Why the Sustainability of your Suppliers Matter

Sustainability has become an increasingly important conversation for businesses, as organizations are recognizing the need to reduce their environmental footprint while also protecting their profits. S&P Global Market Intelligence's Know Your Third Party (KY3P) team partnered with S&P Global Sustainable1 to discuss the complexity of Third Party Risk Management (TPRM) programs, regulatory pressures, and how vendors' sustainability can impact organizations. Register to watch the on-demand replay or read the highlights below.

What is TPRM?

Organizations use third-party suppliers to stay competitive and provide clients with better, cost-efficient services. However, giving up direct control of goods and services introduces risk. TPRM is the established practice used to assess, manage, and mitigate the risks associated with using an outside service provider or vendor. Effective TPRM programs are risk-based to determine the appropriate level of due diligence that may cover more than a dozen risk domains. Various risk areas need to be assessed, and issues identified then mitigated or approved. Sustainability is one of the newer areas. Senior management needs visibility of the risks posed by critical suppliers and there should be ongoing oversight of these relationships.

Current trends in TPRM

In today's rapidly evolving business landscape, third party risk management has emerged as a crucial focus area for organizations across industries, as they strive to mitigate potential vulnerabilities and safeguard their operations from external threats.

As organizations navigate their TPRM, several notable trends have emerged, shaping the way businesses approach the complexities associated with external suppliers:

• Digitization and the ability to consume data
• Automation using AI and machine learning to make sense of that data and continuously monitor vendors
• Emergence of sustainability as a risk domain and the importance of understanding vendors' environmental, social, and governance (ESG) profiles
• Adoption and regulatory support for industry best practices and community models

How to build a resilient supply chain with holistic risk analysis

As sustainability directives and regulations increase, your vendor ecosystem creates even more complex and nuanced risk exposures. Sustainability is understood through three lenses: environmental risks, social risks, and governance risks.

• Environmental risks include how a supplier impacts the environment, their level of emissions, and tracking against their targets (i.e., net zero goals).
• Social risks include the evaluation of the human rights and labor practices of a supplier.
• Governance risk focuses on how well companies are prepared to prevent IT system failures and major information security or cybersecurity incidents among other topics such as innovation and business ethics.

Currently, Europe is leading from a sustainability regulatory perspective with several meaningful initiatives. The EU Sustainable Finance Disclosure Regulation (SFDR) aims to make the sustainability profile of funds more comparable and better understood by investors. In Germany, the Supply Chain Act imposes due diligence obligations on companies which must be complied with to prevent or end certain human rights or environmental violations. Additionally, the Financial Stability Board (FSB) created the Task Force on Climate-related Financial Disclosures (TCFD) to improve and increase reporting of climate-related financial information.

As the landscape of third-party risk management continues to evolve, staying abreast of these trends and adopting proactive strategies becomes critical for organizations aiming to enhance their security posture, safeguard sensitive data, and maintain business continuity. It is essential to continuously assess and reassess third-party relationships, implement robust monitoring and assessment frameworks, and foster a culture of risk awareness and collaboration to effectively manage and mitigate potential risks.

Learn more about S&P Global's Sustainable Supply Chain. Speak to our experts today.

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This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.