In recent years, ESG (Environmental, Social, Governance) criteria have become a key component in assessing the performance and sustainability of companies.
As we will see in more detail later in the article, they represent a set of metrics that measure an organisation's environmental impact, social commitment and quality of governance. Unlike traditional financial indicators, these criteria offer a broader and more comprehensive view of corporate management, allowing long-term value and stakeholder welfare to be taken into account as well.
In the manufacturing sector, the integration of ESG practices takes on even greater relevance, given the resource-intensive nature of its activities. Indeed, manufacturing companies are often among the largest consumers of energy and natural resources, and contribute significantly to greenhouse gas emissions and waste generation. At the same time, these companies are at the centre of global supply chains and bear a crucial responsibility in protecting human rights, working conditions and ethical governance.
Let's take a closer look at how manufacturing companies can adopt responsible ESG practices to reduce their environmental impact, improve social conditions and enhance transparency and business ethics. In addition to reducing risk, these strategies offer opportunities to enhance corporate reputation, increase investor and consumer confidence, and ensure long-term competitiveness.
What are ESG criteria
ESG (Environmental, Social, Governance) criteria are a set of parameters used to assess a company's overall impact in environmental, social and governance terms.
In detail:
- Environmental: refers to how a company manages its impact on the environment, such as reducing carbon emissions, efficient use of natural resources and waste management.
- Social: refers to the company's impact on people, including working conditions, employee health and safety, human rights and commitment to local communities.
- Governance: assesses how the company is managed internally, in terms of transparency, ethics, board structure and shareholder relations.
ESG criteria are increasingly important today, not only for investors seeking to support sustainable companies, but also for the companies themselves, which can benefit in terms of reputation, stakeholder trust and long-term performance.
ESG challenges in the manufacturing sector
The manufacturing sector faces significant challenges in implementing ESG criteria due to the intensive nature of production processes and the complexity of global supply chains.
These challenges can be grouped into three main categories, which correspond to the above parameters:
- environmental;
- social;
- governance.
Let us delve deeper into these three aspects together.
1. Environmental aspects
Manufacturing is one of the sectors with the greatest environmental impact, both in terms of energy and natural resource consumption and in terms of emissions and waste generation.
Companies are called upon to reduce their carbon footprint by improving energy efficiency and switching to renewable energy sources.
The management of industrial waste and water resources represents a further challenge, as many production processes generate waste that is difficult to recycle or treat.
Moreover, environmental regulations are constantly evolving, pushing companies to constantly review their policies to remain compliant and reduce the risk of penalties.
2. Social Aspects
From a social perspective, the manufacturing sector has a duty to ensure fair, safe and healthy working conditions for its employees. Many production facilities present physical and operational hazards that require strict safety controls.
Managing diversity and inclusion is another major challenge, as the sector tends to be dominated by an undiversified workforce.
Moreover, manufacturing companies are often at the centre of complex global supply chains, where the risk of human rights violations and unethical labour is high.
Ensuring good working conditions along the entire value chain is essential to meet ESG criteria.
3. Governance aspects
On the governance front, challenges include the need to improve transparency and accountability in business practices.
Many manufacturing companies operate in countries with different and, in some cases, weak regulations, which can increase the risk of corruption or unethical practices.
Companies must therefore implement robust governance systems that ensure compliance with local and international regulations, compliance with ESG standards and effective management of stakeholder relations.
Moreover, effective governance requires a diverse and long-term oriented board of directors, capable of guiding the company towards greater sustainability.
These challenges, although complex, also represent opportunities for manufacturing companies to innovate and improve their operations, gaining competitive advantages in the market.
Best practices and solutions for environmental sustainability
In manufacturing, implementing sustainable practices is essential not only to reduce environmental impact, but also to ensure regulatory compliance and improve operational efficiency.
Adopting strategies geared towards environmental sustainability can generate long-term savings and enhance corporate reputation. Below are some best practices and solutions that manufacturing companies can adopt.
1. Investment in environmentally friendly technologies
One of the first steps towards sustainability is the adoption of environmentally friendly technologies and energy sources. Manufacturing companies can significantly reduce energy consumption and emissions by investing in renewable energies such as solar, wind and hydro.
Installing energy-efficient systems such as LED lighting, energy-saving motors and cogeneration also help optimise energy use. Advanced technologies such as artificial intelligence and the Internet of Things (IoT) can monitor and manage energy consumption in real time and identify areas where waste can be reduced.
2. Reducing emissions and carbon footprint
Reducing greenhouse gas emissions is one of the most urgent challenges for the manufacturing sector.
Companies can set clear targets for reducing emissions by joining global initiatives, such as the Paris Agreement.
Implementing cleaner production practices, such as using recycled materials or replacing fossil fuels with biofuels, can help significantly reduce the carbon footprint. Carbon offsetting (offsetting emissions through reforestation or green energy projects) is an increasingly popular solution, where there is no immediate way to reduce emissions.
3. Circular economy and waste management
A strategic approach to reducing waste is to embrace the principles of the circular economy, which involves the regeneration of materials and the reduction of waste throughout the product life cycle.
Companies can design products with recyclable materials and improve their durability by encouraging the recycling and reuse of components.
Zero waste practices in manufacturing processes aim to minimise or eliminate waste completely, making resource management more efficient.
Using sustainable raw materials and reducing packaging are other measures that reduce the overall environmental impact.
4. Efficient management of water resources
Water is a crucial resource in manufacturing processes, and its efficient management is a priority to reduce waste.
Companies can implement water recycling systems that allow treated wastewater to be reused in production processes.
Other technologies such as reverse osmosis and desalination can help reduce freshwater consumption. In addition, continuous monitoring of water use, combined with the adoption of leakage and waste reduction practices, helps minimise water impact.
5. Innovation in production processes
Manufacturing companies can improve sustainability by adopting innovative production processes.
Additive manufacturing (3D printing), for example, can reduce the consumption of materials and energy needed to produce components, as it allows only the materials needed to build an object to be used.
Optimising logistics by reducing transport distances and using low-emission vehicles is another practice that can significantly reduce the overall environmental impact.
By adopting these best practices, manufacturing companies not only contribute to environmental sustainability, but also gain a competitive advantage in the market, improving their resilience to future challenges.
Let's see together what these benefits are.
Competitive advantages of adopting ESG practices
The adoption of ESG (Environmental, Social, Governance) practices in the manufacturing sector is not only a matter of social responsibility or regulatory compliance, but also a strategic lever to gain competitive advantages.
Companies that invest in ESG initiatives can benefit in several areas, improving their market position and strengthening their relationship with stakeholders.
Here are the main competitive advantages of implementing ESG practices.
1. Enhancing corporate reputation
Manufacturing companies that engage in sustainable and responsible practices gain a stronger reputation in the eyes of consumers, investors and the communities in which they operate.
Transparency and the demonstration of tangible ESG commitments increase stakeholder trust and strengthen customer loyalty.
In a market where consumers are increasingly oriented towards sustainable products, a company with strong ESG credentials can distinguish itself from competitors and attract new business opportunities.
According to the ‘Indirect Procurement Report 2024’, the topic of ESG is becoming more and more important for procurement professionals, and many are starting to consider it when selecting suppliers and products:
- 52% of procurement professionals consider ESG to be important in the implementation of corporate strategy
- 71% say they consider ESG criteria to be ‘important’ or ‘very important’ when selecting suppliers, products and services
- 32% consider ethical and sustainable sourcing a priority
- 29% highlight the importance of monitoring suppliers' sustainability practices
2. Facilitated access to finance
Investors, both institutional and private, are paying more attention to ESG factors when deciding how they should allocate their financial resources.
Manufacturing companies that adopt well-structured ESG practices have easier access to capital and financial instruments. In addition, investors see companies that effectively manage environmental and social risks as less vulnerable to crises and more sustainable in the long term, thus increasing their interest in these companies.
3. Reducing operational and legal risk
The integration of ESG practices can help companies significantly reduce operational and legal risk.
Moreover, companies that adopt high standards of safety and sustainability are less exposed to production disruptions caused by environmental disasters or social crises.
4. Increased operational efficiency and cost reduction
ESG practices, especially on the environmental front, can lead to lower operating costs in the long run.
Adopting environmentally friendly technologies and improving energy efficiency in production processes not only reduces environmental impact, but also cuts costs related to energy and resource consumption.
Adopting circular economy principles can reduce waste and disposal costs, while optimising the use of water and materials helps improve operating margins.
5. Attracting talent
A company that adopts sound ESG practices attracts not only consumers and investors, but also top talent. Professionals, especially the younger generation, are increasingly interested in working for companies that share their values in terms of sustainability and social responsibility.
By improving employee welfare and promoting an inclusive and diverse culture, manufacturing companies can optimise employee retention and reduce turnover.
6. Innovation and creating new markets
A focus on ESG criteria can also stimulate innovation within manufacturing companies. Developing more sustainable products or more energy-efficient production processes opens up new market opportunities.
The demand for environmentally friendly and sustainable products is constantly growing, both among consumers and business partners.
Companies that succeed in developing innovative solutions within the ESG framework can access emerging market segments and consolidate their competitive advantage over less sustainability-oriented competitors.
Conclusions
The integration of ESG criteria into procurement strategies is becoming an increasing priority for many companies, reflecting a necessary shift towards more responsible and sustainable resource management.
Although the commitment to implement ESG practices is evident among industry professionals, operational and organisational challenges remain significant.
To overcome these obstacles, a systematic approach that includes not only the selection of responsible suppliers but also the continuous monitoring of their practices through independent audits is essential. As illustrated earlier, companies that succeed in aligning their operations with ESG objectives will enjoy an important competitive advantage in the market, attract investors and improve their long-term resilience.
Ultimately, the integration of ESG criteria is no longer just an ethical choice, but a strategy that can foster sustainable growth and create value for all stakeholders involved.