We must stay focused on ESG investments

Redwood Comment
Published:  18 January, 2023
Credit: TH2I Shutter Rich/Shutterstock.com

Mike Redwood discusses the need for the global leather supply chain to continue investments in ESG despite rising costs.

Despite the most challenging global environment in living memory, a lot of individual tanners are doing surprisingly well. While still busy complaining about the situation, many have been incredibly astute and fleet of foot in adapting to complex ever-changing circumstances.

The apparent end of cheap money after three decades adds an additional layer. As the 1990s began, much of the world assumed that globalisation, capitalism (with an emphasis on the 70s idea of shareholder-dominated capitalism) and democracy were the inevitable future. This view strengthened as China became more integrated into world trade. Hopes were high, defence spending was reduced in many countries and companies became rich by moving aggressively to low labour cost locations.

Supporting all this was an era of cheap money and easy access to credit. The financial crash (2008-09) was a big interruption but, with policies such as quantitative easing, low-interest rates continued. Democracy in the west was damaged as groups who had lost out to globalisation and blatantly greedy capitalism looked for new types of leaders who could express their discontent. Elsewhere, governments indicated a lack of interest in shifting further to what they defined as failing “liberal democracy”.

Rising interest rates

And now, interest rates are rising, and the cheap money is disappearing. The net result means that managing existing debts and finding money for investment has already become more expensive. This at a moment when tanneries already need more cash in hand to handle unexpected volatility in all manner of costs and to put more room in their supply networks to handle disruption in the availability of essential items.

Disruptions that might arise because of weather, war, industrial strikes, Covid or even a big container ship getting stuck in a canal. In a global industry network, weird outcomes from shortages on the other side of the world cannot suddenly arise. It’s not surprising that resilience gets mentioned so often as an essential requirement.

So, if more cash is going to be needed to fund existing levels of production, will thoughts of expansion, investment in equipment and the movement towards greater environmental, social, and governance (ESG) improvements be in peril? Let us hope not as, at this moment, the leather industry cannot afford to relax its progress towards enhanced growth and profitability.

Fortunately, many tanners have been steadily investing in new plants and equipment throughout this century, perhaps aided in the long term by the rude reminder in 2008 of the need to maintain a strong balance sheet. There are two other aspects here that the sceptical see as expensive ESG initiatives.

The first is that, when it comes to tannery machinery investments such as new drums, they mostly offer savings such as major energy savings, reduced water usage and quality reliability gains that are now well understood and measurable. The return on investment can be accurately predicted and the long-term benefits are huge. The search for new ideas must be relentless; current technologies do offer a reliable route forward.

Waste and by-products

The handling of waste and by-products fits into this scenario. There are many proven routes to creating energy from waste that again offer sensible, reliable investment timelines and long-term benefits.

While there is no significant evidence that consumers will pay more for sustainable products, it is worth noting that there is a growing trend of consumers, investors and regulators becoming more aware of the importance of ESG issues. Companies are already under more pressure to improve their ESG performance to meet these expectations; the longer a tanner delays, the greater the cost will be.

There is a lot of new funding available in individual countries and regions, and for some areas of the global South, to aid recovery from the pandemic which offers financial aid in such projects. For emerging markets, UN climate change programmes should also help. Many developments are also suited to collaboration with suppliers, other tanners and occasionally with nearby companies with similar objectives.

Since further growth in the leather industry, in what we now term the global South, will clearly occur, it must be a positive development and not regress by ignoring waste treatment and other environmental issues. It is astonishing how many common effluent treatment plants have been built without consideration of the management of solid wastes, and where the local tanners have been unwilling to pay the eventual running costs.

With the proper investment, one could largely handle the other. Indeed, in many parts of the world, if tanneries and their communities made full use of renewable energy – wind, solar, geothermic and ground source – they could produce energy in excess of their requirements, making it easier to handle energy-intensive aspects such as the removal of common salt from the ultimate wastewater streams or building very large reed bed solutions.

It's worth noting that the success of these efforts will depend on a variety of factors such as the level of political will, the level of support from other stakeholders and the capacity of the local industries. But, if governments want good jobs from which they can collect tax reliably, the leather industry demands a modern industry that makes responsibly with the workforce and the environment front of mind the cost of money should not be the barrier.

Mike Redwood

mike@internationalleathermaker.com

Follow Dr Mike Redwood on Twitter: @michaelredwood

Publication and Copyright of "Redwood Comment" remains with the publishers of International Leather Maker. The articles cannot be reproduced in any way without the express permission of the publisher.