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Environmental, Social, and Governance (ESG) VS Sustainability: Why it is Important for Local Government

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Environmental, Social, and Governance (ESG) VS Sustainability: Why it is Important for Local Government

In recent years, Environmental, Social, and Governance (ESG) factors have gained significant attraction in the context of sustainability and responsible investment. As organisations increasingly prioritise sustainability in their business practices, it becomes imperative to understand the nuances between the sustainability and ESG terms and how procurement and tendering function in local government can embed ESG factors.

The ESG narrative traces back to 2004 when the United Nations engaged investors and financial institutions to explore the integration of environmental, social, and governance (ESG) factors into business operations. The “E” represents environmental considerations, encompassing an organisation’s impact on issues like climate change and waste management. “S” signifies social aspects, reflecting how an organisation impact society, including workplace health and safety and diversity. “G” stands for governance, focusing on how an organisation is structured and managed to serve the best interests of its stakeholders, such as through board structure and transparency. The result was a report named “Who Cares Wins”, which emphasised the significance of these factors for sustainable development. It urged investors to prioritise the inclusion of ESG criteria in their assessment of investment opportunities.

Since that time, interest in ESG remained relatively low until around 2018-2019 when a notable shift in the trend became apparent. This shift can be attributed to various rating agencies, such as MSCI, evaluating organisations’ ESG performance and discovering that those with stronger ESG practices tended to yield higher returns and face lower risks. This revelation significantly influenced investors attitude. For instance, in 2022, investment funds managed by TCorp were reviewed to assess how TCorp incorporates ESG considerations when investing in the New South Wales public sector.

The key distinctions between ESG and Sustainability

Sustainability and ESG have often been used interchangeably due to their shared similarities and common goal: Meeting the needs of the present without compromising the ability of future generations to meet their own needs (World Commission on Environment and Development, 1987).

Although there is no clear agreement between the differences, some key distinctions between these two terms have been identified. In fact, sustainability is often regarded as a broad concept, an umbrella term, or a holistic approach, while ESG is viewed as a tool for measuring organisations’ performances towards sustainability goals. For example, having a social procurement policy can be a sustainable goal, whereas the success in implementing that policy would be an ESG target. Moreover, ESG primarily focuses on non-financial key performance indicators (KPIs), whereas sustainability encompasses both financial and non-financial KPIs. Despite the lack of clear distinctions, what is evident is that ESG serves as a catalyst for investment by providing greater transparency on an organisation’s efforts towards sustainability.

Why Local Government needs to focus on ESG in Procurement

The importance of applying ESG factors by Local Governments stems from several drivers. In Local Government Act, section 8a clearly mentions that council need to consider principles of ecologically sustainable development in their decision making which is supported by other instruments of government such as Local Government (General) Regulation 2021 (NSW), The Integrated Planning and Reporting (IP&R) framework in NSW, Modern Slavery Act 2018, and Tendering Guidelines for NSW Local Government 2009.

Also, there is evidence indicate that sustainability projects can lead to financial savings. For instance, initiatives like installing solar systems or utilising LED lighting for street lighting. From the talent attraction perspective, recent surveys suggest that an increasing number of employees and job seekers prioritise working for companies engaged in sustainable practices. By championing ESG initiatives, local governments can position themselves as desirable employers, attracting top talent and retaining skilled personnel.

From an investment perspective, as ESG considerations gain prominence in the investment landscape, local governments can leverage their commitment to sustainability to attract investment and secure funding for critical infrastructure projects and community development initiatives. More importantly, public interest in ESG issues is significantly high and growing, especially given that local governments are primarily responsible for the sustainability and well-being of their respective communities. This increasing interest from ratepayers places substantial pressure on local governments to address ESG concerns effectively.

How Local government can apply ESG in procurement.

By embedding ESG principles within procurement of local government, quick wins can be achieved by prioritising products with sustainability certifications, such as Forest Stewardship Council (FSC) or Energy Star options. Additionally, transitioning to eco-friendly products like recycled paper addresses environmental concerns, aligning with the “E” dimension of ESG. In the social dimension, supporting local suppliers can enhance the local economy. Furthermore, assessing suppliers based on modern slavery risk criteria underscores the commitment to ethical sourcing practices. It is worth mentioning that some practices in one dimension can impact other dimensions as well. For instance, supporting local suppliers not only fulfills social objectives but also reduces the environmental impact of transportation, thereby addressing scope 3 emissions. From a governance perspective, requesting ESG statements from suppliers and measuring compliance against codes of conduct enhances transparency and accountability in the procurement processes.

Looking beyond quick wins, long-term strategies involve integrating ESG criteria into the procurement planning process. This includes; defining ESG criteria in specifications, which can be achieved by identifying high expenditure categories, engaging key stakeholders, and incorporating ESG criteria into specifications. Furthermore, integrating ESG into procurement strategies such as Reconciliation Action Plan can align with social objectives. Developing robust evaluation and selection criteria ensures that ESG considerations are systematically incorporated into supplier assessments. By implementing both quick wins and long-term strategies, local governments can effectively embed ESG principles into procurement practices, fostering sustainable outcomes while promoting transparency, accountability, and ethical conduct.

How LGP can help

Local government Procurement (LGP) is uniquely positioned to assist local governments in integrating ESG principles into their procurement processes. Leveraging our extensive knowledge, skills, and experience, we offer comprehensive assessments of your current procurement practices against ESG goals. Through our assessments, we evaluate various aspects of your procurement operations, identifying strengths, weaknesses, and areas for improvement. We provide tailored recommendations on how to enhance your procurement performance under ESG principles, considering factors such as policy alignment, technology adoption, and collaboration opportunities.

Our recommendations may include:

  • Developing new ESG procurement policies or updating existing ones to align with best practices and regulatory requirements.
  • Implementing new technologies or optimising existing systems to streamline procurement processes and enhance ESG data management and reporting capabilities.
  • Facilitating collaboration with suppliers, other local governments, or industry partners to address shared ESG challenges and leverage collective expertise and resources.

Once recommendations are finalised, our team stands ready to support you in implementing them. We offer a broad range of services.

If you require additional information about our ESG and procurement services, our ESG and Procurement Consultant, Dr. Hadi Rezaei Vandchali, is available to discuss further with you. Please click here to contact Hadi.

To view the ESG Webinar hosted by Hadi Rezaei Vandchali, click here.

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