Why Canadian manufacturers should be reviewing their ESG strategy now

In today's global economy, Canadian manufacturers must transition to a more sustainable and ethical business environment if they want to stay profitable.

Whether you are a large manufacturing company or a small, specialized firm, there is no escaping the fact that regulators, investors, and consumers are increasingly concerned about companies' environmental, social, and governance (ESG) practices being in line with the standard requirements and expectations.

If you aren't keeping an eye on things like carbon footprints and other ESG metrics, now is the time that you did.

What is ESG?

Environmental, social, and governance (ESG) criteria are standards for a company's operations. Like the term sustainability, the criteria are broad guidelines for an organization to do better and be accountable in environmental impact, social responsibility, and organizational governance.

Environmental impact includes carbon/greenhouse gas (GHG) accounting and audits, carbon tax, energy assessments, environmental certifications, water usage, energy transition, environmental impact analysis, and documentation of cross-border projects.

Social criteria include diversity, equality and inclusion, employee engagement, human rights, labour rights, responsible procurement, supply chain advisory and due diligence, and conflict minerals audits.

Governance includes non-financial corporate reporting structure and frameworks, assurance of those reports, green bonds external assurance, responsible tax, board composition, remuneration and executive compensation, shareholder rights, ethics, bribery and corruption, and corporate investigations.

The term ESG was coined more than a decade ago. However, its origins can be traced back to the second half of the 20^th century with movements, events, and publications by unions, economists, governments, and organizations such as the United Nations covering GHG emissions and climate change, sustainability accounting, affordable housing and healthcare, shareholder value, equality, diversity and inclusion.

In the last 18 months, ESG has become a front and centre topic for organizations due to increased inequalities accelerated by the pandemic, racial tensions, the impact of climate change, and rising Millennial and Gen Z representation in the adult population. In 2020, five leading framework and standard-setting organizations¹ announced a shared vision for a comprehensive reporting system that includes financial accounting and sustainability disclosure.

Why is it important to manufacturers?

A growing proportion of manufacturing organizations are now either preparing or executing an ESG strategy. In the first decade of this millennium the leading organizations were mainly larger public companies and mining and energy sectors.

One of the key drivers was shareholder value, as a growing proportion of institutional and private investors looked to invest in businesses with ESG strategies. As a measure of the move towards sustainable investing, over $30 trillion currently sits in sustainable investment funds worldwide, and it is predicted this could rise to around $50 trillion in the next two decades.²

Most Canadian manufacturers are small or medium sized, privately owned businesses, so what does ESG mean if you're in this group? There are several external and internal drivers for change that private companies are feeling:

• Although privately held manufacturers do not have shareholders to consider, they still go to external parties for funding. Banks are starting to review sustainability risks for loans. Private equity firms are increasingly reviewing businesses' ESG strategy as a factor in investment decisions and studying an organization's ESG program as part of an acquisition due diligence has become more common in recent years.
• As an indication of the increased focus on ESG by investors, recent research from the US SIF Foundation found that sustainable investing assets now account for $17.1 trillion—or one in three dollars—of the total U.S. assets under professional management. That's a 42% increase over 2018.
• As ESG programs become increasingly normalized among publicly traded companies, the effect spreads throughout the supply chain. Responsible procurement policies are causing businesses to review their suppliers' ESG policies, and tier one and two vendors risk losing business with their customers if they do not have an ESG program with metrics in place. For example, Scope 3 GHG emission disclosures encompass the entire value chain.
• The Canadian Manufacturers and Exporters (CME) Management Issues Survey has reported that attracting and retaining skilled workers has been an issue for Canadian manufacturers for several years. Employment rates are now close to pre-pandemic levels and employers are again facing challenges finding workers.
• A growing proportion of workers, driven partly by the Millennial and Gen Z demographics, look for employers with an ESG program. Organizations that fall behind their workforce competitors in this respect are disadvantaged when recruiting and retaining, which is likely to become a larger differentiator in the future.
• As investors, customers and employees look to align with sustainable organizations; Governments are also moving to implement measurable standards and regulations that reflect shared goals on climate change and social inclusion. Far beyond a shift to corporate social responsibility that organizations once used to brand themselves, ESG programs are integral to measuring, maintaining and creating sustainable organizational value and impact while shifting and optimizing operational behaviours.

Investors, customers, or employees may have already asked for your organization's ESG Program, policies or corporate reports. If not, you are likely to be asked sooner rather than later. Not having these elements in place will become less acceptable as more organizations embrace sustainability as a competitive advantage.

How BDO can help

BDO's Sustainability team can help you on your ESG journey, from helping you build your program to transforming your business to align with your sustainability goals.