Suppliers Are The Secret Sauce To Manufacturers’ ESG Success

The first notable public mention of environmental, social and governance, or ESG, was circa 2006. Back then, it was included in the United Nations Principles for Responsible Investment. Fast forward and today it’s become a household name and central to nearly every industry.

Much of this transition has been driven by tightening government regulation, married with state and federal policymakers’ focus on holding organizations accountable to their climate footprint, societal impact, and standards of governance.

Yet for manufacturers, an effective ESG program is about much more than simply compliance; it’s a strategic imperative. Firms that put strong ESG principles at the heart of their business can create both short- and long-term value in a variety of ways.

Strategic value

Chief among these is the ability to develop better, more trusted relationships with customers and talent. People today, especially younger generations, care deeply about the world’s environmental, social and ethical issues. They want to buy from and/or work for companies that clearly share their values and concerns.

Firms that demonstrate meaningful ESG progress are also more likely to attract a new wave of climate-conscious and socially minded investors. They can even benefit from cost savings driven by greener, more efficient operating practices – something 61% of respondents cited as their main motivator for developing a sustainable supply chain during a recent EY study.

Seizing these opportunities requires manufacturers to have a deep and strategic ESG commitment that begins at the board and C-suite level and runs all the way to the shop floor. This commitment should influence everything from product development and sustainable finance to their use of technology to reduce energy consumption, smarten delivery logistics and reduce waste.

Beyond their own four walls

But the work they do inside their own organization is also just one part of the story. Between 86% and 95% of a manufacturer’s ESG impact is the result of activity by their suppliers, according to UN Principles for Responsible Investment research. While this figure varies slightly depending on the manufacturing segment in which they operate, what’s clear is that a firm’s ability to build an effective ESG brand rests on far more than just what happens within their own four walls.

Manufacturing companies should act now to enhance their understanding of their supply chain. They should have a clear visibility of how and where they work with various partners to identify opportunities that unlock value and minimize risk. After all, a manufacturer’s component supplier may be operating in a whole different continent, but in the eyes of their stakeholders, its ESG performance is just as important to the manufacturer’s overall brand as its actions in the US.

To take a recent high-profile example, last year a Malaysian palm oil producer came under fire due to forced-labor allegations. As a result, U.S. Customs and Border Protection barred its goods from entering the country. This had a huge knock-on effect for several well-known food manufacturers, both from an operational standpoint as it disrupted their supply of a key ingredient, and from a reputational one as they found themselves publicly linked to a partner accused of dubious operating practices.

This clearly underlines the kind of risk manufacturers can face. Yet more positively, if they can build the necessary knowledge of their supply network, they have a greater chance of spotting any potential issues like this in advance. They can then act quickly to deal with it before it has an impact, either by working with the relevant partner to correct things or by discontinuing the relationship.

Once they have these insights form their supply network, the next step is to develop a more mature ESG program that works for everyone. A recent white paper found that 75% of manufacturers lack confidence in their suppliers’ ability to support their own organization’s ESG goals. As a result, many tend to bombard partners with guidelines, regulations and even sanctions aimed at forcing their hand.

Yet a more productive approach is for manufacturers to collaborate with their supply base to create a program that focuses on business continuity, market access and positive brand reputation for all parties. That means building methodologies and tools that enable suppliers to move forward on both their individual and collective ESG journeys – from sharing data around performance and objectives to creating dashboards and machine learning platforms that automate engagement, sharpen decision-making and identify areas for improvement.

A collaborative mindset

Put another way, manufacturers must shift their mindset, viewing their supply chain as an integral and collaborative part of their ESG strategy rather than a third-party threat to it.

Indeed, by investing the necessary time, energy and resources into enabling their supply ecosystem to deliver meaningful ESG progress, they can go further faster in meeting their own environmental, societal and ethical goals while also feeling the brand-building benefits of being seen as making a positive contribution to society.

After almost two decades of talk around ESG, firms are increasingly judged by their actions. By extending those actions to every point of their supply chain, manufacturers can turn the risk of failing to meet stakeholders’ evolving ESG expectations into an opportunity to deliver long-term operational, financial and reputational success.

The views reflected in this article are the views of the author and do not necessarily reflect the views of Ernst & Young LLP or other members of the global EY organization.