Are Inflation Pressures Impacting Manufacturers’ Sustainability Goals?
With US inflation rates rising rapidly, manufacturers are finding their costs rising faster than the prices they can charge for their products. As a result, they must look for ways to protect their diminishing margins without pricing themselves out of the market. One way has been to curtail their sustainability goals.
What Is Sustainable Manufacturing?
The United States Environmental Protection Agency defines sustainable manufacturing as the creation of manufactured products through economically-sound processes that minimize negative environmental impacts while conserving energy and natural resources. It also enhances employee, community, and product safety.
Thus, sustainability involves more than saving the planet. A company’s sustainability goals must involve all its stakeholders, from investors, regulators and customers to employees. Sustainability must be at the core of all business decision-making.
But, according to a recent survey conducted by Visual Components, 67% of manufacturing decision-makers in the US agree that their sustainability strategy has been stalled due to cost pressures resulting from inflation. Consequently, 60% of the survey respondents admitted that less than 50% of the materials used in their manufacturing processes are sustainable, while 71% stated that less than 50% of their manufacturing operations are powered by renewable energy. Only a third of US organizations are focusing on waste reduction, while less than half are working to improve efficiency, and less than a quarter are actively working on reducing power usage.
Thus, inflation is inhibiting manufacturers’ ability to invest in sustainable processes and products as it prevents consumers from choosing to pay a premium for more environmentally sustainable products over less expensive but unsustainable ones.
Learn More: 61% People Choose Price Over Sustainability: What Does That Mean for Business?
Can Manufacturers Afford Not To Be Sustainable?
Based on their research, Bain & Company predicts that 40% of US consumers will increase spending on sustainable brands over the next three years despite customers’ reluctance to spend more during the current inflationary period. In Europe, millennials account for half of retail spending on sustainable insurgent brands. Thus, Bain & Company predicts companies that wait for the economic climate to improve before pursuing sustainability goals will eventually “lose the hearts and pockets of customers.”
Vanguard, a US investment firm, also predicts: “Climate change, and the ongoing global response, will have far-reaching economic consequences for companies, financial markets, and investors, presenting a clear example of a material and multifaceted financial risk.” Hence, manufacturers that choose to forego sustainability investments will lose market share, talent and brand identity to their competitors who have continued to work toward their sustainability goals.
Learn More: The Sustainability Stall-out: Will 2023 See a Sea-change?
Ways To Remain Sustainable Without Impacting Product Margins
What can manufacturers do today to remain profitable today and in the future? First, they need to recognize that their existence depends not only on making a profit but also on delivering real value for people and the planet. Here are some ways manufacturers can pursue their sustainability goals while working to protect and even improve their margins:
1. Build employee engagement
According to Visual Components research, 65% of the surveyed manufacturing decision-makers agreed that employees hold greater power in driving sustainability strategies. This is especially true for millennials, who are more likely to stay with an employer when they have a strong connection to their employer’s purpose. Thus, sustainability leaders look first to their employees for innovative ideas for sustainable business practices.
2. Avoid a brand-first approach
CEOs and board leaders must rethink their business strategies, operations and supply chains entirely, so sustainability becomes a fundamental part of their business strategy. If the driving force behind sustainable actions is brand management — that is, the company wants to be seen as socially responsible, and sustainability is mainly used for competitive differentiation — it is unlikely that the sustainability expectations of all stakeholders will be met. Thus, organizations need to elevate sustainability to an executive responsibility that sees sustainability as a driving force throughout the organization’s decision-making.
3. Take advantage of the 2022 US Inflation Reduction Act
The US Inflation Reduction Act (IRA) offers various solutions and tax incentives for manufacturing sustainability. With the bill’s funding to support carbon reduction efforts, manufacturers, which account for 24% of all carbon emissions in the US, will be better able to move to more sustainable practices without affecting their bottom line.
Specifically, the IRA provides energy loans and reinvestment financing for energy-related projects. The bill also increases tax credits for companies that build and operate carbon capture and storage facilities to $85 per ton.
4. Take advantage of inflation’s sustainability opportunities
Tim Crockford, who heads the Regnan Global Equity Impact Solutions Fund, says rising commodity prices are actually “triggering investor interest in companies that can recycle, process waste and optimize products to reduce costs.” He warns that with the cost of inputs rising dramatically, sustainable manufacturing has now become a financial imperative.
Investing in technology that helps manufacturers gain visibility throughout their entire supply chain enables them to make sustainability decisions while reducing costs. Technologies such as simulation software, 3D printing, and the use of IoT, cloud computing, mobile devices and edge computing on the factory floor are crucial to reducing waste, optimizing floor layouts and lowering emissions.
PTC, for example, offers digital transformation and IoT software that uses sensors and data to analyze manufacturing processes to find manufacturing mistakes and wastage that results in too much material being used. Befesa helps manufacturers by collecting hazardous waste and residues and processing them back into raw inputs. These companies’ technologies not only help save material but also reduce costs.
5. Focus on the long-term
Despite weathering challenging economic times, organizations must ensure that sustainability stays at the forefront of their decision-making. As Russell Reynolds Associates’ research has found, “The best sustainable leaders commit to audacious, long-term goals, and have the courage to make decisions that may be unpopular with more short term-oriented stakeholders.”
Investments in energy-saving and waste-reduction technologies today will help to reduce costs and exposure to risk in the short term while companies work on plans for more comprehensive and expensive commitments to sustainability in the future.
What other factors do you think are impacting the sustainability goals of manufacturers? Share your thoughts on Facebook, Twitter, and LinkedIn. We’d love to hear from you!
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