Research Updates

Sustainability in supply chain governance and management: The role of Procurement

The questions

From the perspective of risk management, sustainability is becoming a deal breaker. In fact, organizations that aren’t sustainable are being increasingly cut off from resources and opportunities (access to global markets, credit, and favorable insurance premiums; the ability to recruit qualified, motivated human resources; the opportunity to bid on public and private projects and to tap into certified supply chains).   


But to truly grasp what a sustainable ESG corporate profile consists of, we first need to draw a distinction between different kinds of emissions. 


  • Scope 1: Direct emissions from fossil fuels (for heating, operating fleet vehicles, or from gas leaks from heating/cooling systems). 
  • Scope 2: Indirect emissions from generating the power, heat, or steam that the company consumes; these are accrued by the user, even if they are generated by the supplier.  
  • Scope 3: Indirect emissions from sources that are not directly under the company’s control, but are the indirect result of the company’s activities.  


The pool of suppliers and the entire supply chain represent the context for substantiating the sustainable choices that the company has already implemented internally, and for developing and promoting practices that safeguard people and the community, the environment and corporate governance, with respect for all stakeholders. 


Procurement is responsible for profiling suppliers, with an attentive eye to risk factors that could undermine the supplier relationship. This assessment is done both when selecting new partners and managing current ones. Various methods are used to measure ESG sustainability and to model supplier behavior, to include introducing rewards for characteristics and performances which were once seen as non-essential, in contrast to traditional considerations like cost, quality and service. 


The objective of our research is to survey and analyze sustainability management practices along the supply chain. We focused on Scope 3 emission containment programs in particular. Here are the specific questions we posed: 


  1. What approaches are used to measure supplier sustainability? 
  1. What are the main factors that companies consider when measuring sustainability?  
  1. What are the control mechanisms (certifications, auditing)? 
  1. What is the position of the company with regard to Corporate Sustainability Due Diligence (CSDD)? 
  1. What actions can encourage suppliers to improve their sustainability performance?  
  1. What kinds of suppliers are impacted by Scope 3? 
  1. How can suppliers do better on Scope 3 emissions, in terms of aims and actions?  
  1. What models are used to calculate GHG emissions?  


Our aim, and it was a challenging one in relation to company activities, was to find out exactly how companies are monitoring and managing sustainability along their supply chains, and what practices they are using to address Scope 3 emissions reductions. The approaches we found converge both in terms of positioning with regard to the underlying determinants of typical choices, and relative to direct intervention by CPOs in companies that are members of the Procurement Lab. 


We carried out our project, with the help our research team, by compiling a literature review and conducting interviews. The latter, thanks to participation of managers from Procurement Lab companies, gave us a multi-company, multi-industry frame of reference. 


Beginning with motivations and the extension of ESG qualifications and evaluations, we identified two approaches: reactive and strategic.  


  • With the reactive approach, basic motivation is drive by the need to respond to pressure from suppliers, customers, or other stakeholders.   
  • With the strategic approach, instead, it is the company itself that changes, adopting a precise positioning, prompted by business needs linked to specific issues (e.g. energy transition or ecological transition).  


Although both approaches can be winning solutions, as complexity intensifies and companies face imminent change, the strategic option becomes the more viable one.  


To qualify/evaluate suppliers in relation to ESG, we came up with four data quadrants by crossing a sector-specific approach with a generalist approach. Then we explored the role of Procurement within the context of the corporate ESG strategy. We used the label “problem solver” if this role is limited, or “strategic player” when Procurement is actively involved in setting up sustainability strategies, plans, objectives and targets. 


The next phase consisted in analyzing auditing mechanisms. Here we found two approaches: one more documents-based and the other mainly “in the field.” (In other words, after verifying relevant documentation, companies followed up on-site to corroborate that suppliers were actually doing what they claimed.) Then we shifted focus to how companies use the information they collect via auditing mechanisms. We came up with what we call: “best in class” and “in development.”  

Looking ahead

Our research shines a light on an ongoing change in the procurement function. This trend encompasses tools and roles. The first specifically ties into the use of shared platforms that make it possible to achieve the economies of scale that companies need. The second involves elevating Procurement to the level of "strategic player," on the front lines in designing and implementing ESG strategy.  Specifically, this means developing new internal skills, collecting primary data that can be used to calculate Scope 3 emissions, interacting more closely with other company functions, replacing materials and optimizing logistics flows, rolling out initiatives to raise awareness on emissions and help suppliers recognize the relevance of the issue. 


Of the companies in our panel, half use primary data that Procurement collects by interfacing with suppliers of goods and services, in addition to statistical data and standard averages. Having accurate data is critical because it allows companies to set more realistic and achievable targets. 


Our analysis shows that companies are lagging behind in setting objectives on Scope 3 emissions (which represent most emissions for many sectors), and in green lighting targets based on scientific objectives. 


In the near future, in order to monitor ESG-related issues, Procurement will need to play the protagonist, championing a change project that’s integrated into company policies, which means developing sustainability management skills. What’s more, since sustainability is a talent magnet in today’s job market, by bringing related issues under the umbrella of Procurement in a responsible manner, companies will become extremely attractive for new generations. 


Finally, what should emerge in certain business domains is an even stronger commitment to establish a clear timeline for cutting emissions.