Environmental, social and governance (ESG) performance has become an increasing focus for investors and corporate boards alike – but it wasn’t always this way.
A recent report from Natixis Investment Managers found that back in 2014, 48% of institutional investors said ESG approaches were more about window dressing than making a difference. That’s all changed – and so have the expectations of enterprise software customers, as sustainability is now an important part of the selection criteria for technology buyers. We are in the era of ESG as an imperative.
The ESG imperative has been brought to the forefront by geopolitical conflicts, the COVID-19 pandemic, global supply chain pressure and climate change. Enterprise vendors need their CEOs to establish a strong ESG foundation, with ambitious future targets, as CEO Darren Roos notes in the latest ESG Sustainability Report from IFS:
Now more than ever, there must be a global focus on building a brighter future for the next generation, and the imperative for businesses and institutions to lead from the front is greater than at any other point in history.
The manufacturing industry has a critical role to play in the sustainability movement. While technology will always be part of the solution, ultimately the goal is change.
Vendors, customers and suppliers are looking for ways to make changes in a meaningful but manageable and sustainable way. There are several ways that companies can drive change and achieve a culture of sustainability:
Choose the right business applications that support your long-term sustainability requirements
Executive teams need business applications that satisfy ESG-related demands well beyond compliance – to enable them to exceed their sustainability goals. Decision makers should look for capabilities to make certain they're prepared to measure and manage not just by financial value, but environmental and social impact. In addition to ESG reporting, key sustainability enablers to consider include:
- Artificial intelligence. Managing cost, revenue and the environmental impacts of product, services or operations can rapidly become a complex scenario. AI can help here, for example, by optimising the scheduling and routes of field service technicians to decrease the number of miles driven or reduce fuel consumption.
- Circularity. Management of a circular product lifecycle to minimize waste should not only encompass data needed to manufacture a product, but also include a carefully constructed plan for decisions and costs associated with reuse, recycling, reverse logistics, remanufacturing, lifecycle extension or disposal.
- Consider the whole business. Too often, a company will simply implement an ERP system’s financial module, but sustainability requirements mean they also need to consider the supply chain and HR modules to document sourcing and labour practices in an auditable environment
- Carbon footprint. To calculate carbon emissions, businesses need activity data such as fuel, electricity, transport, water, waste and refrigerant gases. Calculating this in Excel is still very common; driving the need for tech-driven solutions to reduce time spent collecting activity data.
Help customers and partners to be more sustainable and deliver more sustainable products
Technology providers need to recognise the urgency of the move manufacturers are making to achieve more sustainable operations, and the specific value sustainability can deliver.
Demonstrating the potential value technology solutions will bring, and how vendors can advance manufacturers’ sustainability goals, comes next. Often, it works to start small with a clearly defined goal and build on that over time. The key is to identify your material ESG topics and develop a focused strategy. Often in manufacturing prioritised focus is on areas where sustainable manufacturing can have a big impact.
We’ve seen numerous examples of how technology solutions delivered by providers that share their customers’ vision of sustainability can yield compelling value. For example, IFS has played a vital role in realizing Rolls-Royce’s ‘Intelligent Engine’ vision. The Blue Data Thread enabled by the partnership between Rolls-Royce and IFS provides the data connectivity between airline and Rolls-Royce that allows businesses to significantly increase the time between engine overhauls and therefore reduce emissions.
Silvermill Group has also reaped benefits including the ability to control factors such as electricity and water, cut down on wastage and be more environmentally efficient.
Continuously influence change through transparency
Delivering on sustainability can’t just be a ‘once and done thing’. Manufacturers need to be continuously focusing on sustainability efforts not only across their business but also the extended supply chain to make a meaningful impact.
Naturally, the technology partners they choose need to be onboard with that journey to facilitate the technology changes needed. There has to be two-way discussion and open, transparent, continuous engagement, so that in turn, providers can continue to deliver value.
That value shifts over time, especially as consumers and customers mature in their sustainability performance, and therefore needs to be tracked and measured. This transparency, together with a common mindset and a shared, positive vision will lead to genuine joint value creation.
It is regarded as completely normal to measure every dollar that contributes to financial performance. The same approach needs to be taken in measuring ESG performance. This may add new layers of complexity and creates new requirements for ERP. Frameworks for measuring and reporting on ESG performance are continuously evolving, , and both customers and funders are demanding "show, don't tell" data to create credibility.
So how do we get started?
- Act now. Technology providers and manufacturers alike need to realise that the time for action on ESG performance and sustainability is now – and that they cannot and should not wait for government to take the lead, nor let regulations take them by surprise
.While governmental consensus on ESG elements such as climate change and the environment is critically important, there is much that manufacturers and the software community can do to advance towards their sustainability goals. Starting small with a defined objective gets the journey under way.
- Share the process with stakeholders. To meet ESG goals, enterprise software should be accompanied by sound organizational structure and processes. A strong governance structure, and roles and responsibility with clearly defined sustainability objectives ensure performance. By communicating information clearly enterprise-wide employees are more likely to acquire the skills and knowledge required to ensure the organization reaches its goals.
- Assess the range of technologies (and data) needed. Sustainability doesn’t happen in a sole, peripheral technologies or data might be adopted to supplement your ERP system and bring you closer to meeting ESG goals. Consider an ecosystem approach with other solutions or external data sources as part of a composable architecture.
Manufacturers should not hold back but instead move positively forward on the path to sustainability by finding the right technology partner and creating that proactive, forward-looking team. At IFS, we have laid strong foundations to be able to achieve long-term change.