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Addressing ESG in Your Supply Chain

Just as you’re getting a handle on your organization’s sustainability strategy, the bar has been raised anew: Your company’s ESG set of risks and opportunities has expanded beyond your operational scope and into your supply chain. As companies approach your annual contractor and vendor review meetings, we at Adamantine have new best-practice recommendations for oil and gas leaders.

Both of these things are true:

  • Leaders are grappling with continually updating ESG- and climate-related strategies within their span of control: their own operations.
  • But those leaders now face new expectations to evaluate and address ESG risks beyond company operations — all of which presents an opportunity to set their companies apart.

The situation

ESG frameworks, rating platforms, and questionnaires are increasingly providing company management with assessments of their supply chains and contractors. While it makes intuitive sense for you to understand the risks associated with your suppliers, vendors, and contractors, conducting these analyses turns out to be difficult. The challenges oil and gas companies face in doing so range from having small suppliers who don’t track key metrics to inconsistent approaches to measurement among even their most sophisticated contractors.

But even though it’s difficult, today’s leading companies are expected to disclose and improve their supply chain management in many ESG reporting channels. Here’s what you need to know:

  • In 2022, CDP noted a 38 percent increase in disclosure, with more than 18,700 companies participating. Oil and gas companies are increasingly responding to climate change and water security questionnaires, which include questions about how they engage with their supply chains on climate-related issues and whether their suppliers must meet climate-related requirements. Participating companies can now request that organizations within their supply chains respond to CDP.
  • While ESG-scoring platforms vary in the information they request and how they weigh their topics, more questions around supply chain management continue to be added. For example, Institutional Shareholder Services (ISS) ESG ratings and rankings include questions about how suppliers and contractors are addressed in existing company policies and audited for compliance with stated ESG plans, and whether ESG disclosures are included in screening and procurement. Many of the questions focus on supplier diversity, human rights management, environmental performance, and labor practices.
  • The looming (and now waning) potential of mandatory Scope 3 emissions disclosure under the proposed Securities and Exchange Commission’s Enhancement and Standardization of Climate-Related Disclosures rule has prompted company leaders to seek more information about the emissions performance of their supply chain partners. The U.S. Environmental Protection Agency’s GHG Corporate Protocol’s Scope 3 categories involve the emissions of purchased goods and services, capital goods, and upstream and downstream transportation and distribution.

The critical mistakes companies are making

  • Simply checking the box. Analyzing the potential ESG risks and opportunities related to your supply chain isn’t a one-time exercise. Failing to set up a process to continually analyze, monitor, and address ESG topics in your procurement and supply chain management could result in overlooked opportunities and underestimated risks, including
    • Opportunities to capitalize on your supply chain partners’ expertise, technological advantages, or networks to improve performance in key areas.
    • Opportunities to learn about emerging technologies or initiatives from supply chain partners that your peers haven’t yet implemented.
    • Risks related to sourcing issues further down your supply chain that could result in economic upsets in future years.
    • Risks around a supply chain partner’s retention that could limit your ability to grow aspects of your operations in your expected timeframe.
  • Asking for information you won’t use. Service companies, vendors, and contractors cringe at the mention of the ESG questionnaires they receive in vetting and onboarding from platforms, such as Veriforce, ISN, and EcoVadis. (We know! We have to complete them, too!) The questionnaires can be time-intensive and detail-oriented. Requesting information that you don’t plan to integrate into screening and management is a waste of effort for your valued partners.

Seize the day

There are many ways to engage your supply chain in ESG, and progress may be incremental. The key is to get started and socialize the importance within your organization. Companies can take these first steps to navigate the evolving expectations:

  • Identify your pressure points. Survey the relevant teams within your organization to understand the requests your company is receiving regarding ESG and your supply chain. Understanding the whole pictures is key to prioritizing resourcing.
  • Dive deep into your current vetting processes. Take time to understand what information you currently request, how it is used, and how you validate it. You may uncover mistakes you are making, opportunities for refinement, and topics worth dropping.
  • Talk to your supply chain partners directly. Engage your partners to understand what disclosures they can make, what challenges they have related to practices or policies, what sustainable progress is underway, and how changing expectations could affect your contractual relationships. Considering their input when developing a strategy will result in more realistic and streamlined processes.
  • Incorporate your supply chain into materiality assessments. Make sure your partners are participating in your materiality assessments to understand how they may be able to support your sustainability goals. Also include questions or prompts related to your supply chain in questionnaires to other stakeholders, such as investors, to understand more about how critical the supply chain is to your ESG strategy.
  • View this as an opportunity. Engaging your supply chain on sustainability opens to the doors to new venues for ESG progress. Vendors and contractors may have ideas and offerings that help reduce emissions and water use, support your diversity pipeline, and mitigate potential risks far in advance.

Thinking — and executing (!) — beyond the scope of your own operations is what will set you apart as a leader. Want to make changing ESG expectations work for you? Reach out — we are now committing to clients with engagements starting in February 2023. Thank you to Anne Carto Kurtis for co-authoring this piece with me.

To finding unexpected, shared successes,

Tisha

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