In a quickly evolving regulatory and market landscape – one that requires large enterprises to report on a growing number of ESG metrics – the necessity to disclose ESG data will no doubt trickle down through the supply chain, and the requests on smaller suppliers will increase in accuracy and the number of criteria. In this article, we provide an overview of the reasons companies are increasingly expected to report on ESG activities and tips on how to respond to these data requests.
Companies look to their suppliers to enhance ESG performance
A 2022 report from CDP established that end-to-end supply chain (indirect) emissions could be 11.4X higher than the direct emissions (or Scope 1-2) from a company’s operations. Like emissions, most other ESG metrics, such as water, waste, and human rights issues, are hidden in companies’ networks of suppliers.
Supply chain emissions are on average 11.4 times higher than operational emissions (Scope 1-2), more than double previous estimates, due to suppliers improving their emissions accounting.
CDP, Global Supply Chain Report, 2022
With a clear link between suppliers’ efforts to improve their ESG performance and buyers’ ability to meet their own ESG targets, comply with regulations, and mitigate risk, a growing number of businesses are looking to collect ESG data and mitigate ESG impacts in their supply chain. As buyers look to highlight their sustainable products and services in a market that favors transparency and action, suppliers will be expected to share more ESG data and improve their ESG performance
Evolving ESG standards and regulatory landscape for suppliers
Across the globe, a constantly increasing number of countries are creating policies and regulations around corporate reporting of ESG and climate metrics. The three most far-reaching pieces of legislation are the SEC’s climate disclosure regulation, the EU’s Corporate Sustainability Reporting Directive (CSRD), and Corporate Sustainability Due Diligence Directive (CSDDD). Each regulation is different in scope, e.g., the number of companies they affect and the timing of their compliance. All are important to note for suppliers as they will likely mean smaller suppliers will be mandated to share a host of ESG and climate data.
SEC Climate Disclosure Regulation: The eagerly anticipated proposed Rules to Enhance and Standardize Climate-Related Disclosures for Investors will mandate publicly traded companies to share their climate data in the same way they do their financial data. Among the requirements to share climate risks, governance information, and climate targets in the proposals is the provision of scope 3 emissions (emissions in the supply chain) for larger companies and companies with a scope 3 target. This means larger public companies in the US could start asking for emissions data if scope 3 is included in the finalized ruling, due in the second half of 2023.
CSRD: The CSRD is the EU’s most extensive piece of sustainability reporting legislation to date. It mandates over 50,000 EU and 11,000 non-EU companies to report on over 100 ESG performance indicators. These indicators also include reporting the social and environmental footprint of companies’ value chains. Therefore, companies that are suppliers to those affected by the CSRD can expect to be required to share their full environmental footprint, including biodiversity, deforestation, carbon emissions, etc., starting in 2025.
CSDDD: The EU Parliament in 2023 agreed to enact the CSDDD, which will affect 4,000 non-EU and 12,800 EU companies. The CSDDD is focused on ensuring companies are doing their due diligence across their supply chains. It will require companies to identify and mitigate negative human rights and environmental impacts in their value chains. However, companies are not expected to comply with the CSDDD until 2030.
In addition to the growing number of regulations, the array of ESG and climate standards are all beginning to coalesce around the International Sustainability Standards Board’s (ISSB) standards for climate and sustainability. Including scope 3 in the ISSB standards, coupled with their likely global adoption, will mean that every large company will eventually be looking for emissions data from their suppliers and likely other ESG metrics in the future.
Growing expectations for supplier ESG data
As large companies commit to their own ESG targets, they’re increasingly mandating that suppliers align with their own goals. This isn’t entirely new, as Supplier Responsibility Programs and Supplier Code of Conduct guidelines have been the standard for some time. While such programs have historically focused more on the governance side of ESG, e.g., sourcing, pricing, and business ethics, increasingly explicit emissions reduction targets and other ESG targets are being included in supply chain partner requirements. Companies that once engaged only a pilot group of key suppliers or those that pose the greatest material risk to financials or brand if their emissions are not quantified and managed, are now driving towards 100% supplier compliance.
Companies are now expecting their suppliers to set ambitious science-based emissions targets, as well as strict deforestation, water, diversity, equity, and inclusion (DEI) goals, and much more. To keep up with the deluge of data needed to meet these goals and to build effective strategies to implement them, comprehensive ESG measurement tools are essential.
Sooner or later, buyers will start asking suppliers to regularly report a growing list of ESG data. Suppliers should start to prepare that data today to meet requirements coming down the line. Leaders that kick start the process today will be rewarded with an improved brand reputation and a competitive advantage. Laggards could be left behind, losing deals, and exposing themselves to financial risk.
Robust ESG measurement tools encompassing not only GHGs but also waste, water, DEI, etc., will be essential to help suppliers meet these demands.
At Good.Lab, we have a 360-degree view of the supplier and buyer relationships – we’ve worked with leading retailers and major buyers to develop supplier engagement strategies and have also worked with suppliers on how best to engage customers. Our team keenly understands the requirements of your customers through our work and is ready to empower suppliers to meet those demands. Regardless of the requirements, if you are a supplier being asked to capture and share ESG data, we can help you prepare now.
If you’re ready to establish, develop an ESG strategy, measure and set goals, and implement solutions for improving your performance in line with your buyers’ expectations. Let’s Talk!
Disclaimer: Good.Lab does not provide tax, legal, or accounting advice through this website. Our goal is to provide timely, research-informed material prepared by subject-matter experts and is for informational purposes only. All external references are linked directly in the text to trusted third-party sources.
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