By: Amanda Petzinger, Benchmark ESG

With some 80% of asset owners considering Environmental, Social, and Governance (ESG) issues to be material (i.e., financially relevant) to a broad swathe of asset classes, the pressure is mounting for non-financial corporates especially to issue investment-grade disclosures of their ESG performance.

And while it’s encouraging to see the market’s response—more than 90% of S&P 500 companies now publish ESG reports in some form—their work is far from over. One key point of contention for both investors and government regulators is the relative lack of trustworthy, decision-useful, self-reported data describing companies’ “Scope 3,” or value chain emissions.

It’s easy to see why investors are keen to rectify this egregious blind spot. Put simply, companies’ upstream and downstream value chain emissions oftentimes comprise their majority and thus account for a significant share of their aggregate climate-related risks.

Business leaders, to their credit, have responded in kind. Facing the U.S. SEC’s proposed corporate climate risk disclosure rule, roughly 80% of recently surveyed supply chain executives are proving cognizant of the need for their organizations to expand the scope and scale of their carbon accounting and climate risk management efforts.

Commendably, survey data suggests a growing number of executives are willing to effect supply chain sustainability outcomes and disclose them to investors, even if it comes at the expense of their organizations’ bottom lines. But it doesn’t have to be that way. What’s needed is a comprehensive strategy backed by a data-driven operational framework.

To effectively identify, measure, manage, and disclose value chain sustainability risks, executives will need to engage their supply chain to obtain primary or high-quality secondary data from their upstream and downstream stakeholders. Yet, more importantly, to ensure this data passes muster with third-party auditors and regulators while yielding financially advantageous value chain sustainability outcomes, business leaders will need to leverage the data management and analytics functionalities of cloud-based software.

On the stakeholder engagement front, the first step is figuring out where to allocate the companies’ time, attention, and resources. To that end, executives would do well to conduct a screening exercise to determine and justify Scope 3 category applicability and employ widely accepted estimation techniques, such as the methodologies of the GHG Protocol enshrined in the SEC’s proposed rule, to assess which value chain operations, engagements, inputs, and outputs account for the most significant climate risks. This process is to be followed by a key supplier spend analysis, where executives identify the Tier 1 suppliers that comprise 80% or more of their company’s total procurement spend, and focus on capturing the emissions reduction and sustainability improvement opportunities among those suppliers with whom they have the greatest buying power..

These exercises are part and parcel with the stakeholder-influenced materiality assessment and performance goal-setting processes conducted at the outset of any effective enterprise ESG program. In short, executives need to ensure that efforts toward improved value chain sustainability outcomes are not only financially relevant, but agreeable amongst internal and external stakeholders.

Business leaders will then need to leverage existing stakeholder communications channels to relay the consensus expectations of their stakeholders, as reflected by the established goals of the enterprise ESG program, and proceed to outline how a given supplier or vendor may align with them.

Value chain stakeholders’ operational ESG performance data will prove critical here. But acquiring it is a challenge in and of itself. A recent survey of supply chain executives found that only 50% have sufficient supplier data to confidently report basic KPIs on upstream sustainability and “E” risks.

To get their hands on credible and decision-useful Scope 1, Scope 2, and ideally, Scope 3 emissions data from their suppliers—not to mention a full slate of ESG performance data—executives will need to play hardball. Clearly defined criteria for supplier data will need to be established, as will channels through which supplier data may be transmitted. Further, to compel these stakeholders’ cooperation, executives will need to be decisive.

ESG performance-serving “decisiveness,” to be sure, will take two main forms. The first of these will be in the performance parameters for value chain stakeholders. For example, a company may set procurement criteria that oblige their Tier 1 suppliers to align with the company’s overall ESG performance objectives. Likewise, downstream stakeholders may be expected to adapt their use of a company’s product, say a leased commercial real estate asset, in a manner that aligns with the company’s goals.

Second, companies will need to analyze the ESG performance data made available by their value chain stakeholders. This is necessary to determine whether these partners are, in fact, aligning with the companies’ established expectations and, ultimately, whether these stakeholders should be penalized, or engaged with to help improve their performance.

Analysis of value chain stakeholders’ ESG performance data will ensure that companies’ targets for Scope 3 emissions and broader ESG performance outcomes are met without compromising their bottom lines. But the complexity—and stakes—of the exercise hardly lends itself to manual, spreadsheet-driven processes.

To that end, business leaders will need to incorporate a multi-functional, cloud-supported ESG performance data management and reporting platform. These are centralized, remotely accessible systems capable of automating the collection, taxonimization, collation, storage, reporting, and even real-time analysis of value chain stakeholders’ ESG performance data. 

Beyond advancing companies’ abilities to collect and report a more complete range of financially relevant ESG performance data, these systems offer two key advantages. First, these systems enable the enforcement of companies’ expectations for the ESG performance outcomes of their value chain stakeholders. Second, by enabling the application of myriad analytical frameworks, these systems help supply chain executives substantiate a business case for value chain sustainability pursuits—a practice that perhaps a third of companies are struggling to complete.

It cannot be overstated, though, that the business case for sustainability improvements across companies’ value chains is well-established. Beyond the pressure applied by investors, the SEC and its counterparts in Europe and other markets are poised to soon require such extensive disclosures—activities that will effectively “level the playing field.”

However, with data and determination, companies will have no trouble cultivating competitive, financially-advantageous ESG performance outcomes.

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