Published: 19 December 2023
Contributors: Tom Krantz, Alexandra Jonker
Sustainable procurement is the integration of environmental, social and governance (ESG) criteria into an organization’s procurement processes.
It encourages companies to obtain the products and services they need while also considering sustainable development, stakeholder expectations and regulatory requirements.
Procurement refers to how companies acquire the goods and services they need from external sources to operate efficiently. Often, organizations enter a tendering or competitive bidding process to help ensure they’re getting the best price while balancing factors such as quality, location and timing.
Sustainable procurement differs in that its goal is for organizations to meet their product and service needs at the best possible price while also having a positive impact on the three dimensions of sustainability: the environment, society and the economy.
Sustainable procurement can align with the framework of the triple bottom line (TBL), which prioritizes the three Ps—people, planet and profit. This framework suggests that by maximizing all three bottom lines, organizations are more likely to have a positive impact on the world while still improving financial performance.
With ESG disclosures starting as early as 2025 for some companies, make sure that you're prepared with our guide.
Register for the playbook on smarter asset management
The 3 dimensions of sustainability are environmental, social and economic.
Environmental sustainability focuses on countering environmental issues such as climate change. For example, companies can choose to reduce their environmental impact by moving away from finite resources like fossil fuels and embracing renewable energy sources.
Social sustainability is not yet as clearly defined, though it’s been suggested that it embodies all human activity and that all domains of sustainability ladder back to a social component. Social sustainability prioritizes human rights and recognizes that the well-being of all people dictates the longevity, efficacy and sustainability of a society.
Economic sustainability refers to businesses being sustainable and profitable. It can sometimes seem at odds with environmental sustainability, though companies have made meaningful strides to embed sustainability into their business by adopting more environmentally and socially conscious practices like sustainable procurement.
The threat of climate change and signs of its adverse effects can be seen in the loss of biodiversity, food and water shortages, and an increase in natural disasters. In response, some organizations are working to reduce their greenhouse gas (GHG) emissions or eliminate waste from their supply chains.
Also, companies are increasingly expected to adopt more sustainable business practices and showcase their progress through sustainability reporting.
Stakeholders are putting a greater emphasis on seeing ESG and corporate social responsibility (CSR) initiatives put into action, which is why legislation like the Corporate Sustainability Reporting Directive (CSRD) has been passed. The CSRD requires companies in the European Union (EU) to report on the environmental and sustainable impact of their business activities, and their ESG initiatives, through ESG reporting.
Many organizations are also considering what it means for their operations to adhere to the United Nations Sustainable Development Goals (SDGs). There are 17 SDGs in total, though procurement professionals are likely to focus on Goal 12, which insists on the need to help ensure sustainable consumption and production patterns. To achieve Goal 12, 11 different targets have been outlined. One of them, target 12.7, specifically aims to promote public procurement practices that are sustainable, in accordance with national policies and priorities.1
Every aspect of procurement, from decision-making to sourcing to future-proofing the function, can be scrutinized to help ensure that organizations have actionable sustainable procurement strategies in place.
This puts pressure on supply chain and procurement professionals to set goals like lowering their company’s carbon footprint by reducing emissions, continually monitoring for human rights violations like child labor, and adopting more sustainable procurement practices.
Depending on where an organization is located, sustainable procurement may be mandated through various laws and regulations.
For instance, the EU requires companies to implement sustainable procurement practices, whereas the United States encourages but doesn’t mandate disclosure in the private sector.
Organizations can consider the following procurement policies, requirements and standards when shaping their sustainable procurement strategy:
Several international standards have been introduced, such as the ISO 20400:2017.2 This document provides guidance on implementing sustainable practices into a company’s procurement process and can help inform its sustainable supply chain management strategy.
The EU’s Public Procurement Directives dictate that public procurement processes consider ESG criteria.3 In the US, a new proposal—the Sustainable Products and Services procurement rule—has been put forth by the Federal Acquisition Regulation (FAR) Council, directing federal buyers to purchase sustainable products and services.4
Often, companies are encouraged or required to disclose their sustainability performance and demonstrate their commitment to sustainable procurement. The Global Reporting Initiative (GRI) provides a framework for organizations to frame their ESG and sustainability reporting.
Across sectors, there are industry-specific regulations that aim to make procurement more sustainable. Organizations like the Sustainability Accounting Standards Board (SASB) provide industry-specific standards to help companies disclose sustainability information to their stakeholders.
Some notable benefits of sustainable procurement include:
Adopting sustainable procurement policies, whether it’s on a global scale by integrating CSR into the procurement process or on a local scale by only using recycled materials, can put companies on the path toward achieving their sustainability goals.
What’s more, it can boost brand value by improving the company’s reputation and ESG score, both of which can create a competitive advantage.
Making more sustainable purchasing decisions can improve procurement operations and lead to benefits like cost reductions in both the short- and long-term.
For instance, a company that prioritizes sustainable sourcing might get a better price on raw materials by working with local small-to-medium-sized businesses. In the long term, they might find that localizing their supply chain helps reduce their GHG emissions.
The key to efficient supply chain management is having the right data. This is also true for sustainable procurement.
With the right metrics in hand, whether it’s tracking energy consumption or scope 3 emissions, procurement professionals can calibrate their risk management strategies to audit suppliers, forecast trends, and navigate around potential disruptions within the supply chain.
Sustainable procurement prioritizes the well-being of everyone within the value chain.
From an environmental standpoint that means reducing waste and using less water.
From a social standpoint that means creating better working conditions for people across the supply chain.
From a governance perspective, it means to comply with established regulations and requirements.
Here’s how companies can embed sustainability into their procurement processes:
Companies can examine their procurement infrastructure, and their ESG initiatives, to gain a benchmark for both. The ISO 20400:17 provides a strategic framework for assessment, enabling companies to set a baseline and determine the next steps for sustainable procurement.
Given the number of frameworks and standards that exist, for example, CSRD, GRI, SASB and more, there are several metrics that can help organizations track their sustainable procurement initiatives.
These range from environmental (waste reduction in cubic meters) to social (community engagement in volunteering hours) to governance (compliance with UN global conduct).
Organizations are encouraged to speak with their partners about sustainability goals and ESG metrics. It’s possible for companies to request information from third-party companies like Bloomberg, S&P Dow Jones Indices and others.
Through sustainable procurement, organizations can balance operational efficiency with sustainability by using recycled or renewable materials, implementing water conservation measures, deploying renewable energy management practices and more.
Sustainability in business refers to a company's strategy and actions to eliminate the adverse environmental and social impacts caused by business operations.
Supply chain management is the handling of the entire production flow of goods or services. Starting from the raw components all the way to delivering the final product to the consumer.
Energy management is the proactive and systematic monitoring, control and optimization of an organization’s energy consumption to conserve use and decrease energy costs.
Footnotes
1 Ensure sustainable consumption and production patterns (link resides outside ibm.com), United Nations
2 ISO 20400:17 Sustainable Procurement Guidance (link resides outside ibm.com), International Organization for Standardization, April 2017
3 Reaching social and environmental objectives through maintenance of public green spaces (link resides outside ibm.com), European Commission
4 Biden-Harris Administration announces plan to maximize purchases of sustainable products and services as part of president’s investing in America agenda (link resides outside ibm.com), The White House