Sustainability is increasingly called for – by customers, environmental organizations and legal requirements. The focus in this context not only includes environmental protection activities, but also the more comprehensive ESG concept, consisting of the key elements ‘environment’, ‘social’ and ‘governance’. A holistic implementation of ESG criteria along the supply chain may seem challenging to companies and their suppliers. Yet, with the right measures and digital tools, a sustainable design can be successfully mastered. We explain what is important in the context of sustainable supply chain management and how companies can benefit in the long term.
- Sustainability: Increasing demands on companies
- ESG: The relevant criteria
- Implementing ESG criteria in a targeted manner
- Approaches and digital solutions for sustainable supply chain management
- Sustainable supply chain management as an opportunity
1. Sustainability: Increasing demands on companies
It is not only the German Supply Chain Act, which has been in force since January 2023, that is increasingly pushing the topic of sustainability into focus: the EU Financial Market Authority (FMA) is planning to have increased minimum standards for the designation “sustainability” come into force this year. In addition, a further disclosure requirement for environmental targets has already been in place since 2022 by means of the EU Taxonomy Regulation.
Sustainability and ESG criteria in particular are therefore becoming an increasingly urgent issue for companies, especially as the industrial sector was responsible for a quarter of global emissions in 2021. Yet, how can companies and their suppliers meet the economic challenges and ecological demands? And what do ESG goals entail?
2. ESG: The relevant criteria
The abbreviation ESG stands for the three areas of responsibility ‘Environmental’, ‘Social’ and ‘Governance’. The latter form a framework for companies to ensure long-term sustainability and accountability. Goals set out in this framework are to be implemented not only within the company’s own organization, but also as far-reaching as possible within the entire value chain – in conjunction with supply chain protection legislation. The ESG concept thus goes beyond the ecological aspect:
- Environmental: The focus lies on environmental and climate protection. In addition to the responsible use of natural resources and environmentally friendly energy management, key aspects include sustainable facility management and the targeted minimization of emissions, for example through shorter delivery routes.
- Social: Companies should act socially responsible, i.e., stand up for the respect for human dignity and good working conditions, and implement minimum standards for health and safety. The ESG concept prohibits child and forced labor, as well as cooperation with dictatorial and authoritarian governments.
- Governance: Corporate management should follow clear, ethical compliance guidelines and enable equal opportunities, diversity, transparency and openness, and systematically combat corruption. Furthermore, companies are required to handle taxes correctly, to ensure the independence of monitoring organizations such as supervisory boards, and to reject anti-competitive practices.
3. How can companies implement ESG criteria in a targeted manner?
Supply chain processes are important for reaching ESG goals: In their efforts to achieve greater operational sustainability, companies should therefore take a critical look at their own supply chain and continuously review it for optimization potential. The rapidly advancing digitalization within the industrial sector, also referred to as Industry 4.0, offers innovative measures and solutions in this context. A study conducted by Accenture used case studies to show that digital technologies can make a decisive contribution to achieving Germany’s climate targets by 2030, as they have a major influence on the net savings potential of CO2 emissions.
4. Sustainable Supply Chain Management: Approaches and Digital Solutions
The following selected approaches and digital solutions can significantly support logistics managers in the sustainable design and management of the supply chain:
- Freight management: The choice of transport mode and the length of transport routes are crucial for sustainable supply chain management. Responsible parties should question in which supply chain section which emissions are generated and where they can best start for their own sustainability strategy. In particular, long or intercontinental routes by ocean or air freight account for a majority of Scope 3 emissions. Continuous analysis of these routes through technologies such as software-based fleet and traffic management or Big Data analytics helps to successfully reduce Scope 3 emissions. For example, higher utilization of containers or vehicles, resource-saving transport routes, or an increased switch to rail and inland waterway transport can support the decarbonization of the supply chain. For this purpose, mature supply chain management platforms can be optimally used to efficiently implement ESG sustainability criteria.
- Supply chain risk management: Under the German Supply Chain Act, companies are obligated to fulfill extensive due diligence obligations toward people and the environment in their value chain. In this context, it is important to continuously monitor and assess risks in the company’s own business area, but also at supplier companies, and to take appropriate measures to safeguard against them. High-risk procurement markets and production sites can be avoided using specialized software as part of risk analysis or risk mapping and monitoring. If all processes and relationships within the supply chain are openly disclosed with a strategic supply chain risk management and corresponding tools, and transparent data sharing is operated, risks that violate agreed environmental or social ESG principles can be efficiently minimized.
- Strategic supplier evaluation: Supplier selection can contribute significantly to greater sustainability in the supply chain. Suppliers are selected according to specific criteria, such as the inclusion of CO2 tracking and emissions control as a fixed criteria for selection. If suppliers are also assessed with the help of ISO 9001 certification, including regular sustainability reporting, companies create a solid basis for implementing the German Supply Chain Act and ESG criteria. The goal should be strategic supplier development, so that ecological as well as ethical-social compliance guidelines are comprehensibly adhered to and further developed for the future.
- Diversification of the supply chain: The systematic optimization of the procurement strategy through diversification of the supply chain also offers ecological potential. Intelligent supplier management via an SCM platform helps to centrally bundle and analyze all master, freight and inventory data of suppliers. Nearshoring or -sourcing can be interesting in terms of sustainability. If suitable producers or suppliers are found in the geographical vicinity, shorter distances not only ensure increased delivery reliability, but also savings in energy consumption.
- Additive manufacturing: If relocating production back to closer regions is not a viable option, modern technologies such as additive manufacturing can be an alternative. Using 3D printing, products are manufactured locally in a cost- and resource-friendly way, as the supply chain is significantly shortened. Material consumption is also minimized – only the necessary quantities are used. According to a recent Bitkom study, almost every other company with 100 or more employees used 3D printing in 2021 and was thus able to keep the use of raw materials and long transport routes to a minimum.
5. Sustainable supply chain management as an opportunity
Logistics managers should see sustainable supply chain management primarily as an opportunity and less as a cost factor – even if the path to greater sustainability may seem challenging. A sustainable supply chain with technology-based SCM strengthens one’s own future and competitive position – especially in view of the increasing pressure and expectation from customers, regulators and the public that companies take ESG criteria into account and report on them. The standards of the Supply Chain Act also provide an opportunity to position oneself as a sustainable company and to meet the generally growing green awareness.
External expertise can help with the implementation: Logistics service providers such as Hermes International offer specialized SCM software and provide support in evaluating existing data in order to identify driving and inhibiting aspects of sustainability and to continuously adapt their own supply chain to ESG requirements with a unique strategy.
The increased use of data and newly gained transparency result in further advantages: Companies are able to identify hidden cost and optimization potential along the supply chain in favor of greater efficiency as well as increase their own resilience.