AM Companies must get started on their ESG journey. Here is how. (Part 1)

ESG concept of environmental, social, and governance. words ESG in a woodblock on a coin for sustainable organizational development.account the environment, society and corporate governance.

For a long time, sustainability in our industry has been focusing on environmental concerns only. As time goes by, conversations with investors and VC companies have urged Additive Manufacturing (AM) companies to make profit while doing good for people and the planet. This triple bottom line is at the heart of Environmental, Social, and Governance (ESG) planning and strategies companies should implement to withstand the test of time, investor demands, and cultural shifts. So, how should they get started? The article below aims to respond to this one-million-dollar question.

ESG is both simple and complex. To avoid drowning in the sea of information the Internet can offer, we sat down with three lawyers from Squire Patton Boggs (US) LLP: Dr. Andreas Fillmann, Wolfgang A. Maschek and Valerio Giovannini. With over 40 offices across the world, this full-service global firm operates on 4 continents with more than 1500 specialist practicing lawyers. Their Brussels-based office focuses on public policy and looks into all ESG-related legislation. Overall, no matter where they are based, the team at Squire Patton Boggs helps companies understand the business and legal implications surrounding ESG, and on the other hand, helps design, develop or overhaul policies and practices in relation to sustainability and ESG.

Together, Fillmann, Maschek and Giovannini help us understand:

  • The different directives and regulations that should draw AM companies’ attention right now
  • The regulatory body in charge of monitoring the rules after the implementation of these directives and regulations
  • And the first steps to get started

1-  What are these ESG regulations?

Since 3D ADEPT Mag is a global digital and print magazine, it’s important to mention that changing administration priorities under President Biden have amplified the need for attention to ESG in the USA but legislation may slightly differ from Europe – which will remain our key focus in this dossier.

Within the EU region, different legal requirements have passed in some jurisdictions but are being enacted at different paces. In this vein, we learned from our subject matter experts that the different regulations concerning ESG include:

  • The Taxonomy Regulation
  • The Non-Financial Reporting Directive (NFRD)
  • The Corporate Sustainability Reporting Directive (CSRD)
  • The Sustainable Finance Disclosure Regulation (SFDR) – (mostly applied to banks and financial institutions)
  • And the still negotiated Corporate Sustainability Due Diligence Directive (CSDDD)

Even across different European companies, one can observe differences in the implementation of ESG legislation. With increasing demand from investors that require companies to be ESG compliant, [technology] companies have to meet reporting requirements but also product requirements. That’s why they should set up a roadmap to ensure that all the discussions around this topic continuously align with their vision and goals,” Fillmann explains.

Simply put, the Taxonomy Regulation is a framework that indicates when a company or enterprise is operating sustainably or environmentally friendly. The Taxonomy Regulation positively recognizes green, or “environmentally sustainable”, economic activities that make a substantial contribution to achieving the six climate and environmental objectives, while minimum social safeguards.

The six environmental objectives that are assessed here include climate change mitigation, climate change adaptation, sustainable use and protection of water and marine resources, transition to a circular economy, pollution prevention and control as well as protection and restoration of biodiversity and ecosystems.

Compared to their competitors, companies in compliance with the Taxonomy stand out positively and thus might benefit from higher investments. Thereby, the legislation aims to reward and promote environmentally friendly business practices and technologies.

Under the NFRD (Directive 2014/95/EU), certain large EU public-interest companies must disclose non-financial and diversity information in their annual reports. The CSRD legislation comes as a reinforcement to this one as it urges around 50,000 companies seated in the EU to report sustainability disclosures across several topics pertaining to environmental and social issues, and improve non-financial reporting.

As for the CSDDD, which is still under discussion at EU level, it would require companies to establish due diligence procedures to overcome adverse impacts of their actions on human rights and the environment along their global value chain.

With the EU Green Deal, one realizes that ESG is becoming a very important component of the game, as more and more legislation is coming into force. It should be noted companies have an obligation of disclosing environmental information from 2025,” Giovannini comments.

But who is concerned and by which legislation specifically?

Rules apply to almost every sizeable company but the level of implementation may vary from one company to another. It’s a question of size,” Maschek adds. This means that CSRD for instance will be a requirement for companies with over 250 employees, EUR 40 million+ turnover, or EUR 20 million+ total assets (two of three criteria should be met).  Even so-called ‘third country’ (i.e. from outside the EU) companies with a turnover of EUR150 million in the EU whose subsidiaries meet the above size criteria or whose branches achieve a turnover of more than EUR40 million will have to comply with the CSRD. Furthermore, “the EU regulator may have defined what it wants to see at the framework level, but there are more granular rules that will apply to specific industry sectors.”

The EU taxonomy for instance is a green classification that applies also to technology companies specifically [such as the ones of the AM industry] helping them to assess if they meet the EU’s climate and environmental objectives,” Giovannini outlines.

In the same vein, as we will see in PART 2 of this dossier, the various ESG rules directly apply to the AM industry as they encompass specific points that touch upon diversity and inclusion (people) and the right management (governance) to operate responsibly.

On another note, “the CSDDD is another puzzle piece [AM companies] will have to look into as some might operate with raw materials coming from developing countries where compliance with the future CSDDD rules might be challenging,” Maschek continues. Not to mention the new EU Deforestation Regulation, which could also affect certain AM companies.

Which regulatory body is in charge of monitoring the implementation of ESG Legislation?

To this question, Fillmann replies that the monitoring will be done at a national level by government bodies as described by EU law, supported by certain EU-level supervisory bodies. That being said, more and more NGOs and non-profit associations are taking responsibility in this area and pro-actively review, and at times sue, firms for incorrect corporate reporting activities.

2-  So, what are the steps that will help you get started?

Getting started on ESG is quite similar to a marketing strategy that you design as the plan needs to follow specific objectives. “This can seem complex as most AM companies do not have sufficient ESG expertise, yet they need to move from marketing promises to tangible actions and dedicated ESG teams. Acting now is the first step to avoid promising something that they can’t deliver in 2025,” Maschek points out.

Based on our conversation with Fillmann, Maschek and Giovannini, we came up with 4 steps that can help any AM company confidently take the leap on this journey.

  • Understand where you are headed

This very first step should be quite similar to the introspection you conduct at the end of the year. With a critical look at your activity, you can assess the areas of your business that may impact people and the planet.

  • Conduct your Materiality Assessment and related ESG obligations

Conducting a comprehensive ESG audit and materiality assessment means evaluating one’s impact on the environment, society, and governance structure, and determining which of these ESG issues could influence your financial bottom line. A third-party audit firm specializing in ESG assessments can come into play here. Important is also to understand which ESG laws apply to your activities.

  • Develop & implement your action plan

At this stage, you will set SMART goals. Needless to say, this goes along with key responsibilities assigned to specific teams, the creation of a timeline and budget allocation to make things happen. Most AM companies set environmental goals like reducing CO2 emissions by x % over the next five years. This is great but there are other pinpoint areas. As we will see in PART 3 of this dossier.

  • Continuously monitor your progress

Regardless of the standards, frameworks, or guidance used to tell your story, what’s important to keep in mind is that your report should tell your results in a concise and clear manner as well as your next areas of interest. At this level, we strongly recommend sharing your lessons/what you’ve learned with the trade press.

What I am hoping to see here is an ESG strategy aligned with business objectives (yes, because in the end, you’re running a business that should be profitable), as well as a focus on ESG goals, metrics and programs put in place.

In a nutshell?

One thing we will keep from this conversation is that just like there is no one-size-fits-all solution with AM technologies, from regulations to implementation, each company’s sustainability journey will look a bit different, depending on its location(s), value chain, investors, or partners. It is important to look for the right external partners on this journey, to ensure you are getting through this new ESG maze.

This dossier was first published in the September/October edition of 3D ADEPT Mag