ESG and how to be a good corporate citizen
Before manufacturers can define their ESG goals in the new year and beyond, it’s important to understand the full scope of ESG and why it’s important
- Understand the full scope of ESG and why it’s important for manufacturers.
- Know the benefits of ESG in practice.
- Learn how to overcome challenges to reaching ESG goals within the manufacturing industry.
- Environmental, social and governance, known as ESG, encompasses the physical environment, as well as an organization’s impact on people and community and its responsibility to be a good corporate citizen.
- By adhering to ESG principles, manufacturers can become better organizations, reduce costs and become more attractive investments.
Over the past several years, manufacturing leaders have increasingly invested in environmental, social and governance practices to reach their goals. There are a multitude of reasons to support ESG principles, but the term itself can feel nebulous to many. Before manufacturers can define their ESG goals in the new year and beyond, it’s important to understand the full scope of environmental, social and governance and why it’s important.
What is ESG?
When people hear the term ESG, they often think about environmental impact. However, it’s important to understand that this is an oversimplification and ESG encompasses much more than the physical environment. It also includes an organization’s impact on people and community, as well as its responsibility to be a good corporate citizen. ESG can be broken down into the following:
- Environmental refers to how an organization is treating the planet. Decarbonization, reducing waste, fuel switching and greenhouse gas emissions can all fall under this category.
- Social refers to how an organization treats its people, including its employees, customers, surrounding communities, stakeholders and more. Issues like diversity, equity and community partnerships would fall under this category.
- Governance refers to whether the organization is acting as a responsible corporate citizen. This category can span from hard-hitting issues like corruption and bribery to whether an organization’s leadership team is representative of the diverse populations it serves. One example of this is the existence of campaigns like the 30% club, which works to boost female representation on all boards and C-Suites globally.
A common analogy that companies should think about is “corporations are citizens and they should act accordingly.” Just as citizens shouldn’t litter while driving or should look to add solar power to their homes, organizations should do everything in their power to protect the planet where they can. And, just as citizens should practice kindness around neighbors, teammates and friends, organizations should treat their people and surrounding communities with respect.
For starters, fulfilling ESG goals can help an organization’s topline growth. In recent years, there has been increasing demand among consumers for ESG-focused products and services, as well as increased interest among investors. This value prop also extends to the ways ESG can help an organization with cost reduction. By reducing costs along the value chain, such as reducing water and energy use, saving on packaging materials or downsizing contribution, achieving ESG and financial goals often go hand in hand. While shifting to a low-carbon operating environment can seem like a massive investment in the moment, the major long-term financial benefits are well worth it. Doing so will set an organization up for success, ensuring that the next generation of plants will be more efficient, more profitable and attract the next generation of workers.
ESG also helps to reduce the risk of making decisions that can negatively affect both internal and external regulatory compliance. The truth is that ESG initiatives create better relationships with regulatory organizations and the community where a manufacturer operates. According to McKinsey, a poor regulatory strategy can put 30% of corporate profits at risk. Actively communicating and delivering on ESG goals will go a long way in ensuring the sustainability of a business.
Internally, ESG also helps to attract and retain top talent. Studies show that Gen Z employees prefer to work for purpose-driven organizations and nearly 71% would even take a pay cut to do so. Overall, there is a substantial upward trend in the value consumers place on sustainable companies that are striving beyond the bare minimum.
The many benefits of ESG in practice
There are numerous examples of the positive benefits of ESG in practice, such as when Samsung produced medical diagnosis cameras by repurposing old smartphones or when Shell developed a renewable gasoline with 20% lower CO2 emissions. Across industries, a decarbonization or energy management plan will lead to long-term sustainability savings. Efficiency-focused Industry 4.0 technologies will create longer-lasting assets, less waste and more efficient operations. This will lead to increased trust from consumers.
At the same time, ESG principles make for a stronger and ultimately more profitable company. With access to more data than ever before, manufacturers can now make more informed decisions about their operations and adhere to ESG principles, helping them become better organizations, reduce costs and become more attractive investments.
From a social perspective, there are obvious benefits to supporting diversity, equity and inclusion initiatives. As the workforce continues to age and retire at an alarming rate, having DEI initiatives in place will prove invaluable for ensuring top talent remains in the workforce. Further, employing technology to aid in operations can help reduce stress and burnout among employees, improving retention.
While most facility managers have access to data that can illuminate the benefits of ESG initiatives — data, which can be wide ranging, from Industry 4.0 tech like “internet of things” — many still have a long way to go in effectively leveraging it. Without data as the foundation of any modernization initiative, future upgrades are not set up to succeed in our current climate. Without increased education and communication around the many benefits provided by ESG efforts — from decreased costs to healthier communities — companies will continue to run into the same, avoidable challenges.
ESG reporting requires diligence and investing in the right software partner can automate this process, creating a single source of truth for all data related to ESG and initiating decision making.
Further, ESG investing requires analysts to review ESG metrics and reporting data from an organization. This is often a subjective process, as the range of factors and metrics across ESG can be large and difficult to summarize, especially without the right software in place.
Finally, we still have a long way to go in standardizing the environmental aspect of ESG. “Greenwashing” continues to be an issue across industries, so it’s important for manufacturers to get really clear on their goals before embarking on a sustainability plan. Seeing a consistent, long-term impact on how an organization uses its resources will require the appropriate planning, team members, resources and KPI tracking.
A good corporate citizen
Again, I’d like to highlight the phrase “corporations are citizens and they should act accordingly.” While it’s true that manufacturers must be profitable, they should not be profitable “at all costs.” Alternatively, being a good corporate citizen — one that helps the planet, its employees and its surrounding neighborhoods — will lead to greater financial gains, increased trust and long-term success.