Friday November 17, 2023

Navigating the manufacturing sector’s challenging road to Net Zero

Despite its energy-intensive past, the UK manufacturing sector is leading the charge towards Net Zero, with a clear mission to create a new age of clean, sustainable manufacturing.

While the industry has already made significant progress in reducing its environmental impact, there is still much to be done to reach Net Zero by the hard deadline of 2050. According to the Office for National Statistics, greenhouse gas emissions have fallen by 39% since 1990, although progress has slowed more recently and manufacturing remains the third highest contributor to overall UK emissions, behind energy and consumer expenditure. The sector itself also has more pressing targets of a 67% reduction in Scope 1 and Scope 2 emissions (compared to a 2018 baseline) by 2035.

And so, it’s notable that the findings from our latest manufacturing report Against the odds: The future of UK manufacturing show that many UK manufacturers still don’t consider their ESG initiatives to be a high priority.

Showcasing the views of a diverse selection of more than 300 of the sector’s senior decision makers, our research found that fewer than a fifth of respondents (19%) cited ESG as a top investment priority, seemingly because they can’t justify substantial expenditure at a time of such uncertainty or position it as a competitive point of difference.

And while just 8% of firms said greater scrutiny over / demand for better ESG performance had been a risk to their business during the past 12 months, increasing to 14% in the year ahead, we can confidently imagine that ESG will continue to move up the agenda as competing pressures continue to recede.

ESG initiatives are increasingly becoming more than just a choice; they are evolving into a legislative mandate. Current UK regulations require companies with over 500 employees that are traded, banking, or insurance companies to produce a Non-Financial Information Statement. This obligation extends to AIM-listed companies and unlisted companies, as well as LLPs with similar size and financial thresholds. These requirements are foundational steps towards mandatory ESG disclosures, signalling a shift to an era where sustainability is not just encouraged but enforced.

In anticipation of future regulatory shifts, the responsibility for UK manufacturers to integrate ESG initiatives will expand significantly. Following the International Financial Reporting Standards (IFRS) framework, the UK’s Department for Business and Trade is set to endorse the first two UK Sustainability Disclosure Standards (UK SDS) by July 2024. These standards, aligned with the International Sustainability Standards Board’s (ISSB) criteria, will set a new benchmark for transparency and sustainability reporting, diverging from the global baseline only when necessitated by UK-specific issues. For manufacturers, staying ahead in this evolving landscape means embracing the challenge to meet and exceed these forthcoming standards, ensuring compliance and leveraging it for strategic growth.

Clearly, measuring environmental impact is a complex area, but it is fundamental to benchmarking a firm’s progress, and it’s positive to see that ‘improving methods to measure environmental impact’ is the number one ESG investment priority for firms, alongside improving the recyclability of their products. It’s also heartening to see that manufacturers feel a deep-seated commitment to the communities where they operate.

Ultimately, ESG represents not just a moral imperative for manufacturers but also an important commercial opportunity too. Firms with clearly defined ESG commitments and objectives are increasingly attractive to funders, and we have seen that banking partners are happy to fund Green Investments at potentially lower rates through green financing and reward firms with plans to improve their ESG performance through Sustainability linked loans. At the same time adhering to environmental goals can significantly reduce utility bills which are considered one of the main burdens of manufacturing firms. After all, ESG is no longer a choice, but a necessity.

The results of the report highlight that while manufacturers are continuing to face challenging conditions, the sector is alive to the importance of making its processes more sustainable if it is to reach net zero by 2050 – albeit it is a lower short-term priority. For further analysis, click below to read our new report in full.

Against the odds: The future of UK manufacturing