What is the Role of ESG in Manufacturing

Which industries lead in ESG?

Many leading companies across industries have committed to pursuing ESG-conscious best practises and initiatives. This essay applies to everyone, not just those in mass manufacturing. Because every manufacturing firm is part of a supply chain, even SMEs are affected.

In addition to automakers pledging to green their cars, big oil and gas companies are stepping up their investments in innovative technologies to achieve net zero emissions and positive climate change. As we’ll see, consumer and investor action are driving them.

ESG supply management is still in its infancy. However, now that ESG investment is ubiquitous, social media has shown how a faulty supply chain can instantly destroy a company’s reputation.

These ESG problems influence near-term large-scale corporate activity. Investing in negative screening your supply chain is as important as investing in human rights. The financial benefits and talent costs enable all industries to benefit from such investments.

Stewardship of nature

Regulatory requirements are one driver of ESG initiatives, but others are gaining importance. The global health crises and growing societal unrest in the previous year have made firms realise that ESG commitment is more important than ever.

ESG includes environmental stewardship. A company’s progress toward diversity, equality, and inclusion (DEI) is also evaluated.

Your manufacturing processes’ influence

With the current global pandemic and changing climate, the ESG imperative is more important than ever. Extreme weather events, excessive carbon emissions, water shortages, and lack of fossil fuel supply are just a few of the major concerns driving company ESG efforts. But there are other reasons to emphasise ESG. Let’s examine four convincing reasons why ESG activities are important in large-scale manufacturing this year, and how technology may help.

Who benefits from ESG investing?

Institutional investors use a variety of ESG criteria to make socially responsible investments. Manufacturing methods, intermediate processes, human capital requirements, and most importantly, raw materials imply ESG investment goes beyond traditional financial issues.

ESG reveals risks

The investment sector is seeking thorough sustainable investing data due to ESG risks. As a result of such investment analysis, banks, ESG funds, mutual funds, and other financial institutions are rewarding firms that have policies and processes that indicate their commitment to environmental, social, and governance aspects.

Buyer expectations exceeded

Purchasers now want more information on ESG goals, not only sustainability. Firms are increasingly asking for details regarding their suppliers’ substantial environmental impacts.

In 2020, large buyers demanded 24% more environmental data from suppliers than in 2019. Many of the world’s most famous brands are now inspired by more than just environmental concerns.

Moreover, according to PWC, younger customers (aged 18-38) are nearly twice as likely as older customers to consider ESG concerns when making purchasing decisions. This demand must be met by manufacturers.

Honesty, openness, and trust!

Transparency about ESG practises is increasingly associated with delivering clear product and manufacturing information to customers. Finished items, whether bespoke or mass manufactured, all have climate change costs.

A single pair of jeans requires numerous materials than denim to manufacture, including tooling, gasoline, and labour. In terms of ESG, each pair of jeans consumes 7,500 litres of water, thus the process must consider the environmental effect.

Consider that customers are also investors in businesses: whether buying a new automobile or a pair of jeans, they prefer to buy products that have a low environmental effect.

Demand for ESG data will rise.

Businesses that do to comply with ESG requirements may face significant regulatory fines. Due diligence legislation is already being discussed for firms in the European Union (EU), and thousands of enterprises in the United Kingdom.

To limit plastic waste, more than 70 nations have passed laws, and 170 have promised to “significantly cut” plastic consumption by 2030.

Note the US SEC’s 2021 announcement of a new ‘Climate and ESG Task Force’ to support their enforcement efforts. This new group will study ways to detect ESG-related misbehaviour. The task force will also look at issues of transparency and compliance related to ESG investing advisors and funds.

Manufacturers and other enterprises will soon be compelled to meet sustainability objectives in order to avoid heavy regulatory fines.

Director duties

The PRI, UNEP FI, UNEP Inquiry, and UN Global Compact have published ‘Fiduciary Duty in the Twenty-First Century’. Failing to analyse all long-term investment value drivers, including ESG issues, is a fiduciary violation, the report says.

Freshfields Bruckhaus Deringer examined the law’s interpretation in regard to investors and ESG issues. Investors can include ESG considerations in their investing analysis, and it may be part of their fiduciary duty.

The evidence linking ESG considerations to financial success is growing, and the combination of fiduciary obligation and widespread acknowledgment of the requirement of long-term investment sustainability has made ESG issues a key focus.

Boardroom and C-suite executives must rise to the challenge

There is rising demand on boardroom directors and C-suite executives of all organisations to make sustainable investments, since worldwide sustainable investment has surpassed $30 trillion USD.

Around 57 percent of CFOs have prioritised ESG efforts since 2020 began, with 23% noting that ESG investments are more vital now than before 2020. The case for convening an ESG task group has never been greater.

Businesses are also starting to relate CEO pay to ESG goals and KPIs (KPIs). This emphasises the necessity for ESG strategy development and implementation, especially in manufacturing.

As of 2016, 45% of FTSE 100 companies integrate an ESG indicator in CEO compensation, meaning executives are rewarded financially for furthering the company’s ESG goal.

The shifting workforce

The “great resignation” and “grey tsunami” have shifted the manufacturing labour force. It is estimated that up to 2.1 million industrial positions would be unfilled by 2030 as a result of the ageing workforce. In the UK, industrial businesses are investing in production automation and other innovative technologies to keep their operations going.

When it comes to employment, millennials choose companies that prioritise sustainability and have ESG goals in place. Indeed, approximately 76 percent of millennials consider ESG commitments when choosing a job. Millennials and Gen Z presently make up 46% of the full-time workforce in the US, but that number is predicted to rise to 74% by 2030.

Companies will need to commit to ESG initiatives to attract and retain talent, especially among the younger generations. For your talent acquisition team to recruit the best, excellent ESG data is required.

Manufacturing, ESG, and technology

Manufacturers will need to adopt new technology to give visibility, traceability, and data for ESG initiatives. Manufacturers can more easily preserve important information about their supply chains, environmental impact, and frontline worker safety thanks to digital technologies like AI, IoT, connectivity, blockchain, and 5G.

Scalable technology will be essential. The four criteria above will continue to grow rapidly. Corporate organisations may better evaluate how their ESG requirements are met by investing in solutions to digitise standard operating procedures (SOPs) used everyday by production line staff. This data may be updated in real time to ensure optimum material utilisation and safety practises are maintained.

A key moment

Sustainability and ESG objectives for firms, particularly manufacturing, is a historical watershed point, which some call an industrial revolution. Developing robust, sustainable, and practical ESG activities supported by proper digital tools and technology will be a given.

Why manufacturers should prioritise ESG

Investors that value ESG norms are growing in size and effect, and our industrial industries are particularly affected. Globally, sustainable investment assets currently total $17.1 trillion, or one-third of all assets professionally managed in the US. This is a 42% increase from 2018. The way we make investing decisions has changed.

Important investors like BlackRock have emphasised the value of sustainable investment to corporations. In his 2021 letter to CEOs, BlackRock’s Larry Fink stated that firms will become more competitive and generate more long-term, sustainable earnings for shareholders if they can demonstrate its purpose in delivering value to customers, workers, and communities.

Fink also referenced BlackRock research showing that “purposeful firms with greater [ESG] traits” will beat their peers in 2020, regardless of size. Investors are now more than ever considering climate-related issues when making investment decisions, and every company’s board must respond.

Manufacturers must set their priorities

Businesses aiming to go beyond “checking the box” on ESG will need to describe their value offer. Identifying their major stakeholders – both external and internal – and understanding their priorities is one example.

Asking the following questions might reveal the company’s level of commitment:

1. Is it our goal to reduce or eliminate regulatory, activist stakeholder, or legal intrusion?
2. Do we wish to receive “green” finance by demonstrating our organisation’s ESG integration and alignment with their investing process?
3. Do we want to establish a long-term plan that focuses on growth and market possibilities while addressing ESG factors?
4. Do we have the tools to match our strategy and business model with ESG goals?
5. Have we created an ESG programme led by the board?

Once a company has determined its value propositions, it can start establishing an ESG programme that aligns with them. To develop buy-in and create a strong tone for ESG across the organisation, executive management and the board should agree on the value proposition.

Decide early on who owns the ESG programme to ensure its success. In industrial/manufacturing companies, the head of investor relations or general counsel often leads ESG integration. We’ve seen CFOs and marketing execs do this.

Some manufacturing companies may also designate a chief sustainability officer, a vice president or director of sustainability, or both.

Making an ESG Plan

The scope of a company’s ESG efforts determines how far along its ESG journey is. Our plan is to cover four subjects along the way:

Exploration and strategy formulation

Analyse existing sustainability programmes, mechanisms for measuring stakeholder interest, and materiality to identify important sustainability risks and difficulties. This phase should produce a road map for the company’s ESG programme implementation and monitoring.

Data management and growth

Identifying the data required to analyse ESG actions. These approaches must be developed specifically for the ESG programme.

Performance tracking and reporting

Monitoring and reporting also includes identifying areas for improvement. “How are we now monitoring our sustainability programme objectives?” the organisation should ask. “Are we disclosing ESG performance to stakeholders in detail?” How reliable are our disclosure controls and processes?

Governing and risk management

Risk management and governance include improving the business’s governance architecture to effectively manage ESG risks and compliance requirements, as well as enhancing internal controls.

We at ESG PRO applaud the World Economic Forum, Worldwide Reporting Initiative, International Integrated Reporting Council, and Sustainability Accounting Standards Board for their efforts to build a global framework for sustainability reporting.

With a complete reporting structure, manufacturers will have less motive to delay ESG reporting while simultaneously fulfilling market expectations for transparency and comparability.

Social responsibility as a resource

SRI requires that the entire production process be optimised for ESG. Human capital management is today as vital to a company’s worth as raw resources and industrial output. A market that rewards risk will decide the production value of completed goods.

This is especially true in large-scale industrial systems involving chemical processing and the usage of raw materials with a poor environmental reputation. The utilisation of certain raw materials will drive to innovation in production, if only to meet the needs of the investment business.

In summary

Risk losing out on an opportunity to position yourself as a leader and jeopardising their ability to communicate a compelling story to investors, customers, and other stakeholders, including current and prospective workers.

This trend is unlikely to alter in the near future as millennials and Gen Z professionals actively seek out organisations with a strong ESG track record. Businesses that reject this perspective may struggle to attract and retain talent in the future.

It’s time to address ESG problems by taking the first step. Manufacturing must assess its processes and implement an ESG programme, such as the one outlined here, to maximise return on investment.