Why ESG Should Be a Core Focus for Obsolescence Management

For businesses in sectors that rely on the vast, globe-spanning electronic component supply chain, obsolescence management is a rising priority. Both active components like integrated circuits and transistors and passive parts that encompass everything from resistors and capacitors to cables and switches are facing diminishing lifespans and an earlier onset of end-of-life (EOL). A number of factors are contributing to this consequential rise in obsolescence, including stiffer competition within the electronics marketplace and a customer base with an unwavering desire for new products, novel functionalities, and rapid advancements in performance. 

In response to the accelerating rates of EOL in electronic components, engineers and sourcing experts are building out their obsolescence management strategies. Popular mitigation measures now include practicing lifecycle forecasting, identifying form-fit-function (FFF) crosses during component selection, and establishing comprehensive contingency plans for EOL events. What many of these professionals may not be aware of, however, is the growing role the ESG framework plays in obsolescence trends in the sector. 

While sustainability and lifecycle management have long been perceived as distinct categories to be addressed through separate strategic measures, key developments in government regulations, climate-related disclosure standards, and sourcing practices over the past decade are pulling these previously unrelated priorities closer together. And as we move deeper into the 2020s, ESG is going to evolve into an even more pivotal force within the obsolescence landscape. 

What Does ESG Have to Do With Obsolescence? 

Historically, electronic component obsolescence has been driven by a number of factors that have nothing to do with ESG’s environmental, social, and governance pillars. For decades variables like market demand, shifting technological preferences, and supply chain and manufacturing issues exerted the largest influence on EOL events, forcing component manufacturers to issue product discontinuance notifications (PDNs) to customers and ultimately shutter production on a part. (For a comprehensive examination of obsolescence patterns in recent years, download Z2Data’s recent report, Obsolescence Trends in 2024.) 

The current decade, though, is gradually reshaping the driving forces behind obsolescence. Government regulations like the Corporate Sustainability Reporting Directive (CSRD), the Corporate Sustainability Due Diligence Directive (CSDDD), and California’s Climate Corporate Data Accountability Act (also known as SB 253) are going to impose a wide breadth of new responsibilities on businesses. As this spate of new environmental directives start entering into force, firms will need to start prioritizing issues like carbon footprint; Scopes, 1, 2, and 3 emissions; the sourcing and labor practices of their suppliers; and the impact of their entire value chain on habitat loss, biodiversity, and other critical environmental concerns. 

Over time, these regulatory regimes and the new priorities they stand to impose on industries like consumer electronics, automotive, and aerospace and defense are going to change the way companies source and select components and design products. Parts that have a disproportionately large carbon footprint, are mined or produced using ecologically destructive practices, or draw on exploitative labor practices are going to rapidly fall out of favor. In many instances, these sharp declines in demand will eventually trigger obsolescence.

Put more simply, demand is going to plummet for electronic components that aren’t sustainable or otherwise perform poorly within the ESG framework. In addition, increasingly stringent environmental regulations mean that some parts will become noncompliant over the next few years, opening up another avenue to EOL. Manufacturers keen to practice agile, proactive obsolescence management need to learn how to put their parts under an “ESG microscope” to ensure that they’re not building their products with components and subassemblies produced in unsustainable fashions and destined for premature EOL. 

How Businesses Can Incorporate ESG Into Their Obsolescence Management 

Fortunately, there are a number of strategies companies that source electronic components can employ in order to assess their vulnerability to ESG-related obsolescence. As a matter of course, these measures require several of the key tenets of good supply chain risk management (SCRM), including extensive data on parts and suppliers, fluency with the evolving regulatory landscape, and in-depth supply chain visibility.

• Estimate the Carbon Footprint of Parts

Being able to obtain an estimate of the carbon footprint of specific parts is an essential practice for calculating Scope 3 emissions. While less than 40% of businesses are currently tracking their Scope 3 emissions, that figure is guaranteed to climb in the coming years, as new directives enter into force and the public’s expectations evolve for corporations’ environmental reporting. Businesses that have the resources and expertise to calculate the emissions of individual parts will be capable of integrating ESG considerations into their sourcing practices and start filtering out the most inefficient components in their products. 

• Identify Supply Chain Impacts

The EU’s CSDDD, which will be implemented in a staggered fashion over the next five years, requires in-scope businesses to “identify and address adverse human rights and environmental impacts” along their supply chain. But having the tools and resources to locate these adverse impacts can yield benefits that extend beyond EU regulatory compliance. Firms that are able to see the suppliers, factories, and locations that are running afoul of ESG principles can respond and rebuild their value chains accordingly, ridding themselves of tainted manufacturers and reducing their obsolescence risk. 

• Peer Into Sub-Tier Suppliers 

Adhering to ESG’s central pillars goes beyond just shrinking your carbon footprint and developing a climate action plan. The framework’s social considerations are arguably just as important. The EU’s new sustainability regulations—some of which require firms to carry out exhaustive supply chain due diligence—are going to jeopardize the future of suppliers complicit in unfair labor practices, unsafe working conditions, and other forms of worker exploitation. Businesses with the ability to identify and assess their sub-tier suppliers can pinpoint risky entities before regulatory problems put those vendors in a crunch and send their parts into early obsolescence. 

The Risks of Neglecting ESG During Design 

It goes without saying, perhaps, that connecting the dots between ESG compliance and obsolescence management is not a strategy every company is going to subscribe to. Some manufacturers may feel that the risks associated with neglecting sustainability concerns are overstated, and their ESG responsibilities only extend as far as the regulations they’re obliged to adhere to. Such perspectives notwithstanding, there are legitimate hazards that come with ignoring the ESG framework during the component selection and design process. The largest and most pressing of these threats is, arguably, obsolescence itself. But there are other lurking risks capable of hurting companies by hindering their manufacturing continuity, impacting their revenue, and even dampening their growth trajectory over time. 

Companies that don’t adequately vet their suppliers for human rights issues, for example, are leaving themselves vulnerable to myriad supply chain disruptions. Manufacturers that mistreat their employees, operate unsafe working conditions, or are engaged in any form of forced labor are at higher risk of suffering factory shutdowns, falling out of regulatory compliance, or ending up on sanctions lists—all developments with ripple effects on their customers. In addition, overlooking the social pillar can lead to the appreciable reputational harm that comes with being exposed for profiting off of unethical business practices. (Customs and Border Protection’s detainment of thousands of vehicles being imported into the U.S. by Volkswagen earlier this year because of links to forced labor could leave a lingering PR stain on the German automaker.)

Failing to account for the ways supply chain relationships can impact a business’s ESG profile may also have a direct impact on their bottom line. A 2021 study carried out by PwC found that 76% of consumers said they would be willing to stop giving business to “companies that treat the environment, employees, or the community in which they operate poorly.” While some businesses may not immediately recognize the connection between component selection and ethical corporate behavior, the decisions a firm makes around sourcing can communicate a great deal about how they treat “the environment, employees, or the community.” Corrupt or exploitative direct and even sub-tier suppliers can taint a manufacturer in the eyes of their customers, with direct ramifications for their revenue and future positioning in their respective marketplace. 

Mitigating ESG Risk to Effectively Manage Obsolescence 

While the overlap is not always immediately evident today, over the latter half of the decade ESG performance and obsolescence management are going to coalesce to a degree that may surprise many professionals. Electronic components with high carbon footprints and mining and manufacturing processes that adversely impact the environment are at growing risk of being singled out and even stigmatized by a public increasingly attuned to ecological considerations. Components seen as unsustainable or unethical are destined to become undesirable—a fate that will set them on an irreversible path toward obsolescence. And as global regulations raise the standard for supply chain due diligence and supplier transparency, parts originating from manufacturers with poor records on the environment and human rights will carry greater risk of reputational damage, similarly accelerating their path to EOL. 

Companies that are able to identify ESG risks like these in a dynamic, preemptive fashion will have an essential new obsolescence management strategy in their toolkit. Industry-leading supply chain risk management (SCRM) platform Z2Data provides customers with the data and visibility necessary to make these fine-grained assessments. 

The software maintains an exhaustive database of over 150,000 suppliers and other businesses all over the world, including comprehensive profiles that include financials, compliance status, risk assessments, and other details to help customers cultivate humane supply chains and practice sustainable sourcing. Further, Z2Data’s extensive parts database contains carbon footprint estimates for millions of components, a critical piece of data for firms looking to analyze the environmental impact—and thus obsolescence risk—of prospective parts. 

To learn more about Z2Data and its suite of tools for ESG compliance and obsolescence management, schedule a free demo with one of our product experts.