Environmental Impact of Reshoring
What is ESG and Why Does It Matter?
Environmental, social and governance (ESG) is a framework used to assess an organization's business practices and performance on various sustainability and ethical issues. It also provides a way to measure business risks and opportunities in those areas. In capital markets, some investors use ESG criteria to evaluate companies and help determine their investment plans.
While sustainability, ethics and corporate governance are generally considered to be non-financial performance indicators, the role of an ESG program is to ensure accountability and the implementation of systems and processes to manage a company's impact, such as its carbon footprint and how it treats employees, suppliers and other stakeholders. ESG initiatives also contribute to broader business sustainability efforts that aim to position companies for long-term success based on responsible corporate management and business strategies.(1)
ESG is important because it helps identify and manage risks, improve social responsibility, enhance long-term sustainability, meet stakeholder expectations, navigate and comply with regulations, and improve access to capital. The figure below is a simple recap of the three pillars of ESG, and some of the constituents of each pillar.
Figure 1: Three Essential Pillars of ESG(1)
Author’s Note: There are mountains of articles on ESG, but for the sake of providing a short overview, we turned to a great article written by Sandra Mathis at Microsoft, published in TechTarget – see the footnote for the link!How HermitCrab Applies ESG to Reshoring
HermitCrab takes a very positive view towards ESG, because reshoring makes every element of ESG better, simply by reshoring manufacturing into the abandoned shells of empty factories that were shuttered during the offshoring heyday. We will use the 3 Pillars analogy to break this down further.
Environmental Elements of ESG
HermitCrab sees the environmental benefits of ESG to be the best case for reshoring. Using the six constituents of the environmental pillar, some of the benefits of reshoring, and the occupation of abandoned factories, are shown below.
Figure 2: The Environmental Pillar of ESG
Energy Usage and Efficiency: China and India dominate the consumption of lignite coal, the least efficient source of energy, with a dramatically negative impact on the environment. Reshoring to the US allows manufacturing to occur in plants whose energy is provided by renewables, nuclear power, natural gas, or in the worst case, clean burning coal.
Climate Change Strategy: Reshoring supports this strategy, as the occupation of abandoned factories provides an indisputable climate change benefit that is important for shareholders, consumers, and regulatory agencies.
Waste Reduction: Relocating manufacturing to the United States from any other country almost certainly reduces the amount of product waste, for no other reason than our regulatory and governance processes will enforce better reuse and recycling of waste.
Biodiversity Loss: HermitCrab’s intention to reoccupy old factories eliminates the need for massive projects that strip the land to prepare for a new manufacturing facility. The best way to reduce biodiversity loss is to not lose any more biodiversity! Move into what already exists versus cutting down trees and leveling the landscap to build a building from scratch.
Greenhouse Gas Emissions: As stated in a previous article, just the idea of reshoring production to the United States will generate a 90% plus reduction in greenhouse gas emissions through the elimination of at least two transportation nodes, shipping from an Asian plant to the port, and ocean freight across the Pacific Ocean.
Carbon Footprint Reduction: the carbon footprint impact of constructing a new manufacturing site from a greenfield site can be safely estimated to be 25 to 30 megatons of carbon for a 300,000 square foot facility on five acres of land. One can argue that a new building can be built to be more sustainable, but the annual savings will never exceed the initial sunk Carbon Footprint over a 20-year period.
Social Elements of ESG
The Social benefits of ESG emphasize the benefits to workers and the community. If we remember the adage that every new manufacturing job creates two related jobs for others, the Social Element of ESG drives massive benefits for the US. A few words on all seven elements are shown below:
Figure 3: The Social Pillar of ESG
Fair Pay and Living Wages: HermitCrab’s philosophy and value proposition states that manufacturing jobs should pay above minimum wage, and that no manufacturing job should pay less than jobs in the fast-food category. We plan to factor in at least $20 per hour as a starting hourly wage, plus benefits for all workers within HermitCrab factories.
Equal Employment Opportunity: If jobs are restored to the US, then it follows that Equal Employment opportunities will be offered as provided for under federal and state laws.
Employee Benefits: In the same way that HermitCrab plans to provide a solid wage, competitive benefits are a must and will be offered accordingly.
Workplace Health and Safety: Can anyone with knowledge of the manufacturing space successfully argue that Asian factories are healthier and safer than American factories? Of course, that is a rhetorical question.
Community Engagement: A significant side benefit of the reoccupation of abandoned factories is the accompanying increase in community engagement and revival. It is a dream of HermitCrab that there will one day be many small towns brought back to life because of reopened factories employing hundreds of workers.
Responsible Supply Chain Partnerships: Every HermitCrab product will require inbound raw materials or subassemblies and outbound transportation to customer warehouses or export facilities. Every supply chain tied to HermitCrab will employ responsible practices.
Governance Elements of ESG
The third pillar of ESG, Governance, is the riskiest of the three pillars. Shifts in Federal or State laws and/or environmental regulations can “kill the baby in the crib” by forcing burdens onto reshored manufacturing that HermitCrab customers did not face in the offshore countries currently making those products. In fact, Governance in general is hard to apply to reshoring manufacturing, because the company buying offshore products leaves most governance issues at the exporting country’s shoreline. Nevertheless, benefits exist and should justify the move, including:
Figure 4: The Governance Pillar of ESG
Corporate Governance: Reshoring manufacturing allows for corporate governance methodologies to be applied to products that are now being manufactured within a HermitCrab factory. This governance may come in the form of treating the factory like an internal asset or treating HermitCrab the company as a third-party supplier. Either way, corporate governance provides better oversight and adherence to the other elements of the Governance Pillar of ESG.
Risk Management: Risk management is the one, if only, element of ESG that might be worsened through reshoring. The buyer of an imported product has no responsibility for risk management challenges from their supplier. They simply receive the goods and move on.
Compliance: Similar to corporate governance above, compliance is made easier when the manufacturing is done onshore, either by a HermitCrab managed company asset, or HermitCrab providing products as a third-party supplier.
Ethical Business Practices: Bribery and corruption are commonplace in many offshore countries. This issue is virtually eliminated by reshoring.
Avoiding Conflicts of Interest: Based on the HermitCrab business model gamma once HermitCrab assumes full responsibility for product manufacturing, they act as a third-party supplier and the concern of conflicts of interest is eliminated.
Accounting Integrity and Transparency: Generally Accepted Accounting Principles (GAAP) ensures better accounting transparency then you will get from an offshore manufacturer. With the possible exception of the strangulating regulations of the European Union, no other country in the world requires more accounting integrity than the US.
Conclusion
Every American company, and every HermitCrab prospect, already has a fantastic marketing story to tell around reshoring manufacturing back to the US and providing jobs to workers and restoring communities around the nation. This alone is a compelling reason to carefully consider moving manufacturing back to the US. But now, with the emergence of ESG, companies that are producing products offshore can quickly come to a financial, regulatory, an ethical justification to move manufacturing back to the US. Rarely in the history of industrial manufacturing has an opportunity come along that allows a corporation to look good and do good at the same time.
Thank you for Reading!
The emergence of ESG, especially over the last 10 years, provides either a carrot or a stick, depending on the HermitCrab customer, to reshore manufacturing back to the US. There's never been a better time to “do the right thing” and help American workers and communities simply by following ESG principles.
Come back tomorrow for Day 11: Technological Advancements: Leveraging emerging technologies for improved operations. The technology advances of the last decade make reshoring even easier!
Thanks for reading,
The HermitCrab Team
Footnotes:
(1) Sandra Mathis, (Microsoft) https://www.techtarget.com/whatis/definition/environmental-social-and-governance-ESG
