9 minute read 6 Sep 2021
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How to unlock the benefits of a sustainable sourcing strategy

Authors
Gustav Mauer

Partner, UK&I Consumer Products Supply Chain Leader, Ernst & Young LLP

Helping organisations transform their supply chains to optimise the efficiency of commercial operations and create value. Digital enthusiast. Lifelong fan of F1.

Morag Leopoldt

Manager, Business Consulting and UK Supply Chain Sustainability Lead, Ernst & Young LLP

Helping organisations understand the business value in sustainability, with a specific focus on sustainable sourcing. German and British national with firm ties to her family roots in Scotland.

9 minute read 6 Sep 2021

The business case for a value-led sustainable sourcing is compelling. This article details six priorities for CPOs to bear in mind when developing their sourcing strategy.

In brief:
  • The intensifying pressure on organisations to include sustainability in their sourcing strategies has brought them to a critical point.
  • It is no longer a case of ‘if’, but ‘how quickly’. Competitors are already doing it. Above all, regulators and consumers worldwide are demanding it.
  • It’s becoming increasingly clear that chief procurement officers (CPOs) or equivalent are best positioned to lead this transition to sustainable sourcing.

The business case for embedding value-led sustainable practices into your organisation’s sourcing and procurement processes has never been more compelling. In the face of this perfect storm, it’s no surprise that sustainability and environmental, social and governance (ESG) issues are likely to top the corporate agenda for the foreseeable future.

We are fast approaching a key inflection point where supply chain sustainability becomes a powerful competitive differentiator for companies that acknowledge their consumers’ aspirations. Companies can achieve this by fully embracing sustainability in the broadest sense of the term; connecting with customers by offering truly sustainable products and services; and backing up their rhetoric with innovative investments that deliver top and bottom line benefits. As Jim Abery, Commercial & Procurement Partner, EY, says: “It is no longer a question of if we reach this inflection point. It’s now just a question of velocity.”

Delivering benefits, creating value

The good news is that integrating value-led sustainability into your procurement processes can open up a rich pipeline of opportunities for your organisation. Indeed, many businesses that have embraced the circular economy are already reaping the benefits of lower costs and increased goodwill from consumers, regulators and investors.

In addition, a comprehensive sustainable sourcing strategy can make a significant contribution to improving an organisation’s ESG rating. Potentially, this can improve access to capital, sharpen competitive advantage, increase shareholder and stakeholder value while attracting future talent.

Overall, the strategic business case for sustainability is clear and, ultimately, investing in a sustainable supply chain will create and protect long-term value for an organisation and its shareholders.

Why is sustainability such a headline topic?

A short answer to this question is: because regulators expect it. Accordingly, our overview of the factors that are driving sustainability up the corporate agenda starts with decisive shifts in the global regulatory landscape.

For UK-based organisations, the Government’s announcement that it intends to make Task Force on Climate-related Financial Disclosures (TCFD)1- aligned disclosures mandatory across the economy by 2025, with a significant proportion of mandatory requirements in place by 2023, is arguably the most significant regulatory development for some time.

TCFD is a reporting framework designed to give investors, lenders, insurance underwriters and others access to the financial information they need to assess and price an organisation’s climate-related risks and opportunities. In other words, UK companies with more than 500 employees that are traded on a regulated market will have to come clean about the environmental risks they face and their long-term strategies for managing them.

In the European Union (EU) plans are in hand to put in place mandatory supply chain due diligence measures that cover human rights and the environment by the end of this year. Other EU regulations that could be in place by the end of 2023 include the proposed Carbon Border Adjustment Mechanism (CBAM). Meanwhile, the EU’s Sustainable Finance Disclosures Regulation (SFDR) went live in March this year.

In some countries, public expectations are shifting towards more holistic forms of reporting, such as integrated reporting, making it important for companies to provide a fuller picture on how they create value.

Beyond the small print and possible implications of these tightening regulations lies an overarching principle: governments worldwide will continue to actively push the sustainability agenda through the application of new rules. Clearly, businesses that can get ahead of emerging regulations and demonstrate greater transparency will avoid last-minute scrambling and fines as the new rules are fully enforced. They are also more likely to attract private investment.

Consumers want it

Consumer and market preferences are shifting at pace2. Sustainability has risen on the consumer agenda as a key buying criterion. According to our Future Consumer Index3, 84%4 of consumers now consider sustainability important when making purchase decisions; 34%5 of consumers plan on increasing their level or exclusively purchasing sustainable products in the future; while 54%6 of consumers have reduced or stopped buying from organisations they believe have acted inappropriately on environmental or social issues.

At the same time, consumers are demanding external verification that the sustainability promises brands make are genuine. One in five consumers actively validate the claims made on the label or in advertising while 60% of consumers have been put off from buying products because they sense deceptive marketing — so-called greenwashing. As Ray MacSweeney, Associate Partner, Consumer and Retail, EY Parthenon, says: “Procurement teams need to invest in transparency and traceability systems that back-up their brand promise and build trust and confidence among consumers.” Here, technology is likely to play an important role in giving people access to the sustainability information they are looking for.

Concerns about climate change are also helping to reshape consumer behaviour. Gen Zs — defined as people between 10 and 24 years old — already comprise 1.8 billion people and account for 24% of the global population. Climate change tops their list of the most important global challenges, and they are also concerned about a range of other socio-economic sustainability issues. So, as they mature, they will expect the businesses they buy from to have sustainable strategies in place. Gen Zs are employees as well as consumers. As such, they are more likely to seek employers who share their commitment to the principles of global sustainability.

While Gen Zs are an important constituency, there are others — which makes it essential to define exactly what sustainability means to your target customers. As Ray MacSweeney comments: “Sustainability means different things to different people in different age groups, markets and channels. In Brazil, for example, consumers are much more likely to put a premium on initiatives that support ecosystem diversity. For Indian consumers, the key issue is water pollution while Chinese consumers are most concerned about air pollution. In the UK, there is a strong focus on plastics.”

While older consumers associate sustainability with the environment, younger consumers have a more holistic view of sustainability that includes human rights and social development aspects. Clearly, it is essential to take these differences into account when developing your sustainable sourcing strategy. A sustainability strategy can only succeed if it places the consumer at its heart.

Competitors are already doing it

As the global economy comes to terms with the downturn triggered by COVID-19, it would be unwise to ignore these changing consumer demands. If your business doesn’t listen to them, then your competitors certainly will. A growing number of companies are taking bold steps to reinforce trust in their brands by engaging more closely with consumers on the sustainability issues that concern them most. A notable example here is a leading British retailer’s ambitious plan to help 10 million live happier, healthier lives and convert the retailer into a zero-waste business7.

Sustainability creates resilience

One of the most important lessons that the pandemic has taught us is the fundamental importance of supply chain resilience. Last year’s wildfires in California and Australia, the world’s 7th and 11th largest economies respectively, indicate the potentially massive fall-out from a worldwide environmental crisis. Some businesses were caught out by supply chain disruptions without even knowing they had connections to businesses operating in California or Australia.

Sustainable supply chains are more resilient supply chains, which can help offset these risks. They require improved data collection which can enhance risk sensing. They also call for closer partnerships with suppliers, which enable collaborative strategies.

Sustainable supply chains are also driving towards investing in local suppliers, further improving resilience and minimising the threat of disruption while creating shared value in the community and boosting the local economy. Once again, public pressure is driving the community-first trend. For example: the COVID-19 crisis has increased demand for locally sourced products8, with 57% of UK consumers more likely to make future purchases from companies that actively support their communities.

The challenge: converting commitments into progress

A number of organisations have taken positive steps to respond to these pressures by publishing lists of commitments towards implementing sustainable sourcing strategies. The problem is that these organisations have been much slower than expected at converting their commitments into measurable progress. Regulators, investors, NGOs and consumers are demanding greater transparency from organisations when it comes to assessing the business impact and resilience of their supply chains. In practice, however, too many organisations are stuck in the dark ages when it comes to applying the principles of sustainability to this area of their business. 

In practice, too many organisations are stuck in the dark ages when it comes to applying the principles of sustainability to this area of their business.
Morag Leopoldt
Manager, Business Consulting and UK Supply Chain Sustainability Lead, Ernst & Young LLP

It seems that this problem is down to a mix of causes including absence of relevant operational metrics, as well as a limited understanding of how much value sustainability can really bring. The challenge is brought to life by, for example, the prevalence of short-term procurement contracts that do little to encourage suppliers to invest capital into developing more sustainable solutions.

But things are changing for the better. Throughout the COVID-19 pandemic, procurement departments have demonstrated significant flexibility and agility when adapting to constantly shifting circumstances. In addition, an increasing number of organisations are embedding sustainability into their recovery strategies. Take a global homeware retailer for example, which is investing an additional €600mn into its green recovery programmes, bringing its total investment to €3.8bn9 while leveraging sustainable sourcing to help fight climate change.

Six priorities for CPOs

The question is: how do we create the momentum? For most supply chains, a large number of sustainability drivers, if not most, now sit outside their organisations. The vast majority of the remainder sits with their supply base. In an increasingly turbulent, ever-greening world, CPOs are emerging as the steady-handed change agents that every organisation needs. With the support of their C-suite executives, we recommend that they focus on the following six sustainability priorities:

  • Collaborate with your marketing team to fully understand your customers’ sustainability priorities, then build a customer-centric supply chain strategy around them.
  • Prioritise your suppliers and refocus resources towards accelerating your joint sustainability strategies.
  • Define the supply chain data and technology model you need to prove your sustainability credentials to your consumers, investors and regulators.
  • Invest in awareness, learning and capability is essential to implementing a truly effective, value-led sustainable sourcing strategy for your organisation.
  • Encourage suppliers to invest capital and innovation focus on building sustainable solutions by developing deeper relationships with them and offering them longer contract lifecycles.
  • Leverage your personal platform to embed your sustainability messages inside and outside your organisation.

Summary

Organisations are under intensifying pressure to improve their environmental, social, and governance (ESG) performance. Consumers expect it. Implementing a value-led sustainable sourcing strategy is an important step towards responding to these pressures. It’s becoming increasingly clear that Chief Procurement Officers, or equivalent, are best positioned to lead the transition to a world where sustainable sourcing is the norm. Ultimately, investing in a value-led sustainable supply chain will protect and create value for an organisation while helping it to meet its ESG targets.

About this article

Authors
Gustav Mauer

Partner, UK&I Consumer Products Supply Chain Leader, Ernst & Young LLP

Helping organisations transform their supply chains to optimise the efficiency of commercial operations and create value. Digital enthusiast. Lifelong fan of F1.

Morag Leopoldt

Manager, Business Consulting and UK Supply Chain Sustainability Lead, Ernst & Young LLP

Helping organisations understand the business value in sustainability, with a specific focus on sustainable sourcing. German and British national with firm ties to her family roots in Scotland.