ESG requirements in the context of production automation implementation

There has been a lot of talk about ESG in recent years. This is hardly surprising, given that the number of regulations has increased rapidly, and today ESG is more than just a matter of ethics – it involves specific regulations and global reports that influence investment decisions. These, in turn, determine the reputation and, increasingly, the success of a given business. Although ESG obligations currently apply mainly to the largest companies, EU regulations are expected to cover an increasingly wider range of businesses in the coming years.

Manufacturing is one of the key sectors of the economy, and its impact on the environment and society is obvious. The ongoing automation of production is not only a means of optimising costs and increasing efficiency, but also an important element of responsible business. Manufacturers today bear a great responsibility for implementing sustainable development requirements, and in this context, production automation is an opportunity to properly implement regulations. But is this automation a tool or an obstacle to meeting ESG requirements?

What does ESG consist of?

ESG requirements relate to three areas: environment (E), society (S) and corporate governance (G). Each of these groups faces separate challenges.

For the environment (E), the difficulties boil down to minimising the harmful impact of production on the planet. This involves, in particular, reducing the carbon footprint and greenhouse gas emissions, limiting the consumption of natural resources, responsible waste management, and increasing the use of renewable energy sources.

Social responsibility (S) concerns people – all staff, their safety, fair remuneration, and care for their physical and mental health, although the manufacturer’s responsibility towards the local community is equally important.

With regard to corporate governance (G), the key issue is to ensure a high level of ethical conduct – from the way the company is managed, through transparency and fairness in production, to the manufacturer’s relationship with other companies and state authorities.

Production automation – a tool or an obstacle for ESG?

Sustainable development principles are a global trend today. The response to market needs is the automation of production processes, which on the one hand facilitates many aspects of business, but on the other hand can pose a significant challenge in meeting environmental and social requirements.

Automated supply chain management (SCM) systems are a means of developing the most efficient and effective methods of delivering and storing goods, and are one of the key solutions for reducing CO2 emissions. This is aided by so-called automatic transport management systems (TMS), which, thanks to artificial intelligence, can optimise routes (taking into account weather conditions and other traffic obstacles, for example), thereby reducing the carbon footprint.

Specialised systems such as Manufacturing Execution Systems (MES) can play a key role in reducing waste and energy consumption, as they enable real-time analysis of waste and energy consumption, facilitating ad hoc measures. However, ESG is not just about large-scale actions – it is also about reducing paper consumption in offices on a daily basis, even in smaller companies, which can be achieved, for example, by digitising documents.

Automation allows a certain level of quality and precision to be achieved, reducing the risk of defective products and unnecessary waste. Product Lifecycle Management (PLM) systems are helpful in this regard, as they make it much easier to control the production process. These systems also facilitate the observation of the “life” of a product after it leaves the production line. Thanks to PLM, it is possible to assess how customers use products, allowing manufacturers to draw conclusions about market and consumer needs. This tool therefore allows manufacturers to improve their products so that they better meet customer needs. This increases the lifespan of products, which also reduces waste. At the same time, PLM systems allow manufacturers to plan production with the reuse of recovered components in mind.

When it comes to the environment (E), current technical developments in production automation offer many helpful solutions. Unfortunately, there are also numerous threats. The desire to optimise production costs may tempt some entrepreneurs to use cheap and non-ecological raw materials. Plastics litter the planet, and the chance of reusing them is slim. Overproduction is also a problem, especially in areas such as fast fashion. Responsibility in this area lies with both entrepreneurs and their customers. However, ethical actions by manufacturers within the framework of sustainable development will reduce consumers’ access to non-ecological products, enabling customers to make more informed purchasing decisions.

Production automation poses a challenge to the social factor (S). On the one hand, the greater the automation (more machines and the replacement of processes with artificial intelligence instead of human labour), the smaller the share of employees. There is increasing talk of job cuts in connection with the development of artificial intelligence. On the other hand, production automation reduces unethical practices by manufacturers, especially in Asian countries, where the employment of workers (including minors) in poor conditions is a widespread problem.

For the social factor, it is important for manufacturers to care for the well-being of their employees as well as local communities. Entrepreneurs should focus on relationships with employees, society, suppliers and their contractors. Production automation allows for the expansion of infrastructure and the creation of new jobs, especially in regions with higher unemployment rates. Some processes cannot be automated, and therefore the use of artificial intelligence has its limits. Human labour is invaluable in this case.

The social component can be implemented by automating human work that is dangerous or burdensome, which translates into improved job satisfaction. The employer’s attention to training can minimise the risk of errors, and decent working conditions and pay motivate employees to perform. However, success in implementing the S factor can certainly be achieved through proper management and the introduction of solutions from the G factor (corporate governance).

Corporate governance requires entrepreneurs to create balance within the company, in particular in all internal bodies of the company (among other things, by eliminating the risk of exclusion or domination). The CSRD ([1] ) directive, which introduces ESG reporting requirements, is of key importance for the corporate governance factor. Currently, this obligation applies to the largest companies, but the European Union ultimately aims to extend it to all companies.

Corporate governance can be implemented by ensuring the rights of shareholders (partners, stockholders) of a manufacturing company, transparency and tax compliance, as well as through proper risk management and the application of compliance principles[2] . Entrepreneurs should ensure that the decisions made by the company are in line with the interests of its shareholders, the well-being of its employees and the environment. The instrument used to fulfil corporate governance obligations is the creation of formalised rules that provide a framework for a given enterprise – a code of ethics, anti-corruption policy, mechanism for reporting violations, data protection and confidentiality rules. However, it is important that corporate governance does not exist only on paper. Corporate governance is primarily about enforcing the rules that have been developed.

Appearances do not pay off

The implementation of ESG principles in the production automation process not only increases efficiency and minimises costs, but also has a positive impact on the competitiveness of the company and its market position. Customers often prefer to choose environmentally friendly products from manufacturers who care about the environment and society. However, the pretence of a manufacturer’s actions can come at a high price – for example, the phenomenon of so-called greenwashing[3] is essentially a one-way ticket. Rebuilding consumer confidence in a brand after this practice has been discovered can take years. Honesty, transparency and high ethical standards on the part of the manufacturer will certainly pay off in the future…

ESG as an opportunity for strategic development

Although reporting obligations and regulations may seem burdensome, they actually provide a basis for streamlining internal processes within a company, leading to better risk management, ethical and transparent business development, and greater customer confidence in the company. ESG promotes responsible business by blocking the temptation of uncontrolled (and often) unethical production automation, which could lead to negative consequences, especially in environmental and social terms.

Responsible implementation of ESG and the application of sustainable development principles in practice can increase a company’s competitiveness and market position. Treating these principles not as a single regulatory obligation, but as a long-term process that will pay off in the future, will allow companies to achieve their environmental, social and corporate governance goals.

[1] CSDR – Regulation (EU) No 909/2014 of the European Parliament and of the Council of 23 July 2014 on improving securities settlement in the European Union and on central securities depositories and amending Directives 98/26/EC and 2014/65/EU and Regulation (EU) No 236/2012 (OJ EU L 257, 2014, p. 1, as amended).

[2] Compliance – ensuring that activities comply with standards, recommendations or relevant practices.

[3] Greenwashing can be translated as “eco-bluff”, i.e. misleading customers about the ecological properties of products, services provided and business activities.