As awareness of corporate responsibility grows, businesses are increasingly expected to address and manage their broader societal and environmental impacts. This evolution has seen a shift from the concept of Corporate Social Responsibility (CSR), which often focused on philanthropic activities, to the more comprehensive Environmental, Social, and Governance (ESG) framework. ESG criteria provide a structured approach to assessing a company’s overall sustainability and ethical impact. Consequently, ESG considerations have become integral to business operations, particularly in areas such as procurement and tendering processes, where they now play a crucial role in decision-making and risk assessment
What is ESG exactly?
Environmental (E): This refers to a company’s impact on the natural environment. Key considerations include energy consumption, carbon footprint, waste management, emissions, water usage, renewable energy adoption and environmental conservation efforts. With the shift to critical minerals, expect more emphasis on decarbonisation initiatives.
Social (S): The social component revolves around a company’s relationships with its employees, suppliers, customers, and the communities in which it operates. It includes labour practices, human rights, community engagement, and diversity and inclusiveness. The emphasis on ”S” is growing – particularly when it comes to delivering social value.
Governance (G): Governance involves internal systems, controls, and policies that govern how a company is managed. This includes board diversity, executive pay, shareholder rights, cybersecurity measures, and transparency in business operations. ESG expertise is likely to become a new skill in demand for board appointments.
Some key trends in procurement
Integration into scoring and evaluation
ESG factors are increasingly being incorporated as weighted criteria in supplier evaluation and scoring models. Rather than treating ESG as a separate consideration, organisations are integrating it directly into their core supplier assessment frameworks.
– Weighted scoring: ESG criteria are assigned specific weights alongside traditional factors like cost and quality. This ensures ESG performance directly impacts supplier selection.
– Minimum thresholds: Some companies are setting minimum ESG score requirements that suppliers must meet to even be considered.
Supply chain-wide approach
ESG considerations are being extended beyond just direct suppliers.
– Subcontractor standards: Suppliers are increasingly required to ensure their own subcontractors meet minimum ESG standards.
– Visibility requirements: RFPs may demand transparency into multiple tiers of the supply chain to assess ESG risks.
Dynamic and flexible contracting
Given the rapidly evolving ESG landscape, procurement teams are building more flexibility into contracts.
– Change management procedures: Allowing for updates to ESG requirements over time.
– Continuous improvement clauses: Requiring suppliers to demonstrate ongoing ESG progress.
Data-driven ESG assessment
RFPs are requesting more granular ESG data from suppliers.
– Specific KPIs: Clearly defined, measurable ESG metrics that suppliers must report on.
– Third-party verification: Requirements for independent audits or certifications of ESG claims.
Collaborative approach
Leading organisations are moving beyond simply imposing ESG requirements to fostering partnerships.
– Supplier development: RFPs may include provisions for joint ESG improvement initiatives.
– Incentive structures: Offering benefits or preferential terms for suppliers who exceed ESG targets.
ESG is now about action, not just commitment.
Let’s explore social value as an example. Social value refers to the broader positive impact that an organisation’s actions and policies have on society, the environment, and the economy. It goes beyond traditional financial metrics to consider the holistic benefits created for various stakeholders.
Some example initiatives a company might include:
Local employment
A company prioritises hiring local workers for its projects. By employing 100 people from the local community, they contribute to reducing unemployment and boosting the local economy.
Skills development
The company also establishes an apprenticeship program, taking on 10 apprentices for 6 months. This not only provides valuable work experience but also generates a quantifiable social value of approximately $234,000 (10 x $23,400).
Environmental initiatives
The company implements a waste reduction program, successfully reducing 100 tonnes of waste through reuse of materials. This effort creates a social value of £9,670 (100 x £967).
Community engagement
Employees volunteer 100 hours of skilled support (e.g financial or legal advice) to local charities. This generates a social value of $20,000 (100 x $200).
Supply chain
The company commits to sourcing 30% of its materials from local small and medium-sized enterprises (SMEs), supporting regional economic growth.
Measuring and reporting
To quantify and communicate these efforts:
1. The company uses a social value framework like the TOMs (Themes, Outcomes, Measures) which was developed in the UK to assign monetary values to their initiatives.
2. They create a comprehensive social value report detailing their goals, actions, and outcomes.
3. The report includes both quantitative data (e.g., number of local hires, waste reduction figures) and qualitative information (e.g., case studies of apprentices’ experiences).
4. They set specific, measurable targets for future years, such as increasing local procurement by 5% or doubling volunteer hours.
By implementing and reporting on these initiatives, the company demonstrates its commitment to creating positive social impact beyond its core business operations. This approach can enhance its reputation, improve stakeholder relationships, and potentially give it an edge in bidding for contracts, especially in the public sector where social value considerations are often mandated.
Download the social value return on investment tool.
Preparing for ESG – update your content libraries
To adequately prepare for ESG-focused tenders, companies should conduct audits to determine strengths and gaps, develop case studies and document their journey; and create repositories of certifications, policies, and reports. Keeping these resources updated to reflect ongoing practices and new achievements ensures readiness for tender questions and exhibits a genuine commitment to sustainable business practices.
By embedding ESG into operations and proactively reporting on progress, businesses can enhance their standing with procurement teams and set new standards for responsible corporate conduct. Consequently, this reflects the evolving role of business in a global marketplace that increasingly values ethical and transparent operations right across the supply chain.
Impacts and benefits
Companies prioritising ESG are rewarded with enhanced brand reputation, increased customer loyalty, access to capital, and reduced operational risks. Responsible business practices that extend beyond mere commitments deliver tangible results, often leading to improved financial performance and a stronger market position. The integration of ESG into corporate culture and operations helps companies remain adaptable to global challenges like climate change and social equity issues.
Small and medium-sized enterprises (SMEs) also stand to benefit from embracing ESG principles. By conducting a double materiality assessment, SMEs can evaluate both how they’re impacted by, and how they impact, environmental and social factors. This comprehensive approach helps identify significant ESG issues that should be prioritised.
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