The global impact of ESG goals and a move to more sustainable supply chains

ESG Planning is fast becoming a priority for businesses of all sizes. Going green isn’t just driving demand for more sustainable supply chains. It’s reshaping the global economy.

Increased costs from “Greenification” are complicating efforts by governments and businesses to combat climate change. According to McKinsey, in addition to responding to social changes and the alarming rise in climate events, the war on Ukraine and the connected geopolitical, economic, and societal factors have increased the need for all organizations to improve their ESG planning.

And climate change is actively raising the pressure on supply chain executives to prioritize ESG strategies after extreme heat waves and forest fires have plagued France, Italy, Portugal, and Spain this summer.

Tom McDonough, Anaplan supply chain solutions senior director, recently spoke with Deutsche Welle (DW) about the growing challenges climate change poses for logistics leaders and how supply chains are being affected by droughts and lower water levels.

“The planners have to find alternative methods, ship or rail, and ultimately the bottom line is that it costs more to operate supply chains under these conditions. In this case, it’s a drought, but there are many other climate events impacting supply chains more frequently,” McDonough shared.

The fast-growing profile of ESG is visible in investments. Inflows into sustainable funds skyrocketed from just $5B in 2018 to 10x that amount in 2020 and then $70B in 2021. This year in Q1 alone, ESG initiative funding commanded another $87B in net new investments, followed by an additional $33B in the second quarter.

This blog reviews ESG strategies, how you can act now to build a more sustainable and resilient supply chain, and the new shifts and regulations that are shaping global supply chains that will likely impact your business soon. But first, ready for a fast refresher?

A definition of Environmental, Social, and Governance or (ESG)

Environmental, social, and governance (ESG) criteria are the standards socially conscious investors use to screen potential investment opportunities with different organizations. ESG environmental criteria explore how each organization protects the environment, including corporate policies responding to climate change. Social criteria show how organizations manage employee, supplier, customer, and community relationships where they operate. Governance specifically handles business leadership, executive compensation, internal controls, audits, and shareholder rights. ESG criteria help investors screen opportunities based on corporate approaches and policies that empower organizations to act responsibly. The explosive growth of ESG investment funds over the last decade has drawn scrutiny around organizations investing in ESG policies and their claims of ESG achievements.

Understanding all the external factors driving sustainable supply chains is critical. Investing in ESG strategic planning requires three core components to help you balance profit margins and sustainability.

What are the 3 essential pillars of ESG?

1. Find sustainable and affordable approaches.

Shoppers are driving sustainable supply chains. Almost half of all consumers will ditch brands that don’t align with their values. That’s even more true with millennials and zennials. According to the National Retail Federation, 67% of millennials in the United States and UK bailed on brands that didn’t stack up ethically. Consumers across continents are ready to pay more for sustainable supply chain practices — including more than half of grocery shoppers YouGov surveyed in Australia, Germany, the UK, and the US.

Meeting customer expectations doesn’t mean ignoring profits. ESG planning involves connecting data and costs from all your third parties across the chain to pinpoint openings to reduce waste, risk, and price to remain competitive. Be ready to negotiate new deals with your suppliers to tackle ESG concerns.

2. Identify incentives and eco-friendly alternatives.

Governments have a shared interest in minimizing pollution and slowing the speed of climate change. If you’re a supply chain executive in the US, you can explore leveraging a carbon credit approach. No matter where you are, you can find more eco-friendly alternatives for logistics and shipping and commit to drastically reducing your organizational carbon footprint over the coming years. PepsiCo, the beverage giant, is making headlines for ordering 30,000 environmentally-friendly shipping pallets from an Israeli company manufacturing them from household waste.

3. Disruption-proof your supply chain.

Toilet paper and paper towel shortages cost retailers more than $1B throughout the COVID pandemic. Meanwhile, growing climate events, including record storms, flooding, and droughts, can create supply issues that crush your margins. “What-if” scenario planning is critical to keep your business and supply chain thriving through disruption and offset potential losses while stabilizing margins. With natural disasters regularly occurring and global experts predicting two new pandemics each year, contingency planning is the new normal to keep your business relevant and competitive.

What’s next for environmental and social governance?

While governments around the globe are ramping up environmental regulations in response to rising temperatures and ecological concerns, a new German bill will shape ESG requirements everywhere. The German legislature recently passed the “Supply Chain Act,” or “Lieferkettengesetz,” a new law on corporate due diligence in supply chains. These new requirements will impact any organization with more than 3,000 employees based in Germany. The Supply Chain Act breaks out all the steps necessary to create products and service offerings — from extracting raw materials to delivery to consumers.

The German Supply Chain Act goes into effect on January 1, 2023, mandating human rights and environmental regulations across supply chains, with global repercussions and severe consequences for working outside of compliance.

For example, Germany is among Brazil’s top ten importers of mineral and agricultural products — coffee, copper, iron, minerals, leather, and meat. According to the FCPA Blog, Brazilian production chains for these staples have been mired in environmental crimes and human rights violations. Starting next year, German-based businesses manufacturing in or importing from Brazil must certify the integrity of supply chains across geographies.

The Supply Chain Act is a significant step forward in combatting everything from forced or child labor to deforestation and water pollution. These implications have a global impact with regulations applying to supply chains dipping into China and other regions known for child work and relentless waste. The new law makes it essential to implement an ESG risk management system with detailed research and analysis into internal business practices and those of suppliers across the globe.

Now is the time to act.

“The last several decades of experience have taught us to prioritize statistically driven insights, buffer stocks, and just-in-time performance to minimize cost and optimize service levels,” said Anaplan’s vice president of solutions & industries, Evan Quasney. “This might have worked when disruptions were localized and discrete, but asymmetric events – broader in scope and length like climate events or a global pandemic – prove that the just-in-time approach needs to be reimagined.”

“There is no way to fully predict major climate events, but supply chain leaders can leverage their internal expertise, married with data and technology at scale like Google’s Supply Chain Digital Twin, to create more accurate views of their operations, model likely scenarios, and better prepare for weather-related disruptions.”

Commit to ESG while balancing environmental requirements and margins.

At Anaplan, we’re committed to our ESG program and building a more sustainable path forward to create a more equitable and brighter future for everyone. We know it’s a daunting task — that’s why we’re leading with transparency and starting dialogues with global supply chain leaders just like you about evolving best practices.