Navigating the Intersection between ESG and Third Party Risk Management: A Modern Approach to Sustainability
In today’s rapidly evolving landscape, the intersection of Environmental, Social, and Governance (ESG) factors with Third-Party Risk Management (TPRM) has become increasingly pivotal. From global pandemics and climate change to geopolitical conflicts, ESG considerations are on everyone’s mind—especially for businesses that rely on intricate supply chains. As organizations strive for sustainability, understanding ESG and its implications for third-party relationships is crucial.
What is ESG (Environment, Social, Governance)?
The Role of Third-Party Risk Management (TPRM)
ESG encompasses three critical areas:
1. Environmental: This measures a company’s impact on the planet. Key considerations include carbon footprint management, renewable energy use, and waste management practices. Companies need to evaluate how their operations contribute to environmental degradation, whether through chemical waste or natural byproducts.
2. Social: This assesses how organizations interact with people, including employees, suppliers, and local communities. It involves evaluating working conditions, safety controls, community impact, and initiatives related to diversity and inclusion.
3. Governance: This examines ownership structures, audit controls, and overall processes. Governance issues directly influence both environmental and social dimensions, making it a cornerstone of a robust ESG strategy.
In the ESG landscape, TPRM is critical because a significant portion of a company’s carbon emissions often originates from its supply chain. Effective TPRM means not only managing your own operations but also ensuring accountability throughout your entire ecosystem. Investors, regulators, and consumers increasingly expect first parties to be accountable for the ESG performance of their third parties.
Scope 3 Emissions
Scope 3 emissions—those indirectly caused by an organization through its value chain—often represent the majority of total greenhouse gas emissions. Understanding and managing these emissions require reporting on relevant categories as defined by the GHG Protocol. This includes both upstream and downstream activities not directly controlled by the organization but influenced by it.
Aligning ESG with Organizational Goals
Success in TPRM and ESG requires alignment with your company’s goals and objectives. Different industries have varied ESG focuses; for instance, fossil fuel companies face different challenges compared to those in banking. The scoring methodologies used to evaluate ESG performance can also vary, introducing potential biases. It is crucial to understand the basis of these scores and ensure alignment with your organization’s ESG goals.
Beware of Greenwashing
Greenwashing occurs when organizations selectively report ESG metrics to appear more sustainable than they are. Given that ESG frameworks are often voluntary and not mandatory in many jurisdictions, it is vital to scrutinize claims carefully and ensure that any voluntary standards are genuinely adhered to.
Assessing Vendors on ESG
To effectively assess vendors, start by aligning their ESG commitments with your company’s goals. For instance, if your target is net zero by 2050, evaluate how potential vendors contribute to this goal. Include relevant questions in your vendor assessments, such as:
- What is your organization’s commitment to ESG?
- Who is responsible for ESG within your organization?
- Is there an ESG committee or expert?
- What are your current ESG objectives?
Linking TPRM practices with ESG objectives helps in understanding the impact of third parties on your ESG ratings and managing associated risks effectively. A cross-functional approach can minimize operational redundancies and enhance risk management.
Future Implications
Understanding the interconnected nature of ESG and TPRM is key to organizational resilience. ESG considerations are increasingly influencing investment decisions, regulatory frameworks, and market perceptions. For example, more than 100 countries have committed to net-zero emissions, and clean energy investments are surging.
Organizations are also setting ambitious targets for emissions reduction. EY, for instance, aims to achieve net zero by 2025 and expects 75% of its third-party vendors to set science-based carbon reduction targets by then.
Conclusion
Integrating ESG into TPRM and Enterprise Risk Management (ERM) does not require reinventing the wheel. By aligning ESG with existing frameworks, organizations can seamlessly incorporate sustainability and social responsibility into daily operations. This approach ensures that ESG considerations are not just compliance requirements but integral to the business strategy.
As the business environment evolves, TPRM emerges as a strategic tool for navigating the complexities of supply chain ESG. By adopting a comprehensive ESG framework, organizations can lead in responsible business practices, fostering a sustainable and socially responsible global business ecosystem. Embracing this integration positions companies as pioneers in a future where responsible supply chains are foundational to enduring success.
Blogged by
Aswathy Varma
Aswathy is a seasoned cybersecurity professional who handles the social media, and membership management at TPRM Alliance. She also blogs on ESG, TPRM, and InfoSec.
