Most Firms Neglect ESG Screening in Supply Chains: S&P Global

Most companies do not perform ESG risk screenings prior to evaluating their suppliers, and this results in inefficiencies and lost opportunities to enhance supply chain sustainability, based on a recent S&P Global Sustainable1 report. The report comes at a time when world regulatory agencies and investors are applying pressure on companies to make value chain transparency and accountability their priority.

The report, written by sustainability analysts Lauren Costello, Martin Staeheli, and Ha-Chau Ngo, examines S&P Global's 2024 Corporate Sustainability Assessment data and finds that 63 percent of firms with supplier evaluation processes are not doing initial ESG risk screenings. Rather, those firms are doing indiscriminate supplier assessments, which the analysts have termed a "shotgun approach" and time- and resource-intensive.

Just 30 percent of the 5,764 companies that were surveyed had a publicly disclosed supplier screening system. Screening, the research finds, is an essential first step in sustainable procurement that can enable companies to filter efforts based on risk factors specific to suppliers such as environmental footprint, labor practices, risk of corruption, and industry fit. It typically uses a combination of actual or imitated data, regulatory data, and media accounts to identify red flags prior to moving on to comprehensive evaluations.

The issue is most pronounced in the consumer discretionary segment, such as automakers, electronics companies, and apparel producers. Thirty-three percent of companies in this segment perform supplier checks without performing screening beforehand, even though their supply chains are often complex and geographically dispersed. In the consumer staples segment, where agriculture and forest-based raw materials are highly relied upon, 53 percent of companies adopt the same wasteful practice.

Failure to screen leads to most organisations missing key suppliers who require more screening or wasting time screening low-sustainability-concern suppliers. Analysts' arguments are that the application of simple screening tools will enable organisations to have better control of their supply chains through resource allocation where they are best needed — for example, in relation to commodity risks, geographies, or sectors.

The second section mentioned in the report is the gap between suppliers' assessment and supplier development. Although 46 percent of firms conduct suppliers' assessments, only 32 percent have formal improvement programs to develop after they have screened ESG-linked issues. The 14-percentage-point disparity means that even when issues are already identified, most companies do not have formal follow-up mechanisms, which dilutes the impact of their ESG approach.

With sustainability a determining factor in the boardroom for business success, the implications of this failure would be enormous. Regulations like the European Union's Corporate Sustainability Due Diligence Directive (CSDDD) and the EU Deforestation Regulation are placing more pressure on companies to identify, manage, and disclose risks in their supply chains. While some aspects of these regimes are in the crosshairs, investor groups are calling for robust requirements to remain.

Meanwhile, business practice is also changing towards rewarding companies with good supply chain sustainability reputations. S&P referenced a 2023 investment report that identified portfolios that invest in companies with less supply chain ESG risk outperforming benchmark indexes by almost seven percent. The move demonstrates how crucial investors regard ESG resilience as both a means of mitigating long-term operating risks and building brand trust.

The report indicates that in order for businesses to succeed in a sustainability age, their supply chain due diligence strategy has to evolve. It entails moving away from the one-size-fits-all boxes to targeted, fact-based screening processes that enable businesses to make precise and effective decisions. Specialists claim that businesses using strong supplier screening can enhance cost efficiencies, mitigate ESG risk, and better align with stakeholder expectations.

The report concludes that unless the practices of ESG screening are enhanced, firms would be likely to overlook compliance requirements and in-house sustainability goals. While market and regulatory pressures remain high, this management blind spot would lead to loss of reputation, legal problems, and fines.

Source & Credits:
It is founded on the June 2025 S&P Global Sustainable1 report by Lauren Costello, Martin Staeheli, and Ha-Chau Ngo. Nirmal Menon covers. Image credit: Cottonbro Studio/Pexels.