Manufacturing, Distribution, and ESG | Where Do We Go from Here?
Published on by Bryan Gayhart in Manufacturing, Wholesale / Distribution
Environmental, Social, and Governance (ESG) principles are rapidly emerging as a critical success factor for businesses across all sectors – including manufacturing and distribution. Driven by escalating regulatory pressures, increasing investor scrutiny, and evolving consumer expectations, ESG has transitioned from optional considerations to essential elements of corporate strategy – and experts anticipate it will keep getting more complex from here.
Today we’re digging into the profound impact ESG principles are having on contemporary business practices – from what we can learn about publicly-traded companies’ ESG disclosures to what we can do today – and where to go from here.
The backstory
What’s driving the rapidly increasing emphasis on Environmental, Social, and Governance (ESG) considerations? In short: consumers, investors, and regulators.
Consumer demand for sustainability
More and more, consumers are prioritizing sustainably produced goods and services – and they’re applying significant pressure on businesses to adopt environmentally and socially responsible practices. Don’t look for that to let up any time soon, because Millennials and Gen Z are even more tuned in – and their influence will continue to grow alongside their economic influence.
Investors are putting a laser focus on ESG
It’s not just consumer demand – investors are actively considering ESG in their investment decisions – and demonstrating a decided preference for companies that can show strong performance in ESG factors. While that’s not as much of a factor for privately held companies today, consider it a bellwether as you eye future growth.
The regulators – at home and around the globe
Arguably, the biggest driver of ESG adoptions is the rapidly evolving regulatory landscape – and that’s on a global level. Governments worldwide are implementing increasingly stringent regulations with regards to environmental and social challenges:
- EU Corporate Sustainability Reporting Directive
- Germany Supply Chain Due Diligence Act
- California Climate Corporate Data Accountability Act
- US SEC Climate Disclosure
What does ESG compliance look like – and how do we get there from here?
The key to success in ESG compliance? Comprehensive data analysis – and education.
A crucial initial step? A deep-dive assessment of the ESG regulations that apply to your business. That will provide a crucial framework for your action plan, and what you’ll need to report.
Once you know what you’ll need to include in your reporting, data collection and analysis are on deck. You’ll need to collect the relevant data points and translate them into meaningful metrics you can report to your stakeholders. This data-driven approach will give you (and your stakeholders) a clear baseline assessment of where you are with ESG – and what you’ll need to do to achieve or maintain regulatory compliance.
Effective ESG programs focus on continuous improvement. What does that mean? Bottom line reporting on ESG initiatives, and implementing improvement plans. Regular reporting on ESG initiative progress and outcomes to show progress and accountability – and improvement plans that demonstrate commitment to continuous improvement and achieving your long-term sustainability goals.
What are the most important steps to take for ESG compliance?
The most impactful steps for most companies include:
- Strengthening oversight and accountability with leadership and your board of directors.
- Adopting renewable energy sources and embracing energy-efficient technologies.
- Reducing your carbon footprint (think process optimization and cleaner production methods)
- Ensuring fair labor practices and workplace safety.
Initial ESG initiative implementation (say that three times fast) may require significant upfront investments and operational innovations – but the long-term benefits can be huge. Think about:
Cost savings
Optimizing your resource utilization, streamlining processes, and minimizing waste are going to benefit your business anyway – increased operational efficiency and increased cost savings will benefit your bottom line no matter what else you do.
Look better to investors
A strong ESG profile boosts your attractiveness to ESG-focused investors (and as we stated, there are about to be more of those) that can potentially unlock access to new capital resources, improve investor relations, and help you maximize the value of your company.
Stronger brand reputation and more loyal customers
When you publicly demonstrate a commitment to ESG and back it up with facts and new initiatives, you’re significantly boosting your brand reputation, fostering greater trust and loyalty with customers, prospects, and investors, and helping to create a better, brighter future for us all.
ESG – the bottom line
By strategically integrating ESG considerations into their business strategies, companies can not only fulfill their environmental and social responsibilities but also unlock a range of competitive advantages.
Sample manufacturer and distributor ESG disclosures
We examined numerous annual reports across a range of distributors and manufacturers. The overwhelming majority of disclosures are simply acknowledging the increase in ESG regulations and the potential impact on the company.
Here’s an excerpt from Boeing’s 10-K for the fiscal year ended December 31, 2023.
Environmental. We are subject to various federal, state, local, and non-U.S. laws and regulations relating to environmental protection, including the discharge, treatment, storage, disposal, and remediation of hazardous substances and wastes. We could also be affected by laws and regulations relating to climate change, including laws limiting or otherwise related to greenhouse gas emissions. These laws and regulations could lead to increased environmental compliance expenditures, increased energy and raw materials costs, and new and/or additional investment in designs and technologies.
Increasing stakeholder environmental, social and governance (ESG) expectations, physical and transition risks associated with climate change, emerging ESG regulation, contractual requirements, and policy requirements may pose risk to our market outlook, brand and reputation, financial outlook, cost of capital, global supply chain and production continuity, which may impact our ability to achieve long-term business objectives. Changes in environmental and climate change laws or regulations could lead to additional operational restrictions and compliance requirements upon us or our products, require new or additional investments in production systems or product designs, result in additional carbon offset investments or otherwise negatively impact our business and/or competitive position. Increasingly stringent aircraft performance standards and requirements including but not limited to manufacturing and product air pollutant emissions, potential carbon pricing mechanisms, and sustainability disclosure requirements in the U.S. and other jurisdictions may result in increased costs or reputational risks and could limit our ability to manufacture and/or market certain of our products at acceptable costs, or at all. For example, certain jurisdictions including the State of California and the European Union have enacted legislation which would require more stringent greenhouse gas emissions and climate risk reporting.
And here’s what Tesla says
The flip side is Tesla, whose essential purpose is to accelerate the world’s transition to sustainable energy. While they don’t disclose metrics, they have embraced ESG in their disclosures.
The excerpt below is from Tesla’s 10-K for the fiscal year ended December 31, 2023:
We are committed to sourcing only responsibly produced materials, and our suppliers are required to provide evidence of management systems that ensure social, environmental, and sustainability best practices in their own operations, as well as to demonstrate a commitment to responsible sourcing into their supply chains. We have a zero-tolerance policy when it comes to child or forced labor and human trafficking by our suppliers and we look to the Organization for Economic Co-operation and Development Due Diligence Guidelines to inform our process and use feedback from our internal and external stakeholders to find ways to continually improve. We are also driving safety in our own factories by focusing on worker engagement. Our incidents per vehicle continue to drop even as our production volumes increase. We also strive to be an employer of choice by offering compelling, impactful jobs with best in-industry benefits.
The evolving regulatory landscape surrounding ESG underscores how important it’s becoming for all organizations – and what our future will likely be. If you’re considering how ESG will impact your organization and what steps you can take to be ahead of the game, let’s talk. As always, we’re here to help.
