The 'G' in ESG: Steering the Supply Chain

Key Statistics on Governance Factor of ESG

Governance, the 'G' in ESG, plays a crucial role in steering the supply chain. Here are some key statistics from 2023-2024 that highlight the importance of governance in today's business landscape: 1. As of 2023, 90% of S&P 500 companies released ESG reports.
2. ESG-related institutional investments are projected to reach $33.9 trillion by 2026.
3. A substantial 83% of consumers believe companies should actively shape ESG best practices.
4. Environmental, Social and Governance (ESG) assets are on track to exceed $50 trillion by 2025, representing more than a third of the projected $140.5 trillion in total global assets under management, according to Bloomberg Intelligence's (BI).
5. Bloomberg Intelligence's (BI) expects ESG ETFs to reach $1 trillion and ESG Debt $11 trillion by 2025.
6.ESG considerations are considered by 89% of investors when making investment decisions.
7. ESG investments are expected to constitute over 20% of assets under management by 2026.
8. In 2023, 76.2% of the 3,000 largest U.S. companies mentioned climate change as a risk in their 10-K reporting, up from 68.2% a year prior.
9. 85% of investors think ESG investments build resilience and unlock better financial returns.
10. However, 75% of companies believe they're not ready for regulation or ESG data assurance. These statistics underscore the growing importance of governance in corporate strategy and supply chain management. They represent a shift in how companies operate and invest, with sustainability becoming a mainstream business imperative. Therefore, businesses are encouraged to consider integrating governance factors into their supply chain management practices.

Introduction

Environmental, Social, and Governance (ESG) factors have become a crucial part of business strategy in the 21st century. ESG stands for environmental, social, and governance and refers to a set of standards used to measure an organization's environmental and social impact. It's typically used in the context of investing, although it also applies to customers, suppliers, employees, and the general public. The importance of ESG has been vividly clear, whether it's on a global scale or within its local community. In fact, ESG-related investments now account for a third of the money managed globally.

The 'G' in ESG stands for Governance, which is increasingly relevant in today's business landscape. Governance is a cornerstone of sustainable businesses. It encompasses various corporate aspects that are part of the overall assessment when it comes to ESG reporting. Examples include transparency policies, codes of conduct for employees, or a diverse board. The importance of good governance may best be illustrated through its absence. An example would be executives or directors engaging in activities like fraud or insider trading or unenforced conflicts of interest.

Supply chain management plays a significant role in shaping a company's governance structure. Supply chain governance is multidimensional and includes initiating, developing, and maintaining relationships between each 'link' in your supply chain. It coordinates the way financial, material, and human resources are earmarked within the flow and the framework for decision-making. For instance, ethical sourcing practices reflect a company's commitment to business ethics. Similarly, transparency in the supply chain is a testament to the company's accountability.

In 2023, national and global economies continued to recover from lingering COVID-19 disruption, with persistent job growth and rising productivity convincing economists to revise their recession predictions; global supply chains continued to adjust for Russia's ongoing war on Ukraine. Amid the challenges faced globally in 2023 and the complexity likely to continue in 2024, businesses are increasingly recognizing the imperative to build sustainable, resilient models. Thomson Reuters research indicates that 71% of C-Suite and functional leaders anticipate the growing significance of ESG in corporate performance.

Deep Dive into Governance Factors

Governance, the 'G' in ESG (Environmental, Social, and Governance), is a broad term that encapsulates various factors such as Board Structure and Independence, Executive Compensation and Accountability, Shareholder Rights and Transparency, Corporate Structure, Business Ethics and Anti-Corruption Measures, Board Diversity and Representation, Compliance Function, Risk Management Procedures, Stakeholder Engagement, and more. These factors are part of the overall assessment when it comes to ESG reporting. They encompass the structures, processes, and mechanisms through which decisions are made, implemented, and evaluated. By adopting suitable governance models, organizations can enhance transparency, accountability, and effectiveness in achieving their objectives and fulfilling their obligations to stakeholders.

1. Board Structure and Independence Board structure and independence are key governance factors. A well-structured, diverse, and independent board can better represent the interests of shareholders and provide strategic guidance. For instance, the average size of the board of the Top 100 Companies decreased from 12.5 directors in 2015 to 11.6 directors in 2020, and 39 of the Top 100 Companies have split the CEO and board chair positions.
2. Executive Compensation and Accountability Executive compensation and accountability are crucial governance factors. Fair and transparent executive compensation practices align the management's interests with the company's long-term goals. However, the specifics of executive compensation can vary widely among companies and industries.
3. Shareholder Rights and Transparency This includes the rights of shareholders and the transparency of the company's operations. Companies with strong shareholder rights and high transparency are often favored by ESG investors.
4. Corporate Structure Corporate structure refers to the organization of a company, including its legal structure and internal hierarchy.
5. Business Ethics and Anti-Corruption Measures Companies are expected to adhere to high ethical standards and implement measures to prevent corruption.
6. Board Diversity and Representation Increasing diversity and representation at the board level has been shown to provide consequential benefits to businesses, improving both their governance and profitability.
7. Compliance Function Ensuring that there is a strong compliance function within the company to adhere to laws, regulations, and standards.
8. Risk Management Procedures Implementing robust risk management procedures to identify, assess, and manage potential risks.
9. Stakeholder Engagement This involves communicating with all parties affected by the company's operations, including suppliers and customers.

The impact of these governance factors on businesses is significant. Good governance creates transparent rules and controls, guides leadership, and aligns the interests of shareholders, directors, management, and employees. It helps build trust with investors, the community, and public officials. Corporate governance can give investors and stakeholders a clear idea of a company's direction and business integrity. It promotes long-term financial viability, opportunity, and returns. It can facilitate the raising of capital. Good corporate governance can translate to rising share prices. It can reduce the potential for financial loss, waste, risks, and corruption. It is a game plan for resilience and long-term success.

In 2023, national and global economies continued to recover from lingering COVID-19 disruption, with persistent job growth and rising productivity convincing economists to revise their recession predictions. Amid the challenges faced globally in 2023 and the complexity likely to continue in 2024, businesses are increasingly recognizing the imperative to build sustainable, resilient models.

The Connection between Governance Factors and SCM

Supply chain management (SCM) significantly influences a company's governance structure. SCM is concerned with the operational side of the supply chain and strategic coordination of partner actions. Supply chain governance integrates coordination of operations and ensures that the proper policies are implemented and controlled. It means taking intentional actions to affect partner relationships. For instance, ethical sourcing practices reflect a company's commitment to business ethics. Similarly, transparency in the supply chain is a testament to the company's accountability.

The governance footprint of supply chains is vast, with each stage contributing to the overall governance impact. The footprint includes all the activities that are undertaken to maintain these logistic operations. For instance, people, transportation, fuel, and equipment. But it is warehouses that play a particularly important role in a company's logistics footprint. According to Carbon Disclosure Project (CDP), an international nonprofit that promotes environmental disclosure, the impact of end-to-end supply chains on emissions is more than five times that of companies' direct operations.

Different stages of the supply chain contribute to the overall governance impact in various ways. For example, the Supply Chain Operations Reference (SCOR) model runs through 5 supply chain stages: Plan, Source, Make, Deliver, Return. Each movement is crucial, and every stage contributes its unique cadence to the activity of commerce.

The planning stage involves a wide range of activities. Companies must first decide on their operations strategy.

The sourcing stage organizes the procurement of raw materials and components.

The making stage is where the products are manufactured.

The delivery stage involves the distribution of the finished goods.

The return stage handles the return of defective or unwanted products.

In 2023, amid global disruptions, there were some key supply chain trends to manage. Managing an organization's response to these trends was a critical opportunity in the year ahead. At KPMG, from within their Global Operations Centre of Excellence, they firmly believed that nations would be skeptical about cross-border trade cooperation; cyber criminals would ramp up activity; there would be key material access turmoil; manufacturing footprints would change shape; retail and distribution supply chains were morphing rapidly; supply chain technology investments would accelerate; and on the ESG front, scope 3 emissions would be scrutinized – notably, by investors and regulators in addition to the environmentally conscious consumer.

In conclusion, SCM plays a significant role in shaping a company's governance structure. The governance footprint of supply chains is vast, and different stages of the supply chain contribute to the overall governance impact. Therefore, companies need to pay close attention to their SCM practices to ensure good governance.

Strategies for Integrating Governance Factors into SCM

Integrating governance factors into supply chain management (SCM) requires a strategic approach. Here are some key strategies that companies can adopt:

1. Ethical Sourcing Ethical sourcing is a critical aspect of modern business strategy, focusing on sustainable and transparent procurement practices. By adhering to ethical standards, companies can enhance their brand reputation, foster consumer trust, and mitigate legal and reputational risks.
2. Transparency Transparency in the supply chain is a testament to a company's accountability. Companies committed to ethical sourcing practices maintain transparency in their operations to allow consumers and stakeholders to see where products come from and under what conditions they were made.
3. Stakeholder Engagement Stakeholder engagement involves communicating with all parties affected by the company's operations, including suppliers and customers. Building solid relationships with suppliers and stakeholders promotes ethical sourcing.
4. Risk Management Risk management involves identifying, assessing, and managing potential risks in the supply chain. Effective risk management can help companies mitigate supply chain disruptions and ensure business continuity.
5. Compliance Monitoring Companies need to ensure that they and their suppliers comply with all relevant laws, regulations, and standards. This includes labor laws, environmental regulations, and industry-specific standards.
6. Sustainable Procurement Sustainable procurement involves sourcing goods and services in a way that achieves value for money on a whole life basis in terms of generating benefits not only to the organization, but also to society and the economy, while minimizing damage to the environment.
7. Supply Chain Integration Supply chain integration is a process of integrating and coordinating the flow of materials, information, and finances as they move from supplier to manufacturer to wholesaler to retailer to consumer. This process involves coordinating and sharing information among all the parties involved in the supply chain to improve long-term performance. 8. Technology Adoption Leveraging technology can help companies manage their supply chains more effectively and efficiently. This can include using SCM software to coordinate and consolidate various supply chain steps, or using technologies like blockchain to enhance transparency.
9. Continuous Improvement Continuous improvement involves regularly reviewing and improving supply chain processes to enhance efficiency, reduce waste, and better align with the company's strategic goals.

These strategies can be implemented at different stages of the supply chain and can help companies ensure good governance and drive sustainable growth.

Benefits of a Governance-focused Supply Chain

A governance-focused supply chain can lead to numerous benefits for a company. Here are some key benefits that can be achieved by integrating governance factors into supply chain management:

1. Improved Investor Relations Investors are increasingly considering ESG factors in their investment decisions. Companies with strong governance practices in their supply chains are likely to attract more investors. For instance, according to the Nasdaq's 5th Annual IR Issuer Pulse survey, 64% of investor relations (IR) professionals indicated they have not yet adopted artificial intelligence (AI) into their processes, but are interested in understanding its potential..
2. Risk Mitigation Effective governance can help companies identify and manage potential risks in their supply chains. This can prevent supply chain disruptions, ensure business continuity, and protect the company's reputation. According to PwC's Global Risk Survey 2023, leading organizations are changing the way they see risk by embracing the transformative power of technology and data in pursuit of opportunity and value creation.
3. Regulatory Compliance Compliance with laws and regulations is a key aspect of governance. Companies that integrate governance factors into their supply chains are more likely to comply with relevant laws and regulations, thereby avoiding legal issues and penalties.
4. Enhanced Brand Reputation Ethical sourcing, transparency, and stakeholder engagement can enhance a company's brand reputation. Consumers are increasingly favoring brands that are socially responsible and transparent about their supply chain practices.
5. Operational Efficiency Good governance can lead to more efficient supply chain operations. For instance, ethical sourcing can lead to better quality inputs, while transparency can lead to improved coordination with suppliers.
6. Sustainable Growth By aligning their supply chain practices with their sustainability goals, companies can achieve sustainable growth. This involves not just minimizing negative impacts, but also maximizing positive impacts on society and the environment.
7. Innovation The integration of governance factors into SCM can drive innovation. For example, companies might develop new products or processes in response to governance-related challenges or opportunities.
8. Competitive Advantage Companies that successfully integrate governance factors into their SCM can gain a competitive advantage. They can differentiate themselves from competitors and potentially command higher prices for their products or services.

A governance-focused supply chain can contribute to a company's overall ESG score. Companies can collaborate with their suppliers to develop and enforce codes of conduct that outline expectations for labor rights, environmental stewardship, and responsible sourcing practices. Companies can also provide training or resources to help suppliers improve their own ESG performance, thereby strengthening the entire supply chain.

There is strong evidence supporting these benefits. For instance, a study by Harvard Business Review found that work/life balance programs, which are part of good governance, boost productivity, reduce turnover, and improve employees mental and physical health. Another study found that physical activity significantly reduces anxiety symptoms in older adults. Furthermore, a report by McKinsey found that companies with higher ESG ratings have a 10 to 20 percent valuation uplift compared to their peers.

In conclusion, a governance-focused supply chain can yield numerous benefits. It can enhance investor relations, mitigate risks, ensure regulatory compliance, enhance brand reputation, improve operational efficiency, drive sustainable growth, foster innovation, and provide a competitive advantage. Therefore, companies need to pay close attention to their SCM practices to ensure good governance and drive sustainable growth.

Challenges and Solutions

While integrating governance factors into supply chain management (SCM) can yield numerous benefits, it's not without challenges. Here are some of the key challenges and potential solutions:

Challenges 1. Data Management: One of the biggest challenges organizations face when implementing ESG standards is data management. This includes identifying relevant data sources, collecting and analyzing data, and reporting on ESG metrics.

2. Scope Definition: Defining the scope of ESG due diligence can be a challenge. This involves determining which topics should be part of an ESG due diligence workstream.

3. Quality Assurance: Receiving quality data from target companies can be a challenge. This is particularly true for smaller companies or those in emerging markets that may not have robust data collection and reporting systems in place.

4. Quantification: Quantifying potential findings can be difficult. This involves translating qualitative information into quantitative metrics that can be used for decision-making.

5. Resistance to Change: Implementing new strategies and practices can often meet resistance within the organization. This can be due to a lack of understanding or fear of the unknown.

6. Lack of Knowledge: There may be a lack of knowledge or understanding about ESG and its importance within the organization. This can make it difficult to get buy-in from all levels of the organization.

Solutions 1. Technology Adoption: Technology can play a crucial role in overcoming these challenges. For instance, software that supports data collection, analysis, and reporting on ESG can help organizations manage their data more effectively.

2. Focused Approach: When it comes to scoping, it's becoming increasingly clear which topics should indeed be part of an ESG due diligence workstream. This involves moving the focus from values to value.

3. Collaboration: Collaboration with suppliers and other stakeholders can help improve the quality of data. This involves building strong relationships and fostering open communication.

4. Expertise: Leveraging expertise, either internally or externally, can help with quantification. This involves using experts who are familiar with ESG issues and have experience in translating qualitative information into quantitative metrics.

5. Training and Education: Providing training and education to all levels of the organization can help overcome resistance to change and increase knowledge about ESG. This can involve workshops, seminars, or online training courses.

6. Leadership Commitment: Having strong commitment from leadership can help drive the implementation of ESG strategies. Leaders can set the tone by demonstrating their commitment to ESG and driving its integration into the organization's culture and practices.

In 2023, amid global disruptions, there were some key supply chain trends to manage. Managing an organization's response to these trends was a critical opportunity in the year ahead. At KPMG, from within their Global Operations Centre of Excellence, they firmly believed that nations would be skeptical about cross-border trade cooperation; cyber criminals would ramp up activity; there would be key material access turmoil; manufacturing footprints would change shape; retail and distribution supply chains were morphing rapidly; supply chain technology investments would accelerate; and on the ESG front, scope 3 emissions would be scrutinized – notably, by investors and regulators in addition to the environmentally conscious consumer.

In conclusion, while there are challenges in implementing the "Governance" factor of ESG into supply chain management, there are also emerging solutions. By adopting a strategic approach and leveraging technology and expertise, companies can effectively integrate governance factors into their supply chains.

Case Studies

In this section, we will explore some companies that have successfully integrated governance factors into their supply chain management. These case studies provide valuable insights into the practical aspects of implementing these strategies.

1. Walmart Walmart, the world's largest retailer, has demonstrated a highly successful and integrated supply chain, propelling its growth and dominance in the retail industry. Walmart has implemented sophisticated barcode scanning and point-of-sale systems to collect real-time data from its stores. By employing these technologies, Walmart gains valuable insights into customer buying behavior, sales trends, and inventory levels. The ability to analyze this data enables the retail giant to make informed decisions on product procurement, inventory management, and demand forecasting.
2. Nike Nike has made significant strides in improving social and environmental conditions in its global supply chain. The company's approach has evolved through integrated management of sustainability and innovation, increased supplier incentives, and systems innovations intended to prevent problems before they arise.
3. Harvard University Harvard University aims to be fossil-fuel neutral by 2026 and totally free of fossil fuels by 2050. As part of this goal, the university is trying to decarbonize its supply chain and considers replacing cement with a low-carbon substitute called Pozzotive®, made with post-consumer recycled glass. A successful pilot project could jump-start Harvard's initiative to reduce embodied carbon emissions.

The Future of Corporate Governance in SCM

As we look towards the future, the importance of governance in supply chain management is only set to increase. Several emerging trends and future directions are shaping the landscape of corporate governance in supply chain management:

1. Emerging Technologies Advanced technologies are shaking up the supply chain world. With quickly evolving capabilities across generative AI (GenAI), data analytics, automation, machine learning, Internet of Things (IoT), blockchain and more, the 'smart' supply chain is well on its way to becoming the new normal. Enabled with a raft of technology developments, a new paradigm is emerging in supply chain management. One where organizations can respond quicker to day-to-day requests, proactively address problem solving, and reduce errors and inefficiencies. It can also provide greater visibility, transparency and traceability. Most importantly, organizations will be more resilient to future supply chain shocks. Through 2024, 50% of supply chain organizations will invest in applications that support artificial intelligence and advanced analytics capabilities.
2. Increasing Focus on ESG The term ESG may have become a target for conservative activists and officeholders, but business leaders can't minimize how climate, human capital and ethical dealing affects supply chains, customer bases, materials availability and more. Sustainability has an increasing impact on the bottom line. We see boards shifting from a regulatory focus to asking management what steps the company is taking toward sustainability, and how those steps will affect the business.
3. Increasing Shareholder Activism The headlines may be smaller and less frequent, but shareholder activists are initiating actions at pre-COVID levels. Universal proxy has created general uncertainty for boards while giving activists opportunities and leverage. Experience shows they can win concessions and even board seats by approaching the company. These trends will likely influence supply chain management practices in the future. For instance, the adoption of emerging technologies like AI and blockchain can enhance transparency and efficiency in the supply chain. The increasing focus on ESG can lead to more sustainable and ethical supply chain practices. The rise in shareholder activism can push companies to be more accountable and transparent in their supply chain operations. In conclusion, the future of corporate governance in supply chain management will be shaped by these emerging trends and future directions. Companies that adapt to these changes and integrate governance factors into their supply chain management will be better positioned to succeed in the future.

Conclusion

In conclusion, integrating governance factors into supply chain management is not just a trend, but a necessity in today's business landscape. By adopting suitable strategies and leveraging technology and expertise, companies can ensure good governance and drive sustainable growth. Therefore, businesses are encouraged to consider integrating governance factors into their supply chain management practices. As we move forward, the importance of governance in supply chain management is only set to increase. Companies that adapt to these changes and integrate governance factors into their supply chain management will be better positioned to succeed in the future.