The sustainability movement is gaining an unlikely ally: big money. In growing numbers, mainstream financial market players, such as large institutional investors, pension funds and stock exchanges, are integrating environmental, social and governance (ESG) factors into their reporting requirements and investment decision-making criteria. This strategy is called sustainable investing, impact investing or sustainable and responsible investing (SRI).
What is more, according to Pam Fitzpatrick, research analyst at Gartner, SRI advocates suggest that there is a positive correlation between a company’s attention to ESG factors and its long-term financial performance.
From the margins to the mainstream
Interest in SRI is no longer isolated to traditionally “socially conscious” investors, such as faith-based pension funds or niche mutual funds. Financial services firms, such as Morgan Stanley and Goldman Sachs, are building a brand around SRI in what appears to be a strategy to attract new markets. Other firms are quietly incorporating ESG factors into their performance analysis without formally announcing interest.
More attention on supply chain risks
Investor interest in environmental and social factors can directly affect the supply chain; the pressure that investors apply to the CEO and CFO will quickly cascade to the chief supply chain officer (CSCO). CSCOs and heads of supply chain strategy should prepare to help the CEO and CFO communicate supply chain risks and plan strategies that improve the company’s risk profile.
The rise of SRI will create a ripple effect on the end-to-end supply chain. When investors put pressure on a buyer (brand owner) company for more transparency and proof of risk controls, the buyer will ask several tiers of upstream and downstream partners to adopt new practices, such as annual corporate social responsibility (CSR) reporting or traceability of raw materials used in components and products.
As this investing style grows, CSCOs will experience more pressure to mitigate CSR-related risks in supply chain – particularly in industries where supply chain is a material business issue.
Plan for resilience
SRI factors change how the CSCO should view risk within the supply chain, where performance is typically measured by achieving the right balance of cost and quality. What investors ultimately are seeking is resilience, an attribute that’s already considered attractive to many CSCOs. In this regard, CSCOs are uniquely positioned to help their CEO and CFO understand what resilience means within the supply chain context, as well as the risk management strategies, capabilities and technologies that can enable it.