Over the past few years, ESG reports and investments have gained popularity as global issues like climate change worsen and the relationship between companies, consumers, and employees evolves. Edelman recently reported that 58% of consumers now buy from companies that share their beliefs and 60% of employees choose a workplace that aligns with their own values. ESG best practices have an impact on stakeholders, including consumers and employees as well as executives, and are becoming increasingly important. But what is ESG, and why is it important to the manufacturing industry?
What is ESG?
ESG stands for Environmental, Social, and Governance. ESG is considered to be the corporate version of sustainability and refers to sets of quantitative standards relating to positive impact. Companies can create their own ESG reports (also called sustainability or impact reports) which outline their goals and procedures for issues relating to those three pillars. According to Niall FitzGerald, the former CEO of Unilever, ESG is an important component of 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.”
ESG has also become a popular investment term as well. In this context, it refers to a lens for evaluating potential investment decisions from outside stakeholders. For some investors, ESG can also be seen as an indicator of potential risk. ESG investments can signal long-term stability because they address business sustainability aspects such as energy independence, climate change mitigation, and worker well-being.
ESG is a new enough concept that there is minimal standardization. ESG is often divided into three pillars but can cover many different areas and metrics within those pillars, including but not limited to:
- greenhouse gas emissions
- habitat and ecosystem impact
- waste disposal
- water usage
- circular economy
- human rights
- supply chain transparency
- data privacy
- workplace safety
- diversity and inclusion
- corporate leadership
- anti-corruption measures
- political engagement
- global standards
- sustainability reporting
ESG Reporting Guidelines
There are no set guidelines when it comes to ESG reporting. However, there are plenty of best practices and standards, especially for companies. Companies can base their ESG framework on reporting recommendations from organizations working to standardize international reporting such as the World Economic Forum, Sustainability Accounting Standards Board (SASB), Task Force on Climate-Related Financial Disclosures (TCFD), and Global Reporting Initiative (GRI). While at this point reporting is still fairly open-ended, ESG Reports are often published alongside Annual Reports mandated by the US Securities and Exchange Commission (SEC), and soon the SEC may mandate ESG disclosures as well.
In 2020, the World Economic Forum developed 21 core metrics for ESG reporting in partnership with IBC, Deloitte, EY, KPMG, and PwC. They are categorized into 4 pillars that align with the ESG framework (with an added pillar for economics and fiscal sustainability): Principles of Governance, Planet, People, and Prosperity. Principles of Governance line up with the Governance of ESG, Planet covers environmental topics, People covers social issues, and Prosperity covers metrics such as rate of employment, economic contribution, and taxes paid.
When it comes to ESG investments, third-party evaluators analyze company activity to determine whether they meet certain criteria to be considered part of an ESG fund. Because of its gaining popularity and the fact that outside parties could assign ESG scores without their input, many companies are deciding to go ahead and address ESG themselves ahead of any mandates. It is in a company’s best interest to be thorough, accurate, and honest. ESG reports can and should include areas of improvement and an actionable plan for making change. For example, a company may highlight current waste generated in their manufacturing process and outline steps for reducing waste through services such as excess inventory recycling.
ESG in Manufacturing
The global manufacturing industry is enormous. In the United States alone, manufacturing accounts for 11% of the country’s GDP and 33% of its annual energy consumption. Adopting techniques like green manufacturing can have a big impact on ESG aspects not only in the industry but for the entire world. The amount of waste associated with manufacturing is also enormous and can be easily mitigated with waste management, recycling, and overstock reuse policies in place.
In the manufacturing industry, ESG should be considered for the entire supply chain to accurately measure a company’s impact. Recently, supply chains have been a popular news topic as climate change and global events have disrupted the manufacturing industry. Just as ESG can be an indicator of stability for company performance, it can also be a risk management tool for supply chains because it can signal long-term efficiency. Important supply chain ESG issues include energy independence and fair working conditions. Measuring waste and overstock supply
ESG Going Forward
ESG will only continue to become more important. According to a poll from the Manufacturer’s Alliance, 94% of sustainability leaders said there was an increased interest in ESG from c-suite, boards, and investors over the last 3 years. ESG is not just an ethical construct, but also a viable risk management strategy.
If your company has not developed an ESG report, now is the time to start. By analyzing environmental, social, and governance impact, your company can set a path toward economic success and stability while improving your footprint in the world. ESG is more than just environmentally and socially good – it’s good business. What is your company’s ESG impact?