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How manufacturers can solve the ESG puzzle: transformation, implementation, and sustainability

02 November, 2021

Cara Haffey

M&A Deals Partner, Private Business leader for PwC Northern Ireland, PwC United Kingdom

+44 (0)7809 551517

Email

Environmental, social, and governance (ESG) criteria are increasing the standards by which investors, customers, and would-be employees assess potential engagement with your organisation. It makes sense, therefore, to track progress. And on at least three measures, UK industrial manufacturing and automotive (IM&A) firms are faring well.

Asked what steps companies are taking to measure and prioritise ESG elements in our most recent UK Manufacturing Operations Pulse Survey: November 2021, the response and findings show that 81% of UK manufacturing operations leaders are significantly focusing on energy efficiency. Similarly, 76% identified health and safety aspects of products, and 74% on diversity and inclusion. These numbers are encouraging and compare favourably with those of global peers.

One word, however, is conspicuous by its absence from this list: sustainability. Less than a quarter (24%) of UK respondents identified it as a business priority. Should that worry us? Yes. Although there is some positive activity in the year of UK COP26, the latest United Nations climate summit, which means that manufacturers are focused on changing their organisations.

Energy efficiency addresses part of the sustainability puzzle. Whether it is driven by cost saving or an environmental imperative, reducing energy usage has long been part of a manufacturer’s investment criteria. The purchase of a new piece of machinery or the design of a new engineering process has long been measured across the life cycle, not simply on upfront capital costs.

Elsewhere in our survey, 70% of UK respondents said a growing demand for sustainability topped their list of operational impacts. That compares with 53% globally. That demand is coming from a range of stakeholders, not least from customers. The fast-tracked introduction of electric vehicles is illustrative of consumer pressure in the automotive sector, while greener chemicals and green hydrogen is indicative of pressure elsewhere. In October, meanwhile, global cement makers committed to cut greenhouse gas emissions by up to 25% by 2030. And they have committed to reach net zero by 2050 without offsetting emissions.

While awareness matters, it doesn’t always guarantee activity. When the Brexit deadline loomed, we encountered organisations that knew what was coming but were failing to act with sufficient speed. Perhaps we are seeing something similar here, particularly among those across the supply chain – think Tier 2 and 3 suppliers – that might lack the resources to devote to ESG implementation, reporting, and measurement.

One word, however, is conspicuous by its absence from this list: sustainability. Less than a quarter (24%) of UK respondents identified it as a business priority. Should that worry us? Yes. Although there is some positive activity in the year of UK COP26, the latest United Nations climate summit, which means that manufacturers are focused on changing their organisations.

UK COP26 offers a key staging-post for the sector. The governance and legislative decisions that flow from Glasgow will shape action for years to come. Wherever you are on your ESG journey, it’s worth thinking of adoption as a three-pronged process:

1. Alignment

Treat ESG as a transformation project, one designed to deliver radical and responsible change. Develop a company-wide strategy that is clearly understood by leadership and employees alike. End-to-end buy in is essential.

2. Implementation

Draw on existing operational acumen to implement the business model reinvention and innovation required to get your organisation to net zero. A fair transition should be front of mind, ensuring the creation of opportunities – and benefits – for all.

3. Measurement

Defining and embedding key performance indicators (KPIs) and industry benchmarks are essential for tracking progress. Essential, too, in order to embed trust through greater transparency and accountability.

Manufacturing firms are well-placed to take on these tasks. Project management at scale is a core expertise across the sector while most are accustomed to defining KPIs whether as a means of measuring production floor efficiency or monitoring engineering targets. It is business-as-usual applied to transformational change.

And when it comes to sustainability, transformational thinking is required before it becomes business-as-usual. It is perfectly possible, for example, to provocatively argue that the current microchip shortage could be mitigated if we created products that were reuse or recycle-ready, making the retrieval of valuable parts more practical or cost effective - a circular economy mindset, if you like...

UK COP26 offers the perfect opportunity to reset ESG thinking – not just the ‘e’ for environmental but the ‘s’ and ‘g’ of social and governance. Strategy and ambitions should be translated into clear objectives. The KPIs that follow will help measure progress and inform business priorities. Any ESG strategy worth pursuing must be both specific and comparable across industry and the economy as a whole. The goal, after all, is long-term sustainability.

Cara Haffey

M&A Deals Partner, Private Business leader for PwC Northern Ireland, PwC United Kingdom

+44 (0)7809 551517

Email

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