What are the top three barriers to assessing ESG risk?

9 August 2022

Four in 10 (40%) businesses have said limited financial resources are preventing them from assessing their supply chain’s ESG standards.

Research by Coupa found almost half (48%) of companies said a lack of data on suppliers’ ESG credentials was the biggest factor preventing them from meeting their ESG goals, followed by limited financial resources (40%), and reliance on technology not designed for compliance with ESG standards (36%).

The report, How to mitigate ESG risk in your supply chain, found nearly two-thirds (65%) of businesses could not tell if their closest supply chain partners were meeting any kind of ESG standards. Almost six in 10 (57%) said they did not have an effective risk management system in place to ensure the ESG integrity of their supply chains.

The majority of businesses (95%) agreed it was important to quickly find new partners that align with their ESG values, however, 42% said replacing a supplier would take a couple of months or more, if they were able to do it at all, compared to just 16% who said they could adapt in a couple of days.

The report said: “While the survey showed that large businesses are concerned about ESG and compliance with legislation, it also indicated that they could be doing much more. A majority are suffering from major blindspots in their supply chains that mean it is impossible for them to make real progress on their ESG objectives.”

It said increasing due diligence laws is placing greater pressures on companies to meet ESG goals. “There is a clear trend of expanding legislation which will make compliance challenges more acute,” Coupa said. 

The report noted how companies could be fined up to 2% of their annual global revenue if they don’t meet standards set in the German Supply Chain Due Diligence Act, which is set to come into force in 2023.

Almost all (97%) decision-makers said it was important to be able to accurately assess the ESG risk and compliance of supply chain partners in order to comply with any future regulation, and the majority of businesses (89%) believed such regulations would place a financial burden on them. 

The top ways to meet ESG goals were buying or building new technology (64%), improving and expanding legal and compliance capabilities (62%), and acquiring new tools for measurement and analysis (59%).

“Community-based approaches” could improve sustainability throughout supply chains, Coupa said, adding “greater industry-wide collaboration and data sharing would reduce this duplication of effort in data collection by magnitudes”.

It said: “Looking forward, a community-based approach could help businesses to scale their ESG commitments by providing insights on how to optimise their supply chain design to reduce CO2 emissions, get leading indicators of supplier performance issues, as well as assess ESG risks of their suppliers using automation. 

“This will help to ensure businesses can adopt the processes and capabilities necessary for compliance with current and future legislation by global governments that mandates greater corporate oversight into global supply chains.”

The survey involved 800 business leaders in organisations with over 1,000 employees across Australia, France, Germany, Singapore, UK and the US.

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