Although good practices related to Environmental, Social and Corporate Governance (ESG) have caught the attention of consumers and public opinion over the past few years, the ongoing Coronavirus pandemic has certainly pushed that trend forward. Throughout the course of the public health crisis, we have seen consumers demanding that companies implement sustainable practices in their business operations, including those related to environmental sustainability, labor and workplace safety, and human rights. In Latin America specifically, this increased focus on ESG represents a good opportunity for attentive companies, as the region has the greatest global demand for ESG investments, according to Natixis Investments.
Today’s consumers are heavily invested in issues pertaining to environmental sustainability, human rights, and other socially relevant topics, such as diversity and inclusion and workplace equality, and they are leveraging their awareness and interest in these issues to push companies to adopt a more sustainable and socially-responsible approach to the way they do business. This consumer pressure impacts in particular the Consumer Goods and Retail (CG&R) industry, where companies interact closely with consumers and must frequently adapt their products to changing social demands. For this reason, companies in the CG&R industry are likely to be significantly impacted by reputational concerns arising from a company’s non-compliance with ESG standards.
In this blog post, we identify three major supply chain trends in Latin America and consider how these trends may have been impacted by the social and economic challenges brought on by the Coronavirus pandemic.
Supply Chain Trends in Latin America
Trend # 1: Traceability – As noted above, consumers around the world are paying more attention to ESG issues, including supply chain sustainability. Growing consumer concern combined with the reputational consequences that often result when major supply chain breaches arise (e.g., the discovery of the use of forced or underage labor to make goods) has motivated companies to increase their own awareness of these issues and implement better ways to trace goods produced in their supply chains.
In Brazil, consumers are concerned that their goods are made by wood that originates from protected areas in the Amazon. This concern has garnered global attention and elicited a global response. For example, in 2019, Norway and Germany cut their funding of the Brazilian Amazon Fund due to the Brazilian government’s failure to reduce forest devastation. Also in 2019, the European Union threatened to stop a trade deal with Mercosul (the South American trade bloc comprised of Argentina, Brazil, Paraguay, and Uruguay) if its member countries did not take more concrete steps to reduce Amazon fires. In addition, European authorities threatened to prohibit the sale of Brazilian products in the region due to the risk that they were produced in the Amazon’s deforested areas.
Tracing the source and origin of goods in a supply chain can be complicated business, especially in larger supply chains that global companies tend to rely upon to run their operations. Although simplifying a supply chain by, for example, reducing the number of distributors and distribution networks, may help companies tackle traceability issues, simplification is not the only answer. Companies should also consider utilizing blockchain technology to track and trace the origin and lifecycle of goods in their supply chain.
For many companies, the Coronavirus pandemic has made traceability more difficult than it already was, especially for those companies in the retail and manufacturing industries that had to turn to new suppliers to keep their business operations going when existing business partners temporarily shut down factories. By bringing on new suppliers, companies expose themselves to new legal and compliance risks and may experience reduced visibility into how their products are made or their origin.
Trend #2: E-commerce – The Coronavirus pandemichas greatly impacted the way consumers purchase their products. E-commerce and direct-to-consumer applications are just beginning to develop in Latin America, and the pandemic has pushed companies to invest more in this growing industry. As consumers have eliminated or greatly reduced trips to the store, they have resorted to purchasing more of the supplies they need online. In some Latin American countries where tougher lockdown restrictions have been imposed, e-commerce development has become even more critical. Companies that already had online purchase services before the pandemic have been pushed to diversify their online products to just about anything one can purchase at a store, and companies that did not use e-commerce prior to the pandemic have had to shift to this type of business model in order to survive.
This growing trend in e-commerce allows companies to reach their consumers more directly without heavy reliance on third-party intermediaries.
Trend #3: Greater ESG Investment – Companies face not only PR and reputational risks when their supply chain partners are involved in environmental and human rights breaches, but also legal and financial harm. Stakeholders (including consumers, employees, shareholders, and NGOs) are increasingly demanding action and transparency from companies around the world. Companies that do business in Latin America are highly susceptible to scrutiny given that the region is frequently affected by environmental issues, slave labor, and corruption scandals.
Consumers and government entities in the region are demanding to see more companies implement steps to reduce carbon emissions. Many companies are responding to this demand by implementing their own carbon emissions goals and demonstrating an effort on their part to listen to consumers—an effort which will likely require companies to redesign their supply chains with this goal in mind.
The social and economic challenges brought on by the Coronavirus pandemic have resulted in shifts in the ESG space that have the potential to create permanent change. As we move into 2021 and beyond, we can anticipate more companies investing more resources in ESG issues in Latin America either on their own, or in direct response to consumer demand.