The Capital Markets Can Help Heal the Supply Chain
(AP Photo/Mark Lennihan, File)
The Capital Markets Can Help Heal the Supply Chain
(AP Photo/Mark Lennihan, File)
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A focus on short-term profit maximization helped create the current crisis. Long-term investor focus can help solve it.

Most people didn’t think much about the global supply chain until that day early in the COVID-19 pandemic when we all seemed to run out of toilet paper and other essential products.  In the two years since, supply chain constraints have emptied grocery store shelves and raised prices on everything from parsnips to pickup trucks.

COVID exposed the downside of that everything-on-demand economy,but the vulnerabilities of globalized, just-in-time supply chains have been building for decades as both inputs and finished products spent as little time in inventory as possible.  As long as nations worked together to smother economic volatility, companies were able to eke out every last ounce of efficiency from their supply chains, juicing profits.

But we have entered a world where the new status quo is an adversarial U.S.-China relationship, ongoing pandemics and epidemics, the escalating use of sanctions, and labor shortages.  It is increasingly difficult for states to backstop the ultra-efficient global supply chain predicated on market-based cooperation. 

Indeed, we’re beginning to see the other side of the trade-off between efficiency and resilience.  Globalized, just-in-time supply chains have left our economy susceptible to crippling bottlenecks and inflationary spikes.

In this new world, bringing supply chains home is the best way to control inflation, rebuild our diminished industrial base, and ensure that American consumers and firms have sustained access to the products they need.  Crucially, innovation occurs where production occurs.  If we want to maintain our place on the technological frontier and thereby our strategic independence, it’s imperative that we invest in production at home.

The capital markets can help play a critical role in the process, and investors are increasingly attuned to this need for supply chain resilience.  Since supply chains with fewer vulnerabilities and better redundancies can be expected to outperform during periods of supply chain stress, shareholders should demand that companies reinforce their supply chains and bring them home.  Resilience is key to sustainable returns

But shareholders should also construe corporate responsibility more broadly to include jobs, security, and economic growth.  Academic research shows not only that companies with more secure supply chains experience superior and more sustainable returns during a shock, but also that companies that are most supportive of their workforce generate significant outperformance.  A focus on job creation here at home, and on the security and stability of supply chains, is good for American communities and for investors’ portfolios.

But to catalyze change, investors need better information.  The environmental, social and governance (ESG) movement has been enormously successful at incentivizing corporations to make rich disclosures on their ESG activities and impacts.  Such disclosures are routinely analyzed by asset managers and incorporated into allocation decisions.  Investors should similarly demand data on the locations of companies’ workforces, suppliers, processors and customers, so that they can better plan for the next global shock.

This new disclosure movement should be driven by demands from investors and analysts who can appropriately reward strong disclosure practices, while holding companies without appropriate disclosure accountable.  After all, you are best able to improve what you measure, and more measurement is likely to result in more secure supply chains.

Investing in our supply chains can help address inflation and keep the U.S. on the technological frontier.  Shareholders can, and should, reward corporations for doing so. The sustainable investing movement has significantly changed capital markets in recent years, rewarding climate-friendly corporations with lower costs of capital.  It’s time we understood that supply chain security is just as important a form of sustainability.  By rewarding companies for their investments, shareholders can work in tandem with industrial policy to onshore manufacturing and improve the resilience of the U.S. supply chain, enhancing U.S. jobs, security, and growth.

Stephen Miran served as a senior advisor at the U.S. Department of the Treasury from 2020-2021 and is a founder of Amberwave Partners, an impact investing firm focused on U.S. jobs, security and growth.

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