Organizations are increasingly concerned about their supply chains. They want to be sure that their vendors’ processes, practices, and values align with those of their culture, customers, and investors — and avoid any entanglements with potentially problematic suppliers.
This means Environmental, Social, and Governance (ESG) standards are becoming an important — and sometimes labor-intensive — part of the RFP process. But what does that mean for you, and how can it be managed?
What is ESG?
ESG criteria are a set of operational standards for an organization. Socially-conscious investors often use these standards to screen companies so they know they are investing in an organization aligned with their values.
- Environmental criteria describe how a company performs when it comes to the environment. Such criteria might include waste, conservation, pollution, or the treatment of animals.
- Social criteria examine how a business manages relationships with employees, customers, and community in general. This set of criteria may evaluate the working condition and pay of employees or the way a company contributes to the communities in which it operates.
- Governance deals with a company’s leadership, audits, internal controls, and shareholder rights. Ethical internal practices and leadership fall under this set of criteria.
Why is ESG so important to vendor selection?
ESG isn’t new to the RFP process — there have always been questions about ESG in some RFPs — but it has been growing in importance lately. In 2021, a panel of executives at the National Association of Plan Advisors’ (NAPA) annual conference said that ESG issues are appearing much more frequently in requests for proposals, particularly in RFPs from the tax-exempt public sector.
“It wasn’t just to check a box in their RFP; they actually cared about those issues when it came to our investment due diligence process,” said panel member Joe DeNoyior, President of Retirement and Private Wealth with HUB International.
The growing interest in ESG issues is likely due to increased interest from stakeholders about how ethically companies do business, but it may also have to do with issues ranging from laws to reputational damage.
New ESG legislation
Laws governing ESG standards have begun to appear on both sides of the Atlantic Ocean; new and prospective laws requiring mandatory due diligence regarding ESG are being introduced in the European Union.
For example, in June of 2021, the Modern Slavery (Amendment) Bill was introduced in the United Kingdom’s House of Lords, proposing various amendments to the UK’s anti-human trafficking law, the Modern Slavery Act 2015. Among other updates, this amendment includes criminal penalties for businesses that continue to source from suppliers that do not demonstrate a minimum standard of transparency after a formal warning by the Independent Anti-Slavery Commissioner as well as new transparency obligations regarding sourcing and a company’s supply chain. A similar due diligence law was introduced in Germany.
Meanwhile, in the United States, the California Transparency in Supply Chains Act requires retailers or manufacturers doing business in California to audit their supply chains for human trafficking and disclose the results of such audits. More recently, the U.S. President released an executive order committing to the resilience of supply chains – ESG considerations were a part of that order.
Bad press (and tumbling stocks)
In June of 2020, an undercover investigation found that fashion retailer Boohoo was using a manufacturing supplier that was putting its workers at risk of contracting and spreading COVID-19. The report, which stated that workers were operating without social distancing measures was followed by a newspaper report alleging that workers were underpaid and received threats of not receiving government assistance if they did not come to work.
The news of these conditions caused a stir in the media. The reputational damage suffered by the brand at the very peak of the pandemic came with a price tag: a tumble in stock prices as share prices dropped by 23%.
Public interest in human rights and environmental issues means that more attention is being paid to what’s happening in companies’ supply chains. This means, practically, that ESG standards are a way to avoid trouble by screening suppliers for issues that might cause headlines later.
Stakeholder concerns about ESG
Legislation and reputation aside, one of the driving influences behind the increased importance of ESG to the RFP process is the interests of stakeholders. Investors are becoming more and more interested in ethics in the supply chain; according to Fast Company, 2021 was a record year for ESG concerns. Investors put an estimated $120 billion into sustainable investments, up from ESG investments of $51 billion in 2020.
The message is clear: investors are about high ethical standards in the supply chain, and are willing to put their money behind the companies that have done their due diligence when it comes to ESG and suppliers. Those who don’t meet those standards will face consequences – legal, reputational, or financial. In some cases, investors may require reporting when it comes to ESG standards.
Managing ESG due diligence during the RFP process
In Charles Dickens’ A Christmas Carol, the ghost of Jacob Marley tells Scrooge, his former partner, that their company should be about more than making money: “Mankind was my business,” he says.
Investors are starting to agree: humanity is their business, the environment is their business, the treatment of animals is their business, and ethical corporate governance is their business as well. That can, unfortunately, mean a lot of long, detailed questionnaires based on potential customers’ values — which poses a problem. If a customer truly cares about an issue, you aren’t going to win a proposal without a well-thought-out relevant answer.
To keep yourself from becoming overwhelmed by lengthy questionnaires, it’s helpful to use smart tools that let you focus on the answers that matter most to your values and those of your prospective clients.
Because your company’s practices and contribution to environmental and social responsibilities continuously evolve, a central repository of knowledge will make answering these questionnaires easy. Ombud’s content collaboration solution allows you to answer questionnaires with always accurate, curated content.
Learn more about Ombud today by requesting a demo here.