Use ESG-linked reward-penalty tool in supplier tenders

This case study is part of The Guide, an initiative that aims to inspire & empower procurement professionals committed to driving sustainability, launched by the Sustainable Procurement Pledge Champion Program. It includes ugly truths, best practices, and case studies across a range of industries and sustainability topics. Learn more here.

BASF is a multinational chemical company based in Germany, founded in 1865, and with 112,000 employees is the largest chemical producer in the world operations in most countries globally. BASF’s portfolio comprises six segments: Chemicals, Materials, Industrial Solutions, Surface Technologies, Nutrition & Care and Agricultural Solutions. BASF supports the objective of the Paris Agreement to limit global warming to below 1.5 degrees Celsius. Above all, the company aims to combat climate change through its skills in applying innovative solutions to address new challenges.

BASF is committed to economically efficient and ecologically effective global climate protection and supports the UN Sustainable Development Goal "Climate Action". This can only be successfully achieved together, in dialogue with policy and society, as well as in strong partnerships for climate protection.

Sustainable procurement is a key element to achieving this commitment.

The ESG BonusMalus addresses the challenge of integrating ESG into tender awards by evaluating suppliers' ESG performance on a unified scale, with bonuses or malus applied based on scores.

The ESG BonusMalus tool evaluates suppliers’ ESG performance through third-party assessments, allowing for a unified comparison scale. Suppliers can earn bonuses from 0.1% to 5.5% based on their scores, with a malus applied for scores under 25 points.

Procurement, Sustainability, and business units collaborated to further incorporate sustainability aspects into procurement processes, managing ESG audit results, and adding value through the ESG BonusMalus. The model is scalable and applicable across industries.

The ESG BonusMalus tool standardizes the evaluation process, providing comparable results on a single scale, and motivates suppliers to obtain certifications through commercial bonuses.

Sustainability Impact

Climate Impact

Social Impact

Increases awareness of sustainability in procurement.

Business Impact

Benefits

• There are benefits for the company’s compliance with current and emerging legislative requirements internationally.

• There are benefits for the company to meet the needs of the company’s own customers

Costs

• External costs: Investment in third-party assessments and communication campaigns is required to effectively explain the methodology and benefits.

• Internal staff costs: Assigning a project leader and planning project phases can help manage resources efficiently.

Co-benefits

Promotes best practices and sustainability across industries.

Typical business profile

Applicable to any company or sector, across industries.

Approach

Step-by-step approach:

1. Assign a project leader

2. Plan the phases of the project

3. Develop the reward-penalty assessment and linked financial tool linked to sustainability performance (ESG BonusMalus)

4. Integrate the ESG BonusMalus into the supplier tenders in the bidding process. Implement a scalable model with third-party assessments and strong communication campaigns to explain benefits and methodology. Standardize the evaluation process for comparable results on a single scale

5. Use existing data available on third parties or other assessment companies

6. Prioritize communication, including email marketing and information sessions, both externally and internally, to establish it as a standard process. This is needed to effectively explain the methodology and benefits of adopting the third-party certification

7. The commercial bonus acts as a motivation for suppliers to obtain certifications

8. Share best practices to promote sustainability across industries

Stakeholders involved

• Procurement: Incorporate sustainability into procurement and contracting

• Sustainability and Business Units: Manage ESG audit results and add value through ESG BonusMalus

• Indirect Purchasing Hub in Spain: Main driver at a global level, scaling the pilot project to other countries

Specific staff leading the project:

• Category Buyer Consumables – Regional

• Regional Category Buyer (National)

• Head of Procurement Hubs EMEA - Regional

Key parameters to consider

The initiative took approximately 1 year to develop and 1 year to implement with the first results showing.

Implementation and operations Tips

• Assign a project leader, plan project phases

• Requires strong communication to explain methodology and benefits

• Strong communication campaign and third-party assessments are crucial