The British Zero Defects thinker Phil Crosby said, “If anything is certain, it is that change is certain. The world we are planning for today will not exist in this form tomorrow.” Few events in modern history have amplified this as much as the COVID-19 pandemic. In corporate supply chains, Chief Procurement Officers (CPOs) have had to exercise muscles of risk management, contingency planning and expedited relationship development to quickly pivot away from complex supply chains, keep supply afloat and meet new demand perpetuated by the pandemic. As we emerge from the throes of the pandemic, CPOs have a new pressing challenge to rise to: sustainability.
While climate change is not the only sustainability topic that must be addressed by today’s corporations, it is the burning platform causing regulators, non-governmental organizations, and the business world to understand the critical role of corporations in driving climate action to keep us all from the consequential and increasingly frequent issues perpetuated by inaction. New regulations sweeping the globe make it clear there is increasing understanding that climate risk is financial risk. Climate risk accelerates the demise of the most vulnerable among us, and climate risk is inextricably tied to other environmental, social and governance (ESG) issues. In this new world focused on sustainability, CPOs must once again redefine their roles in the organization to shape the sustainability focus areas, efforts, targets and impact within the organization.
Defining and driving sustainable sourcing materiality and focus areas
In a world with numerous sustainability challenges, it is easy to fall into the trap of pursuing every sustainable sourcing and procurement opportunity. This can leave the enterprise paralyzed, unsure where to start in an ocean of opportunities. One of the CPO’s leadership imperatives will be to define materiality areas in sustainable sourcing and procurement to maximize return on investment and overall impact from sustainability efforts. Materiality is the measure of the importance of key ESG issues to an organization’s stakeholders. For a consumer packaged goods (CPG) company for example, stakeholders would likely care more about eradicating child labor and slave labor in commodity supply chains than they would about green technology infrastructure. The CPO must therefore understand the ESG issues that significantly provide exponential shared value to stakeholders.
Setting supply chain sustainability targets
As companies have continued to set and announce Net Zero targets, many CPOs feel like they are left holding the bag on Scope 3 emissions reduction targets that they were not part of setting or vetting. CPOs must ensure they are working closely with chief sustainability officers, corporate environmental affairs teams, legal teams and all other functions responsible for setting and communicating sustainability goals. Being able to set sustainability goals should be a direct result of having a well-defined materiality assessment, from which key performance indicators (KPIs) and metrics can be set, and the corresponding goals established.
KPIs and goals must also be aligned with widely accepted standards such as the Global Reporting Initiative (GRI), which is a global standard for impact reporting, or Task Force on Climate-Related Financial Disclosures (TCFD), which is a global standard designed to help public companies and other organizations disclose climate-related risks and opportunities. The CPO must be well-versed in the implications of choosing to align with one standard over another, especially for reporting and compliance purposes in various geographies the company operates in. With the multitude of regulatory requirements in force now and coming soon, CPOs have a mandate to ensure their sustainable sourcing and procurement goals are actionable and achievable, and that they help meet sustainability regulatory requirements.
Procuring sustainability instruments
As companies try to meet the Paris Agreement goals, many are finding they cannot meet emissions goals through their own operations or in Scope 3 emissions collaboration with their suppliers. To meet these goals, companies are resorting to purchasing instruments such as renewable energy certificates (RECs), green power purchases (PPAs), and energy efficiency certificates (EECs). Purchasing these instruments will require an understanding of the valuation of these instruments, as well as an understanding of their effectiveness and environmental integrity in meeting sustainability goals.
There is ongoing debate about the effectiveness of these instruments in actually offsetting emissions. There is constant scrutiny of the companies that sell these instruments. Some are viewed as greenwashers, i.e., companies that create a false impression about how environmentally sound their products are. Category managers in this area are relatively new, so upskilling will be critical in this area. As companies, especially in heavy materials industries, start approaching their target dates for emissions reduction, the instruments will become more important in helping meet any shortfalls in net-zero or decarbonization commitments. More importantly, companies will need to ensure that the instruments meet the decarbonization goals they purport to meet.
Managing the green premium in procurement
Many companies that have attained sustainability brand equity charge a “green premium” for their products and services. These premiums may reflect underlying costs of new sustainable technologies and solutions, but sometimes they are only a result of the market perception. As enterprises transition to purchasing sustainable products and services, it is the CPO’s role to minimize these green premiums and drive competition in sustainable markets.
To drive down green premiums, CPOs must understand the cost factors that drive final price and develop sourcing strategies to drive down costs. These strategies include leveraging supplier collaboration for innovation, complexity reduction and strategic alliances. The CPO’s success will increasingly be measured by how well they develop alliances and collaboratively innovate to develop affordable sustainable products and services.
Supplier development to meet sustainability targets
In assessing company sustainability programs, I have often seen companies forget that their success is intrinsically tied to that of their suppliers. In the transition to Industry 4.0 for example, many companies have implemented leading tools to provide real-time visibility and intelligence — but their success is often hampered by bottleneck suppliers, many of whom are still operating on legacy systems with little visibility to their upstream or downstream supply chain.
To be successful in driving sustainability in their own enterprises, CPOs must also partner with suppliers to drive their downstream sustainability. In Scope 3 emissions for example, suppliers feel like they keep getting the short end of the stick by being instructed to reduce their emissions without any direction or help. Small suppliers especially struggle with how to effectively meet Scope 3 emissions reduction goals without the resources needed to understand their footprint.
It is incumbent on CPOs to ensure suppliers have the support they need to meet company emissions reduction targets and other sustainability targets by working collaboratively, for example in specifications management.
Overall, the CPO role will be critical in helping companies define sustainability KPIs and set and meet sustainability goals. To do this effectively, CPOs must embrace learning about sustainability, must invest in resources required to set targets and understand the ever-evolving regulatory environment, must understand how to value sustainability instruments, and must work collaboratively with suppliers to meet sustainability goals while minimizing the green premium.
In May 2022, Silicon Valley venture capitalist John Doerr and his wife gifted Stanford University a $1.1 billion donation to fund a new school dedicated to climate change and sustainability studies. In an interview Doerr said, “This is what the young people want to work on with their lives, for all the right reasons.” The next generation of CPOs must rise to the challenge and the enormous opportunity of creating a sustainable world for us and our children.
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