ESG of Manufacturing and the Supply Chain

Supply chain issues have plagued the global economy for years, a problem that began during the pandemic. Even now they continue to persist despite a return to relative normalcy in most countries. However, something that has remained a problem for years in manufacturing and by extension the supply chain, even before the pandemic, is the lack of care for ESG standards. A common problem in sourcing is that they may be obtained through unethical labor in another country or maybe, like cotton, the crop itself is an environmentally straining crop. However, in the past few years, more and more consumers are beginning to be more conscientious with their purchases and as such more businesses are prioritizing it as well. In 2020 there was a 24% increase of large-scale purchasers, like Nike, Microsoft, etc, asking their manufacturers and suppliers for environmental information compared with 2019. And beyond heightened consumer awareness for ESG many countries, most notably the EU, have begun to pass stringent laws to implement and enforce these ESG standards.

As such, in the face of such compelling business incentives and forceful government regulation, businesses in many cases have no choice but to conform to ESG standards. But what are the ways that they can do so?

In general, each company’s burden will be drastically different, depending on the nature of their business, product based or service based. But, there are three issues that nearly all companies can keep in mind as they make decisions in the future and can likely continue to improve: environmental pollution, impact of available natural resources, and ethical labor compensation. For the sake of clarity, I will be using the textile industry as a case study and example.

Environmental pollution refers to carbon emissions, toxic waste, or any other substances that might be commonly associated with manufacturing, shipping, or business operations. In the context of the textile industry nylon, a commonly used fabric, is an example of environmentally polluting factor. This is mainly because its production is so energy intensive, requiring 130 MJ/kg of fabric, which can cause heightened demand for fossil fuels, depending on the source of the electricity to create it. Additionally, the transportation of any good requires the use of planes, cars, or boats, all of which produce their own carbon emissions. Unfortunately, all that can be said in regards to this is to track changes in technology and solutions like hydrogen powered vehicles.

The impact on natural resources is a key issue in terms of the social component of ESG. This is mostly because the cultivation or sourcing of certain raw materials can have a detrimental on key natural resources such as water. Cotton, for example, is an extremely water intensive crop to grow and is often grown in countries that struggle with water already, further exacerbating the already existing crisis of water shortage. Transitioning to materials that take up less natural resources is a key solution, especially as many materials will often have more environmentally friendly alternatives, albeit often more expensive.

Finally, when it comes to the final component of ESG, governance, the most relevant aspect for manufacturers and suppliers is ethical labor practices. Many times manufacturing is done in third world countries where labor is cheap or in the communities where certain materials are obtained. Beyond the most obvious examples of not abusing workers it is also key that companies properly compensate their workers and maintain safety standards, regardless of the heightened cost. Clothing is an industry that has been known as labor intensive and as such it is all the more important to maintain ethical labor practices. This is especially as the consequences of not doing so can be lost inventory, regulatory action, lost customers, and general poor reputation. One famous incident that heavily impacted many different clothing companies was the collapse of a manufacturing plant in Dhaka, Bangladesh in 2013 which killed 1,100 workers which had been a result of negligent monitoring of the building's stability.

By starting from these three points, businesses will be able to make changes in regards to their ESG practices in terms of manufacturing and their supply chain.