George Markezinis
Supply chain ESG performance has become a critical factor in business success, with 81% of PwC survey respondents stating that ESG criteria are important in supplier selection. This shift represents a fundamental change in how companies evaluate their operations and partnerships. According to the 2024 Global Trade Report, 74% of businesses reported being impacted by supply chain due diligence, highlighting its growing significance in global trade.
Beyond regulatory compliance, ESG supply chain initiatives do deliver tangible business benefits, enhancing ESG performance and contributing to sustainable corporate growth. However, companies must also address substantial supply chain ESG risks, as sustainability challenges are projected to cost global companies $120 billion by 2026. Additionally, environmental issues remain the primary focus of data collection efforts, with 67% of companies collecting data on waste management and 60% on carbon emissions.
If companies strategically implement ESG requirements, we expect sustainable supply chain practices to consistently outperform traditional models in 2025. Companies can create stakeholder value while carefully navigating the evolving regulatory landscape.
ESG factors and their role in supply chain management significantly impact the long-term business performance of a considerable number of companies globally. As supply chains often account for 80-90% of a company’s environmental and social impact, they place them at the core of meaningful ESG improvements. Notably, organizations that successfully integrate ESG considerations into their supply chains experience higher profit margins of between one and three percentage points and stock market premiums of over 10%.
ESG integration serves as a powerful framework for identifying and mitigating various supply chain risks that fall into three categories:
Environmental risks
They involve pollution, waste management, and carbon footprint that can lead to regulatory fines and reputational damage. Companies that neglect environmental factors face serious consequences, including disruptions from climate-related events and potential regulatory penalties. Proactive organizations address these challenges by investing in sustainable practices and renewable resources.
Social risks
They encompass labor rights and health and safety concerns throughout the supply chain. When overlooked, these issues can result in operational discontinuations through labor strikes, high employee attrition, and diminished consumer confidence. Effective social risk management requires implementing rigid labor standards and fostering proper workplace culture.
Governance risks
These relate to corporate ethics and control mechanisms. Poor governance frequently stems from inadequate transparency and accountability, potentially undermining investor confidence. Strong governance policies help ensure corporate activities align with legal and ethical standards, protecting against legal issues while strengthening market credibility.
Procurement also has a key role in managing supply chain ESG risks through strategic supplier selection. Procurement teams can significantly reduce exposure to disruptions and reputational harm if they thoroughly assess ESG practices and compliance from potential partners. Furthermore, integrating ESG criteria into procurement policies provides a framework for evaluating supplier performance consistently.
Some of the most effective ESG initiatives in procurement include:
A successful ESG integration requires effective collaboration. That means that internally, procurement teams must coordinate with sustainability, operations, and legal departments to develop comprehensive guidelines. Externally, creating transparent supplier communication builds trust and drives business growth by ensuring alignment with ESG expectations and standards.
Consequently, ESG-optimized procurement mitigates risks and creates substantial business value through enhanced brand reputation and stakeholder trust.
Establishing efficient ESG-compliant supply chains necessitates the systematic use of rigorous methodologies and specialized tools. Contemporary enterprises increasingly acknowledge that effective supplier selection and ongoing oversight are the foundation of sustainable supply chain operations. The digitalization of supply chains markedly improves company ESG performance by fortifying governance, enhancing productivity, and mitigating financial restrictions.
To ensure that suppliers are aligned with a company’s sustainability goals, it is highly important for the company to include ESG criteria in their qualification procedures and define what requirements suppliers should meet.
The most effective approach involves conducting thorough due diligence before onboarding new suppliers and regularly reassessing existing suppliers to verify they continue meeting established ESG standards.
For structured ESG assessment during onboarding, organizations should:
Supplier ESG ratings have become essential in vendor selection, with companies calculating numerical indicators that summarize compliance across all three ESG dimensions. The onboarding process increasingly relies on ESG checklists that categorize vendor performance into high, medium, or low levels based on comprehensive criteria.
After successful onboarding, there is continuous monitoring. Primarily, many companies struggle with collecting accurate ESG data across complex global supply chains due to multiple supplier tiers and decentralized production. Therefore, technologies like AI and data analytics have surfaced as critical solutions for tracking ESG performance.
AI algorithms can process information in multiple languages, detect adverse media related to supply chain partners, analyze vast datasets to anticipate disruptions, and identify inefficiencies. These capabilities prove especially valuable for assessing scope 3 emissions, which comprise up to 75% of many entities’ carbon emissions.
Integrated platforms now connect buyers and suppliers while enabling real-time emissions tracking, ESG risk detection, and enhanced sustainability reporting.
Businesses are increasingly addressing environmental and social responsibilities throughout their value chains as stakeholder pressure has intensified attention toward sustainable supply chain practices.
The better the supply chain ESG performance, the more investors’ decisions hinge on that status. What companies need to accept is that investors will still support businesses that make expenditures to address ESG issues regardless of compliance and even if profitability might slow down short-term.
Nevertheless, investors maintain clear expectations regarding returns. Although willing to accept temporary profit reductions, they remain unwilling to sacrifice long-term performance. This balance drives investment strategies, as demonstrated by the number of investors who suspect when corporate disclosures contain some greenwashing or who incorporate ESG considerations into their deal strategy. At the same time, they are also willing to actively divest from companies with inadequate ESG performance.
Small and medium-sized enterprises more often bear a disproportionate financial burden when implementing ESG practices. The main reason is a substantial upfront investment initially required to implement these practices, and that is particularly challenging for suppliers with limited resources.
For many SMEs, however, expenses including sufficient employee training or software appear as a competitive disadvantage compared to larger corporations that possess deeper financial capital to navigate ESG mandates. New ESG requirements demand higher costs, but the choice is either a win or a lose decision. Key stakeholders, such as customers, demand this data from their supply chains, leaving little room for these companies to fail and not comply with risks. They need to do better in terms of thoroughly searching for the tools, assets, and partners that will guide them through the process in the most efficient way without exaggerating costs.
Multinational companies encounter particular deadlocks gathering reliable ESG data across jurisdictions with varying requirements. According to Deloitte, only 16% of companies report full visibility into their supply chains, making comprehensive ESG risk management challenging, if not impossible. Collecting reliable data from multi-tiered supply chains remains a critical hurdle, with smaller suppliers frequently lacking tools or expertise to comply with reporting requirements.
Geopolitical complexities further complicate compliance efforts, as trade restrictions, regional conflicts, and sanctions disrupt global supply chains. This problematic landscape requires constant adaptation to volatile conditions while attempting to maintain consistent ESG standards across borders.
The shift toward ESG-ready supply chains is no longer optional but imperative for sustained business success and resilience. Companies that proactively integrate ESG criteria into their supply chain management benefit from improved profitability, enhanced investor confidence, and strengthened brand reputation. Although the journey toward ESG transformation is not without challenges—particularly financial burdens for SMEs, data collection complexities, and geopolitical disruptions—the strategic advantages significantly outweigh these barriers.
By investing in rigorous supplier evaluation processes, leveraging advanced technologies like AI for continuous ESG monitoring, and fostering strong internal and external collaboration, businesses can effectively navigate the evolving regulatory landscape while maximizing stakeholder value. The future belongs to organizations that recognize ESG not just as a compliance obligation but as a strategic asset, capable of driving competitive advantage, operational resilience, and sustainable long-term growth.
