ESG Considerations for the Manufacturing and Distribution (M&D) Industry

ESG (environmental, social, and governance) considerations have become increasingly important in the manufacturing and distribution (M&D) industry, driven largely by private equity (PE) investors who request their portfolio companies report and disclose their ESG metrics. ESG metrics, defined as non-financial data to mitigate risk, are intended for companies to foster corporate stewardship, reduce spend, drive savings via energy efficiency, and more.

In M&D, the biggest ESG focus areas are on the environmental and social components. Environmental considerations include carbon footprint (a method used to measure impact on the atmosphere), clean energy, energy efficiency and waste management, which are all prominent in the supply chain. Social metrics include working conditions, human rights, health and safety, and diversity and inclusion. And finally, governance areas include board diversity, bribery and corruption, data protection and shareholder rights. Many suppliers are under a code of conduct, so all parties involved in the supply chain are encouraged to do their part to embrace ESG considerations. 

In the supply chain, some prominent areas for M&D companies to integrate ESG include responsible production of raw materials; decent work and economic growth of suppliers; clean water and sanitation; affordable and clean energy, responsible consumption/production and more.

PE investors in M&D companies are driving the demand for ESG metrics to be integrated into a portfolio’s performance. Even though these metrics are non-financial, they indeed have a financial impact and both investors and companies are increasingly realizing how risky it is not to look at non-financial metrics. In addition, the SEC is paying more attention to a company’s ESG reporting and disclosures.  

PE investors can implement the following principles of responsible investment decisions across all stages of the investment lifecycle for an ESG-balanced portfolio including:

• Deal sourcing to identify material ESG issues;
• Executing an investment decision to include material ESG issues;
• Readying an ownership to manage material ESG issues; and
• Adding value (through the strength of their ESG metrics)at the exit.

Deal sourcing and investment decisions reduce the risk and liabilities on ESG-related issues for portfolio companies while the ownership and exit increase their financial performance and investment attractiveness. PE investors can execute these measures via questionnaires to gauge ESG policies of portfolio companies and assess areas of potential performance impact of ESG issues. They can also review the legal and regulatory requirements to mitigate risk and, finally, they can identify opportunities to increase value through ESG initiatives.

The following are a few key considerations for M&D companies to evaluate whether to include an ESG plan:

• Investor, customer and/or employee pressure for a formal ESG policy;
• If they want to include suppliers in their journey toward sustainability;
• If they are monitoring energy consumption or collecting electricity data;
• If they have any energy conservation measures in place (LEDs/smart lighting, energy efficiency equipment); and
• If they have waste management policies or sustainable materials sourcing policies in place.

In conclusion, M&D companies should consider launching a formal ESG policy with the help of a dedicated ESG or sustainability resource, the company’s respective leadership team including a risk officer and head of operations, the facility supervisor, and potentially an engineer to ensure they follow a roadmap for executing on best practices.