Spanish Companies Are Moving Forward with the New ESG Directive, Although They Are Not Yet Ready

On February 23rd, 2022, the European Commission submitted a proposal for a Directive on Corporate Sustainability Due Diligence to the European Parliament and Council, which was finally adopted on November 28th. From that moment on, it establishes that large companies are required to account for the actual and potential adverse effects on human rights and the environment of their own operations, those of their subsidiaries and those of their direct and indirect business partners. Spanish companies are looking for the most efficient and secure operating model.

In addition, the sanctions and civil liability framework is included in the event of non-compliance with these requirements, obliging companies to adopt a plan that guarantees that their business model and strategy are compatible with the Paris Agreement on Climate Change . In other words, companies are now responsible for what their suppliers do or, rather, what they do not do correctly.

And this is critical, because the impact that ESG (Environmental, Social & Governance) factors have on global supply chains is enormous. We are in a globalised market with geographically dispersed production. Therefore, the greatest risks, from a social point of view, come from complex and dispersed supply chains, where risks associated primarily with compliance with human rights and environmental impact can emerge.

The data only support this. A study by the World Economic Forum indicates that 50% of environmental emissions are generated in the value chain, reaching 80% or 90% in certain sectors such as FMCG (Fast-Moving Consumer Goods), fashion, food, automotive and construction.

So, where are Spanish companies in the face of this reality?

How capable are Spanish companies of facing the challenge of the New Directive? The reality is that they are not prepared for this challenge . Currently, 61% of Spanish companies believe that the new European Directive on sustainability in the supply chain will have a high impact on traditional purchasing activities, reaching 76% in relation to the management of the supplier base. However, only 57% have a medium-high knowledge of the implications of the new regulations on purchasing activity and its scope.

It is time to carry out a thorough analysis of the situation of Spanish companies and their suppliers, and establish a risk model to address any critical situation. But can they handle it internally? The reality is that it is a complex situation, which is why more than half of companies consider external specialized support necessary .

Furthermore, technology can be a great ally for generating value, obtaining a competitive and differentiating advantage in today’s market, and for regulatory compliance. Investing in systems that help companies to have a model capable of establishing a complete analysis and control of objectives will be a key lever for this last point. However, here we find another gap: only 13% of Spanish companies have a complete technological implementation of sustainable purchasing processes throughout the value chain. And only 10% of companies have digitalized their indicators and analysis.

ESG has become the second most important point for purchasing managers. Spanish companies are looking for the most efficient and secure operating model through continuous improvement of the purchasing area, the implementation of technology for the digitalization and automation of procurement processes. In this way, they comply with and reinforce the ESG strategy of the business , making it extensible to the supply chain and cost optimization and sustainable improvement over time of the total acquisition cost that ensures quality and level of service.

We believe that this challenge must be addressed with responsibility and strength, because it will make us all contribute to generating social progress and, in addition, it provides benefits to companies in terms of competitiveness, image and reputation, legislative compliance, loss of income and profitability, investor confidence, corporate ethics, among others.

Spanish companies are looking for the most efficient and secure operating model

The objectives of the New Regulations are achieved if sustainability is truly a central and fundamental axis of the company. That is, the supply chain management strategy must be 100% aligned with the corporate strategy. Future purchasing models must be a source of cooperation, creativity and innovation , complying with ESG objectives under a responsible management plan.

In short, having control over aspects such as the origin of suppliers , what labor practices they apply, how they apply equality and diversity in their workforce, what GFI impact their production process and products have, the manufacturing materials or knowing what the life cycle of the product is and how it impacts the environment is essential for purchasing departments to be able to comply with strict ESG principles throughout their sphere of influence, both internally and externally.

The path to a better world starts with awareness of what each company does and, in this case, the supply chain is an essential lever for change.

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(Featured image by Chris Boland via Unsplash)

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First published in EL ESPANOL. A third-party contributor translated and adapted the article from the original. In case of discrepancy, the original will prevail.

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