Demystifying ESG and its Application in Sustainable Manufacturing
Sarah Noro, ESG and Net Zero specialist
ESG Overview
ESG, which stands for Environmental, Social and Governance, is used to evaluate the resilience of a company and the soundness of an investment by the financial sector. It encompasses non-financial indices used to evaluate the risks and opportunities a company could face beyond purely economic ones and measures the company’s impact on the environment and society. It was first introduced in the United Nations Principles for Responsible Investment report in 2006 and was adopted by the financial sector over the subsequent decade, in part due to the awareness of the economic consequences of climate change. (Townsend, 2020)
In ESG, the environmental aspect can encompass data on calculations of carbon footprints and energy usage as well as waste management, resource use, land use, and more. The social aspect includes company training, diversity data and involvement with communities and charities. Finally, the governance pillar considers such questions as: who is in charge, what policies are in place to avoid corruption and mismanagement, and the effectiveness and diversity of the board.
Together, all these metrics allow investors and stakeholders to understand the business as a whole and good ESG performance is associated with better economic performance. (Buallay, 2019) (Azmi et al., 2021) This can be explained among other factors by better talent retention, lower legal and public image risks and better resilience and long-term planning.
The financial sector has totally embraced ESG metrics, leading to more companies producing ESG reports and using them to develop new strategies. This has been reinforced by new regulations such as the Task Force on Climate-related Financial Disclosures (TCFD) recommendations delivered by the Financial Stability Board (FSB) in 2018 in the UK and the Corporate Sustainability Reporting Directive (CSRD) in the EU in January 2023. (TCFD, n.d.) (European Commission, n.d.)
ESG is becoming a necessity, but it is also an opportunity to communicate what a company is doing well and to investigate aspects of business that may be holding it back from better performance in the long run. Let’s look at it in more detail with a couple of examples.
Case Study 1: Promoting Change : How materiality assessment and state incentives drive ESG work in Victrex
Victrex is a chemical company specialised in polyether ether ketone (PEEK) polymers. It is based in Lancashire, UK and has existed under this name and management since 1993, following the buyout of a section of Imperial Chemical Industries (ICI), a company that had been running since 1926. Victrex designs and produces polymers mainly for surgical use and for mechanical parts, especially in transport. As its markets have evolved, Victrex has developed its sustainability and corporate responsibility strategy. (Victrex, n.d.)
In 2013, Victrex created a series of sustainability goals meant to be achieved by the time the company would turn 30 in 2023. These goals were established following a consultation of the business’ stakeholders and sustainability specialists. They included energy and water usage reduction targets, objectives to develop further their sustainable products and goals to engage their employees and the wider community. In 2020, the company carried out a materiality assessment. This analysis allows stakeholders to rate various ESG issues based on their importance. Each issue is then also rated against its importance to the business based on risks and opportunities (see figure 1). Issues that rate highly on both axes should be prioritised since they have more strategic importance and already have strong stakeholder engagement.
In Victrex’ case, the UN’s sustainable development goals (SDGs) were used as a framework. Victrex chose to focus their actions on 7 out of the 17 SDGs and split these into two main focuses, “sustainable solutions and resource efficiency” and “social responsibility”. New targets were set despite not having yet reached the end of the original set of targets. Victrex still reports its progress under the first set but it also has targets on PEEK recycling, carbon footprint reduction, accident prevention and diversity. This is a good example of the necessity for regular reassessment not only of progress made but also of the targets themselves.
On top of the work on the targets achieved thanks to the materiality assessment, Victrex also encourages its workforce to take social and environmental initiative. Employees, especially Social Responsibility Ambassadors, have organised volunteering events and fundraising for various causes. In 2022, they gave a total of 4,784 hours of their time to volunteering activities. Additionally, Victrex also has a series of working groups such as the Race4Equality group promoting anti-racist education and action, and the resource efficiency group that collects data and proposes solutions to help the company reach its targets. This kind of bottom-up solution can help target issues, engage employees, and identify a wide range of possible solutions.
Victrex’ ESG strategy is guided by objective data. In its 2021 Sustainability report, it declared “Our approach has been an ‘if we can’t measure it, we can’t manage it’ principle”. (Victrex plc, 2021) This is why it now has systems to track waste, energy and water consumption, greenhouse gas (GHG) and nitrogen oxide (NOx) emissions, volunteering hours and more. Measuring the current status and establishing baselines must always be the first step in any ESG action, and regular data is necessary to track progress and ensure solutions are in place and working as predicted.
For companies like Victrex, ESG is a journey that requires insight and adaptation. A materiality assessment using an existing sustainability framework like the SDGs is a great source of insight for a company that isn’t sure where to start its ESG work. Once the priorities are established, it is possible to engage the workforce by creating focus groups on each issue. Employees work on solutions, and it can improve workplace satisfaction, increasing talent retention. Whenever possible, ESG objectives should be quantifiable, set against a given baseline and regularly measured and updated. Victrex’ ESG strategy led to it receiving an A rating from the MSCI (the world’s largest provider of ESG Indexes) and being recognised in the FTSE Russell Green Revenues Index and in Apple’s Clean Energy Supplier programme. It has also allowed Victrex to keep its voluntary employee turnover rate at 8% in 2022 despite the Chartered Institute of Personnel and Development (CIPD)’s finding that 20% of UK workers were planning to quit their job that year.
Case Study 2: Embedding ESG in a project : Automotive Cells Company (ACC)
To meet obligations for lower fleet average CO2 emissions and considering impending bans on internal combustion engine (ICE) vehicles in many countries, automobile companies are transitioning towards electric vehicles (EV). To face the many challenges around EV battery production and usage, Fiat Chrysler Automobiles and PSA (which later merged to become Stellantis) and Mercedes-Benz co-created in 2020 their own battery company, Automotive Cells Company (ACC). ACC is meant to drive battery innovation and to reduce dependence on third-party suppliers. This initiative is supported by the French government and involves Total Energy’s battery subsidiary Saft. Since European governments and customers are increasingly concerned with the environmental and social impacts of companies, ACC was designed with these challenges in mind. ACC’s ESG strategy has been fundamental to where the business has chosen to open its factories , and how it has integrated the work of its recycling partners and designed its sites.
According to the 2022 “Global Supply Chains of EV Batteries” report by the International Energy Agency (IEA), China produced 75% of EV batteries. (IEA, 2022) By choosing to build its factories and research centre in western Europe (France, Italy, Germany), ACC trades cheaper production and reduced environmental and labour regulations in China for a better control of its supply chain, an optimal location for innovation, and a reinforced relationship with European governments. It also shields itself from some of the geopolitical, social, and climatic instability which have disrupted the EV supply chain over the past few years e.g., the Chinese Covid-19 policies which were still ongoing in 2022 when most other world regions had fully opened their economies.
This approach commits ACC to prioritise its environmental impact and to encourage better working conditions for employees across the industry. These aspects are beneficial from a marketing point of view: scandals around labour rights and environmental violations can be extremely detrimental to a company’s image and consumers are also sensitive to the job creation that accompanies local implantation. According to McKinsey, the global battery industry faces significant ESG challenges so sustainability sets ACC apart and gives it a strategic advantage. (McKinsey, 2022)
ACC works with the Belgian company Umicore on lithium-ion battery (LIB) recycling which should allow large parts of the lithium, cobalt, and nickel in ACC batteries to close the loop on battery production. These metals are valuable and scarce, and their mining has been associated with water pollution and overuse, soil degradation – and health hazards. (Costa et al., 2021) (Liu et al., 2019) (Bolan et al., 2021) Lithium, nickel and cobalt prices have also increased significantly over the past few years (see figure 2) because of the surge in demand for the production of batteries and difficulty for supply to keep pace. (Alessia et al., 2021) (Lee et al., 2022) When batteries reach the end of their life (EoL), their components can leak out and contaminate the soil and water if they are not recycled or treated appropriately. As a result, recycling is crucial to developing a cleaner battery industry at both ends of the batteries’ lives. By ensuring its batteries are easier to repair or recycle, and by using recycled metal salts supplied from Umicore, ACC is taking a major step towards sustainability. It is mitigating risks to people and the planet, improving its image and profits, and putting measures in place necessary to meet future EU regulations mandating higher recycled content in batteries. (Europa, 2022)
The last aspect of ACC’s strategy that shows embedded ESG policies can be seen in how it builds its sites. Its “Centre of Industrial Excellence” in Nersac is an interesting example of that. The 260,000 square feet (sq ft) building was purpose-built next to a Saft site to host a battery cell production line identical to the ones the company built in its gigafactories. This allowed the company to promote innovation and reduce business travel and material transport as ideas could be tested directly without having to go back and forth between research facilities and factories. The site also included an Employee Training Centre, promoting optimal processes, health and safety practices, and employee development. Unlike many older industrial buildings, the site was designed to minimise energy usage and promote security. This represented a large investment, with the site itself costing around €100 million. However, by making
labour conditions, energy usage and security against industrial espionage top priorities, ACC could expect to improve its ESG standards while also mitigating risks and limiting future running costs.
ACC’s commitment to sustainability and ESG is core to its creation. Its strategy requires large long-term investment but will allow the business to thrive and resist future risks. It is mostly a top down strategy since the company is designed around these values. This leads to harmonised ESG responses and better optimization. ACC has been granted funding from the French government and the EU as an “Important Project of Common European Interest” (IPCEI) because it provides solutions to sustainable and societal challenges.
Conclusion and limitations
ESG is an opportunity to build resilience in a business, to optimise resource use, to improve internal and external communication and to take a leadership position in relation to a company’s clients and competitors. ESG initiatives can look very different from business to business, but there are easy ways to start this journey in any industry. Start by assessing the risks and opportunities for your business as well as the stakeholders’ drivers and priorities. Then collect data to establish baselines, and set long term
goals, broken down into small, quantifiable targets which are regularly assessed and adjusted. Finally, whether you are in a situation where the board can control the strategy, or one where employees’ input is crucial, (or hopefully both) engaging and educating your workforce will help achieve your objectives.
Most of the issues and failures encountered when working on ESG come from a few sources: unclear objectives, poor planning, lack of understanding and lack of investment – be it financial or temporal. However, solutions to some of the challenges that arise from climate change and pollution, may not exist yet. In such cases harm reduction should be the guiding principle, e.g., reducing the number of business flights, since we don’t have a sustainable alternative to flying for intercontinental travel yet.
Similarly, complex structural issues like the lack of diversity cannot be fixed by a single inclusion policy, but companies should strive to attract diverse applicants and challenge systemic racism. Employees work best when they feel safe, supported, and are treated and paid equally at the scale of your company. (Hunt et al., 2015) In return companies benefit from a diverse workforce as it attracts and retains top talents and enhances problem-solving and innovation capabilities. (Dye, 2015) Documenting progress via an ESG framework and adopting inclusive practices should improve accountability and outcomes.
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TCFD Recommendations https://assets.bbhub.io/company/sites/60/2021/10/FINAL-2017-TCFD-Report.pdf
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See https://www.victrex.com/en/sustainability
Victrex plc, Annual Report 2021, Sustainability Report, p57. https://www.victrexplc.com/investors/reports-presentations/
IEA (2022), Global Supply Chains of EV Batteries, IEA, Paris https://www.iea.org/reports/global-supply-chains-of-ev-batteries, Licence: CC BY 4.0
World Bank, Commodity Historical Data https://thedocs.worldbank.org/en/doc/5d903e848db1d1b83e0ec8f744e55570-0350012021/related/CMO-Historical-Data-Monthly.xlsx
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Batteries: deal on new EU rules for design, production and waste treatment (europa.eu)
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