Expert Column Will ESG Management Become the Turning Point in the Logistics Industry?

Logistics is a fundamental business activity required to accumulate corporate value. The logistics industry is a key driver that enables the realization of the global value chain. Therefore, we have to sensitively respond to the global management environment and political/economic situations. Recently, as a global consensus has been made on ‘valuable consumption,’ consuming based on corporate values, awareness is spreading in areas such as production, distribution, and sales: logistics companies should emphasize social and environmental values with producers, consumers, investors, partners, etc.

As the awareness is spreading, the logistics industry, as a main driver of the global value chain, should strategically approach ‘ESG management’ to strengthen the competitiveness in tune with the time. The basic condition needed to strategically approach the global management trend is ‘whether a consensus has been reached for the organization as a whole.’ Furthermore, for this trend to be internalized as a corporate culture, it depends on whether the related management objectives and strategies ‘reflected the consensus of the whole organization.’

Currently, the logistics field is under pressure for a complex change centered on various issues such as ‘environment management,’ ‘sustainable growth and innovation,’ ‘smart logistics,’ ‘supply chain risk management,’ and ‘customer service improvement.’ The logistics industry will face a new turning point by having ESG management as a stepping stone for sustainable management only when the consensus for change is fully reached in the site, and the efforts for change are shown in the organization as a whole. The regulatory consensus for environment management is already complete.

A worldwide consensus is achieved seeking carbon neutrality and sustainable management, and the influence of environmental protection on industries and national competitiveness is increasing. Globally, regulations are being strengthened such as the new climate system Paris Agreement, the EU Carbon Border Adjustment Mechanism (CBAM), Climate-Related Disclosure of the Securities and Exchange Commission (SEC), and the US Inflation Reduction Act. Because of this, passively responding to these regulations is giving a sense of danger that one could be left behind by the changes in global trade and market. Moreover, concerns are widespread that carbon reduction regulations for passenger and cargo transportation such as carbon regulations of the International Maritime Organization (IMO) and Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) of the International Civil Aviation Organization (ICAO) can act as new trade barriers. Therefore, companies, industries, and countries are very active in environmental policies and regulations. In the case of companies, they are increasing the productivity of environmental management through environmental campaigns such as RE100 and ISO environmental management system and are voluntarily participating in establishing market-leading eco-friendly business models.

The logistics industry is actively handling these kinds of market changes by dividing countermeasures into 5 areas such as eco-friendly transportation and conversion of transportation modes.

① Eco-friendly Transportation
From the perspective of energy consumption, transportation is a business field that is directly affected by greenhouse gas (GHG) emissions and carbon neutrality. The main keywords in the transportation sector include GHG reduction, energy efficiency improvement, and air pollution and harmful substance management. Companies’ activities to counter these are conversion to low-carbon eco-friendly transportation modes and optimization of resource use.

② Conversion of Transportation Modes
Changes centered on innovation-based activities including infrastructure establishment and technology development are accelerating in the logistics-transportation sector for the transition of road and ocean transportation modes into eco-friendly ones. According to the Transportation Performance Report of the Ministry of Land, Infrastructure, and Transport, about 99.8% of global cargo volume (1,279,298,631 tons) is processed by ocean transportation, and about 93% of domestic cargo volume (1,926,888,436 tons) is road transportation. To effectively reduce carbon emissions and improve energy efficiency considering the constitutional transportation system, intensive changes are occurring in road and ocean transportation. Road transportation and delivery focused on vehicles are now gradually transitioning into eco-friendly vehicles that use hydrogen, electricity, liquefied natural gas (LNG), etc. Even in the maritime transportation sector, efforts are being continued to develop eco-friendly vessels that run on methanol, LNG, ammonia, electricity, etc., and to increase their operation to achieve carbon emission reduction targets. In addition, it is responding to carbon emission regulations in a way that can be realized immediately, such as installing desulfurization equipment and loading dual-fuel propulsion engines.

③ Optimization of Resource Use
In the logistics site, the most active movement is to reduce energy and carbon emissions by optimizing the use of the existing resources such as reducing blank operation by increasing the load factor of road transportation vehicles through logistics consolidation. This is because this method is the way to increase the efficiency of storage and intermodal freight and fundamentally realize environmental management of storage, loading/unloading, and transportation sectors. In addition, conversion transportation to the ocean and railroad is said to be an alternative to reducing carbon emissions of diesel-based road transportation. This is to reduce social costs by partial conversion as ocean and railroad transportation emit fewer GHGs compared to road transportation.

④ Eco-friendly Packaging, Distribution, and Processing
The waste discharge following excessive packaging has been a representative environmental hindrance. To address this, the use of vinyl, plastics, Styrofoam, etc. is reduced by switching to biodegradable eco-friendly materials for boxes, buffers, tapes, and so forth. Moreover, these have been developed into campaigns that induce customer participation such as the Box Recycling Idea Contest (Samsung packaging material recycling program, etc.), and are spreading corporate social values.

⑤ Reverse Logistics
Reverse logistics including retrieval, returns, and disposal logistics is important in environmental management as it can reduce CO2 emissions through reusing and recycling and solve environmental problems through the reduction of waste resources. Reverse logistics should actively be used to protect the environment with items that are less harmful and can be recycled. It is necessary to expand the logistics functions for realizing the circular economy of resources by linking with waste industries. In addition, the role of logistics should be strengthened by operating a distribution/logistics information-linking platform to prevent a waste of resources and create additional profit through revitalizing the resale of exchange and return items.

Environmental management became a vital element in the logistics industry following the worldwide consent on environmental protection. In turn, major government and logistics companies are systematically responding by concretely setting short- and long-term goals to protect the environment including fine dust, greenhouse gases, and energy reduction.

Social (S) and Governance (G) are Voluntary but Essential Areas. In the logistics industry, responsibility and practice are mandated for environmental management following the regulations on climate change at the global level and implementation of carbon-neutral policies by governments. On the other hand, companies are leading strategic responsibility and practice in the fields of social (S) and governance (G). An inevitable consensus has been reached regarding the necessity of environmental management. However, the need for creating social values and establishing/operating healthy governance is in a transition stage where the organizational agreement is spreading. This is because it is difficult to quantify the goals of social (S) and governance (G) areas as well as the performances compared to the environment (E) area. Providing the organization’s goals and real performances into specific figures is clarifying the direction of the organization as a whole. This, in turn, boosts employees’ motivation to work and creates productive results. Therefore, in the social (S) area, the focus of companies’ efforts lies in creating values that can be quantified such as the employment type, age group, and the number of members. In the governance (G) area, the performance of transparent and ethical management is quantified with major promotion activities, such as the establishment of the ESG Committee, the ESG management implementation review meeting, and the number of reviews on internal transactions following the Monopoly Regulation and Fair Trade Act. For the social (S) and governance (G) areas to be promoted flexibly, diversification is necessary by reflecting the organization’s short- and long-term visions, business directions, cultures, and characteristics. Furthermore, it is essential to have a shared agreement from the organization as a whole on this.

<Social (S) · Governance (G)> Safe jobs and human rights management are major keywords in the social area that are gaining the spotlight in the logistics industry. It is important to actively gather common opinions on reducing the frequency of safety accidents and improving working environments using the adoption of ESG management as an opportunity. To do this, it is appropriate to start from actual places such as the regional community and logistics sites, use supply chains centered on cooperation, and expand social values. For example, create a cooperative ecosystem including all the related partners and focus on support and cooperation of organic connection so that all the stakeholders in the supply chain can understand and comply with the social responsibility.

The efforts in the social (S) and governance (G) areas enhance the stability and transparency of management. Ultimately, they could lead to various performances including the strengthening of competencies in the logistics industry and companies through coexistence with local communities, resolution of chronic safety accidents, work environment improvement, expansion of corporate values, and so forth. The strategies of social (S) and governance (G) areas may be used as an important area that enables companies’ sustainable management by strengthening organic cooperation with linked industries, companies, and local communities. Furthermore, companies’ social responsibility (S) and governance (G) are no longer selective elements as the ecosystem of ESG management is expanding throughout the global supply chain. Therefore, obligatory consensus should be achieved about working for the social (S) and governance (G) areas together with efforts for environmental protection.

The necessity of environmental protection is mandated with regulations, and companies’ efforts for environmental management are now essential. Companies’ social responsibility became the standard for strategic investment as a means of sustainable growth, and transparent governance requires companies’ voluntary participation as a discourse of current social demands. Although decisions are different for the urgency and necessity of each area, a consensus is formed on ESG that it is an ultimate effort for industries and companies’ continuity. Based on this common consensus, ESG management will be a new turning point in the logistics industry if ESG areas are organically integrated and managed.

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