Head of Business Development and Co-CEO at The Nearshore Company.
As ESG principles continue to gain prominence in the business world, adoption is no longer simply a good idea—it’s a necessity.
Large manufacturers increasingly demand that their suppliers also adhere to these standards, ensuring that goods are produced sustainably and that employees are held in high regard. As a result, small suppliers who do not incorporate ESG into their business model may risk losing their clients to competitors who have already made these changes.
Defining ESG
But what exactly are ESG principles? ESG principles refer to a company’s environmental, social and governance practices. Environmental principles refer to a company’s environmental impact, including its carbon footprint, waste management and energy consumption. Social principles refer to a company’s impact on society, including employee welfare, diversity and inclusion and community engagement. Governance principles refer to a company’s internal policies and procedures, including transparency, accountability and risk management.
As has been observed (and discussed openly) recently, ESG comes in a multitude of hues. Some of them even border what’s known as “greenwashing,” a situation where a company demonstrates the pretense of following ESG but doesn’t act on it in an effective or meaningful manner. Pressure continues to mount on manufacturers to meet these sustainability standards, a chorus joined by governments, boards, investors and consumers.
In my view as Head of Business Development and co-CEO at a nearshoring company, this is important for companies relying on nearshoring to produce the components that go into so many manufactured goods. Here’s where the most significant pressure is being applied for companies to adopt ESG principles and work with more ESG-friendly countries.
1. The Rise Of Millennials
Like it or not, millennials will be the most influential consumer group pretty soon. And evidence has shown us that they value ESG standards. This is one of the big reasons why companies of all sizes are being forced to step up.
2. Challenges In The Far East
Though China and Asia have typically been a haven for low-cost manufacturing resources, political winds have made it a less viable option. Though IP infringement remains a substantial problem, human rights violations tend to grab the boldest headlines. According to The Borgen Project, lax enforcement allows numerous violations of age, pay and time requirements in China, with activists being cracked down on. Hundreds of millions of Chinese families survive on less than $2 per day. One major response to this has been the migration of manufacturing from China to other low-cost countries in Asia—Vietnam and India being the biggest new beneficiaries of this migration.
3. Reducing Carbon Footprint
Anytime we can reduce the use of fossil fuels to transport raw materials and finished goods, we reduce our carbon footprint. Companies are constantly on the lookout to address solutions that provide “green efficiency” in this area.
One way to foster results is to produce goods closer to the market(s) you serve. Nearshoring in countries like Mexico can improve a company’s carbon footprint, reduce shipping times and distances, and mitigate supply chain delays. Of course, as with any corporate investment, your company should evaluate a move to nearshoring with feasibility and benefits in mind. The information-gathering process should include a dossier of details around economic indicators, labor costs, infrastructure, political stability and legal considerations, as well as industry-specific data such as availability of skilled labor, proximity to target markets and logistics capabilities in the prospective country’s market.
Also, consider “human” factors such as cultural compatibility and language proficiency. Companies can conduct these feasibility steps on their own or leverage expert advice from third-party consultants who have knowledge of the country’s business environment as it relates to nearshoring. (Full disclosure: My company offers these services, as do others.)
4. Growing Mandates
ESG has given rise to groups such as the International Sustainability Standards Board (ISSB), which seeks to develop a single set of globally recognized practices and bring transparency to the disclosure process. And the United States-Mexico-Canada Agreement (USMCA) of 2020 already has standards that mandate thresholds for locally sourced materials (for example, automotive manufacturers must use 75% local content to comply with the USMCA).
Companies wishing to gain more insight into the emerging ISSB standards may review them here, and the uniform USMCA regulations can be reviewed here.
Incorporating ESG Practices
It may be challenging to incorporate ESG into the business model of a small provider, but many resources are available. Businesses looking to adopt ESG principles can often find guidance and assistance from industry associations, government agencies and nonprofits. Large corporations are also typically willing to collaborate with suppliers to make changes.
I believe that small suppliers must recognize the growing trend of ESG in business. Those who incorporate these principles in their business models can benefit from increased competitiveness, cost savings and a better reputation. Act now before it is too late.
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