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Analysis

Manufacturers Contend with Increasing ESG Regulations

“I have always told my team sustainability should be embedded in how we operate. We should not be doing things just for the sake of doing them. It has to make business sense and better the service that we are providing to our customers but must also better the environment and better our operations.”

— Tory Flynn , Chief Sustainability Officer and Vice President, Hillenbrand

New environmental, social, and governance (ESG) regulations are introduced worldwide as increased scrutiny comes down on climate-related rules, forced labor concerns, and supply chain due diligence, to name a few.  

In the U.S., manufacturers are impacted by many ESG regulatory responsibilities. According to a recent member survey, the top three regulations manufacturers must comply to include:  

  • California Climate Reporting Bill at 78%
  • Corporate Sustainability Reporting Directive (CSRD) at 69%
  • SEC Climate-Related disclosures at 67%.  

To understand how manufacturing is addressing changing ESG regulatory responsibilities, Manufacturer Alliance surveyed 45 manufacturers on their regulation strategy. This article shares how they plan to leverage personnel, technology, and AI options to address evolving regulatory responsibilities. 

Evolving Regulatory Responsibilities

The ownership for the data oversight and filings primarily falls across sustainability, finance, and legal/compliance functions, with manufacturers exploring ways to address changing needs.

At Hillenbrand, sustainability is driven by a collaboration among the Chief Sustainability Officer, Chief Financial Officer, and General Counsel and underpinned by processes in the businesses. Each, while coordinating together, covers core components catered to the specialization and strategy of the three distinct roles. Similarly, at Milliken & Company, the Chief Legal Officer is the executive sponsor for sustainability, and the sustainability team includes a matrix associate in finance that reports up to the Chief Financial Officer. As sustainability data becomes more mature, Milliken & Company reports sustainability KPIs that leverage more alignment with financial reporting and involvement from the finance team. The sustainability reporting function, which reports to legal, shares knowledge across Milliken’s business units to enable strategic decision making.

Departments most affected by changing ESG regulatory responsibilities are those that own regulation filing and data management oversight. While most manufacturers leverage their sustainability, finance, and legal/compliance departments for regulation filings, it varies by regulation. According to respondents, the sustainability department has filing responsibilities for CSRD (43%) and California Climate Reporting Bills (44%). Nearly half of manufacturers have the finance department responsible for SEC Climate-Related Disclosures. Around a quarter of manufacturers have their legal/compliance department responsible for filing regulations.  

The same two to three departments that own filing the data also own data management oversight. While sustainability, finance, and legal/compliance are again the most common owners, we also found that companies with over 10,000 employees are more likely to have the EH&S function (45% vs 28%) own data oversight. The increase in regulations and related oversight is also evolving roles within departments. In other words, it is becoming hard to do everything that is required by governments to report, pushing for changes in ownership and roles within companies. “It’s not clear who’s going to own new regulations,” added Sarah Briggs, Director of Corporate Sustainability at Quaker Houghton.

At Milliken & Company, as data collection grew, so did the demand to maximize their technology platforms to provide data with beneficial feedback loops. Businesses across the company are utilizing sustainability data to drive decision making and monitor opportunity analysis. "I think the fact that we are focusing on automation, being able to audit our responses, and having that review process within a dedicated system, outside of an Excel spreadsheet, has been absolutely transformational and more efficient,” said Nicole Cuadrado, Milliken & Company’s Director of Ethics, Compliance, and Social Responsibility.  

Functions That Own Regulation Filing

 

Source: Manufacturers Alliance member survey, 2024.

 

To address the increased reporting requirements, half of manufacturers are planning to hire additional personnel. Some organizations shared they intended to hire consultants to assist with reporting requirements or planned to grow their sustainability department. This could be a few hires across departments to support the additional workload or adjustment of responsibilities of current employees.

According to our respondents, 71% plan to grow their sustainability departments or hire full-time employees in other departments to support sustainability reporting and 20% are planning to hire an ESG controller, including Hillenbrand. Tory Flynn, CSO and VP, Hillenbrand, shared that the new role would be “the go-between for finance and sustainability” and critical for building alignment across functions and ensuring appropriate reporting and controls are in place.” Alternatively, Quaker Houghton has looked specifically at hiring an ESG reporting regulation specialist or lead, who would manage regulation reporting end-to-end rather than an ESG controller, which better aligns with the department's needs. Milliken & Company also reported utilizing a resource from the finance function that helps with reporting, and also will work with an external renewable energy advisor to develop a 100% renewable energy strategy among other things. 

Additional Personnel Planned to Support Sustainability Reporting

  

Source: Manufacturers Alliance member survey, 2024.

Incorporating Technology

The regulatory environment has significantly changed; increasing the cost of managing compliance, while also producing mass amounts of data to meet the measures. Tory Flynn shared how sustainability reports “transform[ed] from 60 [pages], which is standard, to over 200 pages” to address all the points of disclosures required by the new standards. Hillenbrand envisions the role of the ESG controller to oversee the reporting of data and be the authorizer. Plus, this person will also need to be a change management agent because of the complexity of ESG changes.

The timeline for much of this new regulation is condensed – CSRD reporting begins in 2025. Companies like Hillenbrand are looking to technology to help manage mass increases in regulatory disclosures. “Its not just easier for teams,” added Flynn, “but it helps enable a higher quality of data.” Flynn also noted that part of the reporting requires records that show if data was altered for a better audit trail. 

Manufacturers are still using, or have only recently transitioned from a mix of manual and automatic data tracking to relying on automation. “When we think about the data that goes into the sustainability report, it is coming from a multitude of different systems,” said Sarah Briggs of Quaker Houghton. “We have things that are manually consolidated in Excel, we have things that are coming directly out of our ERP system, we have other things that are coming out of our product stewardship tool, and a variety of other systems." Briggs shared that the organization is looking to invest in a system or tool that will help pull the data together and create an audit trail.

Three in four survey respondents plan to add software/technology to manage regulatory disclosures, and more than half currently use an EHS management software system to manage data.  

At Milliken, as data collection grew, so has the demand to maximize their technology platforms to provide insights that can benefit feedback loops. Departments across the company are utilizing ESG data to drive business decision making and monitor opportunity analysis. "I think the fact that we are focusing on automation, being able to audit our responses and having that review process outside of version control issues in an Excel spreadsheet has been absolutely transformational and very efficient,” said Nicole Cuadrado, Milliken’s Director of Ethics, Compliance, and Social Responsibility.  

Regardless of company size, only 25% of manufacturers are using technology to discover regulations that are new or have changed. In fact, 70% of manufacturers rely on manual updates from team members that new or changing regulations are being reviewed and addressed.

How is AI Being Considered for Regulatory Needs

AI use in managing regulatory responsibilities is still being explored for most manufacturers. “Much of the software is untested,” Tory Flynn added, “no one has been through a CSDR report or file before, so there’s not a lot of benchmarking or customer testimonials [on software].” While 72% have implemented or are exploring potential AI-driven initiatives, the anticipated budget for AI initiatives is a portion less than 10% of overall budget, with 38% of manufacturers unsure of the budget. “We haven’t seen software that will add the value we’re looking for,” added Nicole Cuadrado of Milliken & Company, where they are instead layering AI applications onto existing platforms and capitalizing on resources that they already have. However, AI is top of mind for many right now, and we asked members where AI could be beneficial if they could find the right tools.

Top 3 Reporting Concerns AI Could Support

  1. Data Automation and Management
  2. Process Efficiency and Productivity
  3. Data Quality Assurance

Source: Manufacturers Alliance member survey, 2024.

 

Regulatory responsibilities for manufacturing companies are increasing and ever evolving. The use of technology is enhancing efficiencies and streamlining metric sharing across the organization, but teams are slower to incorporate AI. Despite the challenges, manufacturers are forging ahead and leveraging personnel and technology to meet the changing needs of reporting, continually refining, and working across departments to fulfill requirements.

“I think it's a sign of maturity that we increasingly want to show environmental and social data like you do other data in a business, which is through a financial lens,” said Maurie Lawrence, Associate General Counsel and Vice President of Sustainability at Milliken & Company. "It's driven in part by regulations, but it is also driven by our internal teams who want more of a cost benefit analysis. There is a greater need to integrate the non-financial data into financial numbers. It's more data to make more informed decisions to better drive your business."