Problems of introducing ESG requirements into supply chains

On the one hand, a responsible approach to supply chains allows companies to effectively manage their social and environmental impact. Supply chains go beyond internal operations and standard risk management procedures. Therefore, the risks arising from supply chains can be taken into account insufficiently and cause significant damage to the reputation or production processes.

On the other hand, major players can significantly facilitate the spread of ESG practices throughout the economy by integrating them into supply chains. Small and medium-sized businesses (SMEs) are especially exposed to this influence. The introduction of responsible procurement practices will help raise sustainable development awareness among market participants by providing them with specific guidelines and incentives for applying ESG principles in their activities.

In this study we:

1. Studied the regulatory framework related to building responsible supply chains.
2. Analyzed industry standards related to the implementation of ESG in supply chains.
3. Conducted a benchmark analysis of the development of sustainability practices in the Middle Eastern and global companies.

We analyzed the extent of adopting ESG principles into supply chain management across four industries. The largest companies in the industries disclosing information on sustainable development were identified. We included the companies from Europe, Americas and Australia, as well as Asia Pacific in our study to compare the development of practices in the Middle East with the international level.

Key observations

Like their Western peers, the Middle Eastern companies have started to implement ESG requirements in their supply chains in the past few years. Western business practices in this area are more advanced at the moment, however, the Middle Eastern and Asia Pacific companies are in the same positions on average and have the potential to improve.

The regulatory environment can make a significant contribution to promoting responsible supply chain practices. A number of Western countries have been developing their national legislations to regulate responsible supply chains. One of the new groundbreaking documents is the EU Corporate Sustainability Due Diligence Directive (CSDDD). It will affect Middle Eastern companies that operate in the EU and fall under the CSDDD criteria or have business ties with such companies.

In its turn, the supply chain due diligence regulation is quite underdeveloped in the Middle East. National responsible procurement agendas have shifted their focus to support of local suppliers. Recommendations of stock exchanges are an additional driver for the application of ESG principles in the supply chain.

In addition, the companies from sectors with well developed standards are more likely to implement ESG practices. Supply chain standards are most common in the metals and mining industry. The most significant shortcomings are low degree of detail of the risk assessment criteria and the lack of specific steps to minimize negative impacts.

Currently, most companies in the Middle East have adopted and published documents containing sustainability requirements on suppliers. Many of them have also launched ESG assessments of suppliers. However, further adoption of responsible procurement practices has been slow.

Verification of suppliers in most cases is performed in test mode covering only a minor part of counterparties. Most Middle Eastern companies do not take ESG assessments into account when selecting suppliers. Supplier incentive and communication systems are generally at an initial level of development.