ESG as a Consideration in Vendor Procurement
In the last few years, a strong focus on Environmental, Social, and Corporate Governance (ESG) has become evident in many companies as individuals, businesses and investors alike, seek to have a greater positive impact on the planet and society as a whole. Whilst primarily founded as an evaluation criteria in the asset management industry, ESG matters are intrinsic to the communities we live and work in.
In global subsidiary governance, we are starting to see ESG taking a far more prominent place among selection criteria for vendor procurement. The increased emphasis is rather recent, but in sharing our own experiences, we hope to benefit the broader Entity Portfolio Management industry.
ESG is primarily a framework to measure the sustainability and social responsibility of an investment and how this would impact the stability and longevity of the opportunity. It is generally measured by the environmental impact of a company, as well as accounting for social and governance factors. It is also a tool that is frequently integrated in the procurement processes of many companies.
The integration of ESG into procurement often has three motivations. One is to understand how the ESG of vendors and service providers can contribute towards the company’s own corporate compliance targets. Another is to identify whether there are incentives available for the achievement of ESG targets, in quantifying how much the vendor or service provider can assist in qualifying for these incentives. Finally, evaluating the long-term potential of vendors and service providers.
ESG in legal services
Whilst in the field of legal services, ESG related inquiries in procurement may not yet be as prominent as they are in manufacturing, construction and retail, it is still an increasingly important consideration for firms to address. ESG standards in legal services usually vary depending on in-country requirements, the type of practice and company size.
In outsourcing international legal services, it is important to evaluate the stated standards and position of the company, programs and resources related to its ESG targets. Oversight of ESG matters in international locations and how ESG targets are communicated must be implemented and reported across all levels.
When considering environmental standards, it is important to understand the aspects of a business’ operations that can be controlled. Firms should assess whether vendors have utilised an accepted framework such as the UN Sustainable Development Goals or Global Reporting Initiative (GRI), hiring personnel that are familiar with these practices and where applicable, locating businesses in green certified buildings. In addition, participation in local community programs and initiatives should be evaluated to measure the company’s overall effort towards ESG targets.
The corporate citizenship aspect of ESG also relates indirectly to how the employer brand is perceived, more traditionally viewed under the lens of corporate social responsibility (CSR). Combined ESG and CSR practices have a strong impact on the tenure and quality of employees (which of course has a knock-on impact on overall quality and the retention of client knowledge). Some of the key governance areas to probe include whether service providers have policies in place on workplace practices, diversity and inclusion, as well as enforcement measures to ensure that such policies are followed. Whether they have an open-door culture that promotes employee contribution; rewards programs tied to performance; and employment packages that meet or exceed local standards. Other important considerations are to what extent is there participation in CSR initiatives that impact its immediate employee communities, whether they support social initiatives that ultimately impact diversity and inclusion, as well as playing a leadership role in setting local or regional best practice in terms of employee welfare.
The final element of ESG, governance standards, is highly relevant considering that the type of services being outsourced, global subsidiary governance services, are closely related. It will strongly impact the potential of any long-term partnership. As such, ensuring the following criteria are met is an absolute must when selecting vendors or outsourced providers:
- corporate policies and procedures that are enforced across all locations
- a mechanism to enforce and monitor compliance of these policies
- a history of good governance and experience in maintaining good governance standards
- data and data privacy practices
- corporate accountability safeguards such as KYC and AML policies and oversight committees.
While a focus on ESG is not yet ubiquitous in the procurement of legal services, we believe it should be. It is an ideal tool to evaluate a vendor’s employer practices using a more holistic lens. Among the attributes that can be discovered, a view of a potential partner’s ESG practices will allow the identification of firms that would most likely be a beneficial long-term partner – likely a stable business with employees that build careers within the company, which will both benefit clients and the health of the firm.
Robert-Jan Kokshoorn, Head of Business Development, Citco Global Subsidiary Governance Services
Citco GSGS Focus – Winter 2020/2021