Is ESG in Manufacturing Relevant for Middle Market Companies?

Ed Marsh | Jul 13, 2022

Differentiating Principled Substance vs. Competitive Barriers and Greenwashing

Introduction to SignalsFromTheOP

Guide to episode

  1. ESG is admirable in theory
  2. Enterprise companies, controlled by large activist investors like Blackrock, use ESG for marketing and monopolistic control
  3. In contrast to nice-sounding stories, many enterprises abuse small and medium-size industrial suppliers
  4. Don't chase the ESG fad in your business. Push back on unreasonable demands and honor your vision and values in how you run your industrial company

Transcript follows:

Hi, I’m Ed Marsh. Welcome to this episode of Signals from the OP. Signals is designed to put new ideas and perspectives in front of busy industrial company executives, in brief, easily digestible videos.

The ESG Hype

If you follow the business news you’ve heard lots about ESG lately – environmental, social and governance guidelines for business. You likely get questions from some of your employees, and often questionnaires, surveys or edicts from stakeholders, customers and vendors. So the question at hand is how seriously should you take this trend. Will it impact your business strategically?

The short answer is no. The longer answer is more nuanced and complex. Here’s what I mean. Let’s start with the origin of many of these initiatives. They tend to emanate from groups with good intentions but no practical insight into their application, cost, or relative benefit. Clearly, manufacturing businesses have acted shamefully at times in the past as we know from documented periods of child labor, workplace injuries, polluted rivers, air and ground, and improper labor practices. But no reasonable person seeks to return to those practices, nor inflict the consequences on themselves or their community.

And nearly every reasonable person will agree that reducing carbon emissions, reducing waste in landfills, and increasing reuse and recycling are reasonable goals to which we can each contribute. That’s the innocuous way ESG is promoted, but generally the intent, and therefore the impact, is much more insidious.

Primarily for Activist Investors

In theory, ESG is admirable, but in practice, it’s a form of competitive barrier and a cynical play to consolidate monopolistic power. The primary advocates of ESG are cause-driven organizations that can’t directly impact outcomes. The primary drivers of ESG are large investors – you’ve probably heard a lot about Larry Fink’s Blackrock, State Street, and others – who use financial leverage to dictate participation and “compliance” to companies. The companies in which they invest are naturally the large ones with substantial enough margins to commit resources to the pursuit of some of these lofty-sounding and impractical ideas.

They in turn condition and encourage consumers to demand ESG affirmations without understanding the impact on cost, availability, or even true multi-level impact. But it’s a nice-sounding story of greenwashing. The companies that can afford to invest in these initiatives aren’t the SMBs that provide most employment and produce most products. Rather it’s the enterprises whose management and owners see an opportunity to create market and regulatory barriers to competition that allow them to increase prices and market share.

What About Social Impact on Their Supplier Ecosystem?

Now you may think this sounds cynical. Perhaps you're correct. But it’s also informed. Here’s what I mean. The true measures of a company's ESG commitment and sincerity are first, the way it behaves when nobody “important” will see, and second, its candor in discussing the full complexity of the initiatives it supports. For instance, while GE talked about being a “green energy” company and invested millions in promoting that brand image, we now know that Jeff Immelt flew around the world with a backup private jet. While Starbucks promoted paper straws as a simple fix, it never discussed the additional number that a customer might require to actually make it all the way through a $7 drink. It’s also clear that for many companies ESG is primarily a marketing tactic vs. an ethos. One finds this in the dissonance between how they market in different countries – promoting ideologies in the US and EU for instance but willingly complying with explicit or cultural norms in others. And finally, simple-sounding ideas like cutting out single-use plastic don’t consider food safety, entire product that’s damaged and discarded, shelf life vs. waste and more.

I’ve got a personal perspective on it as well. My work with manufacturers and capital equipment companies is based on my years of activity in the space. In support of that, I run a small legacy business that sells and supports capital equipment. In that context, I keep my fingers in the business to track what’s going on so I’m able to track firsthand the way many of these CPG companies that profess to be pure in intent actually work in practice.

The unvarnished truth is that they abuse SMBs with usurious payment, operational, and contractual terms and practices. It’s common for companies to suddenly stipulate 120 day payment terms; to require that vendors pay to subscribe to expensive proprietary order and invoice processing platforms (and hire extra staff to manage the unique, complex, and unforgiving process for each); to agree to untenable cancellation and pricing terms and more.

Of course an answer to this charge is that vendors can refuse to comply. That’s true. But it’s also true that the there’s essentially an anti-trust type case to make that when Blackrock and others can create blanket requirements for all companies across entire industries, they’re creating a broad market condition which is anti-competitive and deleterious to small and medium-size vendors that innovate and deliver value.

Additionally, many in the F50, 100, 500 and 1000 are as devious in delaying and avoiding payment as insurance companies are in paying claims. Many leverage the working capital of SMBs, carried at high cost to owners, retained earnings and operations, as their own. In other words, with unfettered access to capital and debt markets, and low-cost commercial credit, companies instead foist their burden onto small suppliers. So, while they prance about and preen for the public and investors like Blackrock, and advertise their ESG bona fides, in practice they abuse the very companies that in turn employ most of their customers. It's hypocritical and it’s performance theater.

Don't Chase the Hype - Live Your Values and Resist Usurious Demands from Enterprise Customers

So, here’s my advice to middle-market manufacturers. Don’t get sucked into the game. Surveys show that most consumers support lofty-sounding ideas, but make their choices based on practicalities. So approach these topics from a practical perspective. Honor your vision and values. Support the causes that are important to you because they reflect you and your company’s vision. But don’t get hung up on formal ESG programs as a lower, or middle, middle-market machinery builder. And further, I’d suggest tactically pushing back on the myriad of demands you receive from buyers.

I’m Ed Marsh. Thank you for joining me for this episode of Signals from the OP. If you enjoyed it, please share it and subscribe – either to my YouTube channel EdMarshSpeaks.TV or at the related blog