VALUE FOR MONEY POINTERS

The market force to obtain value for money – Kiran Dhanapala explains

Sustainable procurement (SP) is increasingly being recognised as a market force for sustainability. It means obtaining the best value for money by purchasing the most sustainable goods and services from the most sustainable suppliers, in support of the buyer’s purpose, policies and strategic goals.

SP is an umbrella term that encapsulates net zero, green, circular and social procurement.

It is vital to extend all efforts within an organisation to procure in line with its formal sustainability strategy with time-based targets in order to reap the full rewards of the business case for sustainability.

Management is often unaware of or ill-informed about how sustainable procurement can affect cost-efficiencies and synergies with the goals in their sustainability strategy – and how this can cohesively add to further their achievements overall.

The inclusion of SP helps realise the full potential of added profits of between 51 and 81 percent as a result of sustainability efforts. It also enables potential risk reductions of between 16 and 26 percent. These reduced risks include supply chain climate-related risks and run the monetised risk of not procuring in a sustainable manner.

Sustainable procurement has a broad mandate that includes purchasing from local entrepre­neurs, SMEs and so on to help the economy build back better. This contributes to a cleaner all-round economic revival in Sri Lanka.

Within SP, there is also ‘net-zero procurement’ (NZP). Businesses aiming for carbon neutra­lity may focus on NZP initially.

NZP is a narrower and more achievable goal, which contributes directly to carbon neutrality. It is also easier to start narrow, succeed and later broaden an organisation’s focus on the more ambitious mandate of SP.

The top five benefits of integrating SP and NZP include cost savings; complying with regulatory frameworks; supply chain and client requirements; increasing synchronicity to optimise all benefits in a business’ sustainability strategy; attracting and developing talent; and creating and maintaining a credible brand differentiation.

Cost savings bring substantial benefits in the event of high inflation, and escalating tariffs for water and energy. It reduces the total cost of ownership due to lower energy costs and over-specification, reduced consumption, and fewer environmental and social (E&S) compliance costs.

The expected scarcity of fossil fuels in 2024 and probable price escalations will mean that suppliers who are not dependent on them will have an advantage. On average, sustainable procurement offers six times the payback – or 0.05 percent of total revenue – for each project.

If a business’ procurement is aligned with its sustainability strategy, there’s greater coherence, good governance and higher credibility with regulators, clients and buyers.

The IMF highlighted procurement as part of its governance concerns for Sri Lanka although this focusses mainly on the public sector. While the focus is on public procurement, most buyers would welcome greater transparency and efforts on SP and NZP in the private sector as well.

Global supply chains are instituting stronger due diligence activities in sustainability related initiatives, processes and policies. Many want suppliers to provide them with their sustainable procurement policy and the process of implementation.

Political risk at country level is a given for many organisations – particularly financial institutions. Sri Lanka has high political risk premiums associated with its unsustainable debt and the economic downturn.

Though corporates cannot control this situation, they can become more sustainable and efficient by incorporating SP and NZP in their sustainability credentials. It makes them truly sustainable entities and more attractive overall.

Given the brain drain that Sri Lanka is experiencing currently, it’s a priority to attract and develop talent, which can be bolstered through SP and NZP. In a dwindling talent pool of professionals, both staff and consultants are increasingly keen to see purpose driven organisations walk the talk.

A positive reputation as a sustainable employer is a major pull factor. This dividend can be realised if a business publicises its SP and NZP position and progress. A 2022 Ernst & Young (EY) study found that SP led to a reduction in employee turn­over by 31 percent.

An organisation can use SP and NZP policies as part of its overall sustainability strategy to differentiate itself. A large proportion (about 89%, say Eco Vadis et al) of those surveyed in the West who follow SP and NZP principles seek credible brand differentiation.

Many have seen the main advantage of sustainable supply chains in terms of safeguarding their brand name (39%) while others expect to see this in the short and longer terms (27% and 33% respectively), EY reported.