ESG in PCB: The Risks and Opportunities of ESG for the PCB Industry

Given the current move by governments to impose new environmental regulations that are relevant to the electronics industry, many investors, consumers, and governments are looking for companies to show measurable progress toward more environmentally and socially responsible business practices.

As the regulatory landscape continues to develop, and more and more people look to work for, buy from, and invest in companies that align with their values, environmental, social, and governance (ESG) efforts are now becoming increasingly important to long-term viability, growth, and success. 

Adopting ESG activities is now a business imperative, and the PCBA industry is no exception. Below, we examine the risks and opportunities of putting—or not putting—ESG efforts into practice.

Demystifying ESG

The term has begun to take on new meaning, often used as a catch-all phrase for sustainability, diversity, equity, and inclusion (DEI), and social responsibility. So first, let’s take a minute to demystify ESG and gain some clarity on what it is, where it came from, and where it’s going.

Environmental, social, and governance criteria is a framework of standards used by companies and investors to assess and disclose performance on environmental and social measures, helping to quantify a company’s impact on climate change and the societies in which it operates. Aimed at providing a measurable assessment of the resilience of companies, investors utilize ESG data to identify key risks and opportunities and support investment decision-making.

Although the phrase had yet to be coined, the practice of socially and environmentally responsible investing began in the 1960s when investors began excluding stocks and even entire industries from their portfolios based on perceivably unethical business practices, such as tobacco production or involvement in the South African apartheid regime.

The term itself, however, was first mentioned in October of 2005 by the United Nations Environment Programme Initiative in the Freshfields Report titled “Who Cares Wins.” For the first time, ESG criteria began to be incorporated into the financial evaluations of companies and investors began considering alignment of values to ensure responsible ownership.

Today, ESG investments are soaring. “Around the world, fund managers are convinced of the link between ESG and a company’s shareholder value, and this link is a key input for investment decisions,” states Bloomberg, estimating that ESG assets will hit $50 trillion by 2025, representing more than a third of the projected $140.5 trillion in total global assets under management.

It’s well known that due in large part to its heavy reliance on fossil fuels and the vast amounts of water required, the production of semiconductors contributes significantly to the carbon footprint of the tech sector, which, in turn, is, according to the United Nations, responsible for 2─3% of global greenhouse gas emissions.

 

 

The need for action—and reporting on that action—is clear. As PwC puts it, “When nearly two-thirds of investors globally say they want sustainability reporting to describe the impact a company has on the environment and society, it’s time to listen.”

Understanding the Three Elements of ESG

Let’s take a look at the three components of ESG and some of the risks and opportunities that lay within.

E (Environmental)

Environmental criteria in ESG initiatives refer to aspects of a company’s—and its supply chains—environmental impact, including greenhouse gas emissions, waste production, energy, and water use, and the overall ecological impact of the company. Environmental standards and reporting frameworks are intended to make sure that businesses operate in a way that limits their adverse effects on the environment and promotes a sustainable future through better management of natural resources.

The Risks

Climate-related risks such as extreme weather events or asset damage can bring severe disruption to any layer of your supply chain, with a ripple effect that can end in critical supply shortages, downtime and missed production or sales opportunities, and the litany of costs associated, whether they be financial or reputational. Safeguarding the continuity of business, profits, and your brand are all very real incentives to do your part toward a more sustainable future.

The Opportunity

By working toward lessening their environmental footprint and facing the ESG challenge head-on, companies can mitigate regulatory requirements risks, meet changing consumer expectations, take advantage of investment trends, and secure competitive advantage.

Let’s take a more granular look.

Failure to control pollution or report Scope 2 emissions could result in significant fines and penalties and serious reputational damage. Instead, future-focused businesses can remain in the lead by prioritizing sustainability and altering their business practices. They’ll benefit by more quickly adapting to new regulations, avoiding said penalties, and attracting environmentally conscious consumers, talent, and investors by reporting on their efforts and performance.

Additionally, environmental measures such as pollution reduction initiatives may result in cost savings through improved efficiencies. 

As we’ve touched on, the PCB industry uses substantial energy and resources. By transitioning to renewable energy sources such as wind, solar, and geothermal energy and implementing circular supply chain principles (reverting materials destined for the landfill back into the supply chain to reworked, recycled, or reused), PCB manufacturers can minimize waste production and conserve resources for both cost and environmental benefit.

S (Social)

Social criteria in ESG efforts look at how a business treats its customers, suppliers, employees, and communities, ensuring they keep them safe and treat them fairly. In addition to ensuring the safety of products, companies must respect labor rules, guard against harassment and discrimination, and pay and treat staff fairly, including diversity, equity, and inclusion (DEI) practices. And the responsibility stems into their supply chain. 

The Risks

As recent history has shown us, unsafe working conditions or human rights violations found within any node of your supply chain can have deleterious effects on your reputation. 

Labor strikes may create a scarcity of skilled employees and halt production. Consumer protests can create controversy and damage an organization’s reputation. 

The politics and human rights issues of a company’s Nth-tier supply chain can introduce severe reputational risk. 

We look to Apple for a couple of high-profile examples of the social threats that may hide within your value chain.

In October of 2022, Foxconn suffered from disruption due to impositions of COVID restrictions on around 300,000 workers living at the

Zhengzhou factory campus. By November, the unrest had erupted into violent protests, clashes with police, and attempts to climb fences to exit the facility.

The company has also been accused of using child labor to mine rare minerals in Africa. A lawsuit filed by an advocate group on behalf of Congolese families claims Apple’s mining practices of supporting slavery and using child labor.

The Opportunity

Businesses tend to experience less volatility when they make sure their goods and services don’t pose any safety issues and reduce their supply networks’ susceptibility to geopolitical crises and over-dependencies on suppliers.

Again, looking to Apple, in response to the controversies, the company is building a more resilient—and ethical—supply chain and mitigating its supplier concentration risks by diversifying its supplier base, aiming to have two or more sources per component or value chain, with each supplier having two or more factories in different locations.

By increasing transparency, working to eliminate human rights issues from their end-to-end supply chains, and remodeling a more diverse supplier base, companies can build resilience and mitigate various forms of risk while creating a more competitive supplier landscape.

Social criteria present a further opportunity for value creation through revenue growth. Interestingly, PwC found that social and governance factors, such as a commitment to human rights and diversity and transparency in business practice, seem to have more influence on purchasing decisions than environmental factors.

Additionally, 75% are willing to pay a sustainability premium of 5% or more for a product that is produced by a company with a reputation for ethical practices.

G (Governance)

Governance criteria, which are often referred to as management and decision-making criteria, are the final group of considerations. 

A company’s long-term success is ensured by the effectiveness of its governance. A firm can increase trust, transparency, and financial performance by looking under the hood and addressing how it governs, including the distribution of responsibilities among managers, shareholders, board of directors, and stakeholders and the structure and makeup of the board of directors.

By putting an emphasis on openness and accountability in corporate operations, the governance requirements are crucial for ensuring that a company runs in a responsible and sustainable manner while generating long-term value for its stakeholders.

S&P Global looks at four distinct factors when assessing companies’ governance performance: structure and oversight, code and values, transparency and reporting, and cyber risk and systems.

The Risk

Although it seems to garner less attention than environmental and social considerations, core issues in a company’s corporate governance structures can cause significant financial and reputation damage. Compensation and oversight of top executives, the role and makeup of boards of directors, and bribery and corruption are core issues that may be found in the way a company governs.

Take Volkswagen’s emissions tests scandal as an example. In 2015, the company was found to be hiding excessive levels of toxic diesel emissions. The cheating scandal is said to have cost the company 31.3 billion euros ($34.69 bn) in fines and settlements.

The Opportunity

Good governance is the underpinning of operational excellence. S&P Global research indicates that companies with poor governance characteristics are prone to mismanagement and risk their ability to capitalize on business opportunities over time. 

The ability of those who govern to foster a culture of transparency and proactivity and go beyond the letter of the law will affirm the business’ dedication to its written corporate responsibility commitments and policies through action, build investor and consumer trust, and drive better financial results.

According to McKinsey & Company, strong ESG performance enables companies to get ahead of violations before they occur and can lead to higher equity returns with lower risk, better credit ratings, and improved company valuations.

Specifically, McKinsey links ESG to cash flow in five important ways: 

1. Facilitating top-line growth
2. Reducing costs
3. Minimizing regulatory and legal interventions
4. Increasing employee productivity
5. Optimizing investment and capital expenditures

The long-term development and sustainability of the electronics manufacturing sector depend on ESG issues. 

However, shifting from thought to action can be difficult due to a lack of comprehensive rules, high implementation costs, and a lack of know-how. However, adopting sustainable practices is essential for the electronics manufacturing sector to achieve long-term success and profitability.

By complying with environmental, social, and governance criteria and collectively working toward a more sustainable future, the industry can generate long-term value for internal and external stakeholders and safeguard its future.

Parts Data is Key to Success

For electronics designers who are responsible for building a new product, the first step to navigating the complex environmental compliance landscape is accessing relevant data for parts. Components used in PCBAs have largely transitioned to being Pb-free in an effort to maintain RoHS compliance. REACH compliance in the semiconductor manufacturing process and conflict mineral declarations are also needed in instances where compliance must be proven. It all starts with getting the right parts data when selecting components, as well as when purchasing components ahead of a production run.

Companies that want to locate new vendors, access critical parts data, and view distributor inventories trust Octopart to deliver the data and insights they need for compliance. Sign up for our newsletter to stay up to date on the electronics supply chain.