Toward Supply-Chain-Aware ESG Measures

Businesses, governments, and society are increasingly focused on environmental, social, and governance (ESG) issues. Because supply chain management is an integral part of most businesses, it is imperative to integrate supply chain considerations into ESG measures. However, existing ESG measures focus primarily on the internal operations of companies without paying sufficient attention to the external operations that propagate through supply chain networks. Consequently, ESG performance of most companies can be misleading and there is a need to overcome two key challenges: (1) the challenge of measuring a company’s ESG performance beyond its own operations, and (2) the challenge of aggregating ESG measures related to the company’s operations and those of its supply chain partners. To address the measurement challenge, we advocate expanding ESG measurement frameworks to include supply chain dynamics, using a “scopes” approach that mirrors classifications for carbon emissions. Also, to address the aggregation challenge, we outline a network-based approach to quantifying ESG performance using available emissions data and supply chain linkages. This preliminary approach can be used to assess a company’s ESG responsibility based on its network position and influence. The assigned ESG scores reflect the impact of companies within interconnected supply chains. We hope that our rudimentary framework will inspire more rigorous efforts to develop supply-chain-aware ESG metrics that address these two challenges through a fusion of more advanced network techniques and increasingly available sustainability data.