How manufacturers can meet the ESG challenge

As factories digitize their operations and supply chains, they must accelerate ESG tracking and measurement efforts to maintain competitive advantage

Manufacturers must digitize their operations and supply chains to accelerate ESG compliance efforts.

When it comes to environmental, social, and governance (ESG) objectives, just about every company now feels a need to up its game. Investors increasingly factor ESG metrics into valuations. Regulators are looking at them more closely than ever; and a growing number of consumers and employees expect companies to measure their ESG impact.

Yet fewer than half of executives have a formal ESG program in place, according to a September 2021 survey by corporate governance advocacy organization Open Compliance and Ethics Group. Companies need a way to track and measure ESG progress. That’s especially true for manufacturers, which face ongoing headwinds from the global supply-chain crisis. Digital workflows can help manufacturers collaborate with suppliers and gain insight into their own ESG efforts.

ESG reporting incentives are clear

Investors in ESG funds want more transparency around performance data. Nearly 90% agree that companies that prioritize their ESG objectives are positioned to produce higher returns over the long term. Add to that incentive the more than 200 new ESG regulations that came into effect around the world in 2020, and the willingness of customers and workforces to sacrifice financially to support ESG initiatives, and the message to companies is clear: Please do more.

Suppliers play a critical role in ESG goals

Manufacturers face some unique challenges to improving ESG performance and its measurement. For one thing, they tend to face significant regulatory scrutiny relating to their labor standards, use of natural resources, and environmental impact.

Manufacturing accounts for almost one-fifth of U.S. greenhouse gas emissions, so compliance is essential. Some manufacturers are embracing the circular economy—designing products that can be made more efficiently, used for a longer period of time, and recycled back into their own supply chains. But transparency is an issue: many manufacturers struggle to track ESG compliance among their suppliers.

To execute on ESG goals, the entire supply chain must be aligned to deliver results. Today, only 19% of companies in the manufacturing sector share carbon-emissions numbers from their suppliers—likely due in part to the difficulty of tracking them. And because data on their efforts is so hard to come by, ratings agencies have a hard time quantifying progress against ESG goals across the supply chain.

Digital workflows support manufacturers’ ESG compliance

Digital workflows can help manufacturers improve ESG performance by quickly identifying ESG objectives, ensuring they were achieved, and then measuring the effects for desired impact.

Recording ESG objectives at each stop in the supply chain, passing down spreadsheets, and waiting for data is too slow. Dynamic tracking using automated tools integrated with other systems, on the other hand, allows data to be easily distributed and shared between supplier and manufacturing, helping to fast-track efforts to meet ESG goals.

Manufacturers can do a better job of demonstrating ESG compliance by switching to dynamic, digital workflows that let them track compliance in real-time across their supply chains. On the whole, the supply chain could use a digital boost. McKinsey research finds only a 43% digitization level in the average supply chain, with hardly any executives surveyed giving it importance.

Still, some companies are leading the way. Airbus, which works with 12,000 suppliers, is in the midst of digitally optimizing its procurement and management processes to foster better ESG compliance. Siemens makes use of a digital tool to provide early warnings of potential ESG risks across its 65,000 suppliers.

Going deep into their supply chains to make sure Tier 1 and Tier 2 suppliers use sustainable components will be a significant strength of manufacturing companies in the long-term.

Just take a look at Ford Motor Co., which works with its suppliers to help them implement carbon-cutting measures. By the end of 2021, Ford’s suppliers were on pace to reduce carbon emissions by a half-million metric tons while also saving the H2O equivalent of 837 Olympic-size swimming pools.