October 15, 2024 Top 5 ESG Insights for Manufacturing Companies and Boards

Manufacturers face increased ESG scrutiny, shifting from voluntary to mandatory reporting on GHG emissions, AI efficiency and ESG governance.

By Heidi Friedman and Jurgita Ashley, co-chairs of Thompson Hine’s ESG Collaborative.

Recent news about environmental, social and governance (ESG) policies and practices has been mixed. There appears to be a surge in companies pulling back, rebranding or limiting the components of their ESG programs. While litigation and anti-ESG legislation remain alive and well, so do the regulations, disclosures and requirements being imposed on companies.

Manufacturing companies face particular scrutiny since they are often the focus of the “E” in ESG, in terms of their practices related to GHG emissions, waste reduction, recyclability and chemical replacement, to name a few. Further complicating things for manufacturers is the shift from a voluntary to a mandatory ESG reporting framework, along with an increase in greenwashing litigation. Courts’ responses to these claims have been mixed, but companies that proactively seek ways to mitigate this risk while becoming legally compliant will continue to succeed in the eyes of their stakeholders.

Here are the top five things manufacturing companies and their boards should consider right now:

1. Global companies need to be ready to address double materiality and provide attestation. The Corporate Sustainability Reporting Directive (CSRD) requires companies in the European Union (EU) to report on various ESG components. These requirements also apply to EU subsidiaries of U.S. companies, and the law is already in effect (although there are phase-in periods). The CSRD is unique because it requires a greater level of reporting and confirmation, specifically by adopting double materiality, which presents the new challenge of determining both impact materiality and financial materiality. Additionally, it requires a company to audit the process used to compile this data, and the necessary data exceeds climate-related measures. And don’t forget about Scope 3 for GHG emissions.

2. Manufacturers should consider and evaluate efficiencies gained by using AI. Companies need to make sure their AI commitments are integrated into their ESG programs, including accounting for the energy AI uses. For example, if an auto maker develops an AI component to speed up its manufacturing line, it needs to ensure that its engineers understand the new tool’s impact on energy usage and GHG emissions. Additionally, companies should monitor external communications since AI-washing is a new area of litigation and regulatory enforcement.

3. Companies need board-level governance in place to support external-facing disclosures. Governance is critical to ESG programs, especially as ESG disclosures are made in regulatory and other public filings and as company programs mature to capture their supply chains. Investors look for ESG oversight at the board level, and ESG frameworks and regulations ask for those oversight disclosures. For example, while the SEC climate rules remain stayed, they require companies to disclose board oversight of climate-related risks, and many companies already include these types of disclosures in their SEC filings. Independent directors need to be in charge of policies and procedures regulating ESG. While recent surveys show that there is currently less discussion of ESG at the board level (“U.S. Boards Deprioritizing ESG, with Most Saying it’s Not the Same as Sustainability: PwC Survey,” ESG Today), creating and maintaining the necessary structure to support SEC, CSRD and other ESG reporting is essential for public manufacturing companies.

4. Even private manufacturing companies will be impacted by U.S. and EU laws and regulations. While a recent Thompson Hine survey confirmed that private companies seem to be less committed to ESG, they are bound to feel the impact of the ever-expanding regulatory framework from global customers that need to ascertain Scope 3 emissions, a process we like to call the “flow-down effect.” Private manufacturing companies may also be obligated to report in California in certain circumstances, and perhaps soon in other states as well. Plus, customers continue to request confirmation of participation in programs such as EcoVadis, CDP and SBTi. The commitment to collect, review and audit the data needed for these disclosures has to rise to the board level, with accountability provided to the relevant committees.

5. Boards need to educate themselves on emerging issues such as social campaigns and biodiversity. While hot topics shift over time, there has been a revisiting of various social-related issues, especially DEI. Hiding from these issues or failing to determine their materiality to stakeholders can negatively affect the business. The materiality assessment still needs to drive the company’s commitments. One recent topic being discussed in boardrooms is biodiversity. Understanding a company’s biodiversity-related risks and its potential impact on ecosystems can provide significant opportunities to add value and get in front of an emerging trend as we move into the next phase of goal-setting, tracking and reporting.

We have a soft spot for manufacturers since so many of our clients fall into this category. Plus, who doesn’t love walking around a plant in a hard hat and steel-toed boots? These companies are the cornerstone of ESG, and monitoring the evolving trends, opportunities and legal requirements in this area can help ensure continued success.

Heidi is a partner in the firm’s Environmental and Product Liability practice and focuses her practice on environmental, health and safety counseling in business, regulatory and legislative matters, environmental and toxic tort litigation, environmental enforcement actions, site remediation, product stewardship and compliance with environmental regulations.

Jurgita is co-chair of the firm’s Public Companies group and focuses her practice on capital markets transactions, SEC compliance, and board, ESG and corporate governance matters. She advises public companies, ranging from Fortune 500 to emerging and smaller public companies, and brings considerable SEC, governance and shareholder activism expertise.

Thompson Hine LLP, a national law firm recognized for its innovation focus, has always guided clients on furthering their efforts toward sustainability, diversity and social stewardship. At this critical juncture when ESG criteria are increasing in importance as priorities for businesses, their boards and investors, we combine decades of experience with a multidisciplinary team of transactional, regulatory and other practitioners who possess practical, comprehensive legal and business knowledge to help clients develop and implement ESG strategies and accomplish goals to preserve value and mitigate risk. We also provide defense advice in investigations and litigation. Our overall goal is to help incorporate ESG criteria into our client’s business model to satisfy internal and external stakeholders. By using our proprietary SmartPaTH tools and strategies such as legal project management, value-based pricing and our overall investment in technology, we help clients achieve their objectives while providing value and certainty during uncertain times. Information on the ESG Collaborative can be found here – https://www.thompsonhine.com/services/esg-collaborative/.

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