Introduction: ESG & Sustainability

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In the era where climate changes have become an indisputable topic, businesses are forced to take efforts and change their activities to support a more sustainable approach. People tend to interchange the term sustainability and ESG a lot when they are in a business setting, however, it is important to understand the differences between those terms. Even though both words rotate heavily around terms like environmentally friendly and green, the two carry an entirely different idea. Different from sustainability which generally has a very vague and broad meaning, mainly related to sustaining and supporting the earth for the next generation, ESG is a set of categories that were used by investors to assess the companies they are planning to put their money at, in terms of how they are responsible in Environmental, Social, and Governance aspects. It was a rather narrow concept of sustainability with quantifiable and measurable metrics regarding how the business conduct their business.

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Challenges of the ESG Ratings in Supply Chain Operations

 

ESG metrics are currently being incorporated in almost all the business elements, and the supply chain system is one of them. However, unlike other aspects of business, ESG metrics in the corporate supply chain are one of the hardest to measure as it is almost impossible to track back all the company’s supply chain activity. For manufacturers and brick mortar businesses, it would be hard to have control over how their outsourced material was collected or processed. While for platform-based businesses like Amazon or Shopee, tracking the entire supply chain operations of their third-party sellers was just unattainable.

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Some of the major issues regarding the use of ESG metrics on supply chains often revolve around the ambiguous and opaque nature of the operations. Supply chains are traditionally known to be the complete opposite of transparent. They are extremely opaque and companies have low visibility beyond their immediate partners, especially when their outsourced manufacturers are located overseas and in a rather remote area. Despite the claim of the company that this ‘secret manufacturer’ could be their competitive advantage in conducting their business, it simply eradicates the purpose of ESG metrics. To overcome this problem, researchers are proposing the use of technologies such as blockchain to improve transparency within the supply chain and to make sure that everything was empirically recorded.

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Another problem is regarding the consistency of ESG metrics and rating agencies. Some agencies focus on the ESG impacts and some others focus on ESG risks, creating obscurity in the ESG rankings. However, it was also debated that supply chain ESG can’t be measured in one-fits-all metrics as different industries will encounter different problems in their supply chain operations. Instead, it was recommended for each industry to establish its own consortium consisting of independent and diverse board members to develop suitable ESG metrics for their specific sectors.

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Along with developing suitable ESG measures for each sector, an independent audit agency might be necessary to control the transparency of the scoring process. Companies were often found to greenwash their ESG results by reporting only partners who comply with the environmental standard while hiding environmentally irresponsible partners. At the same time, since ESG inspections are often conducted by NGOs, independent audit agencies are prefered to prevent bribery to the NGO’s inspectors as well as eliminate corruption in general.

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There is still a lot of homework for the complete applications of ESG ratings in supply chain operations. Considering the opaqueness and complexity of the whole system, conducting fair and transparent ESG investigations would still be an important obstacle to overcome. On the same note, it requires the company’s consciousness to commit and comply with the whole ESG metrics to their entire supply chain.

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