In light of new and tougher regulations from the EU, it is becoming increasingly important to calculate the cost of inaction. Failure to address sustainability can lead to lost contracts, fines and brand damage, according to Stratsys ESG expert Anna Lindstedt. What is the Cost of Inaction (COI) for your organization?
Demands for accountability in the supply chain are rapidly increasing from regulators, customers, investors, employees. And there are good reasons for it. For example, the supply chain of companies accounts on average for 90% of total emissions, according to McKinsey.
But many large companies still lack a well thought-out strategy for managing sustainability risks in the value chain in an effective and structured way. This is especially true when it comes to collaboration between different parts of the company - for example between the sustainability department and the purchasing department.
High Cost of Inaction
When ESG risks are not managed proactively, the company ends up in a reactive mode. This not only leads to increased external risks - but also to resources being spent on firefighting, parallel data sources and duplication of effort. It is a silent waste that erodes competitiveness.
The costs of inaction, or Cost of Inaction (COI), are likely to be high for companies that lag behind in their value chain risk management.
- Companies that wait often pay twice. First in the form of lost opportunities. Then in the form of crises that need to be managed, says Anna Lindstedt, Head of ESG Due Diligence at Stratsys.
According to Anna, there are a number of good reasons to take the issue of risk management in the value chain very seriously - not least now. "The pressure is coming from several directions.
- We see today how the regulatory landscape is being redrawn. Directives such as CSDDD and regulations such as FLR and EUDR are placing new demands on companies to identify, manage and report ESG risks. Not just internally, but across the value chain. But pressure is also coming from elsewhere. It comes from customers demanding transparency in procurement, investors wanting accountability and employees expecting ethical behavior.
Despite this, many large companies still lack basic risk management systems. It involves a number of different types of potential harm.
Anna Lindstedt, ESG Expert at Stratsys
1. Lost Business Opportunities
Lost business opportunities are one of the clearest consequences of poor risk management in the value chain, according to Anna.
The Cost of Inaction can include everything from missed tenders where sustainability criteria are not met, to investors choosing to cancel partnerships. Customer churn is also common, both at the B2B level and among conscious consumers who demand more transparency.
In addition, attracting and retaining talent is becoming more difficult, especially among younger employees who want to work in value-driven organizations. In many cases, companies are also losing out on new business models, such as the role of circular or responsibly produced materials supplier.
2. Damage to the Brand
Revelations of social or environmental abuses in the value chain can quickly put companies in crisis mode. Critical social media campaigns tend to be widespread and add to the pressure. At the same time, companies' employer branding is affected. Today's talent is more value-driven than ever. Employers who do not take their human rights and environmental responsibilities seriously are being rejected.
Beyond immediate crisis management, long-term business value is also eroded - brand equity, customer loyalty and recruitment skills are crucial assets for future competitiveness.
- A single incident in the supply chain can have a huge cost in trust. It takes time to build a brand, but it can be torn down in a week, says Anna.
3. Operational and Legal Risks
When companies lack structured risk control in the supply chain, vulnerability increases dramatically. Entire chains can be knocked out in an incident. This often leads to resource-intensive ad hoc investigations and emergency crisis management. In the worst case, legal processes await, where the company is held accountable for failing in its due diligence.
- With the introduction of the CSDD comes the risk of fines and financial sanctions for non-compliance. It's a clear reminder that the cost of inaction can be high, says Anna.
Reading tip: Supply chain due diligence - how to meet the new sustainability requirements
4. Organizational Consequences
Passivity in ESG work does not only have external consequences. It also affects the organization internally. Without clear processes and responsibilities, sustainability work risks being characterized by stress and firefighting, where efforts are reactive rather than strategic. Data quality often suffers when different parts of the organization report in different ways, making both analysis and reporting difficult.
- In the long run, this means a loss of a holistic approach to ESG, where management lacks the decision-making basis required to steer the business towards sustainability and business benefits, says Anna.
From Cost to Competitive Advantage
Taking ESG risks seriously is not just about avoiding problems. It is also a way to strengthen the business, according to Anna.
- Companies that integrate the management of sustainability risks linked to the value chain into their structures and strategies gain better control, but also a clear business advantage. By linking sustainability risks to business objectives, investments and governance, ESG becomes part of a long-term value creation strategy, says Anna.
When risk identification and follow-up are done proactively - rather than after the fact - the need for crisis management is reduced and the confidence of customers, partners and investors is increased. Moreover, with digital tools to support the work, it can be scaled up, followed up in real time, and visualized in a way that makes it useful for the entire organization - from procurement to management.
- When sustainability risks in the value chain are integrated into corporate governance, risks and thresholds in business are reduced. It becomes easier to win tenders, attract capital, and meet the demands of partners and consumers, Anna emphasizes.
Waiting is not Free
Delaying the process of managing and identifying risks in the value chain is a risk in itself. In fact, reacting after the fact can be significantly more costly. Lost business, lost trust, penalties and internal inefficiencies are just some of the costs that come with the lack of a structured approach to sustainability risks in the value chain.
Viewing ESG due diligence solely as a compliance issue is to underestimate its role in business development. In today's business landscape, sustainability risks are directly linked to brand value, customer loyalty and access to capital. Companies that successfully integrate due diligence into their core processes are not only building more robust organizations - they are future-proofing their position in the market.
- We need to stop seeing ESG due diligence as a bureaucratic burden. It's a business tool that will be expensive to ignore, concludes Anna.
See how Stratsys can help you take the next step within your sustainability work: Read more about ESG Due Diligence.
