As global brands increasingly incorporate environmental, social, and governance (ESG) criteria into their business strategies, many are also looking to ensure that their supply chain partners also follow sustainable practices. 

Small and medium-sized enterprises (SMEs) with competitive ratings could use this advantage to gain an entry ticket into global supply chains, says Michelle Sun, general manager of Dun & Bradstreet Taiwan, an international business data and analytics provider.

Dun & Bradstreet released its inaugural “ESG Competitiveness Analysis for Taiwan Supply Chain” in early March. The survey evaluated 691 suppliers in Taiwan serving the island’s six manufacturers on the Fortune Global 500 list: Hon Hai Precision Industry Co. (Foxconn), Pegatron Corp., Taiwan Semiconductor Manufacturing Co. (TSMC), Quanta Computer Inc., Compal Electronics Inc., and Wistron Corp. Although Taiwanese suppliers scored well on social and governance aspects, they did not perform as well in environmental areas.

The lower environmental score is not directly related to the manufacturing-heavy nature of the surveyed companies, says Dun & Bradstreet Taiwan Project Director Rio Chang. “Our scores are adjusted to industry specifics since the environmental aspect of a manufacturing company can’t be judged in the same way as that of an IT company.”

Expanding renewable energy sources could give Taiwan suppliers a competitive edge as companies broaden their ESG assessment to include the greenhouse gas emissions of their supply chain partners. Gas emissions have been categorized into three “Scopes” by the Greenhouse Gas (GHG) Protocol, the world’s most widely used emissions accounting tool. While Scopes 1 and 2 include direct emissions from owned or controlled sources and indirect emissions from electricity, steam, heating, and cooling, Scope 3 includes all other indirect emissions that occur in a company’s value chain.

“Scope 3 has been the elephant in the room for quite some time now because it is difficult to measure,” but is now gaining notability, says Jonathan Ha, founder and CEO of business intelligence company Seneca ESG.

Taiwan has set an ambitious target of generating 20% of its electricity from renewable sources by 2025. Should it succeed, the island’s average ESG ratings will likely also rise. At its current trajectory, however, Taiwan is unlikely to reach its goal – renewable energy accounted for just 5.5% of the energy mix in 2020, according to Bureau of Energy data, and due to COVID-19 many of the island’s wind power expansion projects have been severely delayed.

At its inception, ESG was mostly a buzzword used by marketing departments, but in the last few years, the abbreviation has become a serious priority for upper management, notes Ha. “Within the corporate hierarchy, beyond the investor relations or marketing department, we now often see the corporate finance department asking for more robust ESG practices and transparency,” he says.

Realizing the importance of sustainable business practices, the Taiwan government has also intensified its efforts to prevent corporate greenwashing (giving a false or misleading impression of the environmental value of a product or service) in the name of ESG. The latest such move was made by the Financial Supervisory Commission (FSC) in July, when it enhanced disclosure requirements for ESG-themed funds to prompt companies to take on greater sustainability-related responsibilities.

The commission called for asset management firms to set at least one sustainability goal for each of their ESG-themed funds, along with an explanation of how their investment would help achieve that goal. Companies operating ESG-themed funds that failed to disclose the information within six months would subsequently not be officially recognized as ESG funds.    

“The Taiwanese government, in particular the Taiwan Stock Exchange, is relatively progressive when it comes to ESG,” says Ha. “They have very clear disclosure requirements for all Taiwan-listed companies. Larger Taiwanese companies also know and understand ESG and are already implementing meaningful measurements in their business assessments.”

Standardization issues

ESG ratings are valuable to encourage companies to implement sustainable practices that positively impact society and the environment. But due to a lack of standardization, many companies struggle to rank suppliers fairly. 

“ESG is still pretty nascent as a concept,” says Ha. “ESG data comes in all shapes and forms, and there is no consensus on how it should be measured, let alone how it should be defined.”

Dun & Bradstreet’s solution to a lack of standardization is to expand the global coverage of its ESG rankings, aiming to cover more than 100 countries and regions this year as it seeks to provide a single measurable standard for the global supply chain. Its ESG competitiveness analysis is built on information sourced from its own database, company annual reports, and websites, and uses an AI-driven model to determine the correlation between supply chains.

“With these detailed data points, companies can see their overall ratings, as well as which part of their manufacturing needs to improve what aspect of their ESG rating,” says Dun & Bradstreet’s Chang. “You can go into detail and discover, for example, that one factory in Kaohsiung is doing worse than the others and target your improvement efforts accordingly.”

Meanwhile, Seneca ESG’s approach allows companies to choose from one or several datasets and merge them together to create their own assessment frameworks using the company’s software. “Many companies want to create customized scorecards that reflect their views and values regarding ESG,” says Seneca’s Ha. “We work with several dozen data vendors, and depending on our users’ preferences, we adjust the datasets into our software.”

Ha believes that ESG ratings are on a path to standardization. Until then, he stresses the importance of working with ESG and not letting the many ratings systems deter companies from implementing their own ESG practices. “In its current state, ESG helps us identify the key challenges we face as a society,” says Ha. “Although we don’t have a consensus on how ESG should be implemented, the ratings still provide valuable insight for companies with a long-term business mindset.”