Role of ESG in Reshoring Manufacturing

Climate change is becoming more widely recognized, and companies are expected to act. Businesses now face growing demands from investors, customers, and regulators to decrease their carbon footprint and be more environmentally responsible.

Industrial emissions account for about 23% of total U.S. Greenhouse Gas Emissions. Greenhouse gas emissions from industry primarily come from burning fossil fuels for energy, as well as greenhouse gas emissions from certain chemical reactions necessary to produce goods from raw materials.

The electronics manufacturing industry is one of the largest energy and resource consumers globally, responsible for about 2% of global greenhouse gas emissions. The production of semiconductors, in particular, contributes significantly to the industry’s carbon footprint due to its reliance on fossil fuels and water‑intensive processes. There are various sources of e‑waste in the manufacturing of electronic goods, for example:

• Inventory / Defects Waste These concepts refer to parts and components that are not suitable for use and must be discarded. This can be caused by inadequate management, inventory expenses, product recalls and defects.
• Transport Waste The transportation of goods and components between factories, distribution centers and customer sites can generate a significant amount of waste. Offshore operations, complex supply chains and robust packaging can represent a large spend for daily production, and bottlenecks, delays and rush orders can cause acute issues.
• Time Waste Expenses and lost time associated with movement of tools and people in production processes, idle or down time of machinery, equipment failures, or bottlenecks and delays.

Waste that negatively affects the environment has been a target of manufacturers for a long time. More recently, industrial companies are feeling pressure to increase their ESG ratings, with Purchasers and consumers alike requesting additional details on companies’ ESG results and goals. In fact, Bloomberg reported a whopping $120 billion invested in sustainibility in 2021.

Naturally, global manufacturers focus on factors that influence ESG ratings, internally as well as within their value chains:

• Environmental Performance This includes factors such as energy and water use, waste generation and greenhouse gas emissions. Efforts include the implementation of energy‑efficient technologies, waste/pollution reduction, and the development of sustainable materials.
• Social Performance This includes factors such as labor practices, employee health and safety, and community engagement. Efforts include promoting diversity and inclusion, ensuring fair labor practices, and engaging with local communities.
• Governance Performance This includes factors such as board composition, executive compensation and ethical business practices. Efforts include establishing ethical standards, improving transparency and accountability, and addressing issues of the compensation gap.

By reducing waste through efficient processes, reshoring operations to North America can help to reduce a business’ environmental impact. The USMCA (United States‑Mexico‑Canada Agreement) puts an emphasis on the cooperation of the North American countries to protect and conserve the environment. The parties have agreed to promote corporate social responsibility and responsible business conduct within their borders by encouraging enterprises “to adopt and implement voluntary best practices of corporate social responsibility that are related to the environment.” It provides for an Environmental Cooperation Agreement with a mechanism for expanding the cooperative relationship on environmental matters, as well as an obligation to establish an environment committee made up of senior government representatives to assist with the implementation.

Supply chain effectiveness is a major way in which manufacturers combat waste. Relocating supply chains closer to home and working on consolidating operations to minimize risks has been an increased focus among manufacturers, evidenced by reshoring data. In Q1 2023, the U.S. gained over 100,000 new jobsin the manufacturing sector from Reshoring as well as Foreign Direct Investment.

The top 4 countries creating jobs with their U.S. investments include Germany (100% FDI), China (90% reshored), Korea (100% FDI) and Japan (100% FDI). An estimated 47% of this investment falls under the electronic equipment manufacturing sector, which includes things like semiconductors and Electronic Vehicle (EV) batteries, as categorized by NAICS.

Read more about the semiconductor industry in North America here, including a list of the $210 billion investment in the United States.

Mexico has been proven a leader in nearshoring investment due to the USMCA affiliation and protection as well as its manufacturing benefits including proximity, cost‑benefit and abundance of semi‑skilled labor, among others. Some of the 2023 investments announced in Mexico include:

The benefits of nearshoring and reshoring extend beyond the obvious environmental advantages. It can also create new jobs in local economies, allow for better‑quality control processes, reduce lead times, and increase agility to meet customer demands. All these factors ultimately result in higher satisfaction from customers, allowing companies to further leverage their ESG initiatives.

ESG factors play a crucial role in reshoring manufacturing due to several reasons:

1. Sustainability: Reshoring allows companies to reduce their carbon footprint by minimizing long‑distance transportation and associated emissions. It enables manufacturers to adopt more sustainable practices and utilize cleaner energy sources, contributing to environmental preservation.
2. Social Responsibility: Reshoring can lead to the creation of local jobs, which positively impacts the economy and reduces unemployment rates. It provides opportunities for fair wages, safe working conditions, and adherence to labor laws, promoting social well‑being. Jobs in North America are especially beneficial to the U.S. economy, evidenced here.
3. Ethical Practices: Reshoring manufacturing allows companies to have better control and oversight of their supply chains. By bringing production back home, organizations can ensure compliance with ethical standards, human rights, and fair trade practices. Reshoring helps manufacturers keep better control over their suppliers, ensuring that these measures are being taken. Transparency is increasingly important, with Purchasers and consumers demanding more details on ESG goals.
4. Innovation: Reshoring allows companies to increase their manufacturing and R&D efforts and develop new “green” products and revenue streams. These initiatives can impact ESG performance in a variety of related industries. Optimizing investment and capital expenditures as ESG efforts are tied to a number of positive business outcomes.

Considering ESG factors in reshoring decisions aligns manufacturing operations with responsible business practices, enhances corporate reputation, and contributes to sustainable development. By reducing waste through efficient processes, reshoring and nearshoring can help reduce a manufacturer’s environmental impact.