A procurement leader’s guide to successfully implementing sustainable procurement and driving value.
Implementing sustainable procurement is no longer just a nice-to-have; it's a must-have.
With consumers and governments increasingly demanding businesses to be more environmentally and socially responsible, sustainability has moved from the fringe to the mainstream.
As a CPO, CFO, or business leader, you know that it's not enough to simply say you care about sustainability—you need to show your customers and stakeholders that you're taking concrete steps toward making the world a better place.
But where do you start? Is there an easy, step-by-step blueprint you can follow to take that first step? What will you lose if you miss or lag on this trend? What scale of change is required to implement it in your organization? And above all, what payoffs can you expect when you embrace it?
Let's take a look at all this and more as our CEO and Co-Founder, Sigbjørn Nome, answers your toughest sustainable-procurement questions so that you can stop talking and start delivering real, sustainable changes within your organization.
What Is Sustainable Procurement, and What It Means for CPOs?
Sustainable procurement means buying goods and services in ways that benefit the organization, society, and economy while minimizing environmental damage. The goal is to reduce the negative impact of your business on people, places, and the planet by considering social and environmental issues throughout the value chain.
When we talk about sustainable procurement, we're talking about a key determiner for organizations to successfully achieve their ESG objectives. CPOs and procurement leaders need to take concerted actions to drive the sustainable transition while staying wary of operational and reputational. They need to assess their supply chains and execute new procurement strategies while driving deeper supplier collaborations and clear measures and targets.
But what does it mean for your business? What payoffs will you get if you bring sustainability to your procurement strategy? And what will you lose if you fail to do so?
What Is the ESG Framework?
An ESG framework is a set of guidelines that helps companies manage their ESG or environmental, social, and governance commitments.
The framework you choose will be based on your company's needs; not all companies have the same goals or values when it comes to sustainability, due to the nature of their business. For example, for some companies it’s important to reduce their carbon footprint and for that they need a framework that focuses primarily on carbon emissions reduction, while for others, it’s more essential to focus on social issues like equality and diversity.
There are many different types of ESG frameworks available for use today, created by various organizations, including NGOs, stock exchanges, think tanks, and governments.
Elements of ESG:
- E - or the environmental criteria, which includes your company's energy consumption, carbon emissions, waste discharge, resource requirements, and the resulting ecological impacts.
- S - stands for social, and this criterion addresses your company's relationships with people and institutions in the communities where you do business.
- G - is for governance, which is your company's system of practices, controls, and procedures governing itself, making effective decisions, complying with the law, and meeting the needs of external stakeholders.
What Are the Benefits of Building a Sustainable Supply Chain Foundation?
Let's learn more about how as a CPO or procurement or business leader, you can draw value from sustainable procurement.
With an increased awareness of sustainability, finding a way to measure the benefits of sustainability efforts is on top of Procurement Officers' agendas.
The main benefits that are currently being measured are cost reduction, minimized supplier risk, and revenue growth.
Cost reduction can be measured by reducing carbon footprint, waste management, and transportation costs. Minimized supplier risk is often measured by reduced performance failure rates, quality issues, and customer complaints. Revenue growth can be achieved by increasing sales and customer loyalty through improved brand perception.
Even though there are boundaries in putting a monetary value behind every single sustainability benefit, more companies are seeking to roll out financial proof.
Companies want to address environmental and social issues in a way that creates value, bring immediate benefits, and gives them the momentum to aim for long-term success.
From financial or value perspective, following are the three drivers of green procurement:
- risk reduction, and
- return on capital.
The Drivers and Business Cases for Sustainable Procurement
Sustainable procurement is a policy that seeks to promote the use of environmentally preferable products (Eco-Products) by public authorities, private companies, and other organizations. It is often referred to as green procurement or green buying, and it aims to reduce the environmental impact of products used by organizations in their day-to-day operations.
The following are the main drivers of a policy of sustainable procurement:
1. Risk reduction
Sustainability and risk reduction go hand in hand. When you focus on sustainable procurement practices, you reduce risks from poorly managed supply chains; you identify exploitative and unethical business practices by communicating with your suppliers and subcontractors. This will reduce exposure to reputational, legal, and supply risks.
2. Cost reduction
Sustainable procurement helps companies achieve cost reduction across the spend through reduced energy costs, reduced consumption, and reduced social and environmental compliance costs. Furthermore, by analyzing your existing purchasing and highlighting inefficiencies and waste, sustainable procurement helps you identify saving opportunities.
3. Revenue growth
Over the last number of years, consumer awareness of the environmental impact of the goods and services they are purchasing has continued to grow. But how does this figure look at a macroeconomic level?
As per The World Economic Forum analysis, this trend could add up to $44 trillion to the global economy—a number more than half of the global GDP! Many companies leverage this demand as a growth engine.
Take Siemens, for example. They identified helping customers reduce their carbon impact as a priority and created a portfolio of green products and services, including energy efficiency, renewable energy, and environmental technology. In 2013, these generated revenues of €32.3 billion and saved 377 million metric tons of carbon emissions.
More and more governments are putting restrictions on the environmental performance of products. Take the new Norwegian Transparency law or Åpenhetsloven and the new Supply Chain Act in Germany, both of which aim to ensure that companies provide information about their environmental performance in their supply chains. Likewise, the European Union has also issued a directive that requires member states to reduce emissions from industrial activities.
These laws are making companies to be transparent about their environmental and social impacts, which means they must disclose information about their supply chain—which makes their products and how they are produced—as well as their environmental impact. These regulations also levy fines against companies who claim a certain environmental or social attribute about their suppliers but fail to meet those standards during manufacturing or mislead with vague 'green' claims.
Here's where it gets interesting: these regulations aren't just for big multinationals like Apple and Nike but also for small businesses—even startups—that make up a significant part of the global economy. The Norwegian law applies to all companies with more than 50 employees along with either of these criterions: revenue above 70 million NOK or balance above 35 million NOK. On the other hand, the Germany's Supply Chain Act applies to any company with more than 3000 employees; from 2024, the scope will be extended to companies with 1,000 employees or more.
What Are the Most Common Sustainable Procurement Use Cases?
Let's dig into two common use cases within sustainable procurement: Scope-3 CO2 emissions and social risk in the supply chain.
- Scope 3 CO2 emissions reporting
When you think of carbon emissions, you probably think of big-time offenders like the automotive and fossil fuel industries. But did you know that an increasing number of large companies are now taking a hard look at their own scope-3 carbon footprint?
Scope 3 CO2 emissions are a big issue for companies. The term "Scope 3" refers to emissions that occur outside of a company's owned or leased facilities—in other words, those that occur outside of its direct control. These include indirect activities such as company travel, waste disposal, and more. If a company wants to reduce its carbon footprint, Scope 3 is an important place to start.
Because, on average, 75% of most companies’ emissions fall into scope 3.
Scope-3 carbon accounting is part of a broader suite of tools companies use to reduce their environmental impacts to build trust with customers and stakeholders who care about sustainability issues like climate change mitigation policies impacting their business operations.
If you would like to know more about how to track, report, and reduce your scope-3 emissions, please read the suggested content from our free library - Sustainability Made Easy: Decoding Scope 3 Emission Reduction E-book
- Social risk in the supply chain:
Social risk in the supply chain is something we're all familiar with—it's the idea that there may be human rights violations taking place within our supply chain at any given time. Social risk can take many forms: child labor, violations of workers' rights, unsafe working conditions…the list goes on! For companies interested in sustainable procurement to address social risk in their supply chains effectively, they must first understand what kinds of risks exist within their own organization
The supply chain is a vital part of any business. It's the thread that connects your brand to its partners, customers, and suppliers. But it's also an area of huge risk for many companies. You could be exposed to hidden, often severe issues that could negatively impact your ESG performance.
Failing to grasp potential issues within the supply chain could have a negative impact on a business very quickly–both financial and reputational. Partners might look to distance themselves from the brand for fear of being dragged into the mire. It could also affect future investment potential, with investors preferring not to take a chance on companies they feel aren't doing enough to mitigate these risks.
Reducing social risks and GHG emissions is a core pillar of corporate sustainability efforts.
By mitigating social risks and proactively accounting for scope-3 emissions, corporates can reveal particularly high-risk areas as well as emission hotspots in their supply chain. This helps them frame a more energy-efficient, cost-effective, and risk-proof buying strategies that can boost their overall sustainability performance.
Improving the sustainability performance can give your company an edge in the market, by positioning it as an eco-conscious business and future-proofing it against ESG laws and regulations.
What Are the Barriers to Green Procurement Actions?
Sustainable goals cannot be measured only in terms of profit and loss. They must be measured in terms of the well-being of billions of people and the health of our planet. But for procurement, everything boils down to the fundamental ask around the price, lead times, quality, and risk.
But that’s not all, there are other barriers to sustainable actions. The WWF report from 2021 highlighted three barriers to corporate scope 3 actions in the supply chain:
- lack of transparency and data,
- lack of personnel resources and know-how, and
- lack of co-operation along the supply chain.
When I asked Tormod Lysne Voje, Partner in KPMG, Norway, how to start tackling your company's greenhouse gas emissions, he said:
"Even though barriers exist–and will always exist–there is no excuse to take action.” He further adds, “the pursuit of perfection will paralyze us."
He suggested that companies should start by getting a rough overview of their GHG emissions using the spend-based method in the GHG protocol. This will not just give you the exact picture of your business scope-3 emissions–where 80-90% of your emissions lie–but an overview of where to focus your efforts and where to use more granular methods to precisely measure scope-3 emissions and reduce them.
If you'd like to watch the whole thing, follow this link: How Procurement Can Reduce Your Company’s Carbon Footprints?
For many companies, the challenge often starts with collecting the data, which is often siloed and outdated, and it further transgresses to using existing information, obtaining additional data and subsequently generating high-level ESG transparency.
These pertinent issues made me to pose our CEO, Sigbjørn Nome, with my next question:
Do You Have a Solution or the Most Effective Plan to Overcome These Barriers and Promote Sustainability?
To that he answered, “yes.” Let’s take a look at what he means.
“We at Ignite bring the power of clarity to procurement, finance, and business leaders to help them make responsible decisions for their businesses, society, and the environment. To overcome the barriers associated with implementing sustainable procurement, we look at sustainability from three perspectives: financial, environmental, and social. And, we understand that all these perspectives are crucial for your ESG strategy, that’s why we have tailored our product to meet all these needs.” – Sigbjørn Nome.
If we could list the data challenges people face in implementing sustainable procurement in a step-by-step manner, they would look something like this:
In addition to these, the lack of skill, resource, and time constrain along with the cost-factor associated with proving short-term benefit of carbon accounting are the common barriers most companies face while starting or continuing their journey.
Now that we have looked at the barriers companies face in their sustainability journey, let's look at how procurement leaders can make co2 emission calculation and social risk mitigation a reality with these 4 steps:
4 Steps to Implement Sustainable Procurement
- Step one:
The first step in the green procurement implementation process is to understand the spend. Spend data needs to be collected in a way that makes sense for your organization: whether that's pulling in data from your one or several ERP or P2P systems. Once you have this information at one place, you can start preparing it for analysis.
- Step two:
At this phase, each of your transactions are enriched with industry codes of the suppliers used, and then, using the industry, supplier country, and region, it’s matched to Exiobase database. This step also involves cleansing your data, enriching it with reliable third-party information, and classifying it per the Exiobase* database so you can match every transaction to the best-fitting emissions factor category. Ignite makes sure you don’t have to waste your time on fixing bad data, or run through complicated spreadsheets and calculations.
*Exiobase - The Emission Factor Database—a rich source of emission factor data with dimensions across 200 products and services, 49 regions, and the years 2010-22.
- If you are estimating your scope-3 emissions for the first time, Ignite follows a spend-based approach where the monetary amount of each purchase is multiplied by a relevant emission factor for that purchase.
- Step three:
This is where Ignite leverages the power of its interactive dashboards to generate an emission heat map that shows emission hotspots or where the opportunities for improvement lie. At this step, Ignite makes it possible for you to calculate and report all your scope 3 emissions by combining all calculation methods and data.
- Step four:
Now that you have a CO2e component for each purchase, you can use analytics to find areas that need more granular scrutiny. In this step using Ignite’s modern spend analytics platform, you establish a baseline and run analyses to uncover which industries, suppliers, categories, or projects are driving your emissions in just a day. Ignite ensures you save 80% of the time people normally spend on calculating emissions.
Combining different calculation methods means getting a complete picture of your scope 3 emissions and analyzing different underlying factors to pinpoint which activities lead to high emissions, as well as which actions can lead to improvement.
Using Ignite’s External Assessment feature here is an excellent way to ensure accurate estimation of supplier-specific numbers. With supplier-specific numbers, you not just calculate the environmental impacts for each suppliers better, it also helps you identify the social hotspots and areas of risk in the spend which include child labor, health and safety, human rights, etc., to get a holistic view of sustainability. Thus, ensuring you stay compliant and wary of social and regulatory risks.
This approach of Ignite is unique as it doesn’t require any specialized skillset or additional resource to be added to the procurement teams for implementing sustainable procurement practices. It is also of interest to the Procurement Leaders and Senior Management team as it provides this financial, environmental, and social transparency against the spend of the organization. The outputs from the Ignite’s sustainable procurement offering are science-based metrics and insights, and reports. These not just help you identify areas of inefficiency, cost savings, risk reduction but also uncover opportunities for environmental and social performance improvement.
What’s the Scale of Change Needed to Implement Sustainable Procurement With Ignite?
A common belief is: the scale of change needed to implement sustainable procurement is not small. We agree that instilling sustainable practices requires a complete overhaul of the way we do business, and it will take time, effort, and commitment.
That said, there are things that procurement leaders can do right now to bring about real, sustainable results in their organization. But how? Well, for that you need a product or a tool to help you drive this change.
When it comes to selecting a product that will drive sustainable procurement changes in an organization, there are a lot of options out there. But choosing the right product for your organization can be tricky—you don't want to buy something that doesn't fit your needs or won't be able to deliver on its promises.
The best way to know for sure if a product is a right fit for you is by trying it out.
"We hear all the time from our customers that they want to be able to make sustainable decisions in an easily implementable way. That's why we've made it possible for businesses to access our two highly impactful products: the Carbon Accounting and Supplier Assessment. Both are instrumental in reducing scope 3 emissions and helping companies make more sustainable decisions." – Nome says.
If you're like most companies, you're trying to get a handle on your scope-3 CO2 emissions. But, if you're like most companies, it's been a struggle. You don't have the time or resources to go through all your data manually, and you don't want to pay for an expensive software package that requires you to enter every single piece of data into a complicated system.
With Ignite Carbon Accounting, we've made it easier than ever for companies like yours to get a quick, low-cost estimate of their Scope 3 CO2 footprint. Even if you only have spend data available. So that you can understand where your scope 3 CO2 emissions are coming from and be able to quantify them so that you can include it in the category strategies and start taking action to reduce them.
On the other hand, Ignite Assessments helps you better understand how your suppliers are performing by collecting regular feedback from your employees.
Ignite helps companies improve sustainable operations and supplier compliance too. We do this by helping suppliers self-audit and communicate their improvement efforts in a simple, effective way. And, of course, we do it all digitally.
You can use Ignite’s suggested assessment/evaluation forms or create on your own to collect data on your suppliers' ESG, performance, and certifications so that you can start making rational, responsible decisions.
And that's not all; we want to go a step further in our commitment to enable sustainable change in procurement. So that companies like yours can know where their scope 3 CO2 emissions are coming from and be able to quantify them to start taking action.
That's right—we really want to help you reduce your carbon footprints, and that's why we're offering something valuable, free-of-cost to you so that you can see how quickly you can get an accurate and comprehensive analysis of your upstream scope 3 CO2e emissions at every level - project, category, or supplier—in 80% less time than conventional methods.
Click the link below if you are interested in seeing how much CO2 your company is emitting: Ignite Carbon Accounting.