The business value of supply chain sustainability and environmental, social, and governance (ESG) initiatives extend far beyond environmental and societal impact. Companies and shareholders benefit immensely.
Far from being mandated, many companies are doubling down on their ESG efforts to make their supply chains more sustainable because it’s good for business, full stop. A recent study conducted by The Wall Street Journal found that a sustainable supply chain’s “positive returns” include a myriad of environmental, financial, regulatory, operational, and reputational benefits:
- Greater supply chain stability. Sustainable companies are better insulated against market shocks and risk events and are thus more resilient against disruption.
- A hedge against regulatory risk and reduced legal liabilities. Companies with mature ESG programs have a leg up when complying with related laws and regulations and pay fewer fines.
- Lower capital costs. Locally and diversely sourced commodities, materials, and products reduce transportation, inventory, and real estate costs, which can boost bottom- and top-line performance.
- Greater brand reputation. “Green” and responsible companies attract consumers willing to pay premiums for more eco-friendly and renewable products, especially from reputable sources.
- Faster inventory turnover. Those same companies tend to sell their products faster and at greater volume than conventionally produced products, which boosts revenues and profits.
The business value of supply chain sustainability
Several studies provide measurable, tangible, and substantial proof points on the value of supply chain sustainability – and have led many of the world’s most successful companies to double down on their investments to drive ESG initiatives through the supplier base:
ESG programs encourage revenue growth, strong EBITDA
A 2023 study jointly conducted by Bain & Company and EcoVadis found that companies with sustainable procurement and supplychain practices saw 3% greater earnings before interest, taxes, depreciation, and amortization (EBITDA) – 14% vs. 11% for companies without such practices. The same study found that ESG leaders have higher employee satisfaction, which correlates to a three-year revenue growth up to five percentage points higher than companies with less-satisfied employees.
Another reason “green” companies see higher EBIDTA? Socially conscious customers, who are drawn to sustainable brands and reward them handsomely. A 2023 PwC survey found that 70% of respondents are willing to pay more for sustainably produced goods.
The positive financial performance can be a boon for investors. The WSJ study cited earlier found that companies with fewer negative ESG events had higher relative ROI in the stock market the next year for investors and shareholders. This amounted to 6.77% excess ROI (over baseline) for companies that worked with more low-ESG risk suppliers compared to companies that didn’t intentionally source from such suppliers.
What’s more: firms whose supply chains had the fewest ESG risk incidents also had more positive earnings surprises. This certainly won’t surprise procurement and sourcing pros, since companies that prioritize ethical and sustainable supply chains are generally in a more favorable position to take advantage of sudden business opportunities and avoid sudden business risks and expenses. Luck favors the prepared.
Business sustainability drives supply chain resilience
Companies with sustainable procurement and supply chain practices are better equipped to avoid costly supply chain disruptions stemming from non-compliance with applicable ESG laws and regulations, such as supply chain due diligence reporting requirements. For example, between June 2022 and April 2023, nearly $1B in imports have been seized at US ports over noncompliance with the Uyghur Forced Labor Prevention Act. Companies failed to conduct sufficient due diligence into their extended supply chains to rebut the presumption that what they were attempting to import (e.g., polysilicon) was not made with slave labor. Such seizures disrupt the manufacture of finished products (e.g., solar panels), which has significant operational risks and creates legal and brand / reputational risks.
Companies with mature ESG programs also avoid fines and penalties for non-compliance to such laws and regulations, which can eat into profits. For example, the German Supply Chain Due Diligence Act fines offending companies with at least 3,000 employees up to 800K euros per violation. In 2024, it will apply to companies with 1,000 or more employees and expand the pool of potentially covered companies.
Responsible sourcing drives corporate and procurement objectives
Supply chain sustainability is a key enterprise performance driver. Boards and C-suites have taken notice, and as a result are pushing procurement teams to place supply chain sustainability at the core of their business strategy.
According to the Hackett Group’s 2023 Enterprise Key Issues Research study, corporate leaders see supply chain sustainability driving several key business objectives, including brand value (79%), compliance (77%), risk (77%), improved customer satisfaction (56%), and reduced costs (51%).
Supply chain sustainability is also a boon for procurement performance objectives. According to the same Hackett study, procurement’s teams continue to invest in sustainability programs due to the positive impact on compliance (84%), risk (84%), emissions reduction (84%), and brand image (62%). Having C-suite backing and the mandate to build and drive sustainable supply chains enables procurement to direct more enterprise spend towards sustainable suppliers, which multiplies the compliance, decarbonization, risk management, and reputational benefits mentioned above.
The Bottom Line: Procurement and Supply Chain Teams That Prioritize ESG Deliver Better Results
Creating and managing a responsible and sustainable supply chain is good business, period. The returns are clear and broad: higher EBITDA, lower capital costs, better stock market performance, more resilient and stable supply chains, less risk, and more revenue. The market leaders recognized the correlation a long time ago – and actively invested to expand the reach and impact of their programs.