Strengthening the ESG assessment for use by SMEs

ESG-Bewertung – Verstärkung für KMU

The initial situation

The EDIH Rheinland has carried out a project with a company from the IT sector, ESG Chain, which offers its customers support in complying with due diligence obligations within the supply chain. To this end, suppliers and their upstream products are analysed via web crawling for compliance with supply chain law according to ESG criteria.
These criteria are intended to ensure that environmental protection rights, social standards and corporate governance can be monitored and enforced. The aim is to ensure that producers and their suppliers comply with minimum social, environmental and governance standards. ESG Chain offers its customers solutions for precisely this challenge of due diligence obligations. If companies want to integrate ESG criteria into their operations, ESG Chain helps them to organise and manage the relevant data. Using blockchain and web crawling, publicly available data that indicates improvements or problems in the ESG area is recorded and made permanently available.

The Challenge

The company was faced with the challenge of correctly analysing data on potentially identified problems for its customers and making it quantifiable in risk factors. ESG Chain wanted to support its customers with the necessary due diligence when reviewing their supply chains. Prior to our project, the software only identified the existence of a risk in the supply chain and did not assess its severity.

• Firstly, the company needed an objective external assessment of its software to determine its capabilities and usability. Our assessment identified strengths and weaknesses. With the information gathered, we developed a roadmap with fixed work packages to further develop the usability of the software.
• Secondly, ESG Chain was faced with the problem of further developing the risk assessment in its customers' supply chains. The multi-criteria risk assessment, which is based on various guidelines, laws and standards, required in-depth scientific analysis.

The Approach

1. In an initial sub-project, the project team from EDIH Rheinland conducted a study to test the functionality of ESG Chain's digital services: A multi-stage process was used to analyse how ESG guidelines can be monitored in companies, how incidents can be assessed and how potential impacts can be predicted. The assessment was based on the OECD Due Diligence Circle, which contains guidelines for compliance with human rights and environmental protection, tracking, communication, evaluation and possible redress.
2. A second sub-project focussed on improving the management of potential risks that customers may face from suppliers in terms of social standards, the environment or operational management. Requirements and objectives from the Supply Chain Act in these areas were translated into standardised assessment procedures with measurable key figures. This made it possible to present risk management in a clearly structured scheme.

Other, but not exclusive, guidelines used to improve risk management: Supply Chain Due Diligence Act (LkSG) (D), Corporate Sustainability Due Diligence Directive (CSDDD) (EU) or the OECD Guidelines for Multinational Enterprises on Responsible Business Conduct (OECD).

The Solution

Together with ESG Chain, we conducted this investigation and developed a multi-criteria risk assessment process in three sub-steps: A baseline risk assessment, i.e. the potential impact of an incident on social, environmental or societal conditions, the potential impact on the business relationship between the supplier and the customer company, and the cause-related risk. This is measured by the assumed severity of the impact of the incident and its reversibility or contribution to causation.

This project supported a digital solutions provider that helps companies improve sustainability in their supply chains. This has strengthened the economy around business models in the area of sustainability reporting and general sustainability across industries.

Results and benefits

In the end, all suppliers can be categorised in a matrix. This presents the assessed risks in a portfolio analysis to determine whether there is a sustained impairment of the ESG guidelines. These probabilities are displayed using a colour scheme so that risk mitigation measures can be introduced in good time.

• An evaluation of the user-friendliness of the software and ready-made work packages to improve individual functions.
• Improving user-friendliness: 29 aspects requiring improvement were identified and summarised in 4 work packages.
• A ready-to-use concept for multi-criteria adaptive risk assessment.
• Development of 3 categories for the risk assessment of ESG supply chains with 31 sub-categories and a corresponding rating scale for each category.
• The categories are: Basic risk, case-related risks and business relationships.

This project was carried out in cooperation with the Mittelstand-Digital Zentrum Rheinland and by our Projet partner WZL