Use bonus-malus tool to integrate ESG 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 creates chemistry with a focus on sustainability, combining economic performance with approaches for environmental protection and social responsibility. Around 112,000 employees in the BASF Group contribute to the service to its customers in many sectors and almost every country globally. BASF’s portfolio comprises six segments: Chemicals, Materials, Industrial Solutions, Surface Technologies, Nutrition & Care and Agricultural Solutions. For BASF, climate protection is considered a key task and an essential part of its strategy. BASF supports the objective of the Paris Agreement to limit global warming to below 1.5 degrees Celsius and aims to support climate action by applying innovative solutions to address new challenges. Sustainable procurement is key to achieving this goal.

The ESG BonusMalus tool addresses the challenge of integrating ESG criteria into tender awards by evaluating suppliers' ESG performance on a unified scale, with bonus or malus applied based on ESG scores. Thus contributing to enhancing our stakeholders' awareness of ESG topics.

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.

Colleagues from Procurement, Sustainability, and Business Units collaborated to further incorporate sustainability aspects into procurement processes, managing ESG evaluation results, and adding value through the ESG BonusMalus tool. 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

By incentivizing suppliers to enhance their ESG performance, the ESG Bonus-Malus tool can promote better operational management, including energy efficiency and waste reduction, which can have a positive impact on GHG emissions. It encourages the adoption of sustainable practices, such as renewable energy use, and fosters improved monitoring and reporting of GHG emissions, creating a culture of accountability. Additionally, rewarding high-performing suppliers encourages long-term partnerships and leads to more sustainable supply chains. As more suppliers adopt these practices, the cumulative effect can lower GHG emissions across the industry.

Nature Impact

1. Resource efficiency: Encouragement of sustainable resource usage and waste reduction practices can lead to less environmental strain

2. Biodiversity protection: Suppliers may be motivated to implement practices that protect local ecosystems and biodiversity

3. Sustainable sourcing: Promotion of environmentally friendly materials and processes throughout the supply chain

Social Impact

• Improved labor practices: Incentives can lead suppliers to enhance worker conditions, safety, and fair labor practices

• Diversity and inclusion: The initiative can promote diverse hiring practices and equal opportunity among suppliers

• Stakeholder trust: Enhanced ESG performance can build trust with customers and stakeholders, leading to stronger relationships

Business Impact

Benefits

• Transparency and accountability: Improved reporting requirements foster greater transparency in supplier operations and ESG practices

• Risk management: Suppliers may adopt better governance practices to mitigate risks related to environmental and social issues

• Ethical practices: Encouragement of ethical business practices and compliance with regulations within the supply chain

• Long-term sustainability: Fostering long-term partnerships with suppliers committed to governance improvements can enhance overall supply chain resilience

• Compliance with current and emerging legislative requirements globally

• Promotes suppliers’ sustainable sourcing practices

• Meeting customers' requirements

Costs

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

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

Co-benefits

Promotes sustainability best practices across industries.

Typical business profile

Applicable to any company or sector, across industries.

Approach

Step-by-step approach:

1. Assign a project leader: Designate a project leader responsible for overseeing the implementation of the ESG Bonus-Malus initiative, ensuring accountability and streamlined decision-making

2. Plan project phases: Develop a comprehensive project plan that outlines the key phases of implementation, including timelines and milestones to track progress

3. Define the scope: Clearly outline the scope of the ESG Bonus-Malus model (category and geographical scope)

4. Develop the assessment model: Create the reward-penalty assessment framework based on the result scale from third-party certification methods and tools, ensuring alignment with industry standards

5. Standardize evaluation processes: Establish a standardized evaluation process that allows for comparable results on a single scale, enhancing the reliability of the assessment

6. Utilize existing data: Leverage available data from third-party assessments or other certification bodies to inform and enhance the evaluation process

7. Prioritize communication: Focus on effective communication strategies, including email marketing and information sessions, both internally and externally, to promote the ESG Bonus-Malus initiative as a standard process

8. Explain methodology and benefits: Ensure that all stakeholders understand the methodology and benefits of adopting third-party certification, emphasizing the commercial bonus as a motivator for suppliers

9. Integrate into supplier tenders: Incorporate the ESG Bonus-Malus model into supplier tenders during the bidding process to encourage participation and compliance.

10. Monitor impact: After implementation, gather information on where and how the ESG Bonus-Malus was applied and assess its impact on each tender, allowing for ongoing evaluation and refinement of the model

Stakeholders involved

• Procurement: Further integrate sustainability criteria into procurement and contracting

• Sustainability and business units: Manage ESG evaluation results and add value through ESG BonusMalus tool

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

• Suppliers: They carry out the certification to identify areas for improvement in processes that have an impact on ESG issues

• Third party certifiers: It provides the information base in the form of results on which the ESG Bonus Malus is based and allows for the standardization of the model across all types of suppliers. The ESG Bonus Malus contributes to the enlargement of the network of registered members

Specific staff leading the project:

• Regional Category buyers

• Head of Procurement Hub

Key parameters to consider

• August 2021 - Project start: Concept Development, Information Gathering, Internal and External Information Campaign.

• April 2022 - ESG BonusMalus first cases: the BonusMalus was applied for the first time

• 2022 – 2025: Roll out in Italy, Turkey and Germany.

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