It is possible: ESG and decarbonization for manufacturers

Although more than two thirds of Canadian manufacturers (69%) have an ESG strategy and 66% factor ESG into both their budget planning and supply chain management, 63% say they’re struggling to figure out how to reduce their carbon footprint and 62% say their business and/or leadership isn’t ready (e.g., lack of willingness, technology, financing, etc.) to transform to achieve net zero emissions. While globally the greatest barrier to achieving net zero or similar for manufacturers is the complexity of decarbonizing their supply chains, in Canada, manufacturers say it’s the cost of decarbonization (30%).

63% of Canadian manufacturers say they’re struggling to figure out how to reduce their carbon footprint

62% of Canadian manufacturers say their business isn’t ready to transform to achieve net zero emissions

Transforming your operations to become more sustainable is achievable, especially if you start with engaging the board and c-suite to create awareness and commitment. Equally important is solidifying your 'why' including identifying and prioritizing the material ESG and climate risks for the business, their associated costs, and any gaps in proactively managing them. Next, identify initiatives and opportunities to address risk management gaps. Leverage ESG data from across your operations to dive deep into what can change and how those changes will impact your business, people, technologies, processes, and bottom line.

You also need to evaluate your current talent. Does your organizational structure support an integrated approach to ESG, and do you have the right people, skills and expertise positioned across your organization to make meaningful progress? Ensure you engage and leverage the in-depth knowledge of your operational and frontline people including sales, engineers, and buyers, who have a first-hand view of how the company can improve across the E, S, and G pillars.

To help address decarbonization, engage finance and operations teams to analyze the impact of alternative approaches (e.g., renewable energy, vendor realignment, etc.). HR, marketing, and other departments should also weigh in on the impact to employees and customers.

The critical part of getting started is not letting perfect be the enemy of good. If you’re struggling to craft your ESG strategy, take small, iterative steps – and build momentum.

There is growing pressure from regulators, investors, and customers for manufacturers to develop decarbonization transition plans. The transition to net zero emissions requires consideration of a wide range of critical ESG issues.

1. Understanding the scope of decarbonization is your first step. Decarbonization efforts must be woven into your organization’s operations and align with and enable enterprise strategy.
2. Next, determine your current baseline greenhouse gas inventory. Perform a diagnostic of your carbon footprint on an individual asset level (buildings, vehicles, equipment, etc.) and identify primary sources of emissions.
3. Define what your future state should look like and the incentives that exist to get you to your decarbonization vision and targets. Analyze any gaps in your decarbonization vision from the current state, identify quick wins and longer-term initiatives to address main emission sources, and pinpoint which decarbonization projects are eligible for incentives.

Lastly, conduct a scenario analysis and assess potential pathways to net-zero. Tools such as KPMG’s decarbonization methodology can help you assess these scenarios and pathways.

Setting emission reduction targets, and reporting these, along with other ESG and climate targets and initiatives, are increasingly being seen as minimum business requirements. Transitioning to low carbon operations is an opportunity to safeguard your license to continue operating in the long-term.

Canadian manufacturers that do not make low carbon transition efforts and investments in the short term are unlikely to meet stakeholder expectations in the medium or long term, which can lead to challenging outcomes including:

• Higher cost of and/or difficulty in raising financing.
• Inability to recruit and retain the best talent and the workforce of the future.
• Greater financial risk from the impacts of climate change.
• Exposure to regulatory risk and/or litigation.
• Harm to shareholder value if faced with greenwashing claims, government sanctions, criminal actions, or reputation damage from lack of ESG and climate action.
• Risk of losing preferred supplier status with customers.
• Lagging behind peers.
• Not sustaining the business model to take advantage of new, innovative products and technologies.

The days of storytelling are over

Many manufacturers believe they need to present a strong ESG and climate narrative to meet key stakeholder needs. At the same time, both Canadian (59%) and Global (46%) manufacturers say they struggle to articulate a compelling ESG story.

But manufacturers should not be concerned with telling compelling ESG and climate stories. Instead, the focus should be on presenting relevant ESG and climate related metrics and targets, and year over year performance to meeting targets. Be sure to provide relevant context to any data disclosure, incorporating data as a tool for telling a broader ESG and climate narrative. ESG and climate reports can run the risk of "greenwashing" by emphasizing the good stories, while avoiding the challenges, gaps and limitations that exist. A balanced and fair public disclosure approach is best.