A significant part of the global procurement industry transformation taking place is the shift in priorities from a purely cost-effectiveness-driven ethos towards one that also gives weight to resilience and risk management. The world is a more complicated and disruption-prone place. The threat of procurement chain disruptions is very much the new normal as buyers contend with increasing geopolitical instability, rising costs and, of course, the climate crisis.
According to Heiko Schwarz, Global Supply Chain Risk Advisor at Sphera in a recent op-ed, 2024 will be the year that supply chain risk management merges with environmental, social and governance (ESG) goals. “In particular, supply chains are now recognized as critical avenues for assessing and mitigating Scope 3 carbon emissions,” Schwarz explains.
The need for scope 3 transparency
Scope 3 emissions can account for upwards of 90% of an organisation’s emissions, reflecting the full spectrum of carbon and other greenhouse gas emissions created all the way up the value chain to the production of raw materials or development of land. Scope 3 emissions are famously difficult to track. Supply chains and supplier ecosystems are traditionally opaque, under-regulated, and a very long way away—such is the legacy of hyper-globalisation and neoliberalism birthed in the 80s and 90s that has driven down prices, pushed jobs overseas, and helped keep the over-exploited global south in poverty.
Now, ESG regulations of the sort recently introduced by the European Union on deforestation in its soybean supply chain, are creating consequences for organisations that might not have traditionally looked too closely at the upper reaches of their procurement stream. According to a report on the legislation, “Deforestation-free commitments are prominent, aligning with EUDR goals and setting ambitious target years.” The soybean industry in the EU is a multi-billion dollar market, and the risk of having revenues disrupted has immediately spurred a meaningful response, providing a potential template for regulators looking to cut unsustainable practices from the supply chains of entire industries.
Reputational and regulatory risks are growing more severe
Even beyond direct penalties, Schwarze notes that “Businesses seeking to thrive in a carbon-conscious era also understand that it is critical to make Scope 3 carbon emissions transparent to their stakeholders. Investors, regulators and consumers are sharpening their focus on ESG metrics. Companies that do not address the link between supply chain risk and Scope 3 emissions face potential regulatory scrutiny and loss of reputation and market share.”
Reputational damage can stem from deeper in the procure to pay process than many organisations would care to admit. Upheld until recently (usually by itself and simpering tech journalists, admittedly) as a beacon of a sustainable, clean-energy future, the electric vehicle industry has come under scrutiny recently.
“The primary source of the metal used in electric vehicle batteries and other electronic products is the Democratic Republic of Congo,” writes Gary Wollenhaupt for procurious. “So-called ‘artisanal miners’ use their bare hands to dig, wash and bag cobalt for meagre wages.” Government ESG regulation at the very start of the value chain can have tremendous knock-on effects for multiple industries down the line.
For example, the EU’s deforestation-contact ban could not only keep non-compliant soybeans out of the world’s biggest trading bloc, but could also hurt the bottom line of companies unsustainably sourcing virgin wood pulp, coffee, soy, and cocoa for everything from beverages to toilet paper. At the end of the day, if the risk of noncompliance is greater than short term revenue reduction for pivoting to a more sustainable model, change can be created in the procure to pay process that drives meaningful ESG reform.
