If environmental, social, and governance (ESG) reporting is not already on your radar, it soon will be. ESG data reporting, which allows stakeholders to assess a company's performance in key areas such as sustainability and responsibility, can drive investment decisions, inform risk management, and impact reputation management – all critical factors that impact the bottom line.
“The Security and Exchange Commission, the European Union, and the rest of the international communities are, within a year, looking at regulations that would impact every public company around the world,” said John Vickers, managing director of energy & resources at Deloitte and Touche LLP, during a presentation at the PMMI Executive Leadership Conference in San Antonio in April.
Vickers told the OEM executives that as ESG data reporting emerges as the new normal, manufacturers will need to pay closer attention to all upstream and downstream impacts on the environment and society, not only for themselves but also for their CPG customers.
The E in ESG
Many manufacturers are already laser-focused on the "E" in ESG: the environment. At a time when sustainability is the talk of the industry, many investors and stakeholders are also pushing for greater disclosure from public companies on their environmental data.
On top of that, the Security and Exchange Commission (SEC) is expected to release its ESG guidelines for measuring and reporting greenhouse gas emissions later this year. While the SEC has not yet endorsed specific reporting protocols, it is encouraging U.S. companies to increase transparency and consistency in voluntary reporting, using the Greenhouse Gas (GHG)Protocol, widely recognized as the standard for tracing greenhouse gas emissions, as the benchmark.
In the European Union (EU), it’s a different story. Beginning this year, all manufacturing companies with more than 500 employees are required to report their ESG data as part of a directive to standardize ESG data reporting across the EU. That mandated regulation is already impacting CPGs in Europe who use equipment made in the U.S. as part of their compliance for reporting on Scope 3 of the GHG Protocol (see sidebar below).
“Your European customers or operations are dealing with this right now, trying to figure this out,” said Vickers.
The data challenge
As ESG reporting becomes more widespread globally, manufacturers will face challenges in collecting and managing complex internal and external data. “It comes down to the traceability,” Vickers said. “Understanding the traceability and locking down that data to get to that single source of truth.”
Reporting on Scope 3 emissions poses a particular challenge for manufacturers, as it includes emissions from various company activities, including business travel, employee commuting, purchased goods and services, transportation and distribution, capital goods, investments, and franchises.
The clock is now ticking for public companies in the U.S. to enhance and standardize their climate-related disclosures. The SEC has proposed new rules requiring "large emitters" to disclose all GHG data except Scope 3 emissions by FY 2024 and to disclose Scope 3 emissions by FY 2027.
Vickers said that as capital goods suppliers, OEMs play a key role as drivers of Scope 3 for their CPG customers. OEMs and their customers will need to more closely connect data streams and feeds for the whole reporting cycle. New data management and reporting strategies will be required to enrich data that tells a better ESG story for all parties.
Gaining a competitive edge
The closer the collaboration between OEMs and their customers on data reporting, the more OEMs will be able to gain a competitive edge, Vickers said.
OEMs, who constantly think about the energy efficiency of their products, can now frame that same discussion they already have with their CPG customers to be about helping the customer on their quest for reportable emissions data for their Scope 3 ESG reporting.
“Now, it's not just to sell a piece of equipment to them, but maybe it's to help them monitor their actual usage,” said Vickers.
Vickers suggested that manufacturing companies can also borrow the concept of the nutrition label that their CPG customers in food and beverage use to present the machine’s greenhouse gas footprint succinctly when they sell the machine. Such a “label” on the machine, Vickers said, could provide information about the OEM’s GHG footprint, with details such as emissions produced, waste generated, and fuel usage during the manufacturing process that the CPG could use.
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By providing a clear picture of the environmental impact of their products, OEMs will not only help establish themselves as responsible corporate citizens, but they will also differentiate themselves from competitors by partnering with their CPG customers to provide them with valuable information needed for their own sustainability footprint reporting.
Sidebar:
GHG Protocol for Greenhouse Gas (GHG) Data Reporting
Scope 1: Onsite Generation
Direct, in-plant GHG emissions from:
● Company facilities
● Company vehicles
Scope 2: Purchased Power
Indirect, in-plant GHG emissions from:
● Electricity
● Steam
● Heating and cooling
Scope 3: Value Chain
Indirect GHG emissions from all upstream and downstream sources not mentioned above, such as:
● Capital goods
● Transportation and distribution
● End-of-life treatment of solid products
● Business travel
Source: Deloitte Development LLC
