Let’s start with a quiz. What is the difference between ESG (environmental, social , governance), sustainable procurement and procurement with purpose? You might expect that our Procurement with Purpose book might tell you, but I confess, I did not attempt to provide any clear definitions. We did not cover the “G” in ESG, which stands for “governance”, because it seems to sit outside the procurement sustainability or purpose agenda, but we did not make any clear definitional distinctions between ESG, sustainability or purpose-related activities.
But a recent article from an academic, Julie Binderr (Professor of Sustainable Innovation and Business Transformation at IMD, the Lausanne-based highly rated business school), provided a very useful clarification. This is how she defines two key terms.
“ESG is primarily a risk management and investment framework that seeks to evaluate the financial risks that environmental, social, and governance factors pose for a company’s value. It adopts an “outside-in” perspective that is best described as an investor-and company-centric framework which seeks to de-risk portfolios and increase the economic resilience of a company … this approach is far from “woke capitalism”, as condemned by some US politicians. This is not about ideology. This is simply about solid risk management and is simply good business. ”.
“Conversely, corporate sustainability adopts an “inside-out” perspective as it focuses on the impact a company has on the planet and society. The people- and planet-centric approach seeks to not only minimize harm, but to positively impact society and the environment. As such, it can be costly at times, for example when paying a fair price to everyone in the supply chain or paying a price premium for more environmentally friendly materials”.
Now when I talk about “procurement with purpose”, I believe I am often talking about the contribution procurement can make to both “sustainability” and “ESG” under those definitions are included. From the ESG perspective, and looking at the “E” of that, we would include the supply chain risk focus on areas such as how climate change might affect the supply of critical raw materials, or whether suppliers have premises that would be threatened by rising sea levels.
From the “S” (social) point of view, procurement would for instance be involved in risk and reputation management around human rights in the supply chain – avoiding the bad publicity of finding out that a supplier employed child workers, perhaps.
Then we have all those procurement with purpose actions that would fall under Binder’s sustainability heading, as they do address the planet and its people. I would also argue they must bring some benefit to the organisation itself too – if there is a short-term cost, as Binder suggest can be the case, there should be longer term benefits that provide the business case for these actions. So working with suppliers to reduce emissions or to protect biodiversity, encouraging suppliers to address human rights issues or improve diversity or working conditions in their own organisations, or suggesting they pay their taxes … these are all examples of what Binder defines as “corporate sustainability”.
I do think Binder’s definitions are very helpful, although sometimes when “ESG” is discussed, it does seem to be used in a way that includes certain aspects of what she calls “sustainability” – those actions organisations are taking to help the planet and its people as well as to address their own risk management.
And actually, if we do accept the definitions, that suggests that “procurement with purpose” or purposeful procurement is useful terminology in itself, as it can include both ESG and sustainability actions. I’m not saying that simply to promote the term we use here. But it does reflect what is actually happening in most leading procurement organisations, where the function is engaged in both internally focused “ESG” risk management activities and those outward facing “sustainability” initiatives.