Pulling the tab for change
European Metal Recycling (EMR) sees the potential to make an impact by delivering new, low-carbon and high-quality materials for its customers.
Keeping on track
UK manufacturers are moving ahead at pace with supply chain decarbonisation, our research suggests.
According to our research, UK manufacturers have acted decisively to resolve their recent supply vulnerabilities and now they are tackling the next big challenge: tracking and cutting emissions across their value chains.
Head of Manufacturing, Transport and Logistics, Barclays Corporate Banking
Manufacturers face up to a complex task
Cutting Scope 3 emissions – those not directly produced by a company itself – could be seen as one of the toughest decarbonisation challenges, as they are not directly within the company's control. According to our research, some businesses in the UK are collaborating with industry groups to ensure upstream compliance with their Scope 3 emissions strategy. Our survey also shows that 30% of respondents say their Scope 3 emissions commitment is being driven by brand differentiation, whilst 29% say that their commitments are being driven by the need to future-proof their businesses.
Our research shows:
Why should UK manufacturing businesses act on Scope 3 emissions now?
What is meant by Scope 3 emissions?
Scope 3 emissions are those within a company's value chain which are not produced by the company itself, but for which they are indirectly responsible for producing. These result from activities undertaken both upstream and downstream in the value chain - for example, the emissions produced by suppliers when manufacturing parts for the company, and by logistics providers in distributing the finished goods. The exception is emissions produced by power suppliers, which are labelled as scope 2 emissions.
For now, Scope 3 emissions reporting remains voluntary. However, in October 2023 the UK government published an open call for evidence^1 that could ultimately see it adopt the International Sustainability Standards Board protocol for mandatory Scope 3 emissions disclosures. In practice, larger companies are already requesting their suppliers provide data on their emissions and track progress on improvements, underlining the need to get ahead of any potential regulatory changes.
Our research indicates UK manufacturers already have a keen understanding of this issue, and most are taking action: 89% of respondents said they have a clear strategy in place to measure and reduce their Scope 3 emissions. Brand differentiation was cited by 30% of respondents as being a driver of their Scope 3 emissions commitment, along with 29% of respondents stating future-proofing their businesses is a driver.
Regional breakdown of businesses with Scope 3 emission strategies already in place, according to our research.
For the 10% of businesses yet to make a start on their Scope 3 emissions strategy, complexity (55%) and expense (53%) are the most common reasons for not doing so, amongst those surveyed. This could be seen as an existential risk, however, with 42% of respondents saying that a change of suppliers is part of their action to ensure upstream compliance with their Scope 3 emissions strategy.
How are UK manufacturers progressing?
Working more sustainably
Despite pressures on multiple fronts, our research suggests UK manufacturing remains surprisingly upbeat, with 49% of respondents extremely confident of growth in 2023. Many businesses that we surveyed have found durable solutions to the recent global supply chain disruption. Meanwhile, it appears as though a separate supply chain issue is rising up leaders’ agenda: tracking, reporting and reducing the Scope 3 emissions produced as a result of their operations. These make up the biggest proportion – between 80 and 95%2 – of the total emissions of many businesses, so addressing them will be a key consideration of net zero strategies.
“Manufacturers have a heavy influence on Scope 3 emissions through the choices they make about supplier selection, product design and distribution, for example. Our research suggests these issues are a high priority in manufacturers’ minds.” Says Lee Collinson, Head of Manufacturing, Transport and Logistics at Barclays Corporate Banking.
Inevitably, securing cooperation for Scope 3 emissions action can be difficult. Our research shows that 41% of UK manufacturers surveyed find their customers are working collaboratively on Scope 3 requirements, but also reveals that 32% are finding this work expensive and time-consuming. If regulation were to change, forcing the reduction of Scope 3 emissions in the sector, businesses that have struggled to make clear changes could potentially face challenges in their wider supply chains.
Tackling Scope 3 emissions
For the businesses that were surveyed, Scope 3 emissions action looks to be driving innovation across UK manufacturing, as businesses recognise the need to meet customers’ changing expectations. Our survey results show that more recyclable packaging (31%), reduction of air freight (30%) and use of sustainable materials in development of new products (29%) are among the downstream activities being undertaken as manufacturers collaborate in an attempt to find less carbon-intensive ways of serving customers. For instance, EMR is working on sustainability with the construction industry.3
Alongside these efforts, our research highlights that the monitoring and reporting of emissions could also require investment. UK manufacturers that responded to our survey have invested in data platforms and skills specifically for Scope 3 emissions purposes. Together with other investments such as electric vehicles, this makes it less surprising that many of the UK manufacturers surveyed claim to be investing over half of their net profits on average into sustainability/carbon reduction initiatives.
What are UK manufacturers investing in to support their Scope 3 emissions strategy?
48%
New data platforms
46%
Employee training
42%
Consultants
41%
New talent
More and more businesses are discovering the dual benefits of incorporating sustainability targets into their borrowing agreements.
Head of ESG Strategy & Propositions, Barclays
Heeral Shah, Head of ESG Strategy & Propositions at Barclays, has seen manufacturing companies focus heavily on decarbonising their businesses, as demonstrated by the 239 manufacturing companies who set science-based targets in 2022 (the second-largest industry for validated targets4). Green financing options could be particularly useful for manufacturing companies investing in the low-carbon transition. Our survey revealed a high awareness of products such as green or sustainability-linked loans, with almost half of respondents (49%) now making use of these products. According to Shah, “More and more businesses are discovering the dual benefits of incorporating sustainability targets into their borrowing agreements: a reduction in price aligned with verified progress towards decarbonisation.”
Most respondents are also aware of options to link their cash management activity with their sustainability objectives. Almost two-thirds (65%) are in the process of adjusting their treasury investment strategies from this perspective. “Given the ability to invest surplus cash in sustainable products such as green deposits, we expect this to be a growing area in the future,” says Shah.
Manufacturers progress towards net zero
Beyond Scope 3 emissions, our research indicates a continuing push towards decarbonisation by UK manufacturers in the face of other pressures. According to those who took part in the survey, employee demand is driving these efforts, underlining the importance of carbon emission reduction strategies to employee recruitment and retention.
Many businesses surveyed that are currently off-track to meet their carbon emissions reduction strategy are responding by revising the timeline for execution of strategy (65%) or changing their strategy to achieve similar outcomes by alternative methods (60%).
Of those without a formal carbon emissions reduction strategy, most cite a lack of demand, or say they do not have the right funds and expertise. Barclays’ sustainability hub provides ideas and inspiration for businesses starting their net zero journey. Shah adds: “Some organisations are still unaware of the potential of solutions such as green trade finance and sustainable capital markets, which could provide them with valuable support.”
Storage: a permanent supply solution?
As manufacturers grapple with supply chain emissions, results from our research indicates that other supply difficulties may be starting to recede.
Our 2022 report, Chain Reaction, highlighted the issue of mass storage of unfinished product due to supply availability problems. At that point, 72% of UK manufacturers surveyed had goods in storage for this reason. Our new research shows the proportion is even higher. 93% of businesses who took part in the 2023 survey now have incomplete and unfulfilled items warehoused, with an average value of just over £1m. However, rather than an escalation of the problem, this may represent the new normal, as manufacturers take steps to find long-term solutions to these issues.
“We are seeing that manufacturers are now prepared to put more components in warehousing, to avoid the acute post-pandemic issues they experienced,” says Lee Collinson. “In fact, warehouse space is now at a premium, with some new buildings being sold off-plan, because so many businesses want to reduce their risk in this way.”
For the businesses changing their strategy to hold more stock, there are clear implications for working capital. “Higher inventory levels, coupled with inflation, have meant much higher working capital requirements for businesses – particularly at the larger end, so clients are turning to solutions like inventory finance and asset-based lending,” says Divyesh Modi, Managing Director, Trade & Working Capital for Barclays Corporate Banking.
Year on year increase of products that manufacturers have in storage awaiting completion, according to our research.
Supply chain disruption: a turning-point
Besides arming themselves with increased storage capacity, UK manufacturers have adopted other strategies to overcome supply disruption, our research shows. The most common amongst respondents is to widen the number of suppliers for key raw materials (38%), while 35% have brought elements of their supply chain in-house – a strategy adopted by half of the furniture and toy makers in our survey, and almost as many construction and energy businesses. For instance, building products manufacturer Epwin recently acquired recycler Poly-Pure as a source of PVC-U material – a move that will help secure supply while reducing carbon.5
Sometimes acquiring a supplier to guarantee supply makes the most strategic sense. We would always consider funding such an acquisition, where it’s aligned to a client’s strategy by de-risking supply chain, or capturing margin otherwise taken by the supplier.
Head of Large Corporate Lending at Barclays Corporate Banking
While supply disruption remains a live issue for many businesses, for those that took part in the survey the proportion currently facing supply chain challenges is now 49% – down by 10% from 2022. Inevitably, there are differences in the influence of many variables on sector supply chains. For example, our research shows of construction companies facing supply chain issues, 44% face problems with the availability of raw materials. Part of the response is to bring more supply in-house: 48% of construction businesses are doing so, compared to an average of 35% among manufacturers as a whole.
“These figures back up what I see as I meet businesses around the country, where supply chain issues are now mentioned less often,” says Lee Collinson. “That’s partly because so many businesses have learned critical lessons from the Covid-19 pandemic and moved decisively to ensure they’re not caught out by single-sourcing in the future.”
Growth optimism amid uncertainty
Make UK’s autumn report shows a slowdown after a positive start to the year6, however overall sentiment of those who took part in the survey is positive. Our research reveals widespread confidence, despite the current subdued output. A vast proportion of respondents expect to achieve growth this year, with businesses reporting an average rise in turnover of 55% for 2023 to date compared to the same period last year, with the electronics, aerospace, telecoms and defence sectors performing especially well.
These figures paint a picture of a largely resilient and optimistic sector. While it is no surprise that capital goods manufacturers are performing well, the consumer manufacturing sector is certainly facing strong challenges, and are experiencing reductions in demand as cost of living pressures continue, with more mortgage holders set to see their fixed-term deals end amid continuing high interest rates
Head of Manufacturing, Transport and Logistics, Barclays Corporate Banking
Strategies for success
Support suppliers
Scope 3 emissions action means asking direct suppliers to measure and address their carbon footprints, but avoid simply issuing a lengthy checklist. Discuss their needs, offer support where possible and set realistic deadlines for progress.
Go beyond reporting
Don’t wait for customers to seek carbon reductions. Understand their net zero targets and look for ways that you could offer to help, for instance by developing new products using more sustainable materials.
Find funding solutions
Decarbonisation needs investment. Talk to our teams about green lending, inventory finance and other products that could support your initiatives to meet Scope 3 emissions requirements and achieve wider sustainability progress. Subject to application, financial circumstances and borrowing history. Terms and conditions apply.
About the research
The research was conducted by Censuswide, among a sample of 610 (aged 18 and over) Senior Managers and above, in manufacturing. Broadly even splits on company size (10-500 and above), subsector and UK region. The data was collected between 27th September 2023 and 4th October 2023. Censuswide abides by and employs members of the Market Research Society and follows the MRS code of conduct which is based on the ESOMAR principles.
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1https://www.gov.uk/government/calls-for-evidence/uk-greenhouse-gas-emissions-reporting-scope-3-emissions^
2https://assets.publishing.service.gov.uk/media/652ea475697260000dccf9db/scope-3-emissions-in-the-uk-reporting-landscape.pdf^
3https://uk.emrgroup.com/sell-to-us/sectors-we-serve/construction^
4https://sciencebasedtargets.org/reports/sbti-monitoring-report-2022^
5https://www.epwin.co.uk/epwin-window-systems-publishes-new-sustainability-brochure/^
6https://www.makeuk.org/insights/reports/manufacturing-outlook-2023-q3^
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Epwin Group
Epwin Group is a leading UK-based manufacturer of energy-efficient and low-maintenance building products, including windows, doors and fascia systems.
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