Report: Small manufacturers struggling to meet customers’ increasing ESG demands

Stock image.

This is a headline finding from a survey of 150 UK-based manufacturing companies conducted by Lloyds Bank and industry body Make UK. The survey results were published today (12 February).

Three in four (74%) of these firms said they have built ESG-related conditions into supplier contracts as part of revamped procurement strategies. This ties into an uptick in businesses in the sectors having ESG targets and strategies, particularly prominent since 2021.

Similarly, 77% of the SME manufacturers polled said they are receiving ESG-related requirements from their customers.

This is important given that most large firms will see their supply chains accounting for significant environmental and social impact, for better or worse. For example, CDP estimates that the average large multinational firm’s supply chain will generate 11.4 times the level of emissions as its operations.

Nonetheless, the survey revealed that SME manufacturers are struggling to meet increasing demand for ESG-related disclosures or programmes. 52% said they do not have the resources needed to align with increased customer demands, whether due to financial constraints or a lack of in-house specialist knowledge.

Less than one-third (27%) of the SME manufacturers surveyed said they receive support from their larger customers to improve their ESG-related strategies, performance or disclosures.

The survey also found that, in many cases, businesses are not equipped to measure their suppliers’ performance against top-down ESG targets. 45% of respondents said they are not aware of supplier progress.

Lloyds Bank’s head of manufacturing and industrials Huw Howells said: “It’s particularly encouraging to see that larger companies are mostly in a good position in terms of formalised ESG strategies, corporate and supplier governance, and supplier management. However, these increasing requirements are creating financial and technological barriers for many firms and even more so for smaller firms in their supply chains.

“It’s therefore important for manufacturers to work with their supply chains to ensure that ESG strategies are a sustainable collective achievement and a force for future growth.”

Hot topics

The report found that the most prominent forms of ESG conditions set by manufacturers relate to governance.

For example, four in ten firms have enhanced their human rights requirements for suppliers while a third have boosted labour rights terms and more than one-quarter (27%) have bolstered requirements on diversity, equity and inclusion (DEI).

One-quarter of businesses polled stated that they have set stronger supplier requirements on climate. Just 12% had done the same for biodiversity-related topics.

Those polled said climate and nature are the topics where they will likely increase requirements in the years to come, partly due to mounting risks in the supply chain. These range from the physical risks of issues such as climate-linked extreme weather damage, to the risks of non-compliance with enhanced regulation from national governments.

Tune in to the Sustainability Uncovered podcast 

Lloyds Bank is edie’s partner for the long-running Sustainability Uncovered Podcast – the show for anyone working in, or passionate about, sustainable business and climate action.

The most recent episode, streaming here, is dedicated to communications, reporting and relationship-building. Tune in to hear three new and exclusive guest interviews on these topics from VF Corporation, Pai Skincare and The Open University.

Sustainability Uncovered is available to listen to on iTunes, Spotify, Google Podcasts and Soundcloud – or bookmark this page to see the full list of podcast episodes as they appear.