Procurement consulting

Procurement is in a unique position to further and realise your company’s sustainability goals. By integrating ESG criteria into its strategic sourcing approach, it can set sustainability standards for the selection and the continued relationship with suppliers. Moreover, such requirements should be embedded across the entire supply chain – making procurement into an important driver of a company’s ESG agenda. Supply chains are highly susceptible to environmental risks.  85% of the Swiss CEOs we surveyed in the Swiss edition of our 26th Annual Global CEO Survey believe that climate change will affect their supply chains, and 26% even expect a strong to very strong impact. Integrating ESG goals in its supplier risk management allows a company not only to mitigate certain risks, but to turn them into a business advantage. One of them is by focusing on Scope 3 emissions (indirect emissions generated in the value chain). Not only is their environmental impact substantial, but investors, regulators, and consumers are increasingly demanding such granular information from companies.  

In late 2022, the Swiss Federal Council adopted an ordinance on climate disclosures that provides guidance to large Swiss public companies, banks, and insurance companies on their climate reporting. A year earlier, the legislative amendment of the indirect counterproposal to the Responsible Business Initiative (RBI) that obliges these companies to report publicly on non-financial matters was enacted. In addition, due diligence and transparency obligations in relation to minerals and metal from conflict-affected areas and child labour were introduced. However, Swiss sustainability regulations are less strict than EU standards, which will influence companies operating beyond Swiss borders. As a compass for many organisations serve the recently adopted Corporate Sustainability Directive (CSRD) or the newly developed European Sustainability Reporting Standards (ESRS). In addition, the proposal of an EU Corporate Sustainability Due Diligence Directive (CSDDD) sets also higher requirements than the Swiss obligations. In Germany, a sustainable Supply Chain Act was adopted in early 2022.  

For most companies, Scope 3 emissions account for 65-95% of their total GhG emissions. The majority of them originate in upstream activities. In order to reduce these upstream emissions, companies need to develop a Scope 3 strategy. As a first step, companies must gain a profound understanding of the implications these have on their business. After that, close collaboration with suppliers is essential to effectively measure and manage these emissions. Accurate data on the Scope 3 emissions related to all the goods identified as part of the strategy are key for reducing the footprint successfully. To achieve these goals, we recommend four strategies that help you incentivise suppliers. These include both financial and non-financial measures and apply to all stages of supplier engagement:

• Leveraging procurement: These measures are specifically designed to embed decarbonisation efforts into procurement processes including mandatory carbon reporting and fulfilment of carbon reduction requirements in tender proposals. Furthermore, performance management contracts often have carbon reduction clauses which can lead to penalties, such as the termination of contracts, for suppliers that fail to comply.  
• Building capability: This strategy focuses on shared learnings and leading practices from your carbon-reduction efforts and can involve supplier forums and workshops. In addition, you can help train and upskill suppliers in key areas related to decarbonisation, or offer peer benchmarking to give them insight in how they compare to competitors.  
• Rewarding progress: This aspect uses financial incentives to further the decarbonisation agenda. You could, for example, pay suppliers for performance, hence financially rewarding them when they meet an emissions target. Another approach is to invest in longer-term supplier initiatives such as power purchase agreements or carbon inset projects. Paying premium prices for low-carbon products and providing preferential payment terms based on carbon reduction targets and disclosure are other methods to consider. 
• Enforcing performance: A more direct financial penalty can also serve as an incentive to decarbonise. Carbon pricing shifts accountability to suppliers, while direct financial penalties can be applied for missed net zero targets — which might also lead to reduced fees or elimination of discounts on purchased products. The ultimate penalty is ending the contract.