ESG and outsourcing

Clients are looking for service providers with robust environmental, social, and governance programs

Megh Desai

Megh Desai

Director, Advisory, Procurement & Outsourcing, KPMG US

+1 630-596-3325

Ravi Kiran Krishnappa

Ravi Kiran Krishnappa

Manager, Advisory, Outsourcing, KPMG US

+1 510-709-8437

Environmental, social, and governance (ESG) concerns have become top of mind for most businesses. The pressure to be ESG conscious is, as a result, flowing onto purchased goods and services and to outsourcing service providers.

Service providers, for their part, are stepping up their ESG efforts and proactively disclosing their outcomes to gain a competitive advantage.

To better understand ESG in the context of outsourcing, KPMG LLP embarked on a series of conversations with service providers and clients. The insights gained from these conversations lay the foundational groundwork for making ESG a critical selection criterion when organizations review, renew, renegotiate, or replace their outsourcing relationships.

The service provider lens: The client's lens:
  • Almost all of the service providers we surveyed have committed ESG goals as part of their corporate mantra and have invested significantly in capabilities, talent, and governance to achieve these goals.
  • However, accomplishments on ESG haven’t yet resulted in improved quality of services. But this delay may be because tracking ESG-influenced service quality is still in its infancy.
  • On the environmental front, service providers have focused on reducing greenhouse gas emissions, reducing energy consumption, and enhancing water and waste management.
  • On the social diversity front, significant effort is being applied to reskilling workers and investments in under-privileged communities in the areas of education, skills training, and hiring to build an equitable talent portfolio.
  • To improve transparency and accountability, service providers are implementing technologies to further showcase ESG alignment with those of their clients, but contracts (terms or service levels) remain silent on any major ESG commitments.
  • Almost all organizations see outsourcing service providers as falling into Scope 3 of the Greenhouse Gas Protocol (that is emissions that are the result of activities from assets not owned or controlled by the reporting organization but that the organization indirectly impacts in its value chain). Nevertheless, they also believe services providers have the potential to be influenced with respect to their ESG activities.
  • Company heads of ESG haven’t found a regular seat with their organization’s selection committee, but they expect to be increasingly influential in the selection process as ESG goals get embedded into the company culture.
  • Most organizations we surveyed indicated that they would pay more for a service provider that better aligned with their own ESG goals and further showcased their own commitment to sustainability.
  • On the topic of termination, all organizations agreed that a service provider’s failure to achieve ESG goals was insufficient grounds to sever the relationship.

Final thoughts

Organizations looking to outsource or review their current outsourcing relationships should consider alignment of ESG goals across their portfolio of service providers to further extend the sphere of influenceable change. In addition, organizations should demand service providers to continue to provide transparency of ESG achievements as it relates to the services scope. Service providers on the other hand should realize that ESG is a competitive differentiator, and significant investments should be made to further align to client goals.