Discussions about sustainability and related topics appeared in 29% of manufacturers’ earnings calls in Q1 2024, according to IoT Analytics’ quarterly coverage of keywords in corporate earnings calls. The attention that CEOs of industrial companies are giving to the topic has risen considerably in the last five years. For comparison, in Q1 2019 only 9% of CEOs at the same companies discussed sustainability in their earnings calls.
This is just one of several statistics that show climate change is transforming ‘sustainability’ from a corporate buzzword to an imperative for manufacturers worldwide.
This report, authored by IoT Analytics, focuses on sustainability in manufacturing, including what is driving manufacturers’ sustainability initiatives, how the initiatives are currently tracking environmental impacts, and what manufacturers need to prepare for upcoming reporting and transparency requirements. But first, we will review why sustainability matters.
Why sustainability matters
Since the pre-industrial era (1850–1900), the average land surface air temperature has increased more than 1° C, and the earth keeps getting warmer: February 2024 was the hottest February on record and marked the ninth straight month of record-high monthly temperatures.
In short, the climate is changing, and for decades, researchers have attributed this change to pollution and emissions, primarily of greenhouse gases (GHGs), such as CO2.
These temperature increases may not sound like much, but their impacts are real. In 2022, the World Wide Fund for Nature’s (WWF) Living Planet Report found a 69% decrease in monitored wildlife populations since 1970, attributing this loss of biodiversity to climate change and the unsustainable use of resources.
If the loss of wildlife populations is not tangible enough, climate change’s impact on the weather certainly is. Data from the Université catholique de Louvain’s Emergency Events Database (EM-DAT) shows that the average number of natural disasters per year between 1980 and 1999 jumped 79% between 2000 and 2022, from 217 to 388, respectively. While these numbers include non-climate-related disasters like earthquakes and volcanic activities, climate-related issues such as flooding and extreme weather events witnessed the steepest climbs since 1980 and outpaced other natural disasters. Everyone, including corporations, is impacted by climate change, and most are realising more and more that the way we produce and consume is not sustainable.
Drivers of manufacturers’ sustainability initiatives
According to Our World in Data, using the World Resources Institute’s Climate Watch data, industrial manufacturing made up nearly one-quarter (24.2%) of energy-related emissions in 2020. Meanwhile, 5.2% of non-energy-related emissions come from manufacturing cement, chemicals and petrochemicals.
Manufacturers appear to be aware of these emission levels. Sustainability is a more common topic in industrial companies’ earnings calls than for most other groups (29% of manufacturing earnings calls discussed it in Q1 2024 compared to 22% of overall earnings calls), with many executives discussing individual projects and corporate targets
Four aspects identified in our research drive these projects: cost savings, social pressure, corporate values, and, most of all, regulations.
- Cost savings Often the low-hanging fruit for manufacturer sustainability initiatives in recent years, immediate cost and resource savings have been a motivating factor for many manufacturers. An example of such initiatives is reducing and reusing waste material, which can cut disposal resource costs and let companies use more of the materials they already purchased.
- Social pressure This driver includes environmentally conscientious consumers and investors, who are more and more considering the environmental impacts of their spending decisions (often referred to as responsible investing or responsible consumption). Many consumers consider the environmental impact of the production or disposal processes when deciding to purchase a product. Meanwhile, many investors are looking at sustainability portfolios, which include companies that have sustainability initiatives, be it emission reduction or impact offset initiatives
- Corporate values Research has indicated that companies are internalising sustainability as a corporate value, helping to drive initiatives with full support from executives and other corporate leaders. In 2010, McKinsey shared that ‘Maintaining or improving corporate reputation’ was the top reason for addressing sustainability issues. However, in 2021, respondents to that year’s sustainability survey from McKinsey marked ‘Align with our goals, mission, and values’ as the top reason, highlighting a shift in why corporations address sustainability
- Regulations Our research has found regulations to be the biggest driver of sustainability initiatives at scale. To help cut GHGs and other pollution, many governments worldwide have adopted regulations and limitation mechanisms intended to encourage companies to adopt sustainability measures. Such actions force a large number to comply with the guidelines, helping to advance entire sectors rather than individual companies.
Examples of key sustainability regulations that manufacturers have had to follow in the recent past include the following:
- EU Emissions Trading System (ETS), which caps emissions by sectors and allows companies within them to trade emission allowances
- EU Carbon Border Adjustment Mechanism, which is a carbon tax on carbon-intensive goods imported into the EU and aims to prevent the relocation of carbon emissions from the EU to non-EU countries
- US Clean Air Act, which has served as the basis for the US Environmental Protection Agency’s regulation of pollutants, including greenhouse gas emissions.
Failure to follow these regulations has resulted in sizeable fines or the loss of a business’s ability to operate in the country. For instance, in March 2022, Chevron Phillips Chemical Company agreed to take measures to ensure CAA compliance after it allegedly failed to properly operate and monitor its industrial flares, resulting in excess emissions. The measures were estimated to costUS$118 million, and the company settled on an additional US$3.4m civil penalty as well.
While the aforementioned regulations have largely focused on limiting emissions and pollutants, there are recently enacted regulations that add more focus on precision in sustainability-related data and transparency. These will force many corporations, particularly manufacturers, to thoroughly collect relevant sustainability and emissions data and produce annual reports on environmental impacts, among other matters.
These regulations aim to enable investors and consumers to make knowledgeable, conscientious decisions in line with their sustainability priorities. Failure to follow these can result in hefty fines and bad press.
Sustainability data collection and management
Whether the new reporting directives will place onerous additional requirements on companies depends on how well the companies are prepared to acquire and manage data and convert the data into the desired reporting formats in an understandable and automated fashion.
The struggle: Establishing the sustainability data foundation
Addressing sustainability begins with setting a data baseline: Tracking and estimating emissions, energy usage (such as electricity and fuel), and the overall carbon footprint. Specific methodologies and guidelines exist, such as the GHG Protocol, but these can vary between industries or even within an industry.
Many companies, especially small-to-medium enterprises (SMEs), struggle with collecting sustainability-related data. This often stems from a lack of the right collection tools, bad data quality, or companies not knowing what data they need to collect or even how to collect the data. Faced with this lack of operational or IoT sensor data, many companies turn to estimating their GHG emissions using activity and financial data (such as utility bills or transportation logs) and multiplying by emission factors specific to the source, industry or sub-sector. Worst yet, data are often tracked in spreadsheets, which lack robust data management and interpretation tools.
Considerations for impending reporting requirements
To prepare for upcoming regulations such as the EU CSRD, companies need to adopt tools that can address their industry-specific needs in terms of data collection — whether from IoT sensors or existing company financial or environmental health and safety reporting systems — data management and analysis, and automated reporting. This need is giving rise to a new category of software: carbon footprint management platforms.
These platforms specialise in data collection, management and reporting, including industry-specific calculation models – thereby addressing the requirements set by these new regulations.
Above are eight key features that an ideal carbon footprint management platform would offer.
At the core of the platform are data collection integration capabilities which are important for contextualisation and analysis, providing a clear picture of a company’s carbon footprint and impacts from climate and resource management issues.
These platforms should also be able to interpret the data and assess different scenarios before offering optimisation and emission mitigation strategies. With data, reporting and mitigation strategies in place, companies can meet regulation requirements and better engage with stakeholders to foster dialogue around meaningful sustainability initiatives.
Seizing the future: A call to action for sustainable manufacturing
We are past discussing whether climate change exists. The discussion is now about what can be done to mitigate and, hopefully, reduce its effects. Weather is becoming more extreme, and biodiversity is decreasing — governments, interest groups and individuals alike are calling on manufacturers to address the causes and effects of climate change – and rightly so: Manufacturers are responsible for a significant share of carbon emissions.
With governments introducing new regulations (such as the EU CSRD), the majority of companies will have to get started with the mere basics: Setting a transparent baseline of their carbon footprint. New sustainability management and carbon footprint tracking platforms are emerging to help them achieve that.
Now is the time for any manufacturer to start looking at available solutions that help them collect and contextualise large amounts of differing data, interpret the data for optimisation and emission mitigation strategies, and automate reporting.
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