Is it just me or does it seem as though the whole world is talking about sustainability right now?
Admittedly, it’s not a new topic by any stretch. In fact, it’s been on the agenda for many years, often providing interesting and stimulating content for marketing purposes, but without the board-level focus we are seeing today.
With the start of the Covid-19-pandemic in 2020, sustainability gained a new sense of urgency. For one, the pandemic showed that societies have immense potential for collective action and change when faced with an emergency.
When Covid struck, companies across all industries had to reinvent the way they were operating almost overnight. This was particularly problematic for manufacturers. Especially when faced with supply and demand shock while tackling the challenge of re-arranging their shop floors, to ensure a safe environment among workers. The unprecedented situation demonstrated that sudden change was possible and could positively impact the environment at the same time. For example, think about the abrupt stop to traveling, which lead to a steep drop in CO2 emissions in the world’s most congested places.
On the other hand, the pandemic also accelerated the shift to technology-driven sustainable production as part of economic recovery, which will need to address biodiversity loss, climate change and promote circular economy principles.
So in that sense, 2020 was a turning point and pushed sustainability to the top of business priorities for many manufacturing organizations.
Moreover, there are a range of external drivers putting pressure on manufacturers to act quickly. Customers and end-consumers alike are becoming increasingly information-hungry. They seek assurance that products are produced sustainably and, in some cases, are even willing to pay a premium for it.
Sustainability credentials are becoming more important
Research by Deloitte revealed that 79% of corporate executives observed strengthened brand reputation after their companies committed to set decarbonization targets. The report also highlighted that 80% of consumers seek socially or environmentally responsible products whenever possible and would even switch brands to support a good cause. On top of that, two-thirds of consumers indicated that they feel more positive about companies making efforts to reduce their carbon footprint.
These figures are not unique. Plenty of research provides evidence that sustainability efforts are directly linked to consumer trust. In the future, ‘sustainability’ credentials will become increasingly important selection criteria for customers and consumers. In some cases (as with certain food and beverage product ranges), consumers will even be prepared to pay a premium for this assurance.
Sustainability regulatory forces are accelerating
But above all, the sustainability agenda is driven by regulatory pressure and global goals. These include the Paris Agreement’s goal to limit the global temperature increase to 1.5% compared to preindustrial levels, the European Commission’s mandate to become a net-zero continent by 2050, and the United Nations Sustainable Development Goals. Furthermore, COP26 has established a new International Sustainability Standards Board (ISSB) to develop a global baseline for disclosure standards on climate, and other environmental, social and governance (ESG) matters.
And as if these global goals weren’t enough, manufacturers must stay on top of any regional, domestic, and industry-specific regulations. The proliferation and ever-changing nature of regulatory pressure can be quite daunting. One of the latest developments in the UK is the new plastic packaging tax. Coming into force on April 1, the aim of the tax is to incentivize the use of recycled material in the production of plastic packaging.
Ethical investing is rising
Another key driver for sustainability has been the increasing attention from the investor community. While in the past, ESG (environmental, social & governance) factors have historically lagged behind financial and political ones. During the pandemic, Covid drove an investment shift towards environmentally sustainable businesses when making business and financial decisions. Investors have noticed the financial benefit of doing so – for example, investing in companies and assets with a high ESG score often leads to better returns and carries a lower risk.
At the end of 2021, IFS embarked on a research study with technology analyst firm Omdia, interviewing 117 manufacturers in North America and Europe to understand their views, ambitions, and initiatives around sustainability and the circular economy (CE).
One of the most surprising findings was the short-sightedness with which companies still approach sustainability. According to our data, the top drivers are business risk (18%), regulatory compliance (15%), and financial incentives (15%), revealing a reactive mindset and, to a certain extent, unpreparedness. While companies recognize that sustainability can deliver more value-add benefits beyond compliance – such as a positive impact on customer trust and corporate reputation – it’s not seen as the most important reason to act, at least not at the moment.
So why are companies holding back? According to our research, legacy infrastructure, a lack of centralized responsibility, and upfront costs are the biggest hindrances to investing in sustainability initiatives.
Taking a data-led approach
In light of increasing expectations and legally binding goals, manufacturers will need to overcome their reservations, just as they did when faced with embracing digitalization. It will require a data-led approach.
Why is that? To demonstrate that their net-zero commitments are robust and legitimate, manufacturers will require access to more accurate, detailed, and timely data. Manufacturers will not only look at organization-level emissions but also the granular emissions associated with manufacturing processes, the transport of raw materials and products, and the usage and disposal of products as they come to their end of life.
As we advance, reporting on this type of granular data will be part of doing business, hence the importance of technology, which acts as an enabler for capturing, cataloguing, and sharing data across the organization and throughout the organization’s wider value chain.
Focusing on the long-term value of sustainability initiatives is the key
With industrial sustainability initiatives still relatively new in many cases, the benefits that manufacturers can realize will continue to evolve. They will extend beyond direct and tangible returns to intangibles, such as brand reputation, customer loyalty, job satisfaction, adherence to future legislations, insurance costs etc. To this extent, companies need to approach their business cases by focusing on return on value rather than return on investment, which is typically aimed at producing quick results.
Call to action…
We recently asked over 100 manufacturing organizations in Europe and North America, how they’re tackling the challenges of sustainability and the circular economy and what’s driving their actions. You can download the full results here.