The big picture: The rapid emergence of environmental, social and governance (ESG) mandates from around the globe is requiring companies to collect, organize and report new types of data in new ways; many are not ready.
Why it matters: Manufacturing and distribution (M&D) companies are behind other industries in their data management capabilities, and they need to catch up – fast.
The bottom line: Organizations should define their ESG strategy, connect stakeholders across the value chain, and implement enabling technology to support data capture, analysis, management and reporting.
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Stakeholder demands and a rapid expansion of ESG reporting regulations across all industries have created heightened awareness about climate- and people-impacting business activities, and a fair amount of anxiety among executives who are facing pressure to provide ESG data to a variety of parties, whether or not they have the infrastructure to do so easily. Due to the unique nature of ESG data, some of which is not even inside the organization, firms across all industries are climbing a steep learning curve.
For M&D companies, which historically have under-invested in data management, the challenge is even steeper. But they certainly sit in the spotlight: According to a report by the Intergovernmental Panel on Climate Change, nearly one quarter of greenhouse gas (GHG) emissions (24%) came from the M&D industry, while the energy, transport and building sectors accounted for 34%, 15% and 6%, respectively.
To date, M&D companies have viewed ESG through the lens of efficiency, risk mitigation and voluntary reporting. This may no longer be enough. As policymakers, regulators, investors and customers insist on greater insight into the sustainability endeavors of organizations, M&D companies face mounting pressure to identify, collect, verify and disclose “regulator-grade quality” ESG data from both inside and outside the organization – and to use that data to show they are moving the needle on sustainability.
Which Recent Developments Affect M&D Companies?
The short answer is, virtually all of the recently passed regulations may be of relevance for M&D firms – especially if the organization has a global footprint, which many do. The Corporate Sustainability Reporting Directive from Europe affects EU-based companies, and certain non-EU companies as well (more here). The European Financial Reporting Advisory Group (EFRAG) is planning to develop sector-specific sustainability reporting standards, which will include M&D sub-industries. While regulators in the United States have moved slower than their counterparts in Europe in passing climate-related legislation, California recently passed two broad-reaching laws, and the Securities and Exchange Commission is expected to act before the end of the year to issue a rule for listed companies.
All of these regulations refer to Scope 1, 2 and 3 emissions data and require at least limited assurance over the reporting, meaning expectations for data accuracy are high. Additionally, many jurisdictions around the world have requirements beyond emissions that must be similarly reported (e.g., labor and modern slavery laws).
Even if a company falls between the regulatory cracks, it should not ignore the business case for making progress on and reporting its ESG performance – to win and keep the trust of its investors, shareholders, customers and employees.
Where to Start?
According to the report cited earlier, “reducing industry emissions will entail coordinated action throughout value chains to promote all mitigation options, including demand management, energy and materials efficiency, circular material flows, as well as abatement technologies and transformational changes in production processes. Light industry and manufacturing can be largely decarbonized through available abatement technologies (e.g., material efficiency, circularity), electrification (e.g., electrothermal heating, heat pumps), and switching to low- and zero-GHG emitting fuels (e.g., hydrogen, ammonia, and bio-based and other synthetic fuels).”
With so many options, the first step is to determine what goals the company needs to set, the correct metrics to monitor meeting those goals, and what data will be needed to feed those metrics. M&D companies vary widely – from those that harvest and turn raw materials into products, to those that recycle, resell, ship or distribute them – and the data each company needs to collect and use to tell its story will be uniquely tied to its operations.
For example, firms whose operations depend to a greater extent on trucks, ships and airplanes to transport raw materials and goods will likely look to their standard profit-and-loss measurements such as fuel consumption, vehicle hours and miles, and labor as input for their ESG reporting. But to obtain data that’s actionable toward goals, they will need to consider more granular logistics components such as optimum load weight for fuel consumption, where and how efficiently products are offloaded, what percent of the time trucks are travelling at capacity or empty, and a number of other factors. They will also need to calculate how much of the weight of their products and materials contributes to emissions of third parties to whom they convey loads for transport, and they need to establish a two-way data exchange with their vendors and contractors, who likely need to report similar information themselves and to other partners (though what is material to each may differ).
Additionally, distribution-heavy organizations must consider how industry-specific hazards –decarbonization policies, higher rates of workplace injury and illness, and the scarcity of skilled labor, to name a few – create material risks for the company.
If It Sounds Complicated, It Is
M&D organizations tend to be more data-challenged than other industries that have long been subject to regulatory scrutiny, such as healthcare or financial services. Without good data management tools, retrieving reliable reporting information is difficult, as is organizing it to tell a candid and clear story that demonstrates a company’s ESG progress and compliance.
What’s more, different stakeholders will require different data with different levels of privacy, meaning a system must be able to segment and deliver only the relevant data. At the same time, organizations must ensure that the data they are providing does not tell one story to one audience and a conflicting story to another.
Where the Opportunities Lie
Despite the challenges outlined above, M&D companies are in a position to seize this moment and demonstrate rapid improvement in their ESG data capabilities by doing the following:
- Create an enterprise ESG strategy integrated with IT, data and operations in a holistic way
- Connect data owners and stakeholders across the value chain focusing on diverse target metrics and data details while maintaining data security
- Understand the ESG technology market and implement technology to improve ESG data collection
- Connect internal stakeholders with external data owners and standards-setters to enable more efficient progress tracking, reporting and compliance
It is also worth recognizing where the M&D sector has unique strengths and to use those:
- Investments in capital improvements and operational efficiencies have resulted in ESG-related benefits, which can be quantified.
- Supply chain compliance in multiple jurisdictions – including organization controls, labor and supplier audits – is another source of data.
- Recent pivots regarding fuel costs, materials shortages, packaging needs, customer demands and labor shortages can serve as a springboard for ESG improvements.
Change Is the Constant
As the ESG regulatory environment takes shape, stakeholders will ask more nuanced questions about ESG performance and the data behind it. ESG reporting vendors are cropping up to assist in this effort – from established software platforms adding ESG components to entrepreneurs providing bespoke data solutions – but the market is very much in flux. M&D organizations must be strategic, deliberate, and flexible in response to regulatory changes and increasing demands for data that will inevitably mark the next few years. However, the data and reporting investments put in place today should pay dividends well into the future – not just from a compliance perspective but also for building a more resilient operation, and a better world.
