How ESG Supports Supply Chain Management for Middle Market Manufacturers

January 24, 2023

By:  Lourenco Miranda

The relationship between Environmental, Social and Governance (“ESG”) and supply chain management is that companies are increasingly looking to incorporate ESG factors into their supply chain management strategy. This can include initiatives such as:

  • Reducing carbon emissions
  • Ensuring fair labor practices
  • Promoting diversity and inclusion in the supply chain

By incorporating ESG matters into their supply chain management, companies can mitigate risks, improve their reputation and relationships with stakeholders and gain a competitive advantage.

Why ESG is seen as competitive advantage in supply chain management?

Consumers and investors are becoming progressively more interested in companies that prioritize sustainability and social responsibility. By integrating these ESG factors into their supply chain management, companies can improve their reputation and relationships with stakeholders, which can lead to increased brand loyalty and customer retention.

Incorporating ESG factors into supply chain management can help companies identify and mitigate risks. For example, by monitoring labor practices in their supply chain, a company can identify and address potential human rights violations before they become a public relations problem. By mitigating these risks, companies can protect their reputation and avoid costly legal settlements or penalties.

As regulatory environments become more stringent, companies will be under pressure to comply with different regulations related to ESG. By proactively incorporating ESG strategies into their supply chain management, companies can stay ahead of these regulations and avoid costly penalties for non-compliance.

Finally, companies that incorporate ESG into their supply chain management can often find cost savings by increasing efficiency and reducing waste. This can be achieved through initiatives such as limiting energy consumption, using sustainable materials or improving logistics.

What is the impact of nearshoring to the middle market manufacturers in the U.S.? 

Nearshoring refers to the practice of moving manufacturing or production facilities closer to where the goods will be consumed, as opposed to outsourcing to a distant, low-cost country.

Nearshoring can be beneficial for middle market manufacturers by reducing logistics costs, improving quality control and enhancing customer relationships. However, it also has potential drawbacks, such as increased labor costs and dependence on domestic suppliers. It's important for the manufacturers to weigh the pros and cons and assess whether nearshoring is the right strategy for them.

How can ESG help with nearshoring in the manufacturing industry in the U.S.?

Incorporating ESG practices into nearshoring strategies can help manufacturers identify and mitigate risks associated with their supply chain and operations. For example, by monitoring the labor practices of their suppliers, manufacturers can ensure compliance with labor laws and avoid costly legal settlements or penalties.

ESG can also bring opportunities in cost savings. Implementing ESG best practices, such as reducing energy consumption, using sustainable materials and improving waste management, can lead to cost savings for manufacturers.

Also, as the regulatory environment becomes more stringent, companies are under pressure to comply with different regulations related to ESG. By proactively incorporating ESG considerations into their nearshoring strategy, manufacturers can stay ahead of these regulations and avoid costly penalties for non-compliance.

ESG is a powerful tool to attract investment, as it is increasingly becoming a factor for investors when assessing the potential of an investment. By incorporating sustainability issues into their nearshoring strategy, manufacturers can attract more investment and increase the value of their company. Also, incorporating ESG considerations into nearshoring strategies can help manufacturers differentiate their products and services in the market and attract customers who are looking for sustainable options.

What does a middle market company need to do to incorporate ESG into their business practices?

The first step is to conduct an ESG materiality assessment to understand the current state of their ESG performance and identify and prioritize areas for improvement. This assessment should cover the company's environmental, social and governance practices and should involve input from employees, customers, suppliers and other stakeholders.

Based on the results of the ESG assessment, the company should develop a strategy that outlines specific goals, targets and action plans for improving their ESG performance. This strategy should be aligned with the company's overall business objectives and should be communicated to employees, customers, suppliers and other stakeholders.

Once the strategy is developed, the company should implement and monitor specific ESG practices that are relevant to their industry and operations. This can include initiatives such as reducing carbon emissions, ensuring fair labor practices and promoting diversity and inclusion.

Middle market companies should communicate their ESG performance to employees, customers, suppliers and other stakeholders. This can be done through sustainability reports and ESG rating and certification, as well as other forms of communication.

Incorporating ESG into business practices is an ongoing process, and middle market companies should continuously monitor and improve their performance. This can be done by regularly assessing and reviewing their ESG strategy and performance, and updating their goals and targets as needed.

About Lourenco Miranda

Lourenco Miranda is Managing Director of ESG and Sustainability Solutions. He has experience in the financial industry covering various segments, industries, geographies, including small, middle, and large companies.