The ESG Principles Wake-Up Call

2025 and Rising Sustainability Expectations

Key drivers include technological advancements thanks to artificial intelligence and machine learning, GenAI, advanced big data analytics and agentic AI.

Unfortunately, relatively few companies have embedded sustainability into their core business. For most, sustainability is still not a mature business function and sustainability activities are functionally fragmented.

In the 2023 Gartner Drivers of Environmental Sustainability Survey underlined that 12% of business leaders stated that environmental sustainability was fully embedded and operationalized in decision making. Meanwhile, 11% stated that it was a driver in the decision-making process and 15% said that it was considered in most decisions.

But today expectations around sustainability are no longer a nice-to-have or a decision to be postponed: they’re the norm. Whether it’s governments introducing tighter regulations or consumers choosing greener brands, the pressure is on. While new solutions support transparency and visibility into companies’ ecosystems, manufacturers are feeling the heat to transform how their supply chains work. And since supply chains become at the same time more global and interconnected, it’s more complex to fulfil the growing ESG regulations.

Focus on sustainability and ethical sourcing: Companies are increasingly focusing on sustainability and ethical sourcing, which requires a thorough understanding of supplier practices and risks. Risk management solutions provide insights into these areas.

Why ESG Principles is no Longer Optional for Manufacturers

In the past, ESG (Environmental, Social, and Governance) was sometimes treated like an optional add-on. It was something to talk about in a report or a marketing campaign. Today, it’s the core of how manufacturers operate. Failing to act can cost money and reputation. But companies that get ESG criteria right can boost efficiency and earn real trust from consumers and partners.

Summary of what the Article will Explore

This article looks at how manufacturers are reshaping their supply chains to meet ESG demands. We’ll explore the major drivers behind the shift, break down key challenges, and walk through practical steps companies can take to turn ESG criteria from a hurdle into a strategic advantage. We’ll also touch on the evolving global regulatory landscape and offer a roadmap for companies at every stage of their ESG journey.

The Shift Towards Sustainable Manufacturing

The Evolution: from Voluntary CSR to Mandatory ESG Integration

Ten years ago, sustainability in manufacturing often meant simply planting trees and donating to local causes. Today, that’s changed dramatically. ESG integration is now often a regulation and therefore embedded in business strategy. It touches every part of the value chain, from procurement and production to packaging and recycling.

Market Drivers: Consumer Demand (83%), Investor Scrutiny, Regulatory Acceleration

Why the shift? For one, consumers are paying attention. Around 83% want brands to be transparent and responsible. Investors are also getting serious, directing capital toward companies that can prove they’re reducing emissions and treating workers fairly. And regulators? They’re moving fast, with climate policy and mandatory disclosures taking centre stage: for example, only in EU Corporate Sustainability Reporting Directive (CSRD) and Corporate Sustainability Due Diligence Directive, Foreign Corrupt Practices Act (FCPA), General Data Protection Regulation (GDPR) and others.

ESG Compliance as a Source of Competitive Advantage

Forward-thinking manufacturers are using ESG to get ahead. By cutting waste, conserving energy, and sourcing ethically, they’re not only reducing risks but also creating new value. From better brand loyalty to attracting purpose-driven talent, ESG in business is becoming a smart business move, not just a compliance exercise.

ESG and Corporate Responsibility: Global Regulatory Landscape

Regional Breakdown

• Europe: Europe is leading the charge with strict regulations and mandatory supply chain due diligence. Companies are expected to track everything, including carbon and labour conditions.
• North America: Things are a bit more fragmented here, but innovation is booming. With new rules in places like California and growing investor pressure, U.S. and Canadian manufacturers are stepping up with tech-driven solutions.
• Asia-Pacific: Countries like China are investing heavily in clean energy and setting bold emissions targets. While regulations vary, the region is making big moves to align with global ESG standards.
• LATAM & Africa: These regions are focusing on protecting natural resources and improving labour conditions. ESG is gaining ground, especially among companies that export to Europe or North America.

ESG in Manufacturing: Implications for Global Manufacturers

For global manufacturers, keeping up with all these rules is no small task. But those who align with the most advanced frameworks will be in the best position to succeed worldwide. It takes flexibility and digital tools across the supply chain to stay compliant and competitive.

Key Barriers to ESG Integration in Supply Chains

ESG in Manufacturing: Lack of Visibility Across Multi-Tier Suppliers

Most manufacturers don’t know what’s happening beyond their immediate suppliers. ESG risks, like poor labour conditions or environmental harm, are often buried deep in the supply chain. Without transparency, it’s nearly impossible to fix what you can’t see.

ESG in Manufacturing: Fragmented ESG Reporting and Standards

Another challenge is the reporting landscape. There are so many frameworks – CSRD, GRI, TCFD, and more. Companies often end up duplicating efforts or missing the mark entirely.

Scope 3 Complexity: Indirect Emissions and Data Access

Scope 3 emissions mean those that come from suppliers or product use, make up the bulk of a manufacturer’s footprint. But getting reliable data from dozens (or hundreds) of suppliers is tough. Most don’t have the tools or know-how to measure and report their emissions.

Greenwashing Risks: Regulatory Penalties and Reputational Damage

Sustainability claims are now under the microscope. If a company says it’s “eco-friendly” without proof, regulators and watchdogs may step in with the risk of fines and lawsuits.
The ESG risk management is a critical segment within the broader supply chain risk management and supply chain management sectors. Tools and technologies are necessary to assess, monitor and manage risks associated with their suppliers.

ESG Risk Management: Modern Slavery and Forced Labour Exposure

Sadly, forced labour still exists in many supply chains. With new laws in countries like Germany and Canada, companies must do more to investigate and eliminate these practices.

ESG Due Diligence: The Cost of Inaction

Financial ESG Risk: $3T in Assets Exposed due to Supply Chain Opacity

Poor supply chain visibility can hit companies where it hurts: their bottom line. Analysts estimate that over $3 trillion in assets are at risk because of ESG blind spots. Delays, fines, and disruptions all cost money, and they add up fast.

Social ESG Risk: 50M People in Modern Slavery Globally

The numbers are staggering. Around 50 million people are trapped in modern slavery. If manufacturers don’t take action, they risk being linked to these abuses, even if unintentionally.

ESG Risk: Reputational Damage and Consumer Trust Loss

Today’s consumers are smart and digital. If a brand is caught cutting corners on sustainability or ethics, the backlash can be swift and brutal, with a rapid word of mouth thanks to the strong interconnection of people through the social media. Once trust is broken, it’s hard (and costly) to rebuild.

ESG integration Action Plan: How to Implement ESG in Business

1. Supplier Engagement: Clear ESG Expectations and Training

Start by setting expectations early. Make ESG integration part of your supplier contracts, and offer training to help partners meet your standards, especially those in regions where resources are limited.

2. ESG Governance: Internal Ownership, Policy Alignment

ESG success starts from within. Build cross-functional teams that bring together procurement, legal, and sustainability. Make ESG part of the everyday business rhythm, not just something handled by one department.

3. Materiality Assessments: Focus on Key Environmental/Social Impacts

You can’t tackle everything at once. Use materiality assessments to pinpoint which ESG issues matter most to your business and your stakeholders. Then prioritize action accordingly.

4. Digital Tools: Monitoring Emissions, Sustainability Dashboards, DPPs

Technology is your friend here. Tools like dashboards, emissions trackers, and Digital Product Passports make it easier to collect, monitor, and share ESG metrics and data in real-time, also among suppliers and traders.

5. Industry Collaboration: Shared Standards, Third-Party Audits

You’re not in this alone. Join industry groups, work with third-party auditors, and align on shared standards. It lightens the load and boosts credibility.

ESG Maturity Curve: From Compliance to Innovation

• Level 1: Companies at this stage are just checking the regulatory boxes. ESG is reactive and minimal.
• Level 2: Here, businesses start using ESG strategy to manage risk. They report more consistently and map key emissions and social impacts.
• Level 3: Now the company is optimizing, embedding ESG strategy into procurement, using digital tools, and improving efficiency.
• Level 4: ESG strategy becomes a true driver of innovation. These companies design products for sustainability, attract top talent, and shape the industry’s future.

Knowing where you stand on this curve can help set goals and focus your next steps.

ESG reporting: KPIs & Metrics to Track

Want to know if your ESG strategy is working? Here are a few key metrics to watch:

• ESG metrics – tiered supplier traceability: Can you track ESG data beyond your immediate suppliers?
• ESG metrics – scope 1, 2, and 3 emissions coverage: Are you measuring emissions across your entire value chain?
• ESG audit scores: How do your suppliers perform in independent audits?
• Supplier ESG onboarding ratio: Are new and existing suppliers aligned with your ESG goals?
• ESG metrics – % spend under ESG-evaluated contracts: How much of your procurement includes ESG terms?

Tracking these numbers helps show progress and areas where you still need to grow.

ESG in Business: Next Steps and Challenges

ESG Principles is Now a Global Business Imperative, not just a Reporting Exercise

The world has changed, and ESG is now a defining factor in business success. For manufacturers, it’s about staying relevant and responsible.

Challenges include dynamic risk environment: solutions must be adaptable and updated in near to real time because of a rapidly changing landscape, geopolitical instability, climate change, tariffs application, etc.

Data privacy: Data privacy and security are more and more important also because of the increasing use of data analytics.

Integration complexity: Integration of proprietary system, different IT environment, management solutions can be complex and costly.

Correct use of digital technology to predict and manage risks more effectively, also to meet customer expectations for functionality and customer experience

Future-Proofing Means Embedding ESG Principles into Core Supply Chain Operations

To truly lead, companies must embed ESG into how they source and operate. The rewards are lower risk, higher loyalty, and a stronger foundation for the future.

Want to see what this looks like in action? Check out our next article

Read more: The Circular Economy in Action: How Henkel is Advancing Sustainability Across Its Value Chain