What ESG Means for Global Supply Chains

When built responsibly, global supply chains are tremendously beneficial — reducing costs, improving product quality, using materials efficiently, and contributing to economic and social development. However, when companies turn a blind eye to ESG impacts, they can cause both social and environmental harm while exposing brands to operational and repetitional risks. According to McKinsey, supply chains can be responsible for up to 90 percent of a company’s ESG impact. Unsurprisingly, businesses, consumers and investors are increasingly concerned with the way that goods are produced and delivered.

To discuss the increasing importance of ESG considerations in supply chains, we hosted a virtual panel of design and supply chain experts from across industries: Peter Bogulaski (Logistics & Operations Manager, Americas, Zound Industries), Sarah Carlson (Vice President of Design, Vuori, Inc.), Jess Fleischer (Founder and CEO, Son of a Tailor), and Bonnie Nixon (Sustainable Supply Chain Expert, Sustainable Brands and BonnEco, Inc.). PCH International VP of sustainability Alan Cuddihy moderated a lively conversation full of ideas that other companies can take to heart. What follows are a few takeaways from our discussion.

Interest in supply chains and ESG are converging

Recent research from Stern School of Business at NYU correlates better long-term financial performance with attention to ESG factors. Not surprisingly, business leaders and investors are increasingly paying more attention to sustainability performance and ESG metrics.

“Nearly one out of four investment dollars today now has an ESG lens, meaning that when they look at your ESG data as part of their investment, they’re going to determine whether or not they’re going to invest in you“

— Bonnie Nixon, Sustainable Brands and BonnEco, Inc.; Professor of Sustainable Supply Chain at UCLA and Harvard

Meanwhile, COVID-19 brought new attention and understanding to the importance of global supply chains. When factories shut down and shipping between locations came to a halt, stakeholders across geographies and industries felt the effects; almost overnight, the term “supply chain” was front-of-mind for stakeholders.

As interest in supply chains and ESG converge, the panel agreed that stakeholders will continue to pay more attention in the future to supply chain ESG impacts.

“If customers and your business needs and your stakeholders are requiring you [to] have a sustainable business, that means you need to have a sustainable supply chain as well.”

— Jess Fleischer, Son of a Tailor

Companies can position themselves for future success by building sustainable supply chains and tracking their performance starting now.

Supply chains can make sustainability more accessible

Several of our panelists were from small to medium sized brands that target an upscale, “premium” market. Due to their smaller market position and scale, these brands can’t affect ESG factors on the scale of global enterprises like Target, H&M, et al. But smaller companies have flexibility on their side, which can lead to better ESG outcomes and better business performance.

Especially for small and medium sized brands, size and scale can be used as competitive advantages, as they are often better positioned to free themselves from inflexible, cumbersome supply chains.

“Smart supply chains mean less overproduction, and smart supply chains can bring sustainability to everyone — not just the premium segment. So, we don’t see [the] H&M need to terminate four billion dollars of inventory every year — which is just insane. Why would any sane person make four billion dollars of inventory that you would burn, both economically and for the environment?”

— Jess Fleischer, Son of a Tailor

Design decisions greatly affect supply chain ESG impacts

The product journey begins during the design phase, and this is where many ESG factors can best be addressed. Design decisions account for a large percentage of carbon and other ESG impacts. By designing smartly, a business can position its supply chain for better performance.

“We did an audit of our supply chain and the number one impact on our supply chain is purchased materials … When you move from virgin poly to recycled or to a bio-based material, you save a huge amount of carbon. 60% of the carbon [emitted] is saved from just making that simple choice.”

— Sarah Carlson, Vuori, Inc.

Collaboration is needed to advance ESG performance

The theme of collaboration and partnership surfaced several times during the conversation. As we know from PCH’s sustainability journey, brands must work on developing partnerships with suppliers and educate them on sustainability best practices to move the needle on ESG.

“We have to be there and see what’s happening on the ground to make conditions better and tell our partners that if we are going to work with you, we have a set of [ESG] expectations — just the same way we have quality expectations. But we are here to train and help you be successful.”

— Bonnie Nixon, Sustainable Brands and BonnEco, Inc.

But partnerships also need to exist across industries and between similar brands. When entire industries align to common ESG priorities, brands are more capable of making meaningful progress toward ESG objectives. Sustainability requires a group effort. Brands should seek partnerships with suppliers, industry associations, and even competitors to advance ESG outcomes.

“So that’s kind of the battle that we have to look at. Where can we be the most efficient? Where can we implement programs to offset our impacts? And where can we partner with other like brands to try and have more control over our destiny with logistics and distribution?”

— Peter Bogulaski, Zound Industries

Sustainability makes workforces stronger

Sustainability’s power to transform employee workforces also was discussed several times during the discussion. Panelists noted that sustainability played a key role in attracting better, more committed talent. And, once hired, such talent seemed to be more driven to enact positive ESG outcomes. This eventually leads to a virtuous cycle of talent attraction and retention — the more employees enact positive sustainability outcomes, the easier it became to attract more top talent.

“100% of the time when someone’s interviewing, they say they’re inspired to work at Vuori because of the mission and values and because of sustainability… And then if you ask people who already were here, it’s the same answer. You get more talent, more inspired talent, more commitment … We’ve moved so far towards our [sustainability] goals and targets in such a short period of time, it’s shocking. And it really is the power of the team here that is really doing the work.”

— Sarah Carlson, Vuori, Inc.

Sustainable business models are the future

Layering a bit of sustainability on top of a fundamentally unsustainable business model won’t ever drive meaningful progress. To have the greatest impact on ESG performance, companies should examine their overall business model — and create a supply chain that supports it.

“So, we start to have an economic model that is not only more sustainable, but it also produces our products better and cheaper.”

— Jess Fleischer, Son of a Tailor

The future of sustainable supply chains will not force C-suite executives to make a choice between ESG considerations on the one hand and financial performance on the other. By focusing on a sustainable business model, forward-thinking companies can have both. When enacted correctly, sustainability and ESG will drive (not impede) financial performance.