Sustainable Procurement: Balancing Innovation, Margins, and ESG Objectives

Balancing ESG Innovation While Maintaining Margins

Balancing the organization's ESG objectives while maintaining its margins can be a challenge, but it's one that procurement teams are increasingly being tasked with as more companies set net-zero ambitions. Procurement organizations need to embed ESG considerations into their processes and systems in a way that does not compromise commercial outcomes.

One way to accomplish this is for the procurement team to look for ways they can procure more sustainable materials and products without impacting the bottom line. This can be difficult to accomplish in a single project, but category managers can keep an eye out for more sustainable alternatives on the market using their procurement intelligence solutions. This would allow them to source from sustainable suppliers the moment they become available. 

This type of intelligence can also be crucial in supplier negotiations. For example, procurement functions could pilot a program that encourages suppliers to adopt renewable energy solutions, more sustainable materials, and other sustainable options by demonstrating how alternative suppliers are accomplishing these goals.

Objectively, these strategies could help the organizations become more sustainable without impacting margins. If implemented correctly, they could also produce cost savings.

Internally, the function must search for ways to eliminate waste and optimize energy usage, such as by sourcing energy from sustainable providers. Some organizations have even taken steps to install solar panels and wind generators as part of their physical plants.

CBRE’s Sustainability Program

For example, real estate services and investment firm CBRE has made considerable commitments that support its margins and meet hard objectives for becoming more sustainable. The company’s sustainability strategy encompasses its internal operations, its suppliers, and even its clients.

According to the CBRE website, 55% of the company’s enterprise clients have net-zero commitments and over 72% have set science-based targets for carbon reduction. The company itself has helped to reduce over 1.5 billion pounds of carbon since 2017 based on this strategy.

The CBRE sustainability model is fully integrated into their business strategy.

“Our sustainability approach translates your commitments into practical workplace solutions that reduce impact, regenerate natural resources, and inclusively provide for the future,” says CBRE. “Our methodology addresses emission scopes 1, 2 and 3, as well as water, waste, natural capital, social value, accreditations, and compliance, with a mix of dedicated on-site teams and consultative subject matter experts.”

Image Source: https://www.cbre.com/services/transform-business-outcomes/energy-and-sustainability-services#sustainability

Challenges Meeting Net-Zero Ambitions in Asia

Net-zero goals are a framework for measuring and reducing greenhouse gas emissions to zero. They can be applied to organizations, products, or even cities.

Although most organizations are at least interested in a net-zero framework, teams in Asia are under particular pressure to meet net-zero ambitions as many organizations in the region make pledges to do so. For example, according to Nikkei Asia, almost 40% of the 225 companies in Japan's Nikkei Stock Average had made net-zero pledges by 2021. The Japanese government itself has set a net-zero emissions target by 2050.

Net-zero frameworks may seem like major undertakings that are beyond the scope of the average procurement professional. However, many experts agree that procurement is one of the most important areas in which emissions reductions can be made.

Capgemini suggests that procurement leaders may need new skills and technologies to achieve sustainability KPIs like net-zero and collaborate with suppliers to reach their goals.

"The procurement team needs to be given the skills to better understand any sustainability KPIs embedded in the tender process," says senior procurement transformation professional Florian Sommer. "This might entail collaborating with engineering and product design teams to understand processes and materials requirements. Can products be redesigned to remove fossil fuel feedstock sources, such as plastics? How can suppliers be brought on board in this process so that they incorporate environmentally oriented or sustainable materials?"

Furthermore, heavy investments into sustainable projects are providing procurement organizations with more tools to reach their goals. According to S&P Global Commodity Insights, Australia recently doubled its climate funding support for the Asia Pacific region, totaling about $1.5 billion in Vietnam and Thailand. Although is investment represents only about 0.3% of international goals, it represents a significant injection of funding for those two countries.

Procurement leaders must stay apprised of opportunities to achieve funding for their sustainability projects, whether they come from private sources, company coffers, or government programs.

Image Source: https://asia.nikkei.com/Business/Business-trends/Almost-40-of-Nikkei-225-companies-pledge-net-zero-emissions

Implications of ISSB for Procurement

The International Sustainability Standards Board (ISSB) was created by the International Financial Reporting Standards (IFRS) foundation in 2021. An independent, private-sector body, its purpose is to create sustainability standards for global businesses.

One of the ISSB's primary objectives is to help businesses make their products and operations more sustainable. Its standards cover a wide range of sustainability issues, including climate change, water usage, waste management, human rights, and social responsibility. The board will also work to promote best practices in sustainability reporting, which will enable companies to more effectively benchmark their progress against global standards and the progress of other regions.

The procurement industry will need to pay close attention to the work of the ISSB, as it is likely to have a significant impact on how companies do business in the future. The standards that the board sets could have a major impact on procurement strategies and operations. For example, if the ISSB creates a standard for measuring greenhouse gas emissions, procurement teams will need to find a way to quantify and report these emissions.

The ISSB is still in its early days, but it has the potential to be a major force for change in the procurement industry. Companies that don't take steps now to make their procurement operations and supplier relationships more sustainable could find themselves lagging behind their competitors in the future.

This could have real implications for the bottom line. According to Business News Daily, McKinsey & Company found that most consumers (66%) consider sustainability a factor when making a purchase. More and more, customers are also aligning themselves with brands that are compatible with their values, whether they are consumers or B2B buyers.

SCF's Role in Meeting ESG Objectives

One of the most effective ways to help the organization achieve its sustainable procurement objectives is through Supply Chain Finance Programs (SCF). SCF programs can help procurement organizations meet their ESG objectives by providing financing to suppliers that are willing to switch to sustainable practices. In addition, SCF programs can also help procurement organizations reduce costs and improve supplier relations.

SCF programs can be a benefit to suppliers as well. However, an initial investment is often required to help suppliers start down a more sustainable path.

The International Finance Corporation (IFC) says, "Suppliers [that are] able to meet purchasers’ eligibility requirements are likely to enjoy business growth. However, many are small and medium enterprises (SMEs) that lack the necessary finance and technical skills to improve social and environmental management and operating performance. In the absence of other lending, some purchasers and brokers have stepped in to provide short-term and pre-export financing to their suppliers."

Procurement leaders should work with their suppliers to identify financing opportunities that will help them reach their sustainability goals. These projects can provide direct benefits to the supplier and secondary benefits to the purchaser by helping them make their supply chain more sustainable.

Reaching a Sustainable Future in Procurement

Sustainable procurement is not only about reducing waste and saving money; it’s also about creating a more sustainable supply chain for the future. By developing a long-term strategy and searching for opportunities amongst suppliers, procurement leaders can make their organization’s procurement function more sustainable.

Moving forward, procurement leaders should stay apprised of the ISSB standards to benchmark their progress against those of other organizations. They should also search for opportunities to balance their ESG objectives with cost-saving measures, such as reducing waste production and energy usage in the supply chain.