Risk management has always been front and center in the electronics supply chain. Financial profile and adherence to privacy and compliance standards are top measures of how risky a particular vendor might be. Now, the conversation has expanded to include the environment, social, and governance (ESG) footprint of partners.
“Three years ago, folks were concerned about making sure vendor wasn’t too risky and as long as they weren’t, it was good enough,” said Jag Lamba, CEO of Certa, which offers a third-party risk management platform. “Now, organizations are looking for vendors whose values area aligned with theirs in terms of social impact.”
IPC, an electronics association that is creating an industry-specific guideline, outlines key ESG areas:
- Environmental: Greenhouse gases, renewable energy, water, waste and energy management; landfill diversion, new headquarters building, product energy efficiency, and materials sourcing.
- Social: Employee health and safety, human rights, community, product lifecycle management, workforce diversity goals, employee development, fair wages and benefits, and collective bargaining
- Governance: Gender composition on boards, executive pay linked to sustainability issues and/or diversity, directors with expertise in risk management, supply chain integrity, ethics and compliance
Concern around these topics on the part customers is trickling down through vendors to the supply chain. More and more, electronics OEMs are asking their potential and existing vendors to fill out questionnaires about their social impact and sustainability. Forty-one percent of businesses said their organization has engaged a new supplier based in large part on environmental performance, according to Crowell and Moring, an international law firm. Thirty-one percent said their organization has fired a supplier based in large part on environmental performance.
The procurement function is being pushed to gather data to tell the sustainability story to everyone from investors to customers. Employees are adding to the pressure. “Employees don’t want to work with employers who don’t have this as a mission,” Lamba explained. “If all your stakeholders are focused on this, you have to be focused on it and you have to push it to suppliers.” Further, the legal and regulatory focus on the impact of companies and their supply chains is increasing.
At the same time, OEMs can make their biggest impact through influencing its vendors. “For most products, 80 to 90 percent of greenhouse-gas emissions are ‘Scope 3’: indirect emissions that occur across the company’s value chain, such as embedded emissions in purchased goods and services, employee travel and commuting, and the use and end-of-life treatment of sold products,” said McKinsey’s ‘Buying into a sustainable value chain’ report. “Of these emissions, two-thirds are usually from the upstream supply chain.”
Eventually, procurement will be asked to do more than serve up the data. Soon, they will be asked to produce evidence of measurable improvement. In order to rise to the challenge, procurement will need to focus on improving the quality of their data, Lamba said. “Approximate data is no longer sufficient,” he said. “Investors and customers are making decisions based on their manufacturers commitment.”
Software and automation will be critical parts of the puzzle. “There are two parts to the solution: One is a software led solution that consistently captures data from supply chain and the second is putting in more automation,” Lamba said, adding that the industry has not yet settled upon either open or closed standards for these activities. “Ultimately, the solution is supply networks.”
Today, many organizations are still in the early days of integrating ESG standards throughout the supply chain. McKinsey offers three steps procurement organizations need to take to integrate sustainability into their practice:
- Determine the baseline and how far to go. Understand and quantify the organization’s current ESG footprint. Identify areas of significant risk areas and potential improvement. Determine goals and targets for sustainable improvement.
- Establish the core and drive value-creation initiatives. Define and integrate ESG metrics and policies into the organization’s standard supplier selection, procurement, and supply-management processes. Identify top-priority ESG themes and address them with cross-functional improvement initiatives.
- Shift the organization. Scale up and roll out successful initiatives. Integrate sustainable purchasing practices into the organization. Apply sustainable procurement principles and track performance against specific targets.
Soon, these issues will be a critical part of the day-to-day work of procurement organizations.