Author: Suprita Mallya
Environmental, Social and Governance (ESG) Practices might not be a new concept however, it is certainly going to play a major role in the Indian manufacturing Industry. But what are ESG practices? In simple terms, Environmental criteria take account of how the organisation protects the environment, Social criteria include how the organisation manages its relationship with suppliers, customers, employees and communities that it engages with, and Governance criteria involve standards that ensure transparent accounting and reporting, accountability to stakeholders and diversity in leadership.
In recent years, there has been a growing awareness about the importance of environmental, social, and governance (ESG) practices among companies. With consumers, investors, and regulators increasingly concerned about the impact of businesses on the environment and society, companies are now expected to go beyond profit-making and take responsibility for their actions.
India’s manufacturing sector, which contributed 18% to the country’s GDP in 2022, has also been identified as a major source of carbon emissions. The industry consumes a lot of energy and natural resources while producing waste that is detrimental to the environment. As such, the manufacturing industry must prioritize end-to-end sustainable practices that encompass all stages of production, including design and engineering, sourcing, operations, and supply chain management and also includes societal and governance factors like relationships with society and the stakeholders (E.g. creating a positive impact on society or including diversity in the leadership).
The shift towards sustainable manufacturing has already started, and Indian manufacturers are increasingly becoming conscious of how they can optimize resource and material usage, reduce emissions, and improve machine efficiency to minimize waste. While regulatory pressures certainly play a role in driving ESG efforts, other factors are contributing to the increased focus on sustainability and responsible business practices.
Research indicates that consumers expect companies to actively shape ESG best practices, with a large majority indicating that they would stop doing business with organizations that treat the environment, employees, and communities poorly. Purposeful companies with strong ESG profiles have outperformed their peers and consistently high ESG performers tend to have higher total shareholder returns. Multiple analysts, including those from Gartner, IDC, Blackrock, Boston Consulting Group, and KPMG, highlight the importance of sustainability and ESG for all companies in all industries. Climate change policy developments, ESG ratings, and the COVID-19 pandemic are some of the key drivers for companies’ increased engagement with sustainability issues. Furthermore, having a strong ESG proposition can enhance employee motivation and productivity, and help companies attract and retain quality employees.
In the context of manufacturing, sustainability and ESG initiatives can have several positive outcomes:
Benefits of Technology: Digital tools such as AI, IoT, blockchain, and 5G are transforming the way companies operate by allowing them to gather and utilize data in real-time. These technologies can enable companies to better understand how their operations impact the environment, employee safety and well-being, and resource utilization. Vedanta a natural Resources company, has already taken up digitalization across the value chain; in a particular instance, the company started incorporating technology to mitigate risks and minimize environmental impact while constructing tailings dams.
Sustainable Product Innovation: Sustainable product innovation in manufacturing involves developing products and processes that reduce waste, conserve resources, and minimize environmental impacts. One approach to sustainable product innovation is to replace carbon-based materials with bioresources which are renewable and biodegradable, and can be produced using fewer resources and with lower emissions than traditional materials. Conglomerates in each sector should continually innovate and iterate to create end products that reduce emissions, waste less and are better for the environment. This can be achieved by looking at new raw materials and laboratory equipment, contemporary design methods, and premium technologies to help industries implement, scale and operationalize these targets. One example of sustainable product innovation in the automotive industry would be car manufacturers are exploring new materials, such as bio-based plastics and composites, to reduce the weight of their vehicles and improve fuel efficiency. Bharat Forge, a leading auto component manufacturer is placing a greater emphasis towards manufacturing lightweight automotive components through optimizing design, characterization of material properties, utilising a wider variety of manufacturing processes & use of CAE techniques.
Financial Benefits: Financial commitments to ESG can take many forms, including investments in research and development of sustainable products, partnerships with NGOs and other stakeholders, and funding for employee training and education. This may involve allocating resources towards initiatives such as renewable energy, reducing waste, improving working conditions, and promoting diversity and inclusion. For instance, Google has invested its resources to reduce food waste by creating an algorithm that suggests which foods to serve to minimize waste. For example, it found that serving broccoli and cauliflower together leads to more waste. Additionally, providing shallower plates has reduced the amount of food thrown away.
Sustainable sourcing: This refers to the practice of procuring raw materials and components for production in an environmentally and socially responsible manner. One aspect of it includes switching to renewable sources of energy in the form of solar, natural gas etc. Tata Steel is conducting a trial to replace coal with hydrogen gas in steel manufacturing to improve key performance indicators such as CO2 and dust emission intensity to support their goal of being net zero by 2030.
Other Benefits: Executing ESG effectively can help combat rising operating expenses (such as raw-material costs and the true cost of water or carbon), which research has found can affect operating profits by as much as 60%. There have been more than 2,000 academic studies and around 70% of them find a positive relationship between ESG scores on the one hand and financial returns on the other, whether measured by equity returns or profitability or valuation multiples. Initiatives aimed at sustainability will also improve a company’s brand image, which in turn boosts stakeholder perceptions, increases customer loyalty, and strengthens investor relations.
Despite the strides made by some conglomerates, India’s manufacturing industry needs to make a consistent shift towards sustainable manufacturing, motivated by the need to tackle pressing environmental challenges and meet the demands of stakeholders and customers. The ongoing transition towards sustainable manufacturing is a promising sign, and it is incumbent upon manufacturers, policymakers, and consumers to work together to forge a more sustainable future.