Sustainability has become the burning issue that businesses need to address in the wake of the 2020 Covid disruption, and technology and services providers are responding rapidly to fill gaps in current operating models.
The shift in attention is not just hot air. Multiple firms are putting serious money behind the effort. As just one example, the accounting firm PwC announced in June that it would spend $12 billion over five years to create 100,000 new jobs aimed at helping its clients grapple with climate and diversity reporting, as well as in artificial intelligence, according to a Reuters report.
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Part of that staggering 35% increase in planned headcount — PwC currently employs 284,000 professionals globally — is a perceived need to help businesses understand and comply with the exact requirements of “sustainability,” a broad term that can encompass many topics and subareas.
To fully understand sustainability in the business context, we need to know what exactly the key concepts mean, why they’re important and what technology to use for the best return on your investment.
A need for greater clarity
A common error that we’ve encountered in conversations with businesspeople and providers alike is that the “S” in CSR and ESG are mistakenly referred to as “sustainability,” when in both instances it stands for “social.” If one word trips people up, imagine the confusion that could arise around “net zero” or what a “circular economy” means.
Getting these terms right is not just a matter of semantics. Agreement on what exactly is being discussed is essential to aligning on actions to take.
In a speech last month, US Securities and Exchange Commissioner Allison Herren Lee put it in simple yet stark business terms.
“Because matters such as climate change may bear on the valuation of assets, inventory, supply chain and future cash flows, board oversight of audits increasingly necessitates engagement on those issues,” she said at the Society for Corporate Governance 2021 National Conference.
For any company, that’s a wide range of business areas that face risks — as well as opportunities. To get the data to make business decisions in those areas, stakeholders need technology to work for them in new ways so that a company’s sustainability efforts can be showcased and have a material impact for the business.
And it’s not just the SEC and other regulators who are driving accountability on sustainability issues.
These days, more individual importance is placed on environmental and social issues by investors, consumers and a company’s own workers — all of whom will choose whether to spend money on your products or whether to even put their talent to work for your company.
Accountability has risen in the boardroom and in the marketplace.
To clarify matters, a glossary of terms follows that can help people understand the issues and the obligations that businesses face. Familiarity with these terms will be important in the coming weeks as Spend Matters profiles a range of companies that offer ESG technology to measure, manage and optimize the business responses to the vital issues around sustainability.
A glossary of CSR, ESG and sustainability terms
CSR — Corporate social responsibility stems from companies sensing that environmental issues affect the company’s reputation and standing in the community. Businesses operate in public so they have a social impact that needs to be cared for. To fulfill CSR goals, businesses promote diversity and inclusion, do charity work, recycle, volunteer in the community and take policy stances on social issues and environmental topics. In some cases, a CSR team at a company may bake those concerns into management’s decision-making process. The CSR concept goes back decades, but in recent years, it has become more of a factor in business strategy. Its outcomes for improving the company’s image, adding profits or saving money have often been anecdotal, but as CSR’s profile has risen, more quantifiable results have been sought. Technology providers have developed entire fields out of trying to measure these areas, as you’ll see in the other glossary terms.
ESG — The initials stand for “environmental, social and governance.” The key difference from CSR is the governance angle. The information gathered in ESG is meant for those who govern the actions of a business, like boards of directors and investors. “Follow the money,” right? Sometimes CSR can be thought of more as a voluntary process to burnish a brand, while ESG focuses on measuring the impacts of those efforts. That’s especially true as companies mature and turn CSR efforts into serious strategy and make climate concerns and social issues part of how they generate value at all levels. When a board has to answer to regulators or the C-suite needs to make key budget decisions, they want hard data to back up their ESG efforts. The specific audience for information from ESG monitoring also includes third-party risk firms and third-party auditing firms.
Sustainability — This is a broad term that can mean many things. It generally refers to concerns about environmental issues and seeking a balance in how natural resources are used. But it also applies to labor issues and business decisions on how to not deplete your resources and how to keep a business on sound footing. The context of its use is key. In our introduction to sustainability coverage for S2P tech that will post later today, our analysts offer a thorough exploration of how to define sustainability for procurement and how that translates to specific technology capabilities.
GHG — This stands for greenhouse gases, which are emitted from burning fuels and other organic materials (carbons). GHGs can cause health problems, pollute the atmosphere and add to global warming.
carbon footprint — Roughly, it’s the amount of energy your company requires to operate. That energy can take the shape of how much GHG you emit, how much electricity you use, how bulky your packaging is or how recyclable your packaging is. For example, blockchain-based technologies have taken some knocks for how much energy it uses to run all of its nodes and keep track of all of the information gathered on individual chains. And the work-from-home reaction to the Covid crisis may have an impact on a company’s carbon footprint because employees aren’t driving to work, flying to business meetings or commuting in other ways.
net zero — This is the goal of offsetting your carbon footprint with mitigation efforts like recycling, planting trees, having more energy-efficient machines and offices, using solar/wind/battery energy vs. coal or gasoline-powered engines.
Scope 1, 2 and 3 emissions — These designations stem from requirements that businesses must account for emissions made directly by their business or related indirectly to how the business operates. According to the US Environmental Protection Agency:
- Scope 1 emissions are direct greenhouse (GHG) emissions that occur from sources that are controlled or owned by an organization (e.g., emissions associated with fuel combustion in boilers, furnaces, vehicles).
- Scope 2 emissions are indirect GHG emissions associated with the purchase of electricity, steam, heat or cooling. Although scope 2 emissions physically occur at the facility where they are generated, they are accounted for in an organization’s GHG inventory because they are a result of the organization’s energy use.
- Scope 3 emissions are the result of activities from assets not owned or controlled by the reporting organization, but that the organization indirectly impacts in its value chain. Scope 3 emissions include all sources not within an organization’s scope 1 and 2 boundary. The scope 3 emissions for one organization are the scope 1 and 2 emissions of another organization. Scope 3 emissions, also referred to as value chain emissions, often represent the majority of an organization’s total GHG emissions. Scope 3 emissions fall within 15 categories, though not every category will be relevant to all organizations. Scope 3 emission sources include emissions both upstream and downstream of the organization’s activities. According to the GHG Corporate Protocol, all organizations should quantify scope 1 and 2 emissions when reporting and disclosing GHG emissions, while scope 3 emissions quantification is not required.
On that last point, Spend Matters has found that technology providers have been making advances in accounting for scope 3 emissions. There are multiple approaches, ranging from collaborative modeling with n-tier suppliers, bottoms-up calculation based on BOMs and other transaction information (e.g., transportation documentation), and network-based tracking of the life of materials from source through to production.
Circular economy or “circularity” — Under the umbrella of “sustainability,” two main issues are natural cycles (carbon, water, etc.) and human activities. The circular economy focuses on the man-made cycles, the making of parts/goods/products and the delivery of services. The US Chamber of Commerce offered this insight in an article on sustainability vs. circularity:
“The practice of circularity is focused on and grounded in the technosphere — a human construct designed to support the conversion of raw materials for human consumption beyond simple survival needs of food and water. The intentional design of a system is what separates circularity from sustainability.”
Some businesses try to meet sustainability goals by having a circular process that ensures better outcomes for the environment and the company. And some technology providers help track and manage those activities so that ESG data can be put to the best use.
Technology ROI — Spend Matters’ upcoming analysis of individual vendors will have feedback on how the technology from these different players in the ESG space can offer a return on investment. Here’s how we break down the players in the ESG sector:
- S2P suites — These are source-to-pay technology providers that help manage contracts, sourcing, invoicing, etc. and have some ESG capabilities built into their solutions so companies can use the features out of the box.
- Supplier management (SXM) vendors — Their software helps track suppliers (aka tier 1 vendors) and some can track their suppliers’ suppliers (tiers 2, 3). The solution often aids collaboration, innovation and resiliency — all key to handling crises like the Covid disruption.
- Risk management specialists — These are vendors that track and measure risks, especially related to suppliers or supply chain components, to aid reporting to companies, including S2P providers.
- Supply chain visibility specialists — These firms track raw materials or multi-tier supplier relationships to help direct procurement operations understand the ESG impacts of their supply chains.
- ESG specialists — These technology vendors may focus on just one key area, like waste management or circular practices like leasing equipment.
If your business is making the case for — or is in the process of buying procurement technology — be sure to try out Spend Matters TechMatch℠ to generate a tailored vendor shortlist.