There is increasing pressure on the procurement area to integrate sustainability criteria into the process of procurement, to support the transition to a circular economy and the achievement of the company’s carbon neutrality goals.

How is this possible when even sustainability/ESG experts are talking about a continuously changing regulatory environment and newly emerging practices? Business expectations often conflict with sustainability considerations, or at least it requires significant additional effort to align the two.

Reassessing the supply chain has become a priority issue

In the wake of the unexpected events of the last few years, the assessment and reconsidered management of supply chains management has become a priority issue for most business leaders. Organisations had not even recovered from the pandemic shock to supply chains before the conflict in Ukraine, the energy crisis and the closure of the Suez Canal also hit one after the other. Business decision-makers, procurement buyers and category managers had to take into account previously unknown factors to make the procurement process commercially sustainable.

These problems are further compounded by the recent distancing of many business partners, the involvement of suppliers without on-site visits and audits, and the frequent virtual relationships between customers and suppliers. Conversely, if a supplier is found to be in breach of human rights, labour or IT security standards, the company is exposed to ever increasing reputational, strategic and financial risks.

Sustainability expectations are rising in EU markets

Meanwhile, companies either working in the EU market or for customers operating in EU markets have started to face compliance and then also sustainability assessments and expectations (e.g. commitments to reduce carbon footprint). Finally, as a uniform EU expectation, compliance with the CSRD (Corporate Sustainability Reporting Directive) and CSDDD (Corporate Sustainability Due Diligence Directive) is not possible without collecting data from supply chain members and assessing their sustainability risks.

Further development of the procurement area is essential

As a consequence of the above, organisations wishing to remain competitive will need to improve their procurement function, in the course of which the following areas should be reviewed:

1) Strategy and objectives: compliance should start with issuing an updated procurement strategy/policy, on the basis of which an annual procurement plan can be created, taking into account sustainability aspects. Sustainability objectives are very often (e.g. in case of energy, water use, packaging, etc.) closely linked to cost-effectiveness, which is worth emphasising to strengthen organisational commitment.

2) Commitment of the management: the CEO/members of management should personally reinforce the importance of regulatory compliance, as well as the importance of ESG and ethical behaviour towards suppliers, employees, customers and the wider public.

3) Establishing a policy framework: implementing clear and unambiguous procurement policies and procedures to ensure regulatory compliance and risk management. Policies should ensure that expected behaviours in relation to human rights and fair business conduct are clearly addressed.

4) Training: everyone who deals with third parties should be trained to understand relevant policies, supply chain risk management, best practices and have a clear mandate to communicate the company’s expectations to suppliers. Sustainability mentoring is recommended for key employees.

5) Supplier due diligence: companies with an effective due diligence system both meet regulatory requirements and gain an advantage over their competitors. Without a supplier due diligence system, the data reporting and risk analysis required by legislation are not possible. Assessing supplier risks is important beyond regulatory compliance, in order to build a supply chain that is sufficiently resilient and more responsive to crisis situations.

6) Cooperation: working with business areas and suppliers to review processes, technologies and best practices, thereby making the operations of the organisation more sustainable. Passing on the commitments made by the company to suppliers can only be truly effective if the organisation maintains regular, trust-based relationships with its partners in the interest of improvements.

7) Clear communication: the organisation’s compliance policy and expectations of ethical behaviour need to be clearly communicated to business partners and it is important to make these also part of contracts and to enforce them.

It can be clearly seen that procurement and the way companies operate in general is undergoing significant change. However, it is also obvious that companies starting their preparations in time will not only be able to meet these challenges, which will fundamentally determine their competitiveness, but can also gain significant competitive advantage by increasing the flexibility of their value chain and deepening their supplier relationships.