How SMEs are Impacted in the Quest for Sustainability
By Iskra Yovkova – Co-founder & Managing Director of uIMPACT
The global shift towards sustainability is reshaping the landscape for businesses. Since two-thirds of the average company’s ESG footprint lies with its suppliers, the incorporation of sustainability clauses in vendor contracts, especially by larger corporations, is increasing. Small and medium-sized enterprises, aiming to establish themselves as suppliers or subcontractors, need to be acutely aware of these clauses and the emphasis on ESG criteria.
There are a number of factors enhancing the need for smaller companies to consider measuring their ESG and impact and improve their policy standing in order to keep up with partner requirements:
Stringent supplier requirements by multinational corporations
Many multinational corporations have established robust sustainability policies as part of their brand identity and operational ethos. A study by Standard Chartered reveals that 78 % of multinationals will remove suppliers that endanger their carbon transition plan by 2025. This translates into a clear message for SMEs: meet ESG criteria or risk being left out of high-value contracts.
Sustainability is viewed as a risk management tool
Not just multinationals but businesses in general became more aware of the risks associated with their supply chains, especially when witnessing disturbances like the COVID-19 pandemic, geopolitical tensions, and climate-related events. Analyses show that companies with resilient, ESG-aligned supply chains are more likely to recover faster from disruptions. As a result, many companies look at supplier clauses to act as risk mitigation tools, ensuring the sustainability and resilience of their supply chain.
The CSRD effect and increased compliance scrutiny
The Corporate Sustainability Reporting Directive (CSRD) mandates that larger corporations are obligated to provide detailed, standardized sustainability reports. This involves comprehensive data collection, increased transparency in reporting, and adherence to established sustainability benchmarks. While primarily targeting large businesses, the trickle-down effect of CSRD has significant implications for SMEs. With the directive enforcing transparency, large companies will intensify their scrutiny of supply chains and will invariably demand similar standards from their SME counterparts. This means SMEs as suppliers and subcontractors must be prepared to provide ESG data and insights, even if they're not directly bound by the CSRD.
Shift towards responsible procurement and transparency
Business communities and alliances dedicated to sustainable supply chain practices, such as the Sustainable Procurement Pledge or the ISEAL are gaining popularity. SMEs that fail to align with the principles of responsible procurement and transparency may face obstacles to partnering with the alliances’ members and pledge signatories.
How to prepare
It is crucial for small and medium-sized companies to act early and prepare for sustainability requirements from potential partners. Here is some high-level advice on steps to be taken:
Management support: educate the management and gain support.
Allocate Resources: ensure that there are adequate resources, both in terms of finances and manpower. Appoint a cross-departmental group, responsible for sustainability initiatives.
Perform assessment: Conduct a thorough assessment of the current business operations to identify risks and areas for improvement.
Set targets and ambitions: Define clear, measurable sustainability goals.
Improve your policy standing: adopt a comprehensive sustainability policy that outlines the company's commitment and specific actions to be taken.
Implement sustainable practices: turn policies into actions.
Monitor and report: regularly monitor, measure, and disclose your sustainability efforts.
Engage with stakeholders, incl. suppliers: engage with your suppliers and communicate your sustainability expectations. Encourage them to adopt sustainable practices. Engage employees, partners, and investors to gather feedback and make continuous improvements.
Stay updated: stay updated with the latest trends, regulations, and best practices in sustainability.
…and, most importantly, start today.
Interested in improving your vendor competitiveness by strengthening your ESG policy standing and demonstrating your impact? Let’s chat!