ESG becomes a critical link in the supply chain

In response to growing pressures from their stakeholders, Canadian companies are reevaluating their entire supply chain to determine the human, environmental, and socioeconomic impacts of their products or services, finds recent KPMG in Canada research.

Almost two-thirds (64 per cent) of small- and medium-sized Canadian companies surveyed by KPMG say they currently factor environmental, social and governance (ESG) principles including climate change into their supply chain management. Similarly, 63 per cent also said that they have hired, or plan to hire, an “ethical sourcing manager” to ensure their suppliers are aligned to their ESG values in principle and practice. Such a role also entails monitoring supplier non-conformance and helping suppliers become compliant.

“The push in recent years from multinationals and governments to weave ESG into their procurement requirements is having an impact, as more and more suppliers, large and small, are striving to adhere to social and environmental standards,” says Jean- François Letarte, Partner, Supply Chain Advisory, Management Consulting, KPMG in Canada. “The global COVID-19 pandemic and Russia-Ukraine conflict exposed the vulnerabilities in supply chains and brought ESG to the forefront of the corporate agenda. The supply chain is no longer a back-office function. The public, consumers, investors, and increasingly, regulators around the world today expect companies to pay more than lip service to ESG.”

Mr. Letarte, KPMG’s national subject matter adviser in procurement transformation, says it’s no longer enough to know what your Tier 1 supplier is doing. Business executives are expected to have visibility upstream, that is, on all materials, people, and environmental factors that go into the product or service, and even influence their supply chain beyond the first tier to the second, third and so on. Mature organizations in the area of procurement convey their expectations and standards to their supplier base and build programs to monitor, measure, and influence their suppliers through their procurement requirements and in their critical supply contracts, he says.

“A company’s ESG goals need to be intentional and implemented throughout the entire business, including procurement,” he says. “It’s one thing to have policies and observe progress year over year, but you need to embed ESG into your practices and put dedicated resources behind it, monitoring and adjusting specific actions over time, to deliver on your goals.”

Mr. Letarte points out that most companies find it challenging to follow through on their ESG policies. “Once they’ve reported on their normal state of affairs, a lot of companies then struggle to show tangible progress against their ESG goals,” he says.

When asked to identify the challenges or barriers to delivering on their ESG goals, small- and medium-sized Canadian businesses surveyed by KPMG highlighted increased or frequently changing regulations, not having the appropriate technology and tools to effectively measure and track their ESG initiatives and lacking the skills and expertise to implement solutions. This can be especially difficult if you lack proper ESG measures with your suppliers, adds Mr. Letarte.

As a result, most companies find it difficult to clearly communicate their commitments and demonstrate progress. Six in ten (59 per cent) small- and medium-sized businesses acknowledged that they “struggle to articulate a compelling ESG story” and 61 per cent struggle to overcome stakeholder skepticism, or the perception of greenwashing. A similar percentage (61 per cent) say they expect to rely increasingly on external assurance or validation of their ESG data.

“If companies don’t effectively set measures up and down their operations, they won’t know if their investments are making a difference – and they’ll lose the confidence of their investors, customers and employees,” says Mr. Letarte. “The bar is being raised on reporting and monitoring, so it is critical that companies get this right and get it right quickly.”

Accessibility and reliability of supplier data, both from internal systems and external sources, has shown to be one of the core capabilities that sets mature organizations apart, he says. Supplier data from third party sources coupled with transactional data of corporate information systems can derive highly valuable insights and lead to simulation and essential predictive supply chain capabilities. Data can and should inform and lead to better business decisions and it is no different with ESG, says Mr. Letarte.

The public, customers, investors, and other stakeholders expect organizations to disclose their human rights impacts. They are asking businesses increasingly complex questions about social issues from modern slavery to social procurement that relate directly and indirectly to their operations. If companies do not identify and manage human rights risks and social impacts, they risk an erosion of trust, reputational damage, and potential legal and commercial risk ramifications, says Katie Dunphy, ESG Advisory Partner, KPMG in Canada.

“We’re having these kinds of client conversations everyday,” says Ms. Dunphy. “Our clients are increasingly requesting human rights advisory support and want to align their efforts to a global, principles-based framework instrument like the United Nations Guiding Principles on Business and Human Rights.

“These are complex issues that can be daunting for many companies,” she says. “Businesses across all industries have a responsibility to respect human rights. This requires them to manage the risk of adverse human rights impacts through their own operations and, also through their value chains and business relationships. With increasing scrutiny on these critical business topics, stakeholders are seeking more and better disclosure, and it is essential that organizations improve the transparency of their efforts and communicate them clearly, regardless of where they are in their ESG journey.”

KPMG in Canada surveyed business owners and C-suite executives at 503 small- and medium-sized Canadian companies from August 16 to Sept. 1, 2022, using Schlesinger Group’s Methodify online research platform. Thirty-two (32) per cent of the companies reported annual gross revenue of over $500 million, 26 per cent between $300-$499 million, 18 per cent between $200-299 million, 16 per cent between $100-$199 million, and 8 per cent below $50 million. The vast majority (85 per cent) are privately held companies and the remaining 15 per cent are publicly traded. Fifty-seven per cent are family-owned businesses.

Katarina Lukich
National Communications and Media Relations
KPMG in Canada
klukich@kpmg.ca
416-468-7729