.
However, there is room for improvement under the SP theme. While some individual regions display a stable performance in the SP theme, the global average score is declining year-over-year and falling significantly behind all the other categories. In 2020, the global SP average score was 37.6, compared to 38.7 in 2016.
The reasons behind these scores are complex, as there are a multitude of variables that can influence them. One big reason why the SP theme falls behind other categories is that there has been less awareness and maturity around sustainable procurement; it is just beginning to gain momentum. This is also why we see the SP score dropping in 2020 from 2016. As more companies begin their sustainable procurement journeys, there are more “first-time ratings.” These first-time ratings typically have lower scores because the companies are just starting their SP programs, resulting in a lower average score than in recent years.
Performance varies when comparing the SP scores in different regions as well. Europe is the clear leader with an SP score of 42.0 in 2020 (a relatively stable, five-year score development). In fact, the continent’s SP performance has held steady or improved for the European Union (EU)’s four largest economies of Germany, France, Italy, and Spain.
The most northern EU member states (including Sweden, Finland, and Denmark) have maintained their remarkably strong and consistent level of scoring in the SP theme. This is largely due to a longstanding social and political commitment to climate action that is shared widely across the Nordic region.
Overall North America also shows improvement, gaining ground on Europe in terms of global sustainability performance. While Europe is home to nearly half of the world’s most sustainable publicly listed companies,4 North American organizations are reducing their performance gap at an increasingly rapid pace. With KPMG reporting that over 90% of the top 100 companies by revenue in North America are engaged in sustainability reporting,5 the region has definitely become one to watch in terms of corporate sustainability leadership.
But when it comes to the SP score, North America has been on a steady decline since 2017. Other regions continue to struggle in SP too. For example, Portugal showed a decline in its 2020 SP score, as did several areas in certain Central and Eastern European states that joined the EU in 2004 or later. Companies in the United Kingdom have also shown a steady decline in their SP scores for the last three years, which is largely due to the ongoing regulatory and political fallout from Brexit. All remaining regions also experienced SP score drops over the past five years, most prominently in the Greater China region.
Greater China scored 28.8 in 2020, down from 33.3 in 2016. Recent events—such as the ongoing energy crisis and pandemic-related travel restrictions—highlight the challenges companies face when monitoring sustainability risks in Chinese supply chains. Chinese companies must develop their sustainable procurement management systems in order to minimize upstream impact, both in their own and in their customers’ supply chains.
Sustainable procurement performance also varies greatly among industries. The last five years’ worth of SP performance data shows a downward trend across industries. This trend was worsened by the COVID-19 pandemic.
Heavy manufacturing and construction are the only two outliers among the ten industries assessed. These industries were able to maintain or improve their SP performance from 2019 to 2020. While these industries saw improvement, they fell shy of their best scores to date. The construction industry’s 2020 score (38.0) remains lower than its 2016 score of 39.8, and heavy manufacturing’s 2020 score (38.1) is slightly lower than its 2017 and 2018 scores of 38.3.
The steady decline in SP performance is largely due to COVID-19 drastically disrupting the global supply chain and exposing more risks than in previous years. For example, the number of child laborers increased in 2020 for the first time in 20 years.6 This is an example of the types of activities that companies need to monitor within their supply chain. If a company works with a supplier that uses forced child labor and the company isn’t aware, then they aren’t taking the proper precautions and due diligence to make a positive impact for both people and the planet.
The SP performance results suggest that a majority of businesses are unprepared to meet upcoming supply chain due diligence regulations and are potentially exposed to significant risk, especially in their relationships with suppliers further up the value chain.
Action items
When looking at the data from a holistic point-of-view, sustainability performance around the globe is improving. But there is still exponential room for growth, especially across the SP theme. The question at hand: What should business leaders consider when looking to improve their efforts and make a positive impact on people and the planet?
Recognizing that adverse social and environmental impacts are embedded overwhelmingly in the upstream value chain, business leaders must act to integrate sustainability into the purchasing criteria and relationships at every tier of the supply chain. This need to act becomes even more important as the EU prepares to implement mandatory due diligence regulations.
One action business executives can take right now is risk mapping, which is the process of mapping out an entire supply base for ethical, social, and environmental risks. There are tools available to create predictive profiles of suppliers, built upon intrinsic risk data about industry category and country of operation for each supplier (for example, based on comprehensive country- and category-risk profiles). Risk mapping is essential to gaining visibility into the intrinsic risks of suppliers, and it facilitates the effective prioritization of further due diligence assessment and monitoring activities.
Risk mapping is an important component of a companies’ obligations under the German Supply Chain Due Diligence Act, and it is also expected to be part of the EU’s forthcoming mandatory supply chain due diligence requirements. Companies with headquarters or subsidiaries in Europe will likely need to engage in formal supply chain due diligence steps and risk management at a much higher rate, such as engaging with individual suppliers through performance assessments. Non-European companies may also be subject to increased scrutiny over their own sustainable procurement practices if they maintain trade relationships with business partners subject to such legislation.
As a result of this legislation, companies should become more familiar with their supply chain and proactively implement actions to ensure sustainability considerations are integrated into the procurement function. Due to the risks and regulations surrounding sustainability, companies need to take a more holistic approach to supplier engagements and implement supplier assessment programs that include sustainable procurement as a criterion. The supplier selection process should be about more than just picking the most cost-efficient option. It should also consider whether potential suppliers align with the core values of the company, including but not limited to human rights and sustainability.
This means companies should measure and benchmark performance on environmental, social, and corporate governance (ESG) issues, including everything from worker safety to carbon emissions, and then provide guidance on tactics for improvement. If executives want to maximize their sustainability impact and scale results meaningfully, then they should work **ital{with} suppliers and incentivize them to integrate sustainability considerations into the procurement functions, rather than just expect them to do it themselves. Companies need to implement actions intended to monitor and improve sustainability performance. This could include annual performance evaluations that identify areas for improvement that the company can help the supplier with. It could also include mapping risk exposure ahead of time. In fact, regular supplier assessments on environmental or social practices have become more common over the past few years. In 2016, only 24% of EcoVadis rated companies were issuing regular supplier assessments, but as of 2020, 33% of companies were doing so.
Regular assessments are not the only key SP actions making their way into the mainstream of corporate sustainability tools. In 2016, only 14% of rated companies had a supplier corporate social responsibility (CSR) code of conduct in place; as of 2020, 26% of companies have codes of conduct established. There has also been a steady increase in integration of social or environmental clauses in supply contracts, CSR risk analysis prior to supply assessments or audits, training of buyers on social and environmental issues within the supply chain, and on-site audits of suppliers on environmental or social issues.
As sustainable procurement increasingly becomes the norm for buying companies—fueled by greater ambition around climate action and an evolving regulatory landscape—suppliers will be called upon to implement comprehensive sustainability practices and provide greater supply chain transparency. As uncertainty lingers in the global supply chain, the time for planning and setting targets has passed. Now is the time for companies to focus on real and tangible actions that drive impact.
Notes:
1. Tove Malmqvist, “More consumers are serious about climate change. Are business and government listening?” GreenBiz (Jan.24, 2022): https://www.greenbiz.com/article/more-consumers-are-serious-about-climate-change-are-business-and-government-listening
2. Anne-Titia Bové and Steven Swartz, “Starting at the source: Sustainability in supply chains,” McKinsey Sustainability (Nov. 11, 2016): https://www.mckinsey.com/business-functions/sustainability/our-insights/starting-at-the-source-sustainability-in-supply-chains
3. Business Sustainability Risk and Performance Index, fifth edition, EcoVadis, 2021: https://resources.ecovadis.com/sustainability-impact/business-sustainability-risk-performance-index-2021
4. Samantha Todd, “Who Are The 100 Most Sustainable Companies Of 2020?” Forbes (Jan. 21, 2020): https://www.forbes.com/sites/samanthatodd/2020/01/21/who-are-the-100-most-sustainable-companies-of-2020
5. “The Time Has Come: The KPMG Survey of Sustainability Reporting 2020,” KPMG IMPACT report (December 2020): https://assets.kpmg/content/dam/kpmg/be/pdf/2020/12/The_Time_Has_Come_KPMG_Survey_of_Sustainability_Reporting_2020.pdf
6. “The number of child labourers has increased for the first time in 20 years,” The Economist (Aug. 23, 2021): https://www.economist.com/graphic-detail/2021/08/23/the-number-of-child-labourers-has-increased-for-the-first-time-in-20-years
