Manufacturers accelerate ESG strategies as customer and supplier requirements increase

Posted on 12 Feb 2024 by The Manufacturer

The UK has seen a 48% increase in the number of manufacturing firms setting ESG targets for their business, with around two thirds (62%) now doing so (since 2021), according to a report from Make UK and Lloyds Bank.

The in-depth report, which looked at the progress, opportunities and challenges faced by UK manufacturing firms looking to improve their ESG strategies, reveals that almost two thirds of UK manufacturers (61%) say they expect to expand the scale of their ESG strategy in the next two years. Firms said the reasons behind this increase include increasing pressures from the labour market, government, investors and customers.

Key findings

  • Almost two thirds of manufacturers have Environmental, Social and Governance (ESG) targets for their business, a 48% increase since 2021
  • Yet half of firms don’t have the resources needed to meet conditions set by their customers
  • Three quarters of manufacturers are building ESG requirements into their procurement strategies
  • However, four in ten are not aware how their suppliers are performing against these conditions

Download the full report here.

More than three quarters (77%) of firms are receiving ESG conditions or targets from their customers, but less than half (48%) said they have the resources required, highlighting a need for greater support for those companies. In addition, only one in four (27%) companies being asked meet ESG requirements by their customers are getting support from them to do so.

The report also reveals that businesses are accelerating the ESG requirements of their suppliers. Three-quarters (74%) of firms have built ESG conditions into their procurement strategies, up from two thirds (66%) just two years ago. Yet, four in ten (45%) are not aware of their suppliers’ performance against their targets.

While one third (35%) of manufacturers provide ESG support to their suppliers, UK manufacturing firms are two and a half times more likely to provide support to suppliers in pursuit of ESG targets than they are to receive it from their customers.

The findings come as ESG transition plan disclosures, which include how firms identify, assess, and manage environmental and social related risks and opportunities, are set to become mandatory for many UK companies later this year.

Commenting, Faye Skelton, Head of Policy at Make UK said: “Manufacturers are raising their ambitions and commitments to ESG as the issue moves beyond solely issues relating to human capital. Customers, suppliers, investors, and employees are now increasingly expecting that companies make the issue as core to their strategy as any other business objective.

“It’s now clear that ESG is becoming more than a ‘nice to have’ and rapidly rising up the boardroom agenda. As a result, those companies getting ahead of the game will clearly have a competitive advantage and those who have yet to take action risk being shut out of supply chains.”

Huw Howells, Head of Manufacturing & Industrials at Lloyds Bank added: “The research has shown a significant shift change in the number of manufacturers that are focusing on social purposes and environmental factors, while managing competing priorities and day-to-day challenges.

“It’s particularly encouraging to see that larger companies are mostly in a good position in terms of formalised ESG strategies, corporate and supplier governance, and supplier management. However, these increasing requirements are creating financial and technological barriers for many firms and even more so for smaller firms in their supply chains.

“It’s therefore important for manufacturers to work with their supply chains to ensure that ESG strategies are a sustainable collective achievement and a force for future growth.”

The report found that the most prominent forms of ESG conditions set by manufacturers relate to human capital – the Governance in the ESG framework – with more than half having stipulations on health & safety (53%), four in ten (41%) on human rights, a third (34%) on labour rights, and more than a quarter (27%) on diversity and inclusion.

However, carbon emissions and nature (for example biodiversity or wildlife) are increasingly important, scoring 24% and 12% respectively. UK manufacturers said they expect carbon and biodiversity/nature are the most likely requirements to increase in prevalence in their supply chain conditions.

Almost two in five UK manufacturers (38%) publicly report their ESG performance which is a modest increase compared to 36% in 2021. However, almost a third (32%) have their reporting externally audited, a decrease from 37% in 2021, with the report suggesting cost being a driver for this, pointing to COVID-19 recovery, inflation, energy security, and political instability as events of note.

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