Environmental, social, and governance issues, or ESG, are becoming important concerns for today’s businesses. Consumers increasingly prefer companies that value ESG matters like sustainability, human rights, and ethical practice, which in turn is driving investors and other stakeholders to choose ESG-oriented organizations for partnerships and investment. There are even activists who target companies that fail to incorporate ESG, attacking them with boycotts and protests. 

But ESG can be a complex matter. You need to comply with numerous regulations and frameworks, stay up to date with changing expectations, and meet ESG reporting obligations. What’s more, full ESG reporting requires transparency and accountability not just from your organization, but across your supply chain and business partners. 

That means that it’s not really possible to fulfill ESG reporting requirements unless you have visibility into all your third parties and vendors. You need effective third-party risk management (TPRM) strategies to give you a detailed understanding of your third parties’ attitudes to ESG practices, and to keep you informed about any changes to their ESG compliance. 

In this article, we’ll explore the role of third-party risk management in ESG, and discuss both the challenges of implementing TPRM for ESG, and best practices for doing so successfully. 

Understanding ESG Reporting

If you want to succeed in today’s socially-aware, ethically-motivated markets, you need to comply with ESG reporting obligations. In a nutshell, this means disclosing your policies around environmental sustainability, social responsibility, and corporate governance, as well as your performance in meeting your ESG goals. 

There are many global regulations and frameworks that carry an obligation to report compliance, and the number is growing all the time. ESG reporting covers a wide range of issues and concerns:

  • Sustainability includes measuring and minimizing your carbon footprint, reducing waste and resource usage, and eco-friendly practices like recycling and green packaging;
  • Social responsibility encompasses diversity, equity, and inclusion (DEI), fair labor policies, community impact, and maintaining human rights;
  • Ethical governance covers ethical business practices, compliance with local, national, and international regulations, and transparent business dealings and decision-making

As a result, ESG reporting is a crucial measure of your transparency and accountability. That’s why investors, customers, regulators, and potential business partners pay significant attention to your ESG reports. When you demonstrate a commitment to ESG principles, it helps you to build trust, attract investment, and improve your reputation in the global marketplace. 

The Role of Third Parties in ESG Performance

As mentioned above, your ESG ranking doesn’t depend solely on your practices and policies. Your third parties also affect your ability to meet ESG standards. For example, if you work with vendors that are known for a lack of transparency, poor governance, or unethical practices, it undermines your integrity and damages stakeholder trust. 

Consumers are increasingly aware of the impact of Scope 3 emissions on climate change, meaning the pollution and waste caused by entities further along your supply chain. They’ll hold you responsible for the environmentally harmful practices of your third, fourth, and even Nth-party vendors. 

The same applies to third parties who are careless about human rights and social justice. Partnering with a company that’s known to neglect labor rights, or buying from a supplier that’s involved in modern slavery, child labor, or human exploitation, can tarnish your reputation by association. 

Why Companies Need to Monitor Third Parties

Working with third parties who don’t meet your ESG standards can have serious consequences. If your reputation is linked to theirs, you could miss out on business opportunities and lose customers. 

There are global laws that regulate certain ESG principles, such as human rights, pollution, and transparent business practices. Purchasing from a non-compliant company means that you are also non-compliant, which can expose you to fines and other penalties like a ban on trading. 

You need to implement effective monitoring to keep abreast of the ESG risks associated with your third-party relationships and their impact on your reputation, finances, and business operations. Once you know about your vendors’ commitment to ESG principles, you can take steps to ensure that they align with your ESG standards. 

Integrating Third-Party Risk Management into ESG Strategy

Hopefully, you already have robust strategies in place for managing third-party risk. In that case, you just need to incorporate ESG concerns into your existing risk assessment and management processes. If not, the need to comply with ESG regulations and meet public ESG expectations could be the boost you need to systematize your risk management practices. 

Integrating ESG with third-party risk management should be fairly straightforward. You’ll carry out the same risk assessment, due diligence, and monitoring and reporting that you already apply to cybersecurity, business continuity, and other types of business risk, but you’ll include questions and reviews geared to ESG topics. Here’s a closer look at aligning third-party risk management with ESG objectives.

Risk Assessment in Third-Party Risk Management

It’s important to evaluate potential vendors and contractors based on their environmental impact, social practices, and governance standards, alongside traditional financial and operational risks. 

As with managing all types of third-party risk, the process begins with solid risk assessment procedures. Make sure that ESG criteria like sustainability, transparency, and good governance are part of your security questionnaires and overall risk scoring mechanisms.

Due Diligence in Third-Party Risk Management

The same due diligence that you use for your existing TPRM protocols is a valuable tool for managing ESG risks. Run comprehensive assessments of your vendors’ environmental practices, social responsibility, and governance structures both before and during the business relationship, so that you’re informed about their ESG standing. 

You’ll want to review third parties’ policies around waste, reducing their carbon footprint, labor rights, workplace safety, accountability, and more. Site visits and/or interviews with employees can also be a good idea, to give you a better understanding of their ESG performance and success in meeting their ESG goals. 

Why Monitoring and Reporting is Important in Third-Party Risk Management

Just like other types of business risk, ESG risk is an ongoing issue that needs your continued attention. It’s not enough to run your initial due diligence and onboard third parties to your ESG requirements. You need continuous oversight into their ESG performance. 

Regular audits, performance reviews, and real-time tracking are all crucial to ensure that third parties consistently adhere to your ESG standards. Alongside these, you need detailed reporting mechanisms to document compliance, identify deviations, and promptly implement corrective actions.

Challenges in Third-Party Risk Management for ESG

But while handling third-party risk management in ESG is highly important for your business, it also brings many challenges. It can be extremely difficult to get a grasp on your third parties’ ESG standing, for a number of reasons:

  • Visibility into today’s complex, extensive supply chains is poor
  • Data from global supply chains is often inaccurate or unavailable
  • ESG regulations are constantly changing and evolving

Let’s take a closer look at the challenges of third-party risk management for ESG. 

Complexity of Global Supply Chains

The sheer size and intricacy of today’s global supply chains makes it very hard to monitor and validate ESG policies across all your third parties. For a start, you need to know who all your Nth parties are through all the tiers of your supply chain, otherwise you won’t gain a comprehensive picture of the ESG reality. 

Additionally, different regions have different environmental regulations, labor laws, and governance practices. The way that vendors assess and measure ESG risks varies depending on their regulatory climate, cultural norms, and local business practices, which handicaps your ability to track consistent ESG performance. 

Data Availability and Accuracy in Global Supply Chains

Third-party risk management in ESG is even harder for global supply chains, because of the difficulty in gaining transparent, reliable data from all your vendors. Remember, this means getting consistent, reliable data from multiple tiers of fourth, fifth, and Nth-parties as well as third parties. 

Your vendors might not all share your commitment to tracking ESG performance, and/or may lack the resources or infrastructure to collect and report comprehensive ESG data. There are also likely to be discrepancies in data reporting standards and practices across different countries and industries, which can lead to gaps in the information you receive about third-party ESG standards.

Regulatory Compliance in Global Supply Chains

Last but not least, the ESG landscape itself is constantly evolving. You need to monitor data for all the regulations and frameworks that apply to all the parties in your supply chain. That means keeping up with the specific international, regional, national, and sometimes local ESG requirements and standards for many parts of the world. 

It can take a lot of resources to stay on top of ESG frameworks and guidelines, and you’ll need to update your policies, practices, and monitoring systems whenever they change. Failure to do so can result in legal penalties and fines, so it requires constant vigilance and adaptability to manage ESG risks across your supply chain. 

Best Practices for Effective Third Party Risk Management in ESG Reporting

Fortunately, there are steps you can take that will help you to overcome these challenges, manage third-party risks, and carry out effective ESG reporting for your entire supply chain. These include:

  • Establishing strong vendor partnerships to collaborate for ESG compliance
  • Mandating third-party adherence to ESG standards and certifications
  • Regularly reviewing and updating TPRM processes to reflect changing ESG requirements 
  • Building third-party risk assessment into transparent ESG reporting
  • Implementing advanced technology for real-time monitoring and risk management 

Creating Strong Vendor Partnerships

You need your vendors’ willing cooperation and alignment on ESG goals, otherwise you’ll be fighting a losing battle. It helps to choose vendors who share your concern about ESG, but either way, make your commitment to ESG clear from the very beginning of your relationship. Write specific ESG requirements into your contracts, and support vendors to constantly improve their own ESG practices. 

A robust trust relationship with vendors is the best way to avoid hidden non-compliance. Foster strong, transparent relationships that encourage open communication with vendors, so that they’ll keep you updated about important changes to their ESG profile. Ideally, you’ll work together to find joint solutions to common ESG challenges. 

Implementing ESG Standards and Certifications

Recognized, established standards and certifications provide a valuable framework for assessing and ensuring compliance with ESG criteria. Standards like ISO 14001 for environmental management, SA8000 for social accountability, or the GRI (Global Reporting Initiative) guidelines help you set benchmarks for vendor ESG performance. 

Following well-known standards also helps simplify third-party ESG monitoring. The audits required for compliance give you an objective way to assess third-party ESG compliance, and third parties are more likely to accept and adhere to independent ESG requirements than to those that you create. 

Continuous Improvement and Training

Third-party risk management in ESG can’t stand still. You need periodic reviews, performance metrics, and feedback mechanisms to constantly review, update, and refine your third-party ESG risk management processes. Nurturing a culture of continuous improvement in ESG encourages third parties to enhance their ESG performance.  

At the same time, you need ongoing training on ESG principles, regulatory changes, and best practices. Tailor your training to address specific ESG challenges, like waste management, human rights, or workplace safety, so that employees and vendors understand the importance of ESG and how to implement relevant strategies. 

Transparent Reporting

Transparent reporting, using ESG performance metrics and backed by third-party audits and certifications, enables you to build a clear picture of your sustainability practices and those of your third parties. It’s seen as reliable and trustworthy by your customers, investors, and partners, which strengthens your reputation for ESG compliance.

Ongoing reporting and monitoring also helps make sure that you’re aware of any ESG weaknesses, concerns, and problems while they are still minor. You’ll be able to address any issues before they escalate into serious compliance breaches or harm your reputation.

Technology and Tools

Last but not least, advanced tech and new tools are vital for effective third-party risk management in ESG. You can’t maintain visibility into all the parties in your complex supply chain, or run real-time risk monitoring and assessment, without powerful tech tools. 

Technology solutions like blockchain, AI, and IoT help collect and analyze data from your supply chains. They can track a wide range of ESG metrics, from carbon emissions to compliance with governance standards, and automatically integrate data from multiple sources. Machine learning platforms can analyze that data to spot potential ESG threats, so you can proactively manage them and minimize risk. 

Third Party Risk Management in ESG Solutions

Without third-party risk management in ESG, you’ll only have a partial understanding of your ESG performance. You need to integrate TPRM into your ESG monitoring and assessment policies, in order to keep ESG risks under control and enhance your sustainability, social justice, and ethical governance efforts. 

Proactively addressing ESG risks, just like you manage other business risks, helps build resilient, sustainable, and ethically-governed organizations. This makes it vital to prioritize ESG alignment within your TPRM strategies through best practices, clear communication with third parties, and the right tech for real-time monitoring and advanced analysis and risk detection. 

This is where Panorays comes in. The advanced third-party risk monitoring platform simplifies and streamlines ESG risk assessments and due diligence, incorporating ESG concerns into onboarding security questionnaires. Detailed supply chain mapping ensures that there aren’t any Nth parties with questionable ESG standards lurking unnoticed in your ecosystem, and uncovers hidden ESG risks. 

Panorays also runs continuous, real-time monitoring and reporting, with dynamic Risk DNA scores that reflect ESG performance alongside other types of business risk. It evaluates third-party ESG compliance so you’re always up to date on your broader ESG performance. 

Ready to improve your ESG compliance and address third-party risk management in ESG reporting? Contact Panorays to learn more.

Third Party Risk Management in ESG FAQs