In today’s highly competitive market, manufacturers may want to consider adopting environmental, social and governance (ESG) initiatives. While doing good may be its own reward, these sustainable manufacturing processes and ethical business practices may also produce financial benefits.
What are ESG Initiatives?
In simple terms, these initiatives focus on three areas:
- The environment component considers your company’s impact on the environment, including the energy it uses, the waste it produces and the resources it consumes.
- The social element examines your business’s relationships with people, communities and institutions. It may include fair labor practices, workers’ health and safety, and diversity and inclusivity.
- Governance includes policies, practices and procedures your company adopts to govern itself. Considerations include business ethics, openness and transparency, legal compliance, executive compensation, supply chain management, data protection, and product quality and safety.
Many people believe that to be a good “corporate citizen,” it’s important to recognize the impact of your company’s activities on the environment and the people it interacts with — and to implement business practices that minimize any potential adverse effects.
Do ESG matters really matter?
Your manufacturing business may be facing pressure to adopt ESG practices from multiple fronts. Many customers (particularly younger ones) are increasingly considering ESG issues — particularly sustainability, environmental impact and fair labor practices — when making purchasing decisions.
Similarly, a number of influential investors are making ESG performance a priority when deciding how to invest their capital. Stakeholders may be interested not only in your company’s ESG record but also in the records of your suppliers and other business partners.
Moreover, some governments around the world are prioritizing ESG practices. Failure to comply with laws or regulations related to environmental issues (such as pollution and carbon emissions), social issues (such as labor relations, worker health and product safety) and supply chain issues (such as the use of conflict minerals and human rights violations) can lead to fines, remedial costs and reputational damage.
In addition, governments may impose ESG standards on the companies they do business with that go beyond what the law requires. This can place additional pressure on manufacturers that rely heavily on government contracts.
Changes in the labor force are also having a significant impact. Manufacturers are facing a growing “skills gap,” which requires them to compete for a shrinking pool of talented workers. And because younger workers are more likely to consider a potential employer’s ESG practices in deciding where to work, ESG initiatives may provide companies with a competitive advantage.
What are the benefits of ESG practices?
Adopting ESG practices may produce significant financial benefits, including:
Higher sales.
Some customers are considering ESG practices in making purchasing decisions. Some may even be willing to pay more for “green” products.
Reduced costs.
Focusing on sustainability can help companies identify ways to reduce their energy consumption, streamline their supply chains, eliminate waste and operate more efficiently. ESG initiatives may also help companies avoid the costs associated with government intervention and liability concerns, such as product liability lawsuits, recalls or boycotts.
Improved access to capital.
ESG initiatives may provide companies with access to low-cost capital. Some investors consider ESG issues when choosing companies to invest in. Plus, companies that implement ESG considerations may be perceived to be lower-risk investments.
Greater ability to attract and motivate talented employees.
According to consulting firm McKinsey, “a strong ESG proposition can help companies attract and retain quality employees, enhance employee motivation by instilling a sense of purpose, and increase productivity overall.”
ESG reporting
To take advantage of these benefits, you likely want to communicate your ESG performance to customers, investors, business partners and other stakeholders. Many companies today are combining ESG information with financial performance data in an integrated report.
Contact us at 330-453-7633 to learn more about how ESG practices may benefit your manufacturing company.
