How Manufacturers Can Get Ahead Of The Game On ESG

The term environmental, social and governance (ESG) is now firmly embedded in the language of business. Over the last two years, while the pandemic has disrupted lives and industries, the pressure on organizations to prove they’re helping address key environmental, societal and governance issues has rapidly intensified.

That pressure is coming from multiple directions. A recent study by communications firm Edelman found 58% of consumers now buy from companies that share their beliefs, and 60% of employees choose a workplace based on mutual values. Elsewhere, Bloomberg reported a record $120 billion invested sustainably in 2021, while federal and state regulators increasingly require organizations to comply with stringent ESG-related targets – from carbon emissions to gender-equal pay.

This, of course, is entirely as it should be. The environmental, social and ethical challenges humanity faces are significant and urgent, meaning organizations across sectors must play their part in solving them. However, this is also more than just an exercise in “doing the right thing.” In a recent article on Business Fitness, former Unilever CEO Niall FitzGerald once said that ESG is a vital part of any company strategy, “not because it is a nice thing to do or because people are forcing us to do it … but because it’s good for business.”

The E, the S and the G

This combination of moral duty and long-term value creation provides a compelling reason for manufacturers to lean into this changing landscape and accelerate their ESG efforts. But how? What must they do to start meeting and ideally exceeding the expectations of an ever-expanding group of highly invested stakeholders?

First and foremost, they should consider exactly what ESG means in the context of their industry and their organization. So, for the E, yes, it will almost certainly involve shrinking their climate footprint and cutting carbon emissions throughout their value chain. But it will also come down to having an energy-efficient infrastructure, avoiding natural capital depletion and better managing waste – all the way from the shopfloor to HQ.

The S, meanwhile, includes societal fundamentals like promoting diversity, addressing economic inequality and tackling discrimination. But more broadly, it requires manufacturers to actively protect human rights, labor relations and employee safety across every aspect of their operations and supply chain.

Finally, in the case of the G, it means behaving ethically as well as being open and transparent in their decision-making at a board level and across the C-suite. It also relies on having the right escalation protocols, risk tolerances and compensation policies at every site, everywhere.

A fast start

As for the second question – the ‘”how?” – there’s obviously no single silver bullet solution. Each company and each issue will require a nuanced and, most likely, evolving response.

But in nearly every case, it begins with manufacturers assessing the materiality of the E, the S and the G to their business and using those insights to develop strategies to improve performance. These strategies can then be aligned to clear organizational goals featuring quantifiable metrics and backed up by the data and assurance capabilities necessary to accurately track their progress.

Crucially, this progress (or lack of it) must be communicated honestly and regularly. Often, independent third parties like the Dow Jones Sustainability Index and the MSCI will already be doing so. Consequently, manufacturers shouldn’t wait for regulators to mandate them to report their ESG performance. Rather, they should take the chance to start fast and get ahead of the game now.

Alignment of intent

Communication is a way to build trust and engagement among their community of stakeholders – from their people, customers, and shareholders to partners, regulators and policymakers. It will also help ensure everyone is aligned on the ESG risks in play along with how best to manage them.

For example, if a components maker is employing child labor, depleting natural resources or becoming overreliant on fossil fuels, this impacts the ESG performance of the entire ecosystem. And the whole ecosystem must demonstrate the intent and skill to rectify things, most likely led by the manufacturing company at the center of it. Discussions with stakeholders should therefore be constant and free-flowing, experiences must be shared and any potential issues flagged quickly so they can be acted upon together.

As a large-scale employer and one of the biggest contributors to the nation’s GDP, there’s little doubt that by bolstering their individual and collective ESG performance, manufacturers can have a hugely positive impact on the health of the planet and the fairness of society, not to mention their own ability to lead in the future. ESG is now a core part of doing business. For the manufacturing industry, this brings both responsibility and opportunity.

The views expressed by the author are not necessarily those of Ernst & Young LLP or other members of the global EY organization.

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