Behind All The ESG Virtue Signaling, There’s A Real Opportunity For Manufacturers

Every company you’ve ever heard of suddenly has a 43-part plan to create social awareness, enhance sustainability, and, just
just
maybe, save the planet – otherwise known as the recently ubiquitous acronym ESG. Soon, they’re implying, all our climate and social problems will be a thing of the past. In the meantime, go ahead and cue the applause.

Sigh. These claims make me feel tired mostly because, once you’ve looked past the virtue signaling, they’re often full of hot air. In truth, most companies are trumpeting their environmental, social, and governance promises – not practices – because it’s what they believe people want to hear—companies that talk the sustainability talk.

But what consumers actually want is companies that walk the walk. And that’s the opportunity I see for manufacturers.

No More False Starts

After three years of the pandemic, geopolitical upheaval, and social unrest, whether you like the acronym or not, ESG seems set to impact every aspect of the manufacturing value chain. Operations: The Securities and Exchange Commission drafted new ESG reporting requirements for publicly traded companies last year, meaning climate impact data could be made public and fines levied for transgressions in the future. Talent: Almost 90% of employees prefer to support or work for companies that care about the same issues they do. Sales: 76% of consumers say they won’t do business with companies that treat the environment, employees, or the community in which they operate poorly, according to PwC.

“After two ‘false starts’ in the past two decades, this time ESG seems like it’s here to stay. Society and what matters to consumers has fundamentally changed in the past few years. It’s no longer about maximizing shareholder value at the expense of everything else,” Sharjeel Kashmir recently told me. He is President of the largest angel investors network on the East Coast, the HBS Alumni Angels of Greater New York and specializes in ESG. “People, ethics, climate, and profits must now all be considered in the new bottom line. And the companies that ignore this do so at their peril.”

It’s clearly time to go beyond greenwashing and start making things differently and making different things. Here are three practical ways that manufacturers can do that.

Use Industry 4.0 Technology To Do Double Duty

I’ve often written about the imperative for American manufacturers to modernize production with advanced technologies like AI, sensors, cobots, and automation. This technology is essential to boost competitiveness, profitability and attract the best talent. It can also be used to enhance ESG.

Take the example of National Safety Apparel (NSA), an Ohio company that makes safety clothing. It uses advanced computing software to lay out pattern pieces in the best possible way, so the least amount of fabric is wasted. “The software takes millions of iterations in a matter of minutes and determines the best way to fit all the pieces that go into a garment, like a jigsaw puzzle, together,” describes Sal Geraci, Chief Operating Officer at NSA. “And by investing in that technology, we improved our yields by anywhere from three to four percent, which doesn’t sound like a lot, but it has a significant impact.” An impact not only on costs, but also on sustainability by reducing waste.

Since 1.92 million tons of textile waste is produced every year, imagine if every apparel company used this technology. Industry 4.0 has immense potential to do double duty – increasing profits and increasing sustainability. Sensors help factories increase machine efficiency on the production line and reduce fuel consumption. Automation can increase profits and employee safety. If manufacturers look for opportunities to use technology to simultaneously improve the bottom line and advance ESG, it will make significant Industry 4.0 investments even easier to justify.

Use ESG To Boost Innovation

Major shifts in consumer behavior create major opportunities for innovation. And that’s already happening in the manufacturing start-up space. Kashmir has seen a recent increase in pitches from new companies where ESG is front and center. Like a “slow fashion” apparel company that’s making durable athletic clothing, made in America, from sustainable fabrics in sustainable factories. The clothing is also made on demand to limit inventory waste.

“Manufacturing startups are not only innovating what they make, but how they make it,” Kashmir says. “And they’re focusing on sectors where consumers are willing to pay a premium to support the planet. The lesson in this for established manufacturers is to find ways to do the same thing. Particularly small companies can have a real advantage here because they can move quickly, pivot, and get more grants to support innovation and technology investment.”

The starting point is to look at how ESG can be a competitive advantage, rather than a burden or PR exercise.

Use Your Supply Chain To Boost Resilience And Sustainability

For many years, our impulses have been to cut costs by any means necessary, finding the cheapest suppliers in the cheapest regions. And look where that got us – unable to buy toilet paper, cars, or iPhones after supply chains imploded during the pandemic and the Russia-Ukraine war. As we unknot the supply snarls and try to build more resilient, safer supply chains closer to home, there’s also an opportunity to make these supply chains more sustainable.

Nearshoring production and suppliers can reduce geopolitical risk and can also be more sustainable and ethical. For example, it can require less fuel to ship goods, and provide more opportunities for oversight into how people are treated in factories.

Two-thirds of executives believe a sustainable supply chain can be a competitive advantage. And we’re already seeing that. In the U.S., there was a 34% jump in companies like Nike
NKE
and Walmart
WMT
asking their suppliers for environmental data. With large, publicly traded companies anxious to reach environmental targets, we’re eventually going to see more smaller manufacturers locked out of supply chains if they can’t produce carbon emissions and other data. That creates risk for slow movers and an opportunity for those who more rapidly invest in digitizing supply chains. Digitization improves traceability and reporting – which can incidentally also boost efficiency and better supply chain management. Another win-win.

There’s a real business case here – ESG can help combat rising operating expenses (such as raw-material costs and the true cost of water or carbon), which can impact operating profits by as much as 60 percent. There’s also an equally strong do-the-right-thing case. But here’s the reality. Almost 99% of American manufacturers are small businesses. That means it will likely be years before the regulators force them to do anything on ESG, since the focus is on publicly traded companies. Any pressure in the near-term will come from consumers and large manufacturers trying to green-up their supply chains.

So, small manufacturers can easily coast along and ignore ESG. However, that approach will eventually catch up with them. The reality of the three things I’m suggesting is that they’re all things manufacturers should be doing anyway – investing in technology, innovating, and rebuilding resilient supply chains. If we simply add an ESG lens and look to create win-wins, manufacturers can get ahead of the pack and become more competitive. That’s good for profits and good for the planet since manufacturing accounts for almost one-fifth of U.S. greenhouse gas emissions. The bottom line? Let’s jump before we’re pushed.