How Are Companies Auditing Suppliers on Sustainability Goals

There are many studies that show about 40% of Fortune 500 companies publicly reporting on sustainability. Many other industrial and commercial companies of smaller size are becoming more environmentally conscious as well and have also established sustainability goals internationally. According to IRENA, in 2018, over 100 companies had reached an 85-100 percent renewable energy mix worldwide. In one of IRENA’s recent studies, it indicated that about 36 percent of large energy-consuming companies in Latin America have followed this worldwide trend, a number that continues to grow, especially in Mexico where there is a competitive market that supports compliance efforts. However, there is a large pool of these companies that despite having corporate or indirect carbon reduction goals, don´t know where to begin. 

Many C&I consumers, particularly in the automotive and food industries in Mexico, are already establishing aggressive commitments to their entire supply chain. This supports the sustainability of the end-product, through the materials and operations involved to produce the final output. Many car manufacturers, for example, are focusing on incorporating renewable energy and recycled materials to assemble new vehicles in order to positively impact the environment. These efforts are tracked and marketed to position their brands as environmentally and socially conscious, which produces a more financially attractive entity and increases talent attraction. It is proven that following ESG principles contributes directly to value creation by impacting all internal and external stakeholders positively. If contributing to stop climate change creates value, why don’t all companies engage in this effort? The theory, interest and romanticism around the subject is sometimes difficult to embrace; it takes time, planning, tracking, training, operational changes and new strategies, and that is not always easy. It takes a strong leader and corporate commitment to ESG. 

Lately in Mexico, we have seen how car manufacturers, for example, have applied sustainability commitments to their suppliers; these Tier 1, Tier 2, and Tier 3 companies are in turn also requesting the same from theirs. For many, this is their first time gathering information to understand their current status. This obviously generates consciousness on the matter; some establish a project leader who typically already has many responsibilities and has to invest time in learning, which can be challenging and can impede their capabilities to perform. Others who recognize the time and resource constraints of their team hire a third-party that has greater knowledge and experience on the matter to provide support. The consultants can help not only by gathering information but actually implementing strategies and measurements based on market tendencies, regulations, costs and alternatives that will help companies comply and meet the minimum requirements of their clients’ sustainable supply chain policy.

The company requesting compliance must have a protocol and robust structure to be able to audit each supplier, which means that there could be hundreds or thousands depending on how large the business is. That can take a very long time. There are 10 ESG reporting frameworks that include 41 key performance indicators (KPIs) divided between four main categories: Environmental, Social, Governance and ESG Controversies. In terms of environmental, the subtopics focus primarily on climate change, greenhouse gas emissions, energy supply and water conservation, waste management, environmental policy and environmental management systems. Each company must prioritize the KPIs that are most in sync with their corporate profile and then both start a dialogue and develop frameworks and questionnaires that can illustrate their status and action plan. The 41 standard KPIs carry 735 ESG questions or metrics that can be evaluated. The process may get overly complex, especially when analyzing supplier reporting.

The company being audited must understand what is being asked of them, as several of their clients might be requesting them to comply in different or repetitive ways. The large energy consumer might assign the sustainability, supply chain management or procurement departments to focus on the project. Others might bring in an external consultant to help guide the internal team and divide up the roles; internal focuses on designing ESG strategies and external focuses on implementation, which is a smart way to optimize time and resources.

In terms of planning, a company must first understand the objectives, where they currently stand, whether their corporate goals resemble their clients, how their scores will be determined, whether they have established any metrics or goals already, what risks, country regulations, market trends, company culture and internal process do they need to be able to comply with. To proceed with implementation, consumption and risk profiles must be considered, including geographic locations, operations and market alternatives, such as on-site distributed generation, isolated supply or renewable energy supply agreements, terms and conditions, quality of suppliers, reliability concerns and cost incentives. Focusing on improvement and measuring progress is key to demonstrating interest and actions behind sustainability performance.

Reporting is another major challenge, as data accuracy is questionable, especially because efforts in Mexico are just beginning to be formalized. Many companies auditing their suppliers run into inconsistent disclosing of metrics due to lack of standardization, lack of knowledge or lack of time to put together a quality report. Simplified reporting expectations should be defined in order to transmit clarity and produce an easier process for all parties. To generate a more efficient process, many companies are, in fact, turning to technology that can help track efforts in real time, such as CO2 emissions, renewable energy consumption, water saving and cost reductions. This provides tools to make decisions internally and offers transparency to others, which in turn can solve the concern of going public with the data.

Complying with your client´s sustainability supply chain policies could get rewarded and position your company as a more attractive entity. Not only will it position you as an industry leader that invests in mitigating environmental impact, it will also drive economic interest in terms of investment and sales. These efforts can help accelerate initial supplier selection and incentivize others to increase your engagement with their company. It is, therefore, crucial that your company obtain a realistic panorama and a strong plan to support implementing a strategy and measuring results for accurate reporting. These actions will in turn create value for the company and strengthen your brand among key stakeholders.