Your Stakeholders Are Paying Attention To Your Supply Chain’s ESG Measures. Are You?
By Biju George, EY Canada Associate Partner, Supply Chain & Operations
Environmental, social and governance (ESG) continues to evolve as a strategic business imperative for organizations across all sectors. The Canadian oil and gas sector attracts more scrutiny than most sectors owing to its very visible environmental footprint. In Canada we take pride in prioritizing stakeholder engagement and alignment, and as such there is a sharp focus on the social footprint of such activities.
Stakeholders across the value chain are paying close attention to energy companies’ ESG profiles. Historically, institutional investors and investment management houses have focused on ESG reporting as part of their investment buying decisions, but the pool of interested parties is far broader. Investors’ expectations of ESG disclosures and communication are rapidly evolving, and companies need to carefully navigate their expectations, including the related need for robust internal controls around data collection and reporting of sustainability information.
Investors are no longer just looking at ESG at energy companies themselves — they’re now looking at their extended supply chains too. And the judgments they make about the practices of companies’ suppliers could be the difference between producers’ ability to obtain the capital they need to expand and finding themselves without vital funds. Investors and stakeholders are increasingly demanding companies decarbonize their supply chains — not simply as a compliance exercise, but as a social imperative. Today, producers don’t think of ESG as something they’re being forced to do, but as fundamental to how they carry on business.
More and more, financial institutions are asking about the carbon footprint of new facilities for which energy companies are looking for investment. Depending on the institution’s policies, that could be the difference between securing $100m or $50m — or potentially $0. And while financial institutions in Canada are not yet scrutinizing supply chain ESG as aggressively as they are in Europe, and increasingly in the US, the trend is clear: it’s coming.
The ripple effect across supply chains
Producers are starting to take a good look at the ESG practices of the suppliers and contractors, including oil field services businesses, that supply the goods and services they need to run their business. They’re expecting their suppliers to start tracking their carbon footprints and may start looking for alternative suppliers should their current ones not align with their own ESG policies and practices.
Suppliers will need to start keeping metrics of the cumulative ESG impact of their business on their clients’ final output. That data will help energy companies determine the cumulative effect on their own carbon footprints.
It’s no longer about being the lowest bidder
Energy companies have typically looked to suppliers that offer them the most attractive price while overlooking other important dimensions. Stated prices have often made up as much as half of the consideration, along with quality and on-time delivery, when companies are engaging suppliers. As ESG takes on greater importance, that’s no longer the case.
Cost is increasingly just one of several considerations, and it’s no longer the biggest. Quality and safety are still high on their list of priorities, as is on-time delivery. But now companies are also looking in greater depth at their suppliers’ diversity and inclusion practices. Many companies are starting to give priority to Indigenous-, minority- and women-owned businesses in their supply chains as an important part of their corporate responsibility outreach.
ESG improvement in action
Energy companies’ supply chain groups have been making the shift from pure procurement enablement to bringing in innovation and overseeing achievement of synergies in the recent uptick of consolidation in the industry.
These groups have been taking the lead in embedding elements of ESG in areas such as category management, contract execution and supplier performance, while collaborating with sustainability groups in their organizations to track and monitor ESG metrics.
With digitalization seen as sort of a panacea for tackling many global challenges, we can look to it as a driver for sustainability. We already see energy companies setting up digital platforms for their suppliers to exchange emissions data and explore low-carbon solutions.
Benefits of greater ESG alignment
Understanding your stakeholders’ needs and expectations sets the stage for building long-term, trusted relationships. Align your priorities, visions and policies so that everyone is on the same wavelength. Suppliers can also improve resilience to climate change, social and governmental issues. Establishing contingency plans and enhancing your agility and response time to changing circumstances can help you make your supply base more available, sustainable and ethical.
And then there’s society’s expectations. Public opinion can be volatile. It’s important to keep your finger on the pulse of societal expectations around ESG matters to help safeguard your brand and reputation.
Suppliers that recognize the direction in which the oil and gas industry is moving and adapt to better align with their stakeholders’ changing expectations will be in a stronger position to keep their current customer base, attract investments and — perhaps most important — understand that ESG benefits not only the broader industry and society, but their own businesses.
Those that don’t recognize this risk being left behind as energy companies continue to advance on their ESG journeys.
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