The impact of deglobalisation
Mobility and Transport
For a long time, supply chains have played a key role in the quest for sustainability. The main challenge is to identify and mitigate any environmental, social and governance (ESG) risks to which companies may be indirectly exposed through their supply chains. In this article we look at how companies can improve their supply chains in terms of ESG.
Transparency in supply chains is becoming increasingly important, due in part to regulatory initiatives such as the European Corporate Sustainability Reporting Directive (CSRD).
This directive requires large companies to measure and report their sustainability impact. This includes their indirect impact across the entire supply chain (scopes 2 and 3). Small businesses in the chain are also affected by this development. The need for transparency applies to all industries, but specific concerns vary. For example, mining activities may be focused on health and safety issues, IT and finance will be more concerned about data privacy, whereas in the clothing industry decent pay for workers may be the biggest concern.
Simplifying the supply chain
An important factor that contributes to ESG risks is the large number of suppliers and the complexity of the supply chain itself. Companies can seek to simplify their supply chain by reducing the number of parties they do business with, for example by bringing more tasks in-house. They can also try to choose suppliers that are geographically closer, either by finding local alternatives or by persuading foreign partners to build factories nearby. The main idea in both cases is to gain more control of the company’s inputs.
Less outsourcing
Companies that offer products requiring less finishing find it easier to engage in vertical integration, meaning that they themselves handle most, if not all, of the steps from sourcing a product to delivering it to the customer. From an ESG perspective, this is an attractive choice, as a single company can be held entirely responsible for anything that goes wrong. In addition, full data availability and consistent quality can be expected.
Organising regional networks
One obvious benefit of a shorter supply chain is the reduction of greenhouse gas emissions. This also applies to companies that opt for supply networks that are more regional but diversified. Shorter transport routes mean less fuel consumption, as well as a significant reduction in packaging waste and the use of temporary storage. Shorter supply chains can also shorten the production time of a good, making it possible to reduce stock sizes. A business that can respond quickly to changes in demand is less affected by the risks of overproduction and product waste. One company that excels at this strategy is Inditex. This Spanish clothing manufacturer, with brands such as Zara, Pull&Bear and Bershka, has opted for regional supply networks that produce and sell relatively autonomously from regional hubs. Bringing business activities closer to home is a smart choice, ensuring shorter distances between raw materials and intermediate goods and higher levels of control. This strategy also retains the cost savings of outsourcing.
Globalisation is sometimes best
So is regionalisation the most sustainable solution? Not always. There are reasons why supply chains span the globe – and they’re not just about cutting costs. Some inputs are only available in certain parts of the world, for instance raw materials such as rare earth metals and other minerals necessary for the production of machinery and electronics. Another example would be commodities such as corn or certain types of wood needed for food and packaging production. The same could even be true of ‘natural’ infrastructure such as rivers or sunshine, needed for cooling or as an energy supply. As attractive as it may sound, and despite the advantages of complete independence from other countries, regionalisation is not always feasible. It is also not necessarily desirable from an ESG viewpoint. If energy-intensive products are manufactured far from home, this may in fact do more to limit climate change if it means that renewable energy is used. In terms of positive social impact, globalisation may lead to training for workers in other countries, the improvement of their skills and the creation of better employment opportunities. It will also be necessary to take account of the higher risk of working conditions not meeting our local standards, and this actually creates possibilities for further adaptation to international sustainability standards. Therefore, while it is true that deglobalisation may facilitate ESG risk management, it is not a one-size-fits-all approach. For some companies, global supply chains with trusted partners may still be the best choice; at the same time, such companies have opportunities to improve their sustainability and their positive impact.
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