by Bob Zaruta, President/CEO, NWIRC
I’ve had several conversations in recent weeks with Small Mid-sized Manufacturers (SMMs) who are in the automotive supply chain. There is a set of new challenges on the horizon for SMMs, or opportunities depending on one’s perspective, related to ESG – Environmental Social and Governance. Sustainability, environmental stewardship, and social responsibilities have been critical topics discussed in boardrooms of the largest corporations for years. Today, as consumers and shareholders demand even greater corporate responsibility and accountability, and as government weighs in, those discussions and the ensuing strategies and actions are intensifying and expanding. Automotive original equipment manufacturers (OEM’s) like GM, Ford, Chrysler, Honda, and others are beginning to take steps to drive ESG in their supply chains. While ESG is not exclusive to the automotive sector, nor for the matter exclusive to manufacturing, it will be our focus for this article.
So, what is ESG and what’s driving it in automotive. ESG is a framework used to assess an organization’s business practices and performance on various sustainability and ethical issues. ESG also provides a way to measure business risk and opportunities in those areas. Included in the ‘environmental’ component are waste, energy and water consumption, pollution, direct and indirect greenhouse gas emissions, depletion of natural resources, deforestation, and climate change. Included in the ‘social’ component are employee relations and working conditions, diversity, health, safety, local communities, and conflict. Included in the ‘governance’ component is board diversity, executive compensation, corruption, bribery, lobbying, donations, and tax strategies.
As a major contributor to greenhouse gas emissions and for its heavy consumption of energy, the automotive industry is under intense scrutiny. The industry has responded with aggressive targets to reduce emissions. The shift to increasing production of electric vehicles will certainly be a major factor. But the scrutiny and pressure on the automotive piants is also being applied to their massive and complex supply chains. I listened to a webinar recently where a representative from Ford Motor Company stated that ESG is not mandatory at this time but was just a level short of that from Ford’s perspective.
Right now, Ford is highly encouraging its suppliers to be proactive. So, what does that look like for SMMs that are in the automotive supply chain, or perhaps looking to that sector for future business? It means collecting consumption data related to energy, water, other natural resources, and emissions. It means some estimating initially, updating with actuals in the future including real costs, and entering all the data into a system or software platform. Then, like the OEM’s themselves, it means setting targets for reduced consumption and emissions and developing an action plan to achieve those targets. Ford specifically referenced having quarterly updates whereby the SMMs would share their progress to them (excluding any operational costs savings). Companies would start with scope or level 1 and move to level 2 with some continuing to the advanced level.
Complying with the demands of OEMs and other larger customers is not new for SMMs. In the 1990s and early 2000, many SMMs became certified to the International Organization for Standardization. First published in 1987, the ISO 9001 standard for Quality Management System was revised in 2000, 2008, and 2015. Similarly, ISO 14001:2015 Environmental Management System standard came on the second scene to help organizations operate with sustainability, adhere to environmental regulations, and
continuously improve processes.
Fast forward to more recent times and SMMs in the Department of Defense (DoD) supply chain face the challenges of Cybersecurity Maturity Model Certification (CMMC) published in January 2020 and revised in November 2021. Similar to the multi-level of ESG, CMMC Level 1 is a self-assessment containing 17 practices, Level 2 contains 110 cybersecurity controls of the NIST SP 800-171 requirements, and expert Level 3 for those suppliers that handle the most confidential information requiring the highest level of security.
If ISO and CMMC are any indicators, ESG will evolve with revisions and complexity including auditors to validate. SMMs will respond as they always do with resiliency. Early adopters will look to get a competitive advantage. In front of the opportunity, amidst the uncertainty, NWIRC will be a resource for SMMs. We are planning ESG roundtables, so keep an eye out for those announcements. In the meantime, should you have some questions, please feel free to reach out to me at email@example.com.