ESG, standing for Environmental, Social, and Governance, represents a set of standards defining how a company behaves in relation to the planet and people. These criteria are essential not only for shaping corporate operations but also for serving as an indicator of organizational commitment to sustainability and operational ethics.
The environmental component focuses on managing environmental impacts, such as reducing carbon emissions, efficient resource use, and sustainable practices. The social aspect addresses corporate social responsibility, including human rights, working conditions, diversity, and community impact. Lastly, governance refers to corporate administration, transparency, ethics, legal compliance, and leadership structure.
In recent years, the importance of ESG has become central to corporate strategy, reflecting a significant shift in responsibility and influencing various aspects of business operations, including the supply chain.
Driven by the increasing awareness among consumers, investors, and regulators about the long-term implications of corporate activities, the growth of ESG highlights the responsibility of companies not only for their direct operations but also for their supply chains. They face demands for transparency, ethical practices, and sustainable operations at all levels, underscoring the ESG impact on business practices.
The relevance of ESG in the global corporate landscape has grown substantially, with socially conscious investors using ESG criteria to filter and select potential investments. Therefore, companies that not only provide financial returns but also operate responsibly and sustainably are sought. Through governance and ethical operation, companies can avoid significant risks by adopting more sustainable and ethical practices.
ESG Environmental Impact in Supply Chains
Global supply chains play a crucial role in the world economy, but they are also responsible for significant environmental impacts. From the extraction of raw materials to the distribution of finished products, each stage can contribute to environmental degradation. These impacts include, but are not limited to, greenhouse gas emissions, intensive water consumption, pollution, and loss of biodiversity.
For a typical fashion or food retailer, for example, only about 5% of their emissions are from direct manufacturing, while supply chain emissions can be 5 to 10 times higher (World Economic Forum). Therefore, responsible environmental management within supply chains is vital to reduce these negative effects and ensure long-term sustainability.
Some conscious companies are implementing sustainable practices aimed at reducing their carbon footprint and improving environmental efficiency. These practices include the use of renewable energy, logistics optimization to decrease the consumption of fossil fuels, and the recycling and reuse of materials.
Additionally, many companies are adopting a circular economy as an operational model. The goal here is to keep products, equipment, and infrastructure in use for longer, maximizing the value of resources.
Another implementation that the market has been doing are related to significant changes in the production sourcing and process to reduce environmental impacts. Patagonia, known for its commitment to sustainability, is an example. The brand uses recycled and organic materials in its products. They are also transparent about their sources and share all the details of their supply chain. Furthermore, the company imposes a tax on itself to fund environmental organizations and stands out for its initiatives to repair and recycle used clothing, prolonging the lifespan of products and reducing waste.
Another inspiration is Reformation, fashion brand from Los Angeles. They use sustainable and recycled materials, including vintage clothing, to create its collections. The company maintains its operations carbon-neutral and recycles about 75% of its waste. Moreover, it invests in charity programs to offset the resources used in its productions.
ESG Social Component
Corporate Social Responsibility (CSR) is a fundamental pillar within the context of ESG. It plays a crucial role in how companies interact with their supply chains. Companies committed to CSR adopt policies that ensure fair employment practices, workplace safety, and respect for the rights of workers throughout the supply chain. By implementing these policies, companies may improve their corporate image, as well as potentially increase operational efficiency and reduce legal and reputational risks. The ESG impact in this area can be significant, promoting better working environments and community relations.
Scandalous cases involving brands like Zara and Shein, which have been exposed for using slave and child labor, highlight the prevalence of abusive labor practices in the fashion industry. Additionally, the collapse of Rana Plaza in 2013 in Bangladesh, where over 1,100 workers died and around 2,500 were injured due to unsafe working conditions and corporate negligence, exposed the severity of human rights violations in the sector.
Committing to decent working conditions is essential for the sustainability of supply chains. Companies with solid ESG practices ensure that all workers, from the extraction of raw materials to the final assembly of products, are treated with dignity and fairness. This includes fair wages, safe working conditions, and a firm stance against child labor and labor exploitation. Additionally, positive interactions with local communities—through community development programs or investments in local infrastructure—can strengthen bonds and promote a more stable and favorable business environment.
For instance, Levi's is known for its worker well-being initiatives, which cover over 180,000 workers in its supply chains. These include visual health programs, such as the partnership with VisionSpring, which provides affordable corrective eyewear, and initiatives for promoting gender equality and career advancement for women in factories.
Veja, a French brand, has also been recognized for its social responsibility efforts. Veja focuses on fair trade principles, ensuring that workers involved in the production process, particularly in Brazil, are paid fairly and work under safe conditions. The company uses organic cotton and wild rubber sourced from the Amazon, promoting sustainable agriculture and supporting local communities. Additionally, Veja invests in local development projects, further contributing to the well-being of the communities involved in their supply chain.
Corporate Governance
Corporate governance within the ESG context emphasizes the importance of transparency and ethics in business operations. Companies that adopt high governance standards commit to operating openly and honestly, ensuring that all activities are conducted in accordance with applicable laws and regulations.
Transparency is not limited to the disclosure of financial information but also includes clarity about internal policies, management decisions, and the environmental and social impact of the company's operations. This approach promotes trust and support from stakeholders, including investors, customers, and the community at large.
Compliance is a crucial aspect of corporate governance, with direct implications for the supply chain. Companies must ensure that their supply chains comply with national and international labor, safety, and environmental protection standards. This reduces the risk of legal penalties and reputational damage, while also improving the quality and sustainability of operations. Effective compliance programs help prevent issues like child labor, forced labor, and labor rights violations, and ensure environmentally responsible production practices.
Stella McCartney is widely recognized for her commitment to sustainability, implementing transparent and ethical practices across all brand operations. The brand is a pioneer in the use of eco-friendly materials and actively promotes sustainable fashion. The company's policy strongly opposes the use of leather and fur, opting for alternatives that reduce environmental impact and support ethical practices throughout the supply chain.
Just like Eileen Fisher, which is known for its focus on sustainability and social responsibility. The brand maintains strict governance, ensuring that everyone involved in the supply chain adopts fair and sustainable work practices. Eileen Fisher is also known for its garment recycling programs, which collect and recycle used clothing to promote a circular economy in the fashion industry.
Challenges and Opportunities
Integrating ESG criteria into supply chains presents several challenges for fashion companies. First, there are the high costs. Sustainable practices may require significant initial investments in technology, staff training, and process restructuring, which can be particularly challenging for small and medium-sized enterprises.
Additionally, transitioning to sustainable materials may face obstacles such as limited availability and higher costs compared to traditional alternatives. Another major challenge is the complexity of global supply chains.
The lack of transparency in extensive and multi-level supply chains makes it difficult to monitor and ensure compliance with ESG standards at all levels. This is compounded by differences in environmental and social laws and regulations across different countries, which can complicate the implementation of uniform practices.
On the other hand, integrating ESG criteria also creates significant opportunities for fashion companies. One is the building of a strong brand and customer loyalty. As consumers become more aware of the environmental and social impacts of their purchases, they tend to prefer brands that demonstrate social and environmental responsibility. This can translate into a competitive advantage and access to new markets, especially among younger consumers.
Additionally, companies that adopt sustainable practices often experience improvements in operational efficiency. This can include reductions in water and energy use, minimization of waste through recycling and reuse of materials, and innovations in processes that can reduce long-term costs. These practices help the company reduce its environmental footprint and result in significant savings.
And last but not least, by adopting ESG practices, fashion companies can also improve their relationships with stakeholders, including investors, regulators, and the general community. This can lead to a more stable and predictable business environment, as well as open doors for strategic partnerships and government incentives focused on sustainability.
Future of ESG in Supply Chains
The adoption of ESG practices is essential for both corporate and global sustainability. Companies committed to these principles tend to enhance their market image, strengthen customer loyalty, and gain sustainable competitive advantages while making a positive impact in the community.
To effectively implement ESG in the industry, supply chains must leverage technology and innovation as key solutions. Technological advancements enable greater traceability and efficiency, ensuring that ESG principles are embedded throughout the supply chain. Continuous pressure from consumers, investors, and regulators for sustainable practices will drive the adoption of these technologies, resulting in more resilient and adaptive supply chains.
