Reaching ESG Goals in the Procurement Function

Every business is ultimately intertwined with the communities it serves. Procurement functions are no different. There is no action a procurement team can take that does not have a direct or indirect impact on the world around it.

As such, procurement teams must incorporate their organization’s environmental, social, and governance (ESG) policies into their day-to-day operations. Most procurement leaders are now familiar with the concept of Sustainable Procurement. This business prerogative will be key to building trust and sustainability moving forward, and it must extend from the procurement department to its suppliers and vendors.

Here's how procurement leaders are working to establish ESG in the function and where there is room for improvement.

Aligning Procurement KPIs with Enterprise ESG

According to a recent ProcureCon study of CPOs, most procurement departments link their internal KPIs to enterprise ESG goals.

Specifically, 55% of the respondents to the study said their procurement KPIs are linked to their enterprise’s ESG goals. Likely, these organizations have incorporated company-wide ESG objectives into their operations and extended them to the KPIs they use to manage vendors and suppliers.

This step is crucial, as a company can’t truly gauge its ESG success based on its internal footprint. Ultimately, it must analyze how its capital moves downstream to other organizations, then examine how those organizations’ practices impact the environment and society as a whole.

Nonetheless, about one-third of the respondents to the study said they hadn’t aligned their procurement KPIs with the enterprise’s ESG goals.

The Challenge of Procurement Complexity

Some of the challenges, in this case, lie with the complexity associated with procurement and ESG. More specifically, one of procurement’s main roles in the company’s ESG initiative is procuring products, and those products can weigh heavily on both direct and indirect spend.

ESG products are often categorized under indirect spend, and procurement teams tend to be staffed with individuals who mostly manage direct spend or strategic sourcing. ESG products and services can also be broken down into two main categories: hard ESG and soft ESG.

Hard ESG refers to specialized ESG materials/products such as solar panels or non-GMO seeds. Soft ESG refers to standard materials/products that meet ESG requirements such as organic cotton or environmentally friendly cleaners.

A procurement team is typically composed of direct spend, indirect spend, and strategic sourcing individuals, all with their own unique knowledge sets. Each subgroup may have different goals for ESG activities and therefore ESG initiatives can be fragmented.

The Challenge of Resource Allocation

Challenges associated with ESG could also be caused by a lack of internal resources.

For example, although most respondents to the CPO study said they have the people (53%) and technology (53%) to achieve their ESG goals, significant portions of the respondents do not. Specifically, 44% need more people and technology resources, while 49% need more process and policy resources.

ESG is a project for the entire organization. CPOs must be able to approach other decision makers with their needs, especially if the procurement department and its supply chain have a significant environmental footprint.

ESG doesn’t always take precedence at some companies because it isn’t seen as a topic that’s directly related to revenue generation. However, evidence suggests otherwise. Numerous reports have indicated that strong ESG policies correlate with positive returns for the business.

Learn More About ESG and Procurement

CPOs who can demonstrate the value of ESG investments will be more likely to secure resources for the procurement department. Demonstrating ROI, operational improvements, or even brand opportunities could be key to these negotiations.

To learn more, download the 2022 ProcureCon CPO study today.