ESG

Ryan DeLarme
May 20th, 2022

The current worldwide supply chain problems are not likely to be stabilizing any time soon, at least not according to FreightWaves CEO Craig Fuller.

In a recent article published by Fuller on the Freight Waves website, the CEO makes a compelling case as to why it could take upwards of a decade for things to “return to normal”, and that is assuming world events don’t continue to spiral into chaos.

In the article, Fuller lays out a series of challenges he sees that suggest “continuing challenges for decades to come”. Among those challenges, he lists that:

 

• Supply chains will remain under constant threat of disruption for the next decade 
• Supply chains operate best when the world is peaceful and stable 
• A smoothly running supply chain requires “buffer stock,” which is challenging with declining population demographics 
• There is a conflict between environmental, social and governance (ESG) goals and supply chains optimized for cost and speed. If we prioritize ESG, we will need to contend with supply chain risks 
• Supply chain technology will become the big venture capital category winner as companies continue to make investments in technologies that can help them mitigate their supply chain challenges 

 

To be sure, we live in a world faced with the imminent possibility of tightening supplies, higher energy costs, heightened geopolitical risk, and strained transportation networks. Fuller seems to believe that advanced supply chain technologies will become “mission-critical” for many more companies.

In the article, Fuller explains how supply chains benefit from times of peace:

 

“Since the end of the Cold War, global supply chains have benefited from peaceful trade between developed and developing countries. Many poorer and less developed countries that were previously ruled by Communist or autocratic regimes took advantage of new markets in the developed world and used global trade to move beyond subsistence economies to prosperous ones. Some of these countries developed into capitalistic and democratic countries, while other governments exploited the free market system to solely benefit those already in power, and became wealthy and powerful enough to threaten the very system that enabled their ascension.The Eastern European countries that were formerly part of the Soviet bloc are examples of the countries that embraced capitalism and shifted toward democracy, while China did the opposite.”

 

The arbitrage (that is the capitalisation of risk-opportunities in financial markets)  between the developed and developing countries has been massive. The cost of producing goods in countries with cheap labor, lax environmental and labor regulations, and little regard for sustainable natural resources has enabled the world to enjoy unprecedented prosperity and peace, albeit at the expense of the planet and the oppressed.

According to Fuller, labor is key in supply chains. But cheap labor is becoming scarcer, particularly in Asia. This is largely due to aging populations – the average age continues to increase and there are fewer people working in these manufacturing jobs.

On top of that, ESG requirements hamper the stability of supply chains. ESG stands for “Environmental, Social, and Governance”, and refers to an approach to evaluating the extent to which a corporation works on behalf of social goals that go beyond the role of a corporation to maximize profits on behalf of the corporation’s shareholders. Typically, the social goals advocated within an ESG perspective include working to achieve a certain set of environmental goals, as well as a set of goals having to do with supporting certain social movements, and the third set of goals having to do with whether the corporation is governed in a way that is consistent with the goals of the diversity, equity, and inclusion movement.

These ESG requirements at least appear to be rooted in compassion, but according to fuller they are having a disastrous effect on the global supply chain.

 

“Companies have instituted ESG requirements that require disclosures and monitoring of how and where products have been sourced. This pressure means that goods that are produced in factories that don’t match Western standards for environmental controls and human rights may not be available to Western consumers. The factories that do produce goods that match Western standards will often be more expensive and therefore there will be less buffer stock in the system.  

The same ESG standards also create challenges for commodity producers, as the cost of adhering to environmental and social disclosures makes it more expensive and less productive. It also discourages investment in the production of environmentally sensitive commodities – most obviously in energy. 

Environmental concerns and regulations that have prevented exploration and production and killed pipeline projects are largely the reason that the world currently lacks sufficient energy resources to buffer against the consequences of the Russia-Ukraine war. “

 

So then what recourse is left? Are we forced to remain dependent on cheap labor and pollution? Well, according to Fuller what he calls “Supply chain technology” will be the big winner going forward.

“Companies will look closer to home for product sourcing. They will prioritize production in countries that are far more stable and friendly to the United States. The Freedom Trade movement will drive supply chain professionals to prioritize production and sourcing in the Americas. 

Latin America will become a big winner, as it benefits greatly from having direct land transportation networks with North America and seas that are well protected by the U.S. Navy. 

The American South and Midwest will also see an acceleration in manufacturing and production, as they can offer predictable and resilient sourcing, without the geopolitical risks of foreign suppliers or the labor unions of the Rust Belt.

Automation, including robotics, will become more important. Nearshoring manufacturers will try to offset higher production costs with robotics and other automated production systems.

Supply chain market intelligence systems, a data category that monitors developments around supply and demand, will be critical for supply chain professionals who are trying to navigate increasingly complex and opaque markets. Materials and product supplies are no longer guaranteed, so the need for constantly refreshed data models that track the balance of supply and demand will be critical to the success of companies. 

FreightWaves SONAR provides near real-time market intelligence information, which has seen explosive growth in recent months as shippers have realized that supply chains are not returning to normal and the need for high-frequency data is increasingly critical for success. Historical models no longer work – as the world becomes far less predictable, peaceful, and safe – and supply chains are far more exposed to supply and demand shocks.”