What You Need to Know About ESG in Manufacturing

ESG is a three-pronged reporting framework that stands for Environmental, Social and Governance. Manufacturing companies may be expected to use this framework when measuring and reporting on their ESG commitments using standards adopted by relevant authorities. While multiple entities set the reporting framework for ESG internationally, in the United States, it is primarily the Securities and Exchange Commission (SEC), the U.S. Department of Labor and state legislative bodies.

ESG Reporting Frameworks

The environmental framework covers initiatives to preserve the environment, such as addressing pollution and emission limitations (ground, air, water). Generally, manufacturers will need to report on their stewardship of resources, recycling items such as plastics or rubber back into the economy vs. a landfill, reuse of discarded materials or scraps, and reporting on their progress in enhancing the sustainability of the earth’s resources. Manufacturing companies may need to measure greenhouse gas emissions (including upstream and downstream value chain emissions) when measuring and reporting on their climate-related risks, targets and transition plans.

The social framework encompasses factors such as labor practices, income equality, diversity, health and safety standards (e.g., risk management of “slips, trips and falls” in the production environment), and product liability.

The governance framework covers executive compensation (perhaps also tied to sustainability performance), shareholder rights and corporate behavior (how the company limits anti-competitive practices or corruption).

ESG Reporting Requirements

ESG regulation aims to capture non-financial risks and opportunities in a company’s day-to-day activities regarding the planet and its people and promote transparent and consistent reporting to inform decision-making.

Currently, in the U.S., voluntary ESG reporting has been the primary reporting tool. However, some states are developing and signing into law accounting standards, measurements and government mandates on disclosures (e.g., California and New York). A November 2022 Governance & Accountability Institute research report showed that 96% of S&P 500 companies and 81% of Russell 1000 Index companies published sustainability reports.

Some examples of Georgia manufacturers that issue annual reports on ESG are:

The Coca-Cola Company
Georgia Pacific
Perdue Farms
Mohawk Industries

ESG Reporting for Your Company

If your manufacturing company supplies SEC registrants or companies headquartered in the U.S., you may soon be asked to measure your ESG impact. Consider whether your company does business with or hopes to contract with a governmental entity (including the European Union) or a company dealing in interstate commerce, especially in the manufacturing and distribution industries.

ESG reporting requirements in the U.S. are evolving. You should begin educating your company’s key decision-makers by:

• Following SEC communications or disclosures;
• Subscribing to free resources like the International Sustainability Standards Board (ISSB) or European Sustainability Reporting Standards (ESRS);
• Reading ESG reports from large public and private companies in your industry and reflecting on how your company might evaluate applicable climate-related risks and measure GHG emissions in the future;
• Becoming familiar with the primary regulatory and standard-setting drivers and key terms and definitions, including:
• • Corporate Sustainability Reporting Directive (CSRD)
  • European Sustainability Reporting Standards (ESRS)
  • California’s three climate laws known collectively as the Climate Accountability Package
  • International Sustainability Standards Board (ISSB)
  • SEC final climate disclosure rule pending judicial review
  • Proposed Federal Supplier Climate Risks and Resilience Rule
  • Greenhouse Gases (GHGs) - gases in the earth’s atmosphere that trap heat (e.g., carbon dioxide, methane, nitrous oxide, water vapor)
  • Scope 1 GHG emissions - Direct GHG emissions from operations owned or controlled by an organization (e.g., burning fuel in an organization’s fleet of vehicles)
  • Scope 2 GHG emissions - Indirect GHG emissions from the generation of purchased or acquired electricity, steam, heat or cooling that is consumed by operations owned or controlled by an organization (e.g., emissions caused when generating electricity used in an organization’s manufacturing plant)
  • Scope 3 GHG emissions - Indirect GHG emissions not produced by the company itself or the company’s activities, but by those that it’s indirectly responsible for up and down its value chain. (e.g., when an organization buys, uses and disposes of products from suppliers)

In addition to ensuring your manufacturing company complies with developing federal and state laws, recent surveys show that there is stakeholder interest in sustainability that may drive opportunities for value creation for your company, supply chain relationships and investment strategies, including attracting and retaining talent, brand reputation and maintaining values that are important to your value chain, including the end consumer. Sustainability and corporate governance influence peoples’ decisions about where they choose to work, who they do business with and where they purchase goods.

There will likely be increasing climate-related asks from your supply chain relationships, whether it’s requesting information before entering into a contract, or requesting an inventory of emissions generated by your company to comply with state or federal regulations or to enhance their annual ESG report.

If you expect to acquire or merge with another company or plan to sell your business, investors are more commonly requesting ESG-related information to drive their decisions.

According to the Deloitte 2024 Sustainability Action Report, when asked to identify the top expected outcomes of enhancing their company’s ESG reporting, respondents expect to strengthen their brand reputation and trust with stakeholders, reduce risk, improve talent attraction and retention, enhance premium pricing of products and increase efficiencies and ROI.

If you have questions on ESG reporting for your company, our Manufacturing Industry Group can help. Please contact us for more information specific to your manufacturing business.