Environmental, Social, Governance – ESG for short – has changed how many investors and companies assess risk and opportunity as they invest in and fortify supply chains. As any procurement team will tell you, these non-financial indicators have become increasingly important in recent years.
Initially, ESG compliance and evaluation was a qualitative analysis focused on unearthing risks. But as companies become more sophisticated in how they think about ESG, a number of quantitative metrics are beginning to be established by leading research and ratings firms. Entire funds are being established that prioritize ESG in their investment approach. As this article in Institutional Investor points out, many investors have found that corporations with higher ESG performance tend to deliver higher profits.
As NPI works with large enterprises to optimize the cost of IT purchases, we are seeing increased focus on ESG ratings – in part to manage risk, and in part to contribute to the company’s own goals for ESG ratings internally and across its supply chain. It’s particularly prevalent in RFP situations as part of the down-select criteria for purchases that are highly ESG-relevant, and in purchases and renewals for IT subcategories or vendors that are determined to hold high ESG risk exposure.
Determine Priorities in Rankings
While third-party ESG ratings provide a high-level assessment, internal initiatives may have more specific areas of focus in mind. Here are some of the questions our clients are exploring with their ESG-relevant suppliers:
- How are they handling hazardous waste, recycling where possible, and reusing materials in their operations?
- What is the approach to handling, containing, and addressing any controversies?
- What current exposure to material ESG risks exists?
- Do plans exist to reduce and improve ESG risk exposures?
- What kind of diversity measures exist?
- What is the vendor’s reputation as an employer?
Consider Different Metrics
As ESG becomes a factor in IT purchases and vendor management, here are a few information sources that are helpful:
- Morningstar Sustainalytics
- S&P Global Ratings
- MSCI ESG Ratings
- TealBook ESG Reporting
- FactSet IdealRatings ESG Scores
Analyze Any Cost Premiums Needed to Achieve ESG Goals
Vendors are capitalizing on the pressure companies face to improve ESG posturing and compliance. Both legacy and new vendors are coming to market with services and solutions to help companies achieve their ESG objectives, as well as pursuing their own ESG goals. It’s important to perform price benchmark analysis on any ESG-related purchases to make sure they are within appropriate Fair Market Value (FMV) ranges.
The subcategories where NPI sees this being most relevant today as clients submit purchases for analysis include:
- End-user PC IT Asset Disposal (ITAD)
- Managed Print Services (MPS), particularly in the areas of consumables, asset disposal, and usage efficiencies
- Human Capital Management (HCM) and Human Resources Information Systems (lots of potential for overspending on this one)
How important is ESG criteria to your IT procurement organization? How are you currently evaluating compliance/performance among IT suppliers? Is meeting ESG requirements impacting (increasing) your IT spend?