Sustainable Procurement Definition

What is Sustainable Procurement?

Sustainable procurement integrates environment, social, and governance (ESG) criteria and performance factors into a company's procurement process and sourcing decisions

Responding to rising pressure from customers, ESG investors, regulators, and other stakeholders, more companies are implementing sustainable procurement practices and programs to improve the safety and sustainability of their supply chain. According to both McKinsey and our own internal data, a corporate supply chain’s enviromental impacts are, on average, 5 to 25 times higher than the company's direct operations, making sustainable procurement a priority for organizations taking action to decarbonize, reduce sourcing costs, de-risk their brand, and improve ESG performance.

While environmental sustainability is one of the foundational attributes of "sustainable procurement," the practice is also defined by economic, ethical, and social criteria and considerations. Sustainable procurement promotes value chain circularity, well-being, and long-term resilience - both in nature and among organizations.

What is Sustainable Procurement - A Definition

The 7 Pillars of Sustainable Procurement

Sustainable procurement integrates processes, systems, requirements, and criteria designed to provide double-bottom-line benefits for the organization and its stakeholders. A comprehensive sustainable procurement strategy or program-set is based on:

  1. Long-term, strategic procurement lens - Sustainable procurement needs to think long-term about enterprise value, resource availability, sustainability, and risk, including areas like biodiversity and climate risk
  2. Comprehensive, thoughtful procurement criteria - Sustainable procurement should consider both financial procurement requirements like cost, quality, and risk alongside ESG factors like ethics, human rights, equity, and environmental impacts
  3. Systematic, transparent supplier evaluation, onboarding, and management - Establish consistent and well-documented guidelines, processes, policies, and systems for monitoring and approving purchasing requests, managing vendors, procurement negotiations, invoicing and payment, data and record-keeping, inventory management, and other strategic purchasing considerations
  4. Efficient spend - Sustainable procurement should aim to be a source of cost savings and positive ROI by reducing input costs, usage, and/or promoting circular re-use
  5. Optimized inventory and logistics - Better-optimized logistics and inventory isn't just better for business, it's often more sustainable. Less transportation mileage, less raw material consumption, lower energy use, and reduced waste are all hallmarks of sustainable procurement and operations
  6. Supplier engagement - Building strong relationships with high-quality suppliers is essential to your organization’s success, particularly when you need to collaborate with those suppliers on sustainable procurement performance, transparency, and traceability
  7. Unified data - From assessing supplier risks to understanding product-level environmental and social impacts, accurate data is a critical component for better supply chain sustainability. You need to collect, organize, manage, and take the steps to understand the data your organization gathers throughout its value chain to optimize your sustainable procurement decisions

The Benefits of Sustainable Procurement

Strategic, sustainable procurement delivers consistent financial, social, and stakeholder benefits. Here are just a few examples highlighting the ROI of sustainable procurement:

€1.2 billion

Sustainable sourcing efficiency improvements helped Unilever realize over €1.2 billion in operational cost savings since 2008

Source: Unilever, 2020

$227 million

Operating cost savings from manufacturing efficiency improvements that reduced product defects and waste

Source: McKesson, 2020

$60 million

Reduction in operating costs from sustainable procurement programs and practices focused on product ingredients

Source: PepsiCo, 2017

$50 million

Company-wide improvement in profit margins for Nike by replacing certain shoe components with more sutainable materials and improving its supply chain sustainability practices

Source: Nike, 2021

Beyond cost reductions and savings from reduced energy use, lower materials consumption, and more efficient transportation, sustainable procurement unlocks other value levers too. Authentically sustainable products improve brand reputation, provide opportunities for premium pricing, and reduce legal, compliance, and publicity risks. Research by the World Economic Forum finds effective sustainable procurement can raise revenue by 5-20% and reduce procurement costs 9-16%, while improving brand perception and reducing risk.

Moreover, strategic sustainable procurement helps derisk and future-proof organizations when it comes to supply chain pressures, resource scarcity, and consumer purchasing trends.

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Your Path to More Sustainable Procurement

Sustainable supply chain management is complex. It requires a holistic view of all the partners, processes, logistics, and raw materials involved in manufacturing and delivering your products to customers, plus the ability to track, collect, and connect data at each step. It also involves use of procurement influence to shift suppliers in sustainable directions. By reducing partners’ Scope 1, 2 & 3 emissions, you reduce your company’s Scope 3 emissions.

But sustainable procurement isn’t just about risks and challenges. It also presents historic opportunities to make and distribute more appealing, durable, valuable, and differentiated products, invent (or reinvent) new products, reduce costs, protect the environment, and elevate your company’s brand. Products and packaging can become biodegradable, compostable, or even upcycled from other products’ waste. The entire world benefits - both now and in the future.

Sustainable procurement opportunities include:

  • Purchasing renewable energy (PPAs, etc.)
  • Procuring energy efficiency technology and services, and encouraging, advocating, or even financing them at leased and third-party sites
  • Purchasing and sourcing other organizations' waste and byproducts as raw material inputs
  • Sourcing raw materials closer to the plant or site that manufactures or cultivates it
  • Sourcing a greater percentage of recycled and upcycled raw materials for products and packaging
  • Improving and reducing the emissions intensity of your raw material transportation
  • Partnering - and even financing - to implement sustainability improvements in strategic parts of your value chain
  • Purchasing carbon credits, renewable energy credits (RECs), and other sustainable assets

As well as setting better, more sustainable procurement standards - and helping suppliers meet them.

Your sustainable procurement strategy should fit the needs and realities of your business, but at a minimum consider material ESG factors and key supplier relationships.

Sustainable Procurement Themes

Sustainable Procurement and Supplier Engagement

Supplier relations is an ongoing dialogue, and your organization will have varying degrees of influence in a specific value chain. When working with suppliers on sustainability initiatives, it's important to be clear, consistent, and understanding with your sustainable procurement approach and policies:

  1. Engage your CEO, CFO, or Chief Procurement Officer (CPO) in this communication process. Make it clear to your suppliers sustainable procurement is a company-wide initiative and top priority.
  2. Ask your suppliers what they're doing currently around sustainability and human rights, and what policies and controls are already in place now. In many cases, your larger and more strategic suppliers will already have been approached by their other value chain relationships around similar initiatives. Your partners may already have innovative approaches, products, and solutions they can bring to the table
  3. Educate each supplier on why sustainable procurement matters for your business and stakeholders, as well as why investing in sustainability is beneficial to their business as well. Cite other brands and examples. Highlight the opportunities and risks of inaction.
  4. Also work to engage your Tier 1 and priority suppliers around their supply chains. Who are their suppliers? What are their procurement policies? Where are the biggest lower-tier risks, issues, and opportunities for improvement?

Once you've established one or more sustainable supply chain programs, work with your suppliers to implement best practices:

  1. Introduce your Sustainable Supply Chain Code of Conduct and policies up front. Make it publicly available on your website. Include it in contracts and RFPs. Track which suppliers have reviewed and signed on.
  2. Help suppliers establish long-term sustainability goals and science-based targets.
  3. Include your suppliers' suppliers within these sustainability programs.
  4. Request each supplier designate a sustainability lead and primary point of contact on their staff to work with you to extend the sustainability program(s) to lower-tier suppliers.
  5. Offer training to suppliers and provide them with incentives for implement sustainable procurement practices and building capacity
  6. Offer co-investment or supportive financing to help your strategic suppliers implementing sustainability practices like renewable energy, energy efficiency, and closed-loop processes (if your organization has the means).
  7. Conduct annual reviews and solicit feedback from your suppliers on how to improve.
  8. Use independent audits, verification steps, and data checks.

For example, in 2021 Hewlett-Packard (HP) launched a new Sustainable Bond Framework, which the company will use to issue bonds to help finance HP sustainability projects. The company plans to issue up to $2 billion in sustainable bonds, and one use of proceeds will be projects that help decarbonize its supply chain. Similarly, Unilever and Campbell Soup Company offer their farmers technologies, guidelines, and products to help them optimize their fertilizer and water use and improve soil conservation.

Your Next Steps With Sustainable Procurement

Aligning your organization's procurement policies, programs, and decision-making with its ESG and sustainability targets can be challenging - but also incredibly powerful for innovation, differentiation, and value creation. If your company makes or sells physical products, your supply chain is the foundation for your organization's overall sustainability performance - putting sustainable procurement at the forefront of ESG implementation.

Achieving sustainable procurement exellence does require internal capacity, resources, and investment. But, done correctly, it can boost everything from your firm's brand and reputation to employee morale and retention, operating financials, and risk management efforts.