The shortage of personal protective equipment (PPE) in the U.S.—which has exacerbated the COVID-19 crisis across the country—is likely to continue in a second wave of the pandemic. It has also exposed supply chain vulnerabilities in the process, namely, the reliance on foreign countries to produce the overwhelming majority of specialized PPE, such as N95 masks.
While imported PPE can make sense for cost minimization in normal times, the penny-wise dependence on imports during a prolonged pandemic has proved pound foolish and has caused incalculable human and economic losses. But even as domestic manufacturers ramp up production of PPE, the U.S. will face significant public health and national security risks because the extent of manufacturers’ supply chain reliance on foreign countries is unknown.
In a new study published in the Journal of General Internal Medicine, we found that the three largest PPE manufacturers in the U.S.—3M, Honeywell International, and MSA Safety—have not disclosed any basic supply chain information, not even in their annual sustainability and corporate citizenship reports. The companies’ disclosures to the Food and Drug Administration have included only the locations of their manufacturing facilities, without data on the production quantity in each facility or the magnitude of their supply chains’ dependence on foreign countries.
Several bills have been introduced in Congress to address the vulnerabilities of the PPE supply chain. These bills focus on mandatory reporting of supply chain information to the FDA, assessment of supply chain weaknesses, and requiring items in the Strategic National Stockpile to be made in the U.S. These bills, however, have neglected a powerful force in changing corporate behavior—investors.
In recent years, environmental, social, and governance (ESG) investing has gained substantial traction as a measurement of corporate sustainability and social impact. The Securities and Exchange Commission’s ESG subcommittee has recommended that publicly traded companies disclose material ESG information.
However, it is unclear what ESG really means or how we hold CEOs accountable for the ESG promises they make. In the May 27 ESG subcommittee update, nine items were listed as examples of the social focus of ESG: weapons, alcohol, gambling, support for organized labor, practices forbidden by a faith, human rights practices, supply chain labor standards, consumer protection, and animal welfare. Amid growing calls from ESG investors to incorporate into the criteria the economic and human impact of COVID-19, the SEC should add public health and national security to this list.
In addition, private ESG rating agencies, such as MSCI and Vigeo Eiris, should incorporate supply chain vulnerabilities for public health and national security risks into their ESG scorecards. The rating should be based on how much of the company’s PPE products are manufactured at home versus overseas. For products created overseas, the rating should factor in the country’s Defense Department–assessed risks to U.S. national security. The ratings should also consider to what extent the companies depend on foreign suppliers for crucial raw materials and ingredients.
Furthermore, rating agencies should monitor and assess individual PPE manufacturers’ disclosure efforts. Two of the largest PPE manufacturers, 3M and Honeywell, are members of the Business Roundtable, a group committed to serving all community stakeholders. To protect stakeholders like health care workers, senior citizens, and the broader public, 3M and Honeywell (as well as all PPE manufacturers) should take steps to reduce their supply chains’ dangerous dependence on foreign countries and release metrics to prove their progress. Doing so will enable companies to rapidly expand domestic production and reduce our national security risk when the next public health crisis hits home.
Making essential supply chain information public would immediately empower market participants, including activist investors, some of whom are ESG investors seeking positive social and environmental impact. Market participants have the means, motivation, and track record of successfully changing corporate behavior. Investors committed to ESG cannot afford to look away from vulnerabilities that threaten public health and national security. Neither can companies afford to lose their most important source of capital—the trust of customers, employees, and society.
Ge Bai is an associate professor of accounting at Johns Hopkins Carey Business School and an associate professor of health policy and management at Johns Hopkins Bloomberg School of Public Health.
Tinglong Dai is an associate professor of operations management and business analytics at Johns Hopkins Carey Business School.
Shivaram Rajgopal is the Kester and Byrnes professor of accounting and a Chazen senior scholar at Columbia Business School.
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