The accountable supply chain: operationalising ESG with digital agreements
Now more than ever, businesses are rethinking their operations, seeking to transform themselves into more nimble and resilient organisations. Leading organisations are focusing particularly closely on their global supply chains. They are striving to enhance their supply chains’ agility and efficiency.
Companies are increasingly viewing their business strategies, investments, and business models through the lens of environmental, social and governance (ESG) metrics. However, a report by Bain and Company found that only 2% of sustainability programmes achieve or exceed their goals, with 81% “settling for dilution of value and mediocre performance.”16% fail to deliver altogether, producing less than 50% of the expected results. The most crucial step is making clear public commitments with quantitative targets. But this is just the beginning.
We recently held a (virtual) event to discuss how organisations are incorporating environmental, social and governance (ESG) metrics into investment decisions and financing, tying them to executive compensation, and of writing them into agreements.
Contrary to perceptions that undertaking ESG measures is a cost for organisations, there are several compelling business reasons to take action to improve the social and environmental impacts throughout the supply chain. Immense business value can be added and shared through a comprehensive and integrated approach towards an accountable supply chain. By improving their environmental performance, organisations can not only improve the planet’s prospects but also significantly improve their business results related to cost reduction, revenue enhancement, greater innovation, access to new markets and brand enhancement.
In this article we take a closer look at ESGs—what they are, how they can be operationalised, and the role that technology can play in this.
What Are Environmental, Social, and Governance (ESG) Criteria?
Environmental, social, and governance criteria are a set of standards for an organisation's operations that socially conscious investors use to screen potential investments. Environmental criteria consider how a company performs as a steward of nature. Social criteria examine how it manages relationships with employees, suppliers, customers, and the communities where it operates. Governance deals with a company’s leadership, executive pay, audits, internal controls, and shareholder rights. The CFA Institute has broken the ESG classifications as follows:
- Environmental Issues: Climate change and carbon emissions, air and water pollution, deforestation, biodiversity, waste management, water scarcity, waste management
- Social Issues: Customer satisfaction, Data security and privacy, gender diversity, employee engagement, community relations, human rights, labour standards
- Governance Issues: Board composition, audit committee structure, bribery and corruption, lobbying, political contributions, whistleblower schemes
Spurred by rising pressure from investors, consumers, regulators, employees and other stakeholders, more and more companies today are scrutinising the effects of their businesses.
In September 2020, the World Economic Forum’s International Business Council (IBC), in collaboration with the “Big Four” accounting firms announced the world’s first common reporting framework for environmental, social and governance standards, urging all members to measure and disclose ESG performance in their mainstream annual reports.
The framework, which defines a core set of “Stakeholder Capitalism Metrics,” helps solidify commitments the IBC secured in 2017 from 140 of the world’s largest companies to align their corporate values and strategies with the United Nations’ Sustainable Development Goals (SDGs). With less than 10 years left to achieve the SDGs, and as sanitary, economic and environmental crises converge, business leaders are setting increasingly ambitious sustainability targets—and holding themselves publicly accountable.
Unilever has committed to being “carbon-positive” by 2030 by eliminating fossil fuels from its operations and generating more renewable energy than it consumes.
What is the difference between ESG and CSR?
There is still some confusion around these terms—the primary differentiator is that measuring CSR is an internal function, while ESG is an external one. That is, CSR programmes are internally proposed and accountability is provided within an organisation, while ESG is a measurement that outside analysts can use to objectively compare the effectiveness of ESG across organisations.
The opportunities of supply chain transparency and accountability
An accountable supply chain manages the environmental, social, and economic impacts, encouraging good governance practices throughout the life cycle of the goods and services. The objective here is to create, protect, and grow long-term ESG value for all stakeholders involved in bringing products and services to market.
Today, there is an ever growing emphasis on organisational responsiveness towards the environmental and societal impact of their products and services is changing the dynamics of the market place and the way organisations do business.
Organisations must work closely with their partners in the supply chain and other key stakeholders, for effective resource management and risk mitigation. If managed well, these challenges could also provide an opportunity for businesses to:
- Discover innovative solutions
- Drive impactful action
- Realise efficiencies
- Enhance market share
Thus, operationalising ESG agendas across the entire supply chain is a business imperative.
The bottlenecks to supply chain transparency and accountability
Establishing a vision: Articulation of a vision and objectives for creating a sustainable value chain gives a perspective and a common understanding of the intent of the leadership across the organisation as well as to the external stakeholders.
Achievable, short-term objectives: One of our customers told us that the problem was ‘making it real’. When big targets are set for 20 years in the future, it might look good on paper but leaves employees questioning what impact, if any they can have and what role they should play. Targets need to be achievable and broken down so that there is an understanding of what’s involved at each stage. Leaders from every G20 country recently gathered online to discuss climate change. U.S. President Joe Biden made a pledge to cut U.S. emissions by at least 50 per cent by the end of this decade. This pledge underlines the concept of 'making it real', as an emerging understanding that climate change requires urgent action this decade, not by 2100 or even 2050.
Institutionalising sustainability in supply chains : Moving towards a sustainable supply chain is a strategic initiative, the successful implementation of which is only possible with leadership commitment. It can often be difficult to get seniors to invest in long term value such as ESG—this needs to be addressed. Measurable targets should be set for executives.
Public commitments: ESG targets must be public so that organisations are held accountable for how they are progressing.
Measurable, quantitative targets: There needs to be actionable clauses written into contracts. These targets need to be measured, monitored and reported on so that organisations are held accountable to their commitments.
ESG targets need to be operationalised. By including ESG clauses in legally binding contracts accountability is created. Below we look at how you can benefit from organisations such as the Chancery Lane Project as well as the role that innovative technology such as DocuSign can play in addressing this bottleneck.
The Chancery Lane Project
For our event, we were joined by Rebecca Annison, Global Engagement Lead at The Chancery Lane Project—a non-profit organisation which brings lawyers from around the world together to collaborate and develop new contracts and model laws to help fight climate change. The Chancery Lane enables organisations to “start using new contractual clauses that help fight climate change”.
So far they have 700 legal professionals collaborating (pro-bono) and are working with 149 organisations. By providing model laws, model clauses, and constantly running events for different industries they are addressing fundamental bottlenecks with supply chain management. The lawyers involved are on hand to draft clauses/ facilitate the drafting of clauses that are specific and measurable to fill gaps. During the event, Rebecca emphasised the importance of embedding ESG clauses into agreements.
She also shared recommendations such as:
- The necessity of businesses to face up to how much climate change has already cost them.
- Linking executive compensation to ESG targets.
What role can technology plan?
Andrey Muntyan, Value Engineer at DocuSign joined the conversation to discuss the crucial role DocuSign can play in the operationalisation of the supply chain.
Modern systems of agreement give organisations the tools to enshrine their sustainability agendas in contracts and monitor—and even ‘automate’—compliance, keeping buyers, suppliers, and suppliers’ suppliers accountable.
With a modern system of agreement, businesses can design agreement templates, clause libraries, and AI-assisted review protocols around sustainability. In short, modern systems of agreement help organisations prepare, sign, act on, and manage sustainability agreements in much the same way as other agreements.
The result could be a higher share of contracts with best-practice sustainability clauses, a higher share of sustainability objectives met, and, ultimately, real improvements to metrics like carbon productivity—the volume of carbon employed per unit of GDP (the private sector accounts for as much as 46% of greenhouse gas emissions in the U.S., with 50-70% of that figure coming from supply chains).
With DocuSign AI, the manufacturer uses natural language processing to analyse hundreds of agreements automatically. It can ensure supplier contracts include up-to-date ESG language, and that obligations are being tracked and managed accurately: that audits are conducted on the agreed schedule, and that incentives are applied—or revoked—as appropriate. Moreover, by making contract data more structured and accessible, the procurement team was able to develop best practices for transfer into other purchasing areas.
And this manufacturer is not alone. Today, organisations in industries as varied as energy production and furniture retail increasingly use DocuSign to keep themselves and their partners accountable to requirements such as responsible sourcing, carbon offsetting, and fair labour practices.
As business leaders work to implement the UN’s sustainability agenda, reporting standards, technologies, and business models are converging to better address the sustainability imperative. Agreement clouds will help connect ESG targets to outcomes.