SIG University Certified Sourcing Professional (CSP) program graduate Sophie McNally shares how there is no one size fits all approach when it comes to ESG and that each company has to take a deep dive into what will ultimately work best for them.
This analysis attempts to explore how procurement and sourcing functions of publicly traded technology companies with market capitalizations between $15 billion to $35 billion (“Tech Company”) can evaluate, implement, and monitor emerging Environmental Social and Governance (“ESG”) regulations within their supply chain.
All publicly traded companies are required to disclose their ESG efforts and generally, Tech Company boards have ESG oversight. While Securities Exchange Commission (“SEC”) Reporting on the “S” and “G” components of ESG metrics has evolved and is standardized across industries, there is no single consistent baseline on environmental and sustainability reporting on the “E” component.
A survey of 2022 Proxy statements indicated that boards generally voted against proposals to manage climate risk through comprehensive science-based targets due to the potentially costly and burdensome target-setting process. This is consistent with the change in tone that ESG champions like BlackRock who once supported shareholder proposals pushing for lower emissions at public companies have taken.
This does not necessarily mean that these initiatives should be deprioritized as BlackRock’s sustainability 2023 Proxy states that, “we pursue an environmental sustainability strategy focused on reducing greenhouse gas (“GHG”) emissions and have implemented a digital enterprise climate platform to help improve carbon footprint accuracy, understand emissions drivers, and track the impact of emission reductions against our operational science-aligned emission reduction goals.
Over the last two years, various regulatory bodies that include the Federal Acquisition Regulatory Council (“FAR Council”), the SEC, European Financial Reporting Advisory Group (“EFRAG”), and International Sustainability Standards Board (“ISSB”) have issued exposure drafts (“EDs”) on climate related disclosures based on recommendations from the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (“TCFD”).
- FAR Council: Federal Supplier Climate Risks and Resilience Rule (November 2022)6
- EFRAG: EDs on the first set of European Sustainability Reporting Standards (“ESRS” issued in April 2022)
- SEC: The Enhancement and Standardization of Climate-Related Disclosures for Investors (March 2022)
- ISSB: First EDs on IFRS sustainability disclosure standards (March 2022)
In its 2022 annual report, the TCFD indicated that the main barrier for many companies towards disclosing climate-related information is that the data and methodologies for producing these metrics over extended time horizons is still relatively immature compared to traditional financial metrics.
However, companies cannot wait until the data and methodologies are perfect to begin their disclosure journey. In that vein, Tech Company procurement and sourcing functions should develop programs that monitor their supply chain emissions and align these programs with the Paris Agreement’s ambition to limit global temperature rise to 1.5°C.
Tech Company procurement compliance procedures should include obtaining completed CDP (formally known as the Carbon Disclosure Project) questionnaires and ESG reports or policies that provide supply chain transparency and traceability. In addition, the supplier onboarding checklists and compliance requirements should include collecting data on the following policies and programs that most align with Tech Company specific ESG areas:
- Carbon emissions - metric tons of carbon dioxide avoided and saved.
- Supplier diversity and inclusion - direct spend with diverse and underrepresented suppliers.
- Resource scarcity - percentage of electricity consumed at data centers that comes from renewable energy sources.
- Waste management recycling and reuse.
- Labor rights and working conditions.
- Ethical sourcing and responsible business practices as they relate to conflict minerals and human rights.
- Data privacy and cybersecurity.
- Product safety standards and quality requirements.
In conclusion, there is no one-size-fits-all solution to overseeing sustainability in the supply chain – and for good reason. There are several strategies that companies can deploy in implementing sustainability emission reduction targets. The selection of the right pathway depends on the company’s industry, size, resources, and long-term objectives A majority of technology companies have significant emissions embedded in their supply chains.
Mid-size procurement and sourcing teams that fit the Tech Company profile can lead these efforts by collecting complete and accurate data. Over the next six months, I plan on enhancing our supplier onboarding and review processes to include a requirement that new and existing suppliers provide the most recent ESG reports and a supplier portal questionnaire that solicits information on the sustainability considerations above with required supporting policies and programs.
The Certified Sourcing Professional (CSP) Program is a 10-week course that focuses on the hard and soft skills of sourcing, including strategic sourcing and outsourcing methodologies, as well as best practices in negotiations.
Sophie McNally is a seasoned finance leader at CoStar Group, Inc., a publicly traded commercial real estate data subscription services company headquartered in Washington, DC. Currently, Sophie oversees a team responsible for supporting ten countries through the procure-to-pay process.
Sophie has a wealth of experience spanning multiple finance disciplines and has previously held key roles in process and system integrations, financial reporting, and technical accounting. Her expertise and insights have been instrumental in driving operational efficiencies and ensuring compliance across diverse financial landscapes. Sophie’s commitment to excellence and strategic thinking have consistently delivered measurable results and established her as a trusted leader in her field.