The focus on environmental, social, and governance (ESG) factors today cannot be overstated due to pressing climate issues. Consumers have taken notice and added increasing pressure on companies to take a stand and align ESG with business and operational goals. Many have heeded the call, with ESG-focused institutional investment expected to jump by 84% to US$33.9 trillion in 2026, up from US$18.4 trillion in 2021.
In manufacturing, companies are increasingly recognising the importance of ESG factors in driving long-term sustainable growth. One of these key growth drivers is strategic capital allocation, yet many manufacturing leaders are still not doing enough. An EY survey showed that 72% of 500 global CFOs need to improve their capital allocation processes, while a mere 40% stated that their capital allocation approach was flexible enough to adapt to a constantly evolving operating and socio-political environment.
Effective capital allocation towards ESG initiatives must be achieved so that manufacturers can not only enhance their environmental and social impact but also drive long-term value creation for their stakeholders.
Importance of strategic capital allocation in boosting ESG goals
Strategic capital allocation plays a pivotal role in advancing ESG goals for manufacturing companies. By earmarking funds for ESG initiatives, manufacturers can invest in sustainable technologies and processes, implement social responsibility programs, and enhance governance and ethical business practices. This strategic allocation of capital enables manufacturers to mitigate environmental risks, improve social impact, and strengthen corporate governance, thereby contributing to sustainable growth.
A recent Deloitte survey revealed that ESG is an integral part of capital allocation strategy for several reasons – four in 10 survey respondents say ESG gives them the opportunity to create value and gain a competitive advantage, while 65% say that they expect ESG initiatives to boost their enterprise value.
Furthermore, effective capital allocation towards ESG initiatives can help manufacturing companies align with global sustainability targets, mitigate the impact of climate change, and enhance their reputation as responsible corporate citizens. As a result, manufacturers can attract environmentally and socially conscious investors, access sustainable funding sources, and bolster their competitive advantage in the market.
Impact of capital allocation on long-term sustainability and growth
In addition, capital allocation plays a critical role in driving long-term sustainability and growth. Manufacturing companies that prioritise ESG when allocating capital will be able to more effectively manage risks and create long-term value for stakeholders. Matthew Lock, Deloitte Business Modeling and Analytics Partner, says: “Every ESG opportunity has some economic value nested in there somewhere.”
By allocating capital towards ESG initiatives, manufacturers can drive innovation, improve operational efficiency, and foster a culture of sustainability within their organisations.
What should manufacturers consider in their capital allocation strategies?
Manufacturing companies have a range of options and strategies to consider when allocating capital towards ESG initiatives.
Investing in sustainable technologies and processes
Manufacturers can allocate capital towards the adoption of sustainable technologies and processes, such as renewable energy systems, energy-efficient machinery, and waste reduction initiatives. By investing in these technologies, manufacturers can reduce their environmental footprint, lower operating costs, and enhance their overall sustainability performance.
Implementing social responsibility programmes
Another crucial strategy for manufacturers is to allocate capital towards social responsibility programmes that benefit local communities, employees, and other stakeholders. This can include initiatives such as employee welfare programmes, community development projects, and diversity, equity, and inclusion (DEI) efforts, which contribute to a positive social impact and foster goodwill.
Enhancing governance and ethical business practices
Manufacturers can also allocate capital towards enhancing governance and ethical business practices, such as implementing robust risk management frameworks, strengthening compliance measures, and promoting transparency and accountability. This helps develop trust with investors, customers, and other stakeholders.
What you should not do in your capital allocation strategy
While it is essential for manufacturers to allocate capital towards ESG initiatives, there are certain strategies that should be avoided to ensure the effectiveness of such allocations.
Don’t only look at things from a bird’s eye view
Like any organisation, manufacturers need to ensure that they have a comprehensive view on the processes and alignment of their operations and ESG initiatives. Having a broad overview is beneficial, but taking a deep dive into the details is what will paint a clearer picture for leaders, so they understand where their capital is going to and if it is aligned with the organisation’s priorities.
Avoid biased decision-making when allocating capital
Greater care must be exercised when it comes to biased capital allocation, especially since it’s been found that more than six in 10 finance executives are unconfident in their company’s ability to allocate capital optimally. Organisational decision-makers should therefore avoid “groupthink” and abide by capital allocation best practices like bundling investment decisions, involving cross-organisational teams, and more for optimal outcomes.
Steps for ensuring effective ESG capital allocation
Conduct comprehensive ESG risk assessments
Manufacturers should conduct comprehensive ESG risk assessments to identify and mitigate potential risks. By understanding these risks, manufacturers can allocate capital towards initiatives that address the most pressing ESG challenges and opportunities.
Engage with stakeholders and investors to align ESG goals
Manufacturers should actively engage with stakeholders and investors to align and outline ESG goals and priorities. By seeking input from key stakeholders, manufacturers can ensure that their capital allocation decisions are in line with the expectations and values of their stakeholders, thereby enhancing the effectiveness of their ESG initiatives.
Integrate ESG considerations into overall business strategy and decision-making processes
Manufacturers should integrate and embed ESG considerations into strategic planning, budgeting, and performance management, as well as devise a structured roadmap. This is especially important for getting closer to hitting ESG targets so that these goals are prioritised and effectively supported through capital allocation. In the words of Rochel Hoffman, a Deloitte Touche Tohmatsu Ltd. partner in Financial Advisory and Deloitte Australia’s ESG M&A leader: “ESG should no longer be siloed. It should be integrated into investment decision-making.”
Devising the right capital allocation strategies for manufacturing ESG
Strategic capital allocation plays a critical role in driving sustainable growth for manufacturing companies. Along with developing the right capital allocation strategies, having a neutral and objective maturity assessment framework like the Consumer Sustainability Industry Readiness Index (COSIRI) can also guide manufacturers towards better ESG and environmental outcomes. By having these capital allocation strategies and peer comparison tools available and working in tandem, companies will be empowered to get closer to Net Zero and achieve their ESG goals.
