Financing Sustainability - The Intelligent Way to Efficient Manufacturing

Klaus Meyer, Siemens Financial Services, explains why sustainability should be a top priority for manufacturers and how smart financing solutions can come to the aid of manufacturing companies.

Major economies around the world have committed to massive improvements in environmental sustainability in the face of climate change. EU legislation has set an interim target of reducing greenhouse gas (GHG) emissions by at least 55% from 1990 levels by 2030. (1)

At the same time, global events are creating new hurdles (2) to meeting these commitments in the form of geopolitical conflicts, fossil fuel shortages, supply chain disruptions and inflationary pressures.

But are manufacturers backing away from their sustainability goals in the face of these pressures? The answer should be "no." Why? Because experts believe that sustainable production, in addition to ethical and environmental benefits, also brings economic advantages.

In Europe, the OECD says: "In short, sustainable manufacturing aims to minimize the various risks inherent in operations while maximizing the opportunities created by better processes and products, economically, environmentally and socially." (3)

So what do sustainability initiatives look like in the global manufacturing sector? What improvements can manufacturers implement to achieve cost savings, higher productivity, competitive advantage and security of supply, while contributing to CO2 emissions prevention, waste reduction and other sustainability goals?

"Sustainability by Design.

Great strides can be made by making entire manufacturing processes more resource- and energy-efficient, and thus more environmentally friendly. The ability to design or reconfigure processes in the virtual world - through a digital twin - also allows these developments to be implemented and tested faster and more cheaply. At their core, Industry 4.0 and digitalization are natural enablers for greater sustainability. They are supported by remote collaboration and virtualization, with up to 80% of the environmental impact of products being determined at the design stage - including the use of responsibly sourced raw materials. (4) In addition, the term 'Design' can also be applied to supply chains, which, when complex, account for up to 90% of emissions, according to the Carbon Disclosure Project. (5)

Energy efficiency

Studies have shown that energy efficiency initiatives in the manufacturing industry typically result in an improvement of about 20%. (6 This can be done through better design of new equipment or retrofitting of existing equipment. Opportunities to increase energy efficiency exist throughout the process. For example, cogeneration (CHP) is used to recover energy from production and use it elsewhere.

Installing variable speed drives can save up to 50% of energy in industrial processes. (7)  Building automation can reduce power consumption - over 50% of energy consumption in industrial buildings is for space heating/cooling. (8) Switching to LEDs reduces energy consumption for lighting by 40-60%. Using energy-efficient materials handling equipment (e.g., forklifts) in warehouses and production can reduce consumption by up to 30%. (9)

Waste reduction

Reducing waste corresponds to reducing raw material consumption. Digital management of the manufacturing process results in fewer defective or spoiled products. A good example comes from the food industry, where machine learning is transforming existing processes by automatically optimizing the selection of baking conditions and eliminating errors caused by manual adjustments, such as gas valves in ovens. (10)  Waste can also be reduced by using additive manufacturing technologies or by simplifying or reducing packaging requirements.

Smart financing for sustainable production

More and more manufacturers want to benefit economically from sustainable alternatives, gain trade and competitive advantages, and meet socially responsible standards as quickly as possible. But ambitious sustainability goals must be financeable in practice. That's why there is consensus that private sector capital is needed to enable a comprehensive transformation to sustainability. (11) To become more sustainable, manufacturing companies need to invest in new or alternative technologies - for example, more energy-efficient equipment, combined heat and power (CHP), additive manufacturing, materials recycling, water efficiency or eco-packaging.

 

There is therefore an urgent need for investment - and a significant one at that. At the same time, in the wake of a pandemic and in the face of political and economic uncertainty, companies are cautious about committing capital to new equipment. This creates a dilemma: Manufacturers cannot afford to postpone their investments in sustainable production, but they need smart ways to overcome their reluctance to invest.

To this end, far-sighted manufacturers have recognized the importance of having the right financing mix in times of uncertainty, volatility and crisis. In the industry, examples of the use of debt capital in the form of intelligent financing structures are increasing. Experience shows that this enables investments in sustainability - and at the same time often in digitization - that are themselves financially sustainable. The way there is paved by flexible financing that takes into account the expected added value from the investments.

The cash flow needs of manufacturers are highly diverse - yet most financing offers only off-the-shelf terms and structures. Specialized financiers, on the other hand, are able to leverage their technical knowledge of the manufacturing industry to understand the benefits of sustainable manufacturing technologies - and develop customized financing packages accordingly. Agreements can be structured to take into account the timing of production (including revenue from it) and efficiency. Likewise, payments can be aligned with expected results or varied seasonally.

This sustainably accelerates the transition to sustainable platforms. Importantly, smart financing also covers all the costs of transitioning to more sustainable systems - equipment, software, maintenance and service, installation, testing, training, and even new staff where necessary.

The evidence presented in this study makes a strong case that investing in sustainable manufacturing brings significant productivity, cost and competitive advantages. There is also a strong case that smart, flexible, industry-specific financing techniques can combine seemingly conflicting interests - the desire to invest in sustainable technologies with the unwillingness to commit capital in uncertain times.

To learn more about smart financing solutions and the range of sustainability measures supported, download the study here.