The Middle East Environment, Social and Governance (ESG) revolution is underway, and buzzwords are being replaced by benchmarks. This began in January 2023 when the GCC Exchange Commission published its ESG framework to standardise metrics and unify reporting. Later that year, the Abu Dhabi Global Market (“ADGM”) launched its ESG Disclosures Framework for the finance sector. Such regulation has added much needed structure, and is setting up firms for success.
Increasingly, procurement is finding itself under the ESG microscope. Quite apart from supply-chain security and cost-efficiency, procurement must now fulfil expectations around sustainability. This is because organisations have come to understand more about their direct emissions (Scope 1) and indirect energy-consumption emissions (Scope 2). They often find that Scope 3 emissions — those resulting from a range of value-chain activities including those of suppliers — constitute the majority of their carbon footprint. This majority can be between 65% and 95%, according to PwC, with up to 80% originating from just 20% of purchases. Many Gulf Nations have committed to carbon neutrality by 2050, and if they are to achieve this admirable ambition, supplier collaboration will be critical.
This is where the involvement of regional bodies like ADGM will give businesses an advantage. Transparency and consistency will make the selection of suppliers easier and their onboarding smoother. For example, knowing which suppliers observe global standards like the Science Based Targets initiative (SBTi) will help narrow down which of them will contribute the biggest reductions in emissions.
The circular argument
An important component of supplier disclosure is the extent to which it supports the circular economy. Prospective customers must look at the upstream and downstream activities of the supplier. How innovative are its packaging solutions and materials sourcing, and what is its end-of-life strategy for each product? Then, when it comes to risk management, the procuring organisation must look at whether it has the right technology platform to give real-time visibility across the entire supply chain. Does the organisation’s infrastructure allow it to anticipate and mitigate risks to Scope 3 targets?
When we talk about risk, we frequently picture regulators. All our businesses, throughout the region, have compliance and reporting obligations. One of the reasons that so much ESG focus is now on procurement is that regulations change. By addressing procurement (and its influence on Scope 3) now, enterprises ensure their operations are futureproof.
So far, we have covered the “E” in ESG, but what about the social aspects? An ethical supply chain should be devoid of forced or child labor. Some legal jurisdictions around the world also mandate diversity. ESG-focused corporations are now starting to recruit professionals trained in diversity-related issues to monitor suppliers. Not only is this meant to appease a consumer base that values diversity; it is meant to strengthen the supply chain through the innovation boosts associated with a diverse workforce. Technology platforms can support diversity-focused professionals in identifying those suppliers that not only meet business needs but also align with diversity criteria.
Partnership is paramount
Finally, we turn to governance, which covers everything from data breaches to anti-competitive practices. Procurement professionals will rely on established policies to guide them as they sift the market in search of ethical suppliers. Reputation is important. To be associated with a disreputable partner is to become disreputable also, in the eyes of consumers. Procurement teams must screen thoroughly using sanctions lists and politically exposed persons (PEP) lists. And where data protection is involved, everyone in the supply chain has an obligation to everyone else (and to multiple regulators, local and international) to protect sensitive information.
Close collaboration is necessary between the procuring enterprise and the supplier if governance objectives are to be achieved. Purchasers and suppliers must resolve issues together in light of ESG goals; and any action taken by either should be defined and integrated into contracts from the beginning. Feedback and performance monitoring will be crucial to maintain transparency and adherence. As part of the process, the procuring party could provide ESG training to suppliers as well as incentives for meeting goals.
For GCC organisations, a collaborative culture throughout supply chains could be the difference between ESG success and disappointment. To make it work, customers will need access to detailed ESG records for each supplier, including carbon emissions, ethical practices, and governance standards. The customer must ensure that its own ESG expectations are open and clearly understood as it onboards partners, and that contracts include these understandings between parties and list remedies for non-compliance.
Reaping a hearty harvest
If enterprises collaborate with suppliers on ESG, a new wave of ESG partnerships could gain momentum. Supplier training, performance monitoring, incentives, and rewards will become standard, supported by data partners that provide clear insights for all stakeholders.
Change is urgent, and governments and consumers are watching. Businesses must address ESG — starting with procurement, where Scope 3 emissions and supplier relationships offer the greatest impact. The rewards are significant, and the region has the potential to set a global example of how supply chain collaboration drives measurable results.
By Hany Mosbeh, Senior Vice President – MEA & APAC, JAGGAER
