Environmental, social and governance (ESG) scrutiny of businesses is increasing rapidly as investors and UK policy makers put more pressure on companies to disclose and reduce the environmental impact of their operations. For example, the scope of Streamlined Energy and Carbon Reporting (SECR) legislation was extended on 1 April 2019 to large UK incorporated companies (including private companies) that meet certain qualifying criteria.1 The scheme requires businesses to report on their energy consumption, scope 1 and 2 greenhouse gas emissions and explain their actions to improve energy efficiency.2
Further, the government aims to expand the scope of the Task Force on Climate-related Financial Disclosures (TFCD) in the UK. In November 2020, the UK government announced mandatory climate risk reporting aligned with TCFD guidelines for premium listed companies, for accounting periods beginning on or after 1 January 2021. It also laid out a roadmap to bring all listed entities, large private companies and limited liability partnerships in the UK under the scope of TFCD by 2025, most by 2023. This means that every year an increasing number of UK manufacturers will have to report on their governance and strategies for managing climate-related risks and opportunities and assess the financial impact of such risks on their business based on a number of scenarios.
In addition to tightening the rules around climate-related financial disclosures, two recent policy papers set out measures to help the UK meet its net zero target and the role that the manufacturing sector is expected to play in the process.
The UK government’s Ten Point Plan for a Green Industrial Revolution outlines the technology areas that will benefit from greater government support as well as policy proposals and funding packages to scale them up. These technologies include advancing offshore wind, low carbon hydrogen production, zero emission vehicles and their associated infrastructure, greener buildings as well as carbon capture, usage and storage (CCUS). The Plan aims to mobilise £12 billion government investment and potentially three times as much private money, while also creating and supporting up to 250,000 green jobs.
The Industrial Decarbonisation Strategy sets ambitious carbon emission reduction targets for industry to support the UK’s net zero effort. The Strategy expects industrial emissions to be reduced by two-thirds by 2035 and by 90 per cent by 2050, with 3 megatonnes of CO2 (Mt Co2) captured through CCUS and around 20 terawatt-hour (TWh) of energy used in the form of low carbon fuels by 2030. This is a tall order for the sector that was responsible for 72 Mt Co2e emissions in 2018. However, the government is confident that “ the UK can have a thriving industrial sector aligned with the net zero target, without pushing emissions and business abroad”.
The new financial reporting requirements and the two policy papers create a level of urgency that requires manufacturers to take greater responsibility for the environmental impact of their activities. While the pressure falls more immediately on listed companies and large private businesses, the inference is clear for all UK companies, regardless of their size.
According to a 2020 survey by the Institution of Engineering and Technology (IET), 53 per cent of manufacturing and 61 per cent of construction businesses in the UK have sustainability agendas. The top three actions companies took to deliver these agendas related to using new, greener technologies, adapting existing technologies to be more green and encouraging telecommuting/remote working.
However, the real challenge and opportunity will be for both UK and global businesses to combine carbon focus with efforts to improve their productivity and international competitiveness. This cannot be done by treating sustainability as just one of many company initiatives. Sustainability has to be a strategic driver. This may drive a company to reconfigure its entire manufacturing lifecycle. This is a complex decision that could involve a company’s entire supply chain and require forging new partnerships. Areas that need to be considered include:
- product design – reducing cost and waste during production, improving energy efficiency of the product and rapidly incorporating the use of new materials in the design process. It can also make a product part of the circular economy, by making it easier to repair, reuse or recycle.
- raw material selection – using ethical, sustainable and alternative materials for production.
- production – improving operational efficiency and reducing waste during production, implementing smart production technologies and using renewable energy sources.
- shipping – reducing the carbon footprint of transporting raw materials, components and delivering final products. This involves setting carbon targets for transport providers and working closely with them.
- aftermarket – shifting towards the circular economy model by providing spare parts, repair, recycle and disposal services, and optimising the efficiency of products in the field.
The benefits of sustainable manufacturing go beyond meeting regulatory compliance and energy cost reduction. They can include better risk management, improved overall operational efficiency, reduced waste, a positive impact on the company’s brand and reputation as well as relationships with local communities. While cost efficiency is a key performance indicator for nearly every business, companies realise that green credentials can help build trust with customers and open new markets. It also helps that customer perceptions of value are changing: 51 per cent of respondents of a recent survey think that the environmental credentials of a product or service are now just as important as the price they pay for it.
No manufacturer was left untouched by COVID-19. Business models, operations and attitudes to technology and the workforce all had to change as the pandemic rapidly unfolded. As leaders reflect on lessons from the pandemic, many realise that the speed of decision-making, agility to change operating models and a more resilient supply chain will be crucial for a long-term, green recovery.
As complex international supply chains were disrupted during national lockdowns, companies needed to consider multiple sourcing and, in some cases, relocating parts of the manufacturing lifecycle.
Digital adoption and the potential for increasing carbon costs may provide further incentives to establish regional, distributed manufacturing hubs across the UK. The term ‘green-shoring’ could be used to describe this potential trend.3 These hubs could be driven by businesses that engage in the circular economy and focus strongly on customers. For example, networks of small additive manufacturing facilities could serve specific customer needs faster and potentially cheaper if they are located close to their clients – thus reducing carbon emissions, time and cost spent on transport. Further opportunities may also arise in the future in combining low carbon energy sources and circular economy concepts in ‘reindustrialising’ certain parts of the country very much in line with the government’s levelling up agenda.
The pandemic gave leaders an opportunity to rethink strategies. As companies adapt and learn to live with the virus, we may see a growing number of manufacturers choosing to re-engineer their product portfolios towards the new energy technologies highlighted in the two policy papers. Undoubtedly, there will be opportunities to build infrastructure, manufacture equipment and components, and supply services for these green technologies. Initially, these will be focusing on the large industrial clusters to provide volume. While the pipeline of activities and a low carbon supply chain are slowly building, most of the projects that will make a material contribution to the net zero objective need to mature to provide opportunities on scale for UK businesses. However, companies need to get ready for when the floodgates open – as they may do when strategies and financial support mechanisms for various green technologies are established. Therefore, the question arises: what can manufacturers do now to create a competitive advantage for the green industrial revolution?