Sustainable Procurement 101
Sustainable procurement positively impacts the planet, profit, and people. Learn how to make a sustainable procurement policy! Download the FREE PLAYBOOK to get started on your action plan.
Updated: Aug 12, 2022
Welcome to Sustainable Procurement 101.
During our two decades in procurement analytics, we’ve had numerous discussions with industry-leading enterprises on the role of procurement in corporate social responsibility (CSR). The message is the same: Procurement and supply chain can have the greatest impact on the planet.
We realized our mission has to be more than turning data into dollars. We need to turn data into positive social and environmental impact. That’s why CO2 Analytics was added to our solution portfolio to help companies track their Scope 3 emissions.
Sustainability is a business imperative in the modern economy. It improves supply chain resilience, increases innovation, and positively impacts the triple bottom line (profit, people, and the planet). Sustainability gives you the license to operate today and keep doing so in the future.
Procurement is not competing against prices—it’s competing against the clock. Are you here to enjoy the ride without concern for future generations? It’s your call.
The fact is that it takes good business to be sustainable and sustainability to be good in business.
Nobody wants to work for the company that killed off the panda. As individuals and collectives, we owe it to future generations to act sustainably.
This guide will teach you the basics of sustainable procurement, best practices, and how to make a sustainable procurement policy. Additionally, you will learn how to measure and report sustainable performance based on KPIs.
Be sure to download the FREE PLAYBOOK to start building your sustainable procurement policy.
What is sustainable procurement?
Sustainable Procurement Definition
Sustainable procurement (or “green procurement”) is the process of integrating environmental, social, and governance (ESG) goals into procurement, purchasing, and supply chain.
Sustainable procurement integrates responsible business practices and sustainable corporate behavior into procurement processes, policies, and decisions. It balances sustainability, profitability, and meeting stakeholder requirements.
Sustainability is a strategic direction that goes beyond the requirements of legislation or economics. It considers stakeholder expectations on what is acceptable and fair. It aims to do good business now without compromising the future.
The helpful report, “Sustainable Procurement Guide A practical guide for Commonwealth entities,” created by the Australian Government, focuses on product lifecycle in their definition:
“Sustainable procurement helps build a circular economy, aiming to reduce adverse social, environmental, and economic impacts of purchased goods and services throughout their life. This includes considerations such as waste disposal and the cost of operations and maintenance over the life of the goods and services.”
That’s why sustainable procurement isn’t just about choosing the right suppliers. It considers how a product’s lifecycle can have the least negative impact, from sourcing to after-use. Procurement has the biggest role to play.
Corporate social responsibility (CSR) and corporate citizenship are terms used when discussing sustainable procurement. These terms suggest that businesses have a duty to the planet and people, like this definition of “sustainability” suggests:
“Meeting our current needs without compromising the ability of future generations and societies to meet their own across time and geographies.”
Why sustainable procurement is important?
Sustainable procurement is important because we have a key duty to the planet and people. That’s why thousands of companies have already committed to reducing their Scope 3 emissions and complying with internationally recognized standards and agreements for corporate responsibility.
The largest companies in the world are starting to enhance their sustainability agenda. 92% of the S&P 500 companies published a sustainability report in 2020. They regard suppliers as an extension of their business and work with them to build capacity and reduce long-term risk.
Sustainable procurement is also essential for compliance reasons. There are many guidelines out there that dictate how to measure ESG performance:
Sustainability as a competitive strategy
Sustainability can be a competitive strategy. More companies are entering the market with sustainable product offerings and company missions. These companies align their core values with sustainably minded customer segments to differentiate.
Sustainability can drive innovative product design. Here are a few examples of companies strengthening the circular economy with sustainable innovations:
- Repreve – a company turning plastic from the oceans into recycled fibers. Their material is used in Ford car seats and The North Face products.
- Sulapac – a company that has created an eco-friendly alternative to plastic that can be created using existing plastic product machinery. Their material is featured in N° 1 de CHANEL and Four Seasons Resort.
- Huhtamaki – a sustainable food and packaging solution, tackling high waste to-go packagings like coffee cups and lids. Huhtamaki Future SmartTM paper cup is the first 100% renewable paper cup made from plants.
Sustainability requires understanding the business landscape to maintain profitability and achieve competitive advantage. Without intelligent business thinking, you can’t do good! That’s why sustainability also takes business smarts.
The benefits of sustainable procurement
Sustainability is a business imperative. To keep up with the market, create customer value, and innovate with suppliers, leading companies are setting ambitious ESG goals. You need to consider all areas where procurement can have an impact.
A cohesive ESG strategy can affect the bottom-line profits. McKinsey’s research shows that strong ESG credentials drive down costs by 5-10%, and top ESG performers have higher growth and valuation by margins of 10-20%.
ESG policies carry substantial brand value. Companies that focus on social impact like work-life balance can be more attractive employers. The environmental impact of companies is a significant factor in what employers people choose. 69% of workers note the company’s environmental record as a factor for a job.
Robust analytics and visibility into the supply chain can identify potential shortages and supply shocks. A governance policy can also reduce risk through fraud and corruption. Here are just a few of the many benefits you can gain from choosing a sustainable procurement strategy:
Business benefits of sustainable procurement:
Complying with regulations and applicable laws
Ensuring business continuity and security of supply
Minimizing business risks
Managing reputation and customer perceptions
Controlling costs by adopting a TCO approach to the product life cycle
Savings through efficient resource use and demand management
Ecological benefits of sustainable procurement:
Reducing waste and pollution
Reducing carbon emissions
Reducing energy consumption
Limiting the negative impact of purchasing from non-certified sources
Restoring biodiversity and protecting wildlife
Social benefits of sustainable procurement:
Improving living conditions and employee well-being
Spreading awareness about climate action
Improving engagement, morale, and community involvement
Putting pressure on the market to act responsibly
Eliminating unfair and unjust labor practices
How is sustainable procurement implemented?
Sustainable procurement is implemented from the beginning of identifying a purchase need and involves the whole supply chain. In the past, green procurement only focused on the environmental aspects. However, today organizations are beginning to take a more holistic approach that considers social and economic factors.
Sustainable procurement challenges whether there is a real need for a product or service. It considers the potential environmental and social impacts and alternative options to save resources and avoid unnecessary consumption. It actively develops suppliers to meet a higher standard of responsibility.
To implement these ESG goals, you must create a sustainable procurement policy (we will go over the entire process of creating your policy later in this guide).
Example of sustainable procurement
Sustainable procurement can be seen in new sourcing strategies. In 2022, 24% of manufacturing executives considered moving operations closer to the end customer. Onshoring, or local sourcing, improves your agility to counter supply-chain disruptions. By bringing the supply chain closer, you also are reducing carbon emissions and saving on costs.
Onshoring your products and services meets many corporate responsibility objectives. For instance, it can reduce the CO2 footprint of logistics and increase supplier diversity. It also supports the local economy, which drives engagement in the community. Shared infrastructure, tools, and facilities increase your efficiency and communication. Finally, your data security and governance are more controllable.
Another example is sourcing recycled or upcycled material alternatives. Such material innovations have raised investment from leading fashion brands and retailers.
- Infinited Fiber, a company that recycles trashed textiles into premium-quality fibers, raised 30 Million euros in investment from brands like Adidas, BESTSELLER, and H&M.
- Spinnova is another textile solution made of wood or waste, saving more CO2 emissions than it emits. They had an impressive 135 Million IPO, and Adidas has unveiled the first Adidas product made with SPINNOVA® fibers.
- Finnair renewed its onboard amenities package with less SUP (single-use plastic) and more sustainable material sources. The toothbrush is made of bio-plastic containing cornstarch instead of plastic. Plastic wrappings for the earplugs are now wax paper. The Business Class slippers are made entirely from recycled PET plastic bottles. With these changes, Finnair has reduced plastic waste by almost 4,500 kilograms per year.
Sustainable public procurement
Public procurement organizations also have a chance to make an impact. Sustainable public procurement (or Green Public Procurement) applies to government departments and local bodies.
Alongside the private sector, the public sector can also apply the principles in this guide. Because public procurement involves spending taxpayer money, it’s even more critical to consider stakeholders’ interests and values. It’s not always easy to satisfy many stakeholders when politics are involved.
Many local and national governments are forming strict guidelines on the ESG factors of public spending. Sustainable public procurement policies address sustainability through governmental spending. It tackles the sustainable agenda through buying solutions, vendor selection, and life cycle assessment.
Additional reading on sustainable public procurement:
- UN Environment Programme Sustainable Public Procurement Article
- History of European Commission’s Green Public Procurement Initiatives
- Australian Government Sustainable Procurement Guide (PDF)
The Triple Bottom Line in procurement
The triple bottom line (TBL)—or the 3P’s (profit, people, and the planet)—is a business idea that companies should consider more than just their financial performance. Companies should assess the social and environmental impact of the company as well.
Assessment of the company’s footprint in society is no longer optional. When organizations embrace sustainability, they believe in creating value for all stakeholders. These include customers, suppliers, employees, and the broader community.
The challenge for Procurement is integrating these considerations into the decision-making process.
Enviromental, Social, and Governance (ESG) framework
ESG is another way of breaking down the parts of sustainable procurement. Environmental criteria apply to things like CO2 emissions and waste; social factors include diversity, well-being, and more; governance relates to the laws and certification compliance. All three parts are equally important.
The ESG framework applies to each stage of the supply chain, from sourcing to delivery. Leading global organizations recognize that sustainable supply chains can offer competitive advantages. So, organizations must also put pressure on their suppliers to embrace sustainability.
Drivers of sustainable procurement
There are both external and internal drivers affecting ESG practices in Procurement. Some relate to global macro trends, while others are company specific. The three biggest drivers for sustainable procurement are:
- Legislation & regulation
- Industry competition & stakeholder pressure
- CSR and making real change
These drivers are enough to start addressing sustainability in procurement, but what capabilities are required for a sustainable procurement strategy?
8 requirements of sustainable procurement
Understanding of global, regional, and local actions
Support from mission, culture, strategy, and people
CSR committed leadership
Integration of strategic and operational decision making
Performance measurement and appropriate reward systems
Systematic risk management approach
Transparent and well-structured communication
Seeing sustainability as an opportunity for innovation
These requirements summarize a high-level commitment from management, a strategic vision tied to the company culture, and policies that affect the decision-making level. Most importantly, sustainability must be a strategic initiative—not just a reporting requirement.
The importance of data and analytics
Good data is needed to increase supply chain transparency and understand performance. Improving your primary data availability and quality is one way to address this. For example, you can collect more data from your key suppliers and verify it.
Also, you should capture high-quality secondary data, like average emissions by industry and manufacturing locations. This data guides strategic actions, like focusing on emission hotspots in the supply chain.
You need good data and analytics to identify sourcing opportunities, consolidate suppliers, and make decisions that can help meet your sustainable sourcing goals. Assessing supplier performance and total cost of ownership (TCO) is necessary for effective sourcing decisions.
Seasoned procurement professionals know that TCO is much more than the price tag. The same applies to sustainable performance evaluation. A supplier may use renewable materials, but the total carbon footprint may rise due to the long transportation distance. Another example is business travel: having more online meetings could be more sustainable than switching company cars to electric. Only data can tell.
External data partners
Procurement analytics benefits from enrichment from third parties. Having external data integrated into your internal systems gives you a more enhanced view of your company's sustainable performance. That’s why Sievo works with leading data providers to enrich your spend data and monitor sustainability:
Ecovadis: the world’s most trusted provider of business sustainability ratings, intelligence, and collaborative performance improvement tools for global supply chains.
Rapidratings: sophisticated analysis of the financial health of public and private companies in over 150 countries worldwide. The company’s predictive analytics provide insights into how suppliers, vendors, and other third parties are likely to perform.
Dun & Bradstreet Corporation: provides commercial data, analytics, and insights on over 100 million businesses around the world. Through a global partnership with Bisnode, Dun & Bradstreet’s data is automatically integrated into Sievo’s procurement analytics platform and updated in real-time, providing customers with immediate access to more accurate information on their supplier relationships.
Supplier.io: the global leader in supplier diversity solutions for over 20 years, serving over 30% of fortune 500 companies.
Ecoinvent: publishers of the world’s most consistent and transparent life cycle inventory database.
Exiobase: a global, detailed Multi-Regional Environmentally Extended Supply-Use Table (MR-SUT) and Input-Output Table (MR-IOT).
The urgency of sustainability: Risk and resilience
The post-pandemic years will be challenging for Procurement. Hackett’s CPO Key Issues Study (2022) shows that increased supply chain disruption, inflation, and commodity volatility are the most significant risks to business. CPOs reported that resilience is their #1 priority, surpassing the need to deliver cost savings.
There have been many recent supply chain shortages, from baby food to microchips. Procurement’s top risk area is managing ongoing supply disruption and its impact on revenue.
The global Procurement community has now recognized that more than ever, flexibility and resilience are critical these days.
Procurement will play a key role in developing resilience strategies and reacting to shifts in demand. For example, before the pandemic, reducing single-use plastics was on the Procurement agenda. But, the sudden need for personal hygiene products in the wake of the pandemic quickly changed priorities.
Global procurement risks
Sometimes, it’s good to step back and see the big picture. By reviewing global risk trends, we can identify all types of risks that could affect Procurement. Conducting a risk assessment that considers the likelihood and severability (impact on your business) of each risk may help you target the key areas for development. While many of these are by no means predictable, a sustainable mindset can offset many of these risks and you’ll be better prepared to mitigate the damage when the sh*t hits the fan.
You cannot understate the risks of climate change. We see factory shutdowns and transportation challenges due to extreme weather. Material unavailability and rising commodity costs are becoming business as usual. The time for Procurement to act is now. Companies play the biggest role in reducing carbon and greenhouse gas emissions on the planet. Environmental risks include:
Global temperature changes
Natural resource crises
Because the world is so interconnected, there is a high sensitivity to geopolitical conflicts. Wars and other conflicts send ripples worldwide, causing mass migratory events, humanitarian crises, and supply disruptions. Geopolitical risks include:
Interstate conflicts, war
Geopolitical resource contestation
Geoeconomic confrontations, trade wars
Weapons of mass destruction, terrorism
Monopolistic supply markets
Transparency into supply chains has also revealed the alarming prevalence of modern slavery, child labor, and forced labor worldwide. Social risks affect us all and have implications for employee well-being and human rights. Negligent behavior towards the social aspects of your supply chain can cause serious reputational and employer brand-related damage. Social risks include:
Livelihood crises, living wages
Social erosion, dissent
Mental health and well-being
As the global pandemic has shown, new infectious diseases are always a threat and will require more efficient supply chain solutions. Also, we’ve unfortunately seen tons of examples of dangerous additives and products harming consumers on the market. Health risks include:
Food pollution, product recalls
Harm to consumers through unsafe products
Harm to health from pollution
Famines and droughts
Medical supply chain shocks
Economic stagnation, rising prices, and inflation can hurt businesses and supply chains. Economic risks include:
Asset bubble burst
As the regulatory landscape rapidly adapts to mitigate these negative trends, Procurement must pay closer attention to compliance. Compliance risks include:
Losing license to operate
Losing competitive advantage
Losing brand reputation
Losing stakeholder trust
Losing revenue and customers
Wow! Those are a lot of scary things. But with good data, transparency, and strong analytics solutions, you can prepare for any risk.
Sustainability and resilience
Sustainability and supply chain risk reduction work well together. Sustainability drives resiliency, as sustainable practices increase transparency and a holistic approach to Procurement.
Sustainable procurement is resilient because it focuses on processes that manage, mitigate, and understand risks. When you have an ESG-focused Procurement function, you look holistically at your supply chain. This suggests that you have more visibility into potential threats, especially ones related to the environment and society. This risk mitigation covers short-term and long-term planning for business contingency.
The next chapter explains how to begin planning your sustainable procurement roadmap and company-wide policy.
How to create a sustainable procurement policy
A sustainable procurement policy is a document that outlines the goals, processes, and KPIs of a sustainable procurement strategy. It should clearly state your ESG goals and processes to achieve them.
There are many benefits to a sustainable procurement policy:
Creating competitive advantage
Increasing brand value to suppliers, partners, and customers
Promoting sustainable behavior in teams
Being more cost efficient and focused on product lifecycle
In 5 steps, you’ll learn how to create a sustainable procurement policy.
1. Building the business case for sustainable procurement
Building a viable case for sustainability includes factors such as your organization’s needs, priorities, values, resources, and stakeholder requirements.
Identify focus areas and priorities. These are some valuable considerations for understanding your sustainable business case:
Is sustainability a core company value and part of your DNA?
Are you incorporating sustainable practices to please your target market or to satisfy your investors and stakeholders?
Are you driving sustainable procurement initiatives to comply with government regulations?
What is the role of procurement in your organization?
Once you have the purpose figured out, engage in discussion with other stakeholders:
Align the internal stance on sustainability.
Identify which country-specific standards and regulations affect you and which functions in your business would be responsible.
Consider what level of depth your key stakeholders expect of you.
Consider the industry standard for sustainable development and the potential for competitive advantage.
Discuss your sustainable procurement vision and ambition level. Be inspiring yet realistic.
Supplier scoring is one way to set realistic and efficient targets:
“Sievo’s ability to provide sustainability scoring made it possible for us to start driving our conversations on where we should channel our energy.”
– Head of Indirect Procurement for CGP Company
Make sure the Management, Procurement, Sustainability, and Compliance teams agree on the business case and benefits.
Ensure top management engagement to develop and implement a sustainable procurement policy. Assign business sponsor and owner for the policy.
When your purpose and direction are clear, you can begin the next steps of the sustainable procurement policy.
2. Align on ESG Goals
Different business models and industries may have other focus areas of their CSR policies. The business priorities and risk areas most relevant to you should guide your sustainable procurement strategy. Setting ESG targets provides direction, commitment, and a way to measure progress.
Examples of ESG goals for sustainable procurement policy:
100% compliance with environmental guidelines in your industry
100% of key suppliers’ environmental impact assessed
X% reduction in consumption of resources such as energy and water
Become carbon neutral by 2030
Plastic free by 2030
Commitment to United Nation’s Sustainable Development Goals
100% compliance with paying living wages and eliminating child labor
100% compliance with health and safety audit standards
100% compliance with the Modern Slavery Act
100% compliance with The United Nations Guiding Principles on Business and Human Rights (UNGPs)
100% compliance with regulations and applicable laws
100% compliance with terms for anti-bribery and anti-money laundering
X% of key suppliers engaged in joint sustainability program
X% of suppliers are diverse suppliers
Once your ESG goals are established, conduct a current state analysis. Current state analysis is built on data. Identify gaps in your current practices, processes, and sustainable performance. Assess the current state against your ESG goals and future legislative requirements. You might identify new focus areas.
Be optimistic yet realistic in terms of expected progress and speed when setting targets for sustainable procurement. Identify your main ESG goals in the short, medium and long terms.
Remember to update your targets with your industry by joining initiatives like Together for Sustainability (chemicals), Railsponsible (rail), or AIAG (automotive). Joining an industry initiative and matching targets is a great way to stay accountable.
3. Build strategy and action plan
Your sustainable procurement policy should be clear and understandable so that everyone making purchase decisions in your organization knows their responsibilities.
Translate your ESG goals into your procurement processes and decisions. Redesign your purchase-to-pay process and map decision points for making more sustainable choices. Additionally, you should include sustainability in your RFP evaluation criteria.
Making sustainable decisions is not always easy. Help your procurement team make future-proof decisions with data, tools, templates, and decision trees.
Identify your most significant procurement categories with the highest sustainability impact and risks. Then, develop a sustainable procurement strategy and action plan for each category.
You might want to start with a small number of categories to test your sustainable procurement policy and processes first. Who knows? It might even spark some friendly competition:
“There is now a bit of a competition between the category teams about who has the most sustainable supplier base within their categories. That is something we didn’t have on the radar, and you can only do it when you link it smartly to spend data.”
Lars Runde – Head Group Procurement at Lindt & Sprüngli
Communicate your sustainable procurement targets internally and engage with stakeholders, e.g., through Q&A sessions. See the implementation process through on the function and category level.
Promote responsible purchase behavior. Manage stakeholder demand and purchase needs in the first place. Limiting the number of orders, consolidating your supplier base, and optimizing shipments mitigate emissions from transportation.
Roles and responsibilities
Introduce the responsibility assignment matrix (RAM), also known as RACI matrix. RACI stands for responsible, accountable, consulted, and informed. Here’s an example from the Cacao category:
Responsible = Director Direct Spend
Accountable = Cacao Category Manager
Consulted = Raw Material Sustainability Manager
Informed = Chief Procurement Officer
Aligning roles and responsibilities will enable the effective execution of your plan and helps avoid misunderstandings later on.
Sustainability is a challenge and opportunity for all procurement organizations. They are in different stages of maturity and have different focus areas depending on their industry field. Benchmark and share best practices with your industry peers and other procurement professionals that be further on in the process. Sharing success stories can be insightful and motivating.
4. Supplier management and performance development
The importance of suppliers to sustainable procurement can’t be understated. You should develop a consistent approach to supplier selection and share your sustainability criteria with your suppliers in the sourcing and onboarding phase. Communicate your sustainable procurement policy, mission, and targets to your suppliers.
Identify strategic and critical suppliers whose actions make the most significant impact on sustainability. Use supplier segmentation practice that is supported by your procurement team. Your policy may include different levels of sustainable practices and verification methods depending on the product’s or service’s purchase volume and business impact.
Here's a useful 4-layer Responsible Sourcing Framework you can use to assess suppliers.
Be transparent about their performance—onboard your suppliers to relevant programs and follow up on their progress with sustainability KPIs. Consider implementing environmental and sustainability audit standards, develop performance together, and validate corrective actions as needed.
Your sustainable procurement policy should clearly state how to monitor and report supplier performance. The policy should also outline the implications of sub-optimal performance, breaches, and audit deviations.
5. Sustainability reporting
Sustainability reporting is a part of an organization's annual reporting process. There is a growing demand for more accurate reporting on sustainability programs. Sustainability reporting depends on demonstrating success through data and reliable information. Reports have two objectives: to monitor compliance and inform future targets and sustainability plans.
Procurement teams are employing new data and analytics approaches to look at the sustainability of their products and services. With available sustainability data and analytical tools, it is possible to establish ESG performance development programs and track carbon footprint on the category, business unit, line, supplier, and product level.
Monitoring the sustainable performance of suppliers entails continual assessments and measurements. This monitoring is essential for your strategic Tier 1 suppliers.
Data sharing and analysis are vital to sustainability tracking and reporting. Luckily, the market availability and competence to gather reliable sustainability data have gone through the roof. There are solutions to establish baselines, assist in setting KPIs, track progress, and report successes.
Also, professionals can share plans and metrics with their partners and stakeholders through dashboards and portals that are secure, timely, and private. These analyses require reliable data sources (internal and external), automated data management, and skilled expertise in combining those for meaningful insights.
The next chapter takes a deep dive into sustainable performance reporting and development.
How to measure sustainable performance
The requirements for sustainable procurement are evolving. As such, the KPIs need to develop as well. Companies must evaluate supplier commitment and performance.
There are many factors to success in sustainability performance tracking: reliable data, industry knowledge, and analytical competence. Besides tracking KPIs, procurement must also be able to communicate performance and enable change in the organization.
Procurement needs to identify emission hotspots and which areas of spend have the highest ESG impact and potential for improvement. Focus your primary efforts on key suppliers and risk categories where you can make the most significant impact.
The best way to ensure the continued relevance of sustainability is through reporting. Using formal standards keeps your reporting structured and transparent.
Although sustainability reporting is a whole other topic, the more global companies standardize their reporting practices, the easier it will be to make comparisons.
So far, there is no globally accepted sustainability tracking and reporting system. However, the GRI Standards come close, used by 73% of the world's 250 largest companies. The GRI Standards are a modular system comprising three series of Standards: the GRI Universal Standards, the GRI Sector Standards, and the GRI Topic Standards.
GHG footprint: Scope 1, scope 2, and scope 3 emissions
The Greenhouse gas (GHG) protocol is the world’s most widely used greenhouse gas accounting standard. Since 2001, governments, NGOs, and corporations have used their principles in accounting for GHG emissions. They state that GHG emissions fall into 3 “scopes.”
Scope 1 emissions come directly from owned and controlled company sources (like production facilities and vehicles).
Scope 2 emissions are from facilities that provide energy bought and consumed by the company, also known as indirect emissions.
Scope 3 emissions originate outside the company, such as from other companies in the supply chain or end-users.
Here’s an example of the emissions from a car’s production:
Upstream Scope 3 emissions come from suppliers’ sourcing processes, facilities, and transport. It also includes other indirect emissions, like employee commuting.
Scope 2 emissions come directly from the purchased water, heating, and electricity providers.
Scope 1 emissions come from the car’s manufacturing and transport. These are the “direct” emissions from the manufacturer.
Downstream Scope 3 emissions come from non-company owned transport, business travel, use of the vehicle, end-of-life processing, etc.
What is and isn’t scope 3 is hard to discern. However, reducing (or compensating) scope 3 emissions is essential to combating climate change. It is also the area where Procurement has the best chance to influence GHG reductions and achieve business objectives.
Procurement will most likely collaborate with others to fulfill sustainable reporting. They must have clear and traceable KPIs tied to sustainable performance. But don't just take it from us:
“We have a duty of care towards patients, our people and the environment and are committed to making our overall supply chain more energy efficient and environmentally sustainable. Having our GHG emission data accessible with high granularity levels at our fingertips is a key differentiator and will accelerate our objective to reduce our impact on the environment.”
Francois Rousselot – Group Head of Procurement at Hikma
Carbon management tools and software
A carbon management tool gives you a place to track carbon and GHG emissions. By combining external data on suppliers and your spend data, you can identify the footprint of your activities.
Other functionalities of carbon management software are:
Capturing emissions data across scope 1, 2, and 3 sources
Identifying carbon hotspots
Benchmarking against your KPIs and visualizing the results
Enhancing your sustainability reporting with more granularity
Targeting the most effective reduction strategies
Generating what-if scenarios and gaining insights
Budgeting your carbon footprint and preparing for Net-zero emissions
What are the KPIs for sustainable procurement
Each organization will choose different metrics based on what is important or material to their business and industry. Environmental metrics cover various activities impacting climate, waste, and energy use. Social and governance metrics can be more region and company-specific but have good examples to follow from leading sustainable organizations.
Carbon emission KPIs
Greenhouse gas (GHG) emissions and other pollutants are the major factors contributing to climate change. The UK-based Carbon Disclosure Project (CDP) helps disclose major corporations' environmental impact. Also, the International Integrated Reporting Council (IIRC) provides a comprehensive corporate reporting option useful when proving sustainable value to potential investors.
Organizations can assess how their products or services contribute to climate change.
CO2 emissions (direct)
CO2 emissions (indirect)
CO2 emissions from business travel per employee
Other toxic emissions by type
Water is also a key sustainability metric for many organizations, especially in manufacturing and the FMCG sector. Organizations can track their water usage, quality, the cost of water pollution on the environment, and loss of water through leaks and evaporation.
Companies are also beginning to focus on contributing to the circular economy through waste management. Waste includes food and packaging waste, hazardous materials, debris, industrial waste, and final disposals. You can replace plastic packaging and single-use materials with recycled, recyclable, routable, or circular materials.
These measures look at energy operations and identify where to use less, resulting in cost savings and fewer emissions.
Power and energy KPIs
Energy consumption used in production kWh / month
Energy use in offices, kWh / m2 / month
Energy saved due to implemented improvements, %
Fuel consumed in the transportation of goods
Total supply chain miles
Water consumption in liters
% of water recycled
% of water reused
Product waste by type, volume, and disposal method
% of recycled materials used
Measuring performance against human rights goals such as improvement in living conditions and creating work opportunities in affected communities requires data and detailed analysis. Some easily quantifiable metrics include employee welfare, diversity, and inclusion. Tracking other social metrics is less straightforward.
TIP: The Anker Living Wage and Living Income Research Institute provides a methodology for producing high-quality, consistent, objective information about living wages and wage gaps. This methodology has been used since 2017 to estimate living wages at Patagonia, a leading manufacturing company in ESG reporting. The aim is to support wage improvement strategies and programs in ESG projects.
These KPIs track social impact. They should include measures of the quality of life for employees and the wider community. Suggested KPIs are:
Employee engagement and satisfaction
Community engagement, volunteering hours
Near miss incidents reported
Number and type of unsafe behaviors reported
Success of sustainability awareness training
Work-life balance, working hours
People development, learning hours
Number of community-based initiatives
Diversity, equity, and inclusion (DEI) survey result
% increase in diverse suppliers
Finally, for governance-related metrics, KPIs should reflect your level of adherence to regulations within your specific industry sector. They should consider the compliance of both your organization and your supplier base. Corporate governance KPIs include:
% supplier compliance to code of conduct/guiding principles
Compliance with industry regulations
Compliance with UN global conduct
Compliance with safety and security requirements
% of suppliers audited against CSR standards
Share of suppliers that filled in self-assessment questionnaire (SAQ)
Sustainability in supplier selection and development
Suppliers play an essential role in your sustainability journey. They can only engage if they understand your goals and their role in achieving them. Suppliers will support you and can even drive new innovative solutions.
Joint research and development with suppliers can help innovate new solutions. Likewise, you should see what others are doing, collaborate with partners, share best practices with industry peers, and be part of the broader global discussion. As there is more demand and standardization in sustainability, the research, development, and implementation costs decrease too.
You first need to communicate your sustainability aspirations and commitments. By sharing your business values and criteria, you slowly build and develop your supply base towards a more sustainable one.
Next, you should focus your sustainability efforts on where it matters most. Key suppliers account for a major share of your business and performance. It's crucial to align your goals with theirs. You should agree on sustainability standards and monitoring practices together. After that, it is up to each party to achieve the mutually agreed-upon standards.
There are two ways of working towards your sustainability goals within your supply base. The first way is to choose new suppliers who meet your sustainability criteria. The other way closer to business realities is collaborating with your suppliers on an ongoing basis to help them improve and achieve the new set of requirements.
Translating your organization’s sustainability goals into the supplier selection process is the first step. By doing this, you make sure you select suppliers that support your ESG goals.
Manufacturers like Nike and Adidas have suffered fallout because their suppliers dumped toxins into China’s rivers. This could have been avoided with the proper sustainability criteria.
Basic supplier selection criteria only look at price, delivery, and quality. A more nuanced approach will consider the total cost of ownership (TCO), product quality, capabilities, consistency, and risk. However, more companies are considering sustainability as a supplier selection criterion.
Here are some example questions that you can use to start a sustainability conversation with suppliers:
Supplier’s Environmental Standards
Do you use a certified environmental management system (EMS)?
How do you manage emissions, energy, waste, and water use?
Supplier’s Social Standards
What is your policy on human rights/fair pay/working conditions/diversity?
Do you comply with UN Global Conduct?
Do you comply with fair trade practices?
What is your health and safety record?
Do you have an anti-bribery and anti-corruption policy?
Do you comply with industry regulations and legislation?
Have you ever been prosecuted or fined for infringements?
Benefit for suppliers
Your suppliers may ask "what's in it for them" to comply with the new practices and requirements. Staying in business together is an obvious benefit. An additional benefit is shared innovation, research, and development. These initiatives impact the future success and customer satisfaction for both parties.
Sustainability is a joint effort and teamwork, however. Collaborative development in sustainability leads to new products, more intelligent solutions, and more efficient processes. The aim is to support and promote progress and improvement rather than impose penalties.
Top reasons to track your supplier's sustainability:
Joint innovation and development with sustainable suppliers
Competitive advantage through improved reputation and offering
Increasing brand value through investor and consumer support
Becoming an employer of choice and better staff engagement
Cost savings through better control over energy and resources
Better compliance with laws and regulations
Sustainability and SRM
Supplier relationship management (SRM) is a business initiative aiming to increase supplier performance through collaboration and incentives. SRM is the perfect tool for communicating targets and improving sustainability performance.
Successful SRM aims to create value for both parties. SRM is not a one-time effort. It requires consistency and good intentions. The expectation of good intent and progress should not only be limited to business performance. It should also encompass the corporate responsibility framework.
Don't neglect these 7 core areas of SRM:
The 7 core areas of SRM
Focusing on KPIs keeps sustainability at the forefront of the relationship. It also helps distinguish which suppliers to develop further. It also encourages suppliers to maintain their performance to stay in business with you.
Building a solid governance program and steering model clarifies the relationship. Plus, it can help resolve problems faster if a party is not meeting its end.
Trust and interpersonal relationships are a core part of SRM. A true partnership means having the other’s best interest in mind.
4. Technology and data
Data enables better transparency into performance. Many solutions on the market can support sustainable goals, such as CO2 analytics and third-party sustainable reporting.
SRM is a two-way street. It takes active participation to drive success.
Choose the right people to lead the relationship. These are where vital “soft” skills come into play.
7. Joint value
Ultimately, SRM should consider how both parties can benefit and grow together.
SRM for Sustainable Procurement
Sustainable performance is like any business performance metric, with targets and agreed-upon KPIs. These milestones will help in tracking progress. Now, we will cover the full scope of sustainable SRM through these steps:
Sustainable program target setting
Establishing governance models
Value creation & sustainable innovation
Let's break down each step in detail:
Sustainable program target setting
Firstly, get to know your supplier's present state: what is their sustainability status? Do they have their own goals, and are they aligned with yours?
Here are some ways of scoping sustainability targets with suppliers:
Ask for their specific sustainability objectives and metrics.
Refer to their documented history and any certifications gained, e.g., ISO.
Ask how they track their progress against their goals.
Establish if they are successfully achieving their goals.
Review of their Code of Conduct includes the same elements as yours.
Supplier segmentation enables an organization to manage its internal and external resources more efficiently. Supplier segmentation separates suppliers based on their business impact, criticality, and spending. Standard supplier segments include critical ("key suppliers"), volume, bottleneck, and routine.
Often, SRM efforts focus on strategic partners, key suppliers, or at-risk suppliers. Key suppliers have the highest amount of spend to have a positive influence in terms of sustainability targets. At-risk suppliers have the highest amount of potential risks.
This is how Sievo Customer Fazer is targeting the Cocao and Grain categories for maximum impact:
"At Fazer, we have many categories because we are in so many different food items and all their ingredients, but we have selected those which are the most important. So for us, it's the grains and the cocoa [...] So there we can, of course with our programs and our development, work directly there and try to understand the situation and help with technical support or with financing."
-Kaisa Mattson (Director Sustainability and Quality at Fazer Group Procurement) at ImpactNow 2022, Best Practices in Procurement and Sustainability Collaboration: Panel Discussion
There are many ways of identifying the risk potential of suppliers. You can use an ABC method, geographic analysis, third-party reporting, indexes, scorecards, and assessment protocols. Pareto analysis and spend analysis can show which suppliers are most at risk for supply disruptions.
Establishing governance models
An SRM governance model is the structured organization of people, controls, and mechanisms. In general, a governance model includes:
Processes and escalations for problem-solving.
Accountable people and their roles and responsibilities.
Descriptions of the corporate relationships, obligations, and levels of collaboration.
When making a governance model, top management agrees on the sustainable development targets, account management translates those targets into roadmap and performance measures, and operations ensure the execution of the objectives in day-to-day business operations.
An SRM steering group allows for a structured approach to managing relationships, making decisions, and guiding the work. Steering groups consist of experts with experience and knowledge on specific topics. The steering group of a key supplier relationship could include sustainability, human rights, or circular economy advisors.
Developing sustainability with suppliers requires continuous improvement. That means setting goals and tracking performance. Select key performance indicators (KPIs) relevant to your supplier’s and business performance. The service level agreement (SLA) specifies how and when KPIs are measured.
This is what Sievo Customer Fiskars Group is doing to help their suppliers along their sustainability journey:
“It was hard for us to set our own [science-based] targets. We are currently doing a program where we educate and help them set their own targets, and that will then help us as well. I think communication and cooperation is a key here. No one can succeed on their own, and it doesn’t make sense for us just to put pressure on them. We also have to help them—that helps all of us.”
-Kati Ihamäki (Vice President Sustainability at Fiskars Group) at ImpactNow 2022, Best Practices in Procurement and Sustainability Collaboration: Panel Discussion
Value creation & sustainable innovation
By working together, you and your suppliers can become more resource and energy-efficient, optimize your processes, reduce waste, and generate sustainable innovations. One way to ensure mutual value is by creating vested partnerships through contracting.
In sustainable supplier management, developing together is the key. Your suppliers can provide a new perspective and fresh ideas for implementing responsibility into your supply chain, product development, and sourcing. As your organization grows in maturity, you can build innovative partnerships to embed best practices in all sourcing decisions and look beyond Tier 1 suppliers.
Consider organizing industry-specific development and knowledge-sharing days. Reward and acknowledge the best performers.
Bonus: Sustainable contract models
In the HBR article "A new approach to contracts," the authors suggest that the remedy is to adopt a different kind of arrangement. A "relational contract" creates a flexible framework designed to foster collaboration. These legally enforceable contracts specify mutual goals and establish governance structures to align the parties' expectations and interests.
Contract forms a platform and structure for collaboration and sustainable development. A sustainable contract benefits both parties and evolves.
In true partnerships, each party is committed to each other's success through joint commitments and development initiatives. Traditional contracts rarely support these intentions. They only describe the transaction and commercial responsibilities of parties.
These purchase and supply agreements are often not designed to nurture mutually beneficial long-term relationships. Many use the word partnership loosely when in reality, the benefits are one-sided and favor the buyer.
Sustainability in law: Legislation examples
Sustainable procurement is not simple. The requirements for Procurement and Supply Chain are in constant development. As sustainable legislations increase, companies could lose their license to operate if they aren’t compliant.
Sustainability is no longer a demand driven by NGOs and active consumers—it’s being written into law. Working with a network of partners specialized in sustainable procurement helps keep up with these changes and updates.
In this last chapter, we cover some legislation examples to keep your organization informed and ahead of the upcoming changes. To ensure you’ll be compliant, the time to take action is now!
The German Supply Chain act
The German Supply Chain Act refers to the Act on Corporate Due Diligence Obligations in Supply Chains, or in German Lieferkettensorgfaltspflichtengesetz (LkSG) (we’ll call it “the Act”).
The Act requires large companies to identify, prevent, and address human rights and related environmental violations within their operations and their direct suppliers’ operations. The Act will come into effect from January 2023 onwards. It is the first legislative step requiring German companies to take more strict actions on sustainability. The regulations will initially apply to around 600 German companies. You can read more about the specifics in this blog (also available in German).
“We can see how large German businesses are taking this upcoming Act and its’ requirements very seriously. Companies are collecting information from their suppliers to understand the current situation. After this mandatory step, the companies tend to ask themselves; how we could use this data for business value, what to prioritize and where to start? That’s where the shift towards Procurement Analytics usually happens.”
- Jarkko Kerkola, Head of Sales & Business Development DACH, Sievo
Requirements of the German Supply Chain act
The Act ensures that companies conduct human rights and environmental due diligence. The duty to comply with environmental regulations intends to prevent harmful effects on people.
Supply chain risk management
Companies affected will need to adapt and update their risk, governance, and compliance processes to identify where the human rights and environmental risk areas are, not only in their business activities but also in their extended supply chain. The risks that companies must address include internationally recognized human rights conventions:
Violations of freedom of association
Unsafe working conditions
Remedying human rights behavior
Companies must establish a policy statement on their human rights strategy, defining their procedure for abiding by human rights and environmental due diligence obligations. The policy should also describe the process of remedying human rights and related environmental violations.
The grievance process
Companies must ensure they provide ways for affected persons to file a formal written complaint alerting the company to known human rights or environmental violations.
Documentation and reporting
A report on the status of the human rights-related due diligence obligations must be documented and published annually. This report must also be submitted to the competent authority. A government authority will be equipped with an effective enforcement capacity to monitor every company’s adherence to the new requirements.
Corporate Sustainability Reporting Directive (CSDR)
The Corporate Sustainability Reporting Directive (CSRD) is being phased in over two years, starting with the companies already covered by the Non-Financial Reporting Directive (NFRD). It will replace the current NFDR and increase the scope and requirements of sustainable reporting.
From 2025 onward, companies will be required to report on their performance in specified areas. These companies will have to disclose detailed and transparent information on defined sustainability issues publicly:
Social matters and treatment of employees
Respect for human rights
Anti-corruption and bribery
Diversity on company boards
The disclosure should indicate how they impact their business risks and opportunities as well as people and the environment.
The first set of standards will be released on the 31st of October 2022. The topics will be concerned with identifying all potential negative and positive impacts on people & environment connected with a company’s operations and value chain. Standards will likely apply to:
Greenhouse gas emissions (GHG Protocol)
Environmental footprint results (Life Cycle Assessments) and dependencies
Social responsibility (e.g., working conditions, human rights, equal opportunities)
All sustainability/ESG issues affecting the company’s financial health and operational performance.
Methodology to ensure information is of high quality
A further set of standards will be released on the 31st of October 2023. This set will help companies finetune their processes to address linking financial and sustainability reporting. It will also cover standards for alignment and consistency between EU reporting standards and public policy agreements, goals, frameworks, and regulations. You can find more details here on timing and the inclusion of more organizations in CSRD.
CSRD and Sustainable Procurement
The directive on sustainability reporting indicates that there will be a need for a robust, transparent, and verifiable reporting system that is auditable. Although the standards have not yet been published, it is expected that the environmental requirement will cover up to 15 categories, including measuring and reporting on greenhouse gas emissions (GHG 1, 2 & 3 emissions).
The reporting requirements will likely also include measuring water usage and pollution, energy use, and climate change mitigation strategies. Eventually, this means tracking the entire environmental footprint of your business operations.
Collating, cleansing, and categorizing sustainability data is a huge task that Procurement cannot achieve manually. Sustainability data required to form the “big picture” lives in various locations, forms, and data sets.
Cloud-based analytical solutions can identify data sources, automate the collection of raw data and turn it into usable information for reporting and insights. Having a single source of truth for your sustainability data enables diving deep into function and category level and following up the progress.
Modern slavery can be defined as the recruitment, movement, harboring, or receiving of humans of all ages through force, coercion, abuse of their vulnerable position, deception, or other means of exploitation for commercial or personal benefit (UK Government).
Modern slavery takes many forms. The most common types of modern slavery are human trafficking, forced labor, child labor, bonded labor, domestic servitude, descent-based slavery, slavery of the children, and forced marriage.
Modern slavery legislation
In the UK, the Modern Slavery Act came into force in 2015. It requires organizations with a turnover exceeding £36m (incl. subsidiaries) which supply goods and services in the UK to report annually. They must publish an annual statement explaining what they are doing to eliminate slavery from their businesses and supply chains.
The UK Government supplies specific guidance to help both suppliers and buyers within the public service to understand the risks of modern slavery in supply chains and take appropriate action to identify and address those risks.
Australia followed in 2018 with its Modern Slavery Act. The Australian legislation requires organizations based or operating in Australia, with a turnover exceeding AUD $100 million, to report annually. They must identify the risks of modern slavery in their operations, the actions taken to address those risks, and the effectiveness of those actions. Other entities may report voluntarily. The Modern Slavery Statements Register is accessible by the public, free of charge, on the internet.
The European Union (EU) does not have equivalent legislation to the UK or Australia, but legislation is constantly evolving. The EU has issued guidance on “forced labor” risks in operations and supply chains. Guidance is not legally binding yet. However, it is a sign of what is coming up.
Belgium is an early adopter of modern slavery and due diligence legislation. In 2021 the Federal Parliament voted in favor of a due diligence bill to strengthen the obligations of companies to identify and prevent human rights violations and to mitigate social and environmental risks in their supply chains. It includes criminal sanctions and compensation for victims.
We hope you enjoyed the read. You should now be well on your way to making a sustainable procurement plan. If you still feel unsure and lack the data and tools to make your sustainable procurement roadmap happen, we’re happy to help.
Download the FREE PLAYBOOK to begin planning how you will structure your sustainable procurement roadmap and what are the key questions to consider in the very first stages of your journey.
Reducing emissions starts with understanding them. The same applies to improving your supply chain’s diversity and social responsibility. Lack of resources and data accuracy are the biggest obstacles to an organization’s sustainability journey.
Accurate and timely data is essential in managing a company’s sustainable performance. Sustainability goals need regular review, validation, and adjustment.
Sievo helps hundreds of customers to focus their efforts and target-setting to areas of spend where it matters most. With CO2 Analytics, you can set realistic targets against your spend and follow the realization of those measures.
Want to hear how to improve your supplier performance and address the sustainability targets for your supply chain? Let’s discuss!
International Chamber of Commerce (ICC) guide to responsible sourcing represents the basic steps that organizations can take in order to implement corporate responsibility and monitor the performance of their supply chain.
The Australian Government has established a Sustainable Procurement Guide to provide guidance on how to align sustainability with the general stages of the procurement process, which supports the ICC guide.
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