The new push to rate suppliers on sustainability

Many companies long have evaluated aspects of their suppliers’ environmental, social and governance policies and performance.

Examples of these approaches include two decades of work to evaluate labor practices in overseas factories to more recent holistic efforts to map environmental footprints of the entire value chain of a product or commodity.

These efforts to advance corporate sustainability have benefited from a wide range of collaborative initiatives spanning the public, private and nongovernmental sectors. As more actors extend the breadth and diversity of the corporate sustainability movement, however, challenges emerge.

Many companies now report that the number of investor, customer and other stakeholder evaluation initiatives they find themselves subject to has expanded dramatically over the past few years and is rapidly accelerating. Companies are compounding this issue with their own supplier evaluation initiatives by creating proprietary B2B surveys, the results of which stay locked away in their own procurement departments.

These dynamics have left many companies struggling to understand, prioritize and respond to the growing external demands for sustainability information.

But what if more companies collectively pushed suppliers to report to reputable providers, the vibrant ecosystem of corporate sustainability ratings and rankings that has arisen over the past two decades?

For example, many investor-related ratings and ranking firms have coalesced around the consideration of sustainability issues across the spectrum covered by standards such as the Global Reporting Initiative’s (GRI) G4 guidelines.

Companies such as Microsoft have started requiring portions of their supply base to publicly report using the GRI, thereby pushing more data into the public domain for all to see and for existing ratings providers to review and assess.

To understand the breadth and depth of ratings and rankings, it’s important to first understand what data investors were really looking for from companies. (A BrownFlynn and Nasdaq webinar series, “The Transparency Triumph: Using Existing Systems to Enhance Operational Awareness, Track Progress and Manage Sustainability,” delved into this trend.)

While it is clear that many people have an interest in sustainability, the question is if investor-focused ESG ratings providers can be used for purchasers to evaluate their suppliers.

Reassessing ratings

The Committee on Supplier Ratings (COSR) is a collaborative, multi-stakeholder group formed to answer that question.

COSR’s goal is to help companies send a consistent sustainable market signal to their supply base without reinventing the many wheels that already exist to assess corporate sustainability.

The group aims to do this by identifying and using ratings that are more transparent and accountable, and to determine how they can be effectively used to meet the needs of corporate (and public) purchasing departments.

COSR initially was started in the fall of 2015 through a series of conversations between Microsoft’s Tim Hopper, Anastasia O’Rourke at Industrial Economics, Inc. (IEc) and BrownFlynn’s Mike Wallace.

At the time, Microsoft was enhancing its overall engagement with indirect suppliers around sustainability issues and expanding on the idea of leveraging the existing ESG research ecosystem. In partnership with IEc and BrownFlynn, the group formalized the concept of COSR and developed a formal structure to initiate a series of multi-stakeholder conversations and the development of an assessment framework.

The group assembled included Create.org, EICC, Global Initiative on Sustainability Ratings (GISR), The Global Impact Investing Network (GIIN), ITC, Microsoft, Nasdaq, Responsible Sourcing Network, SustainAbility, Sustainable Purchasing Leadership Council (SPLC), United States Postal Service (USPS), and World Resources Institute (WRI); with 21 other organizations large and small observing as COSR and its concept emerged. 

Phase 1 of the COSR project aimed to explore and pilot the feasibility of leveraging the existing ecosystem of professional ESG research firms and their ratings products for supply chain assessment purposes.

If these well-known and well-respected ESG firms already were assessing the overall sustainability performance of tens of thousands of companies, couldn’t this information, and/or the process itself, be leveraged to look at the same multitude of suppliers? If yes, which ESG ratings systems can be applied to and relied upon for procurement purposes?

A three-part framework was developed, piloted and refined by the COSR committee, along with an analysis of the landscape of ratings systems.

Given that there are many varieties of ESG ratings systems and methodologies, we developed a three-part flexible framework that guides procurers to ask specific questions of ESG ratings providers: Who is producing the rating and how are ratings made? What ESG issues and criteria are covered? Where are they covering companies?

From there, we drew on our program evaluation, certification and assessment experience to elaborate on more detailed indicators. Moving forward, the plan is to collect more input from the wider sustainability community to make this a robust tool.

Deepening ties

The COSR framework is being tested with a set of 10 leading ESG ratings organizations from around the world, which will provide their input and insights into best practices.

The project team is also expanding the group of interested parties to continue work on enterprise-level sustainability assessments in 2016, hosted by the SPLC.

In Phase 2, the COSR project team expects to further develop the COSR framework and provide better navigation through the landscape of ESG ratings, as well as other indices, platforms, data providers and scorecards.

“In the spirit of the lean startup methodology, we are looking to iterate, pilot-test, calibrate and thereby continue to improve our guidance on enterprise-level sustainable tools,” said Jason Pearson, executive director of the SPLC. “A big part of that is connecting to other like-minded initiatives.”

If the topic of converging (and amplifying) the sustainability signal from investors and procurers is of interest to you, see the work completed to date and join the conversation.