Written by: Hendrik Damanik, Asti Haptadewi, and Nathaniel Hieronimus
With the emergence of Industry 4.0, digitalization has become a major trend. Digitalization, with digital technology as a core element, is leading society and the economy in the digital age. Companies are using digital technologies like artificial intelligence, big data analytics, cloud computing, and IoT to adapt to changing customer expectations, market forces, globalization, regulatory requirements, and talent needs.
Governments are competing to place digital technologies on the agenda, and business decision-makers are leveraging their potential. Sustainability remains a major concern for companies, as they face global challenges like the COVID-19 pandemic, energy crises, climate crises, and political instability. Digital transformation is a key strategy for enterprises to become more resilient and achieve sustainable development. Thus, it is important to explore the relationship between digital transformation and sustainable corporate development which leads to having a sustainable reporting report for a company.
Sustainability reporting itself is the disclosure and communication of environmental, social, and governance (ESG) goals—as well as a company’s progress towards them. The benefits of sustainability reporting could come from internally and externally. Such as helps companies avoid publicized environmental, social and governance failures, increases companies’ understanding of risks and opportunities, and assess sustainability performance with respect to regulations, standards and voluntary initiatives, etc. Given the numerous benefits associated with sustainable reporting, it is not surprising that many companies have made the switch as it could enable companies to be more transparent about the risks and opportunities they face, giving stakeholders greater insight into performance beyond the bottom line.
The combination of DTs and Sustainability reporting helps companies to collect, aggregate, and transform sustainability data, measuring and managing sustainability performance and impacts, analyzing, visualizing and reporting sustainability data, and increasing stakeholder engagement and materiality assessment. If the company is able to combine the two, the company will experience benefits such as environmental performance, improves resource efficiency, and promotes a sustainable circular economy.
Although there are many benefits that entities can get from DTs utilization, 50% never or rarely used DTs (cloud computing, data analytics and mining tools, data management tools, data integration tools, data visualization tools, and ERP systems) for sustainability reporting and 75% of organizations have never or rarely used emerge DTs (artificial intelligence, the internet of things, and blockchain) for sustainability reporting purposes. The low use of DTs in sustainability reporting may happen due to several barriers, such as data-related barriers, software system-related barriers, human-related factors, and organizational inactivity.
Data-related barriers Difficulties in obtaining data from supply chains and concerns over data security prevent companies from collecting data for SRs.
Software system-related barriers There are challenges in adapting industry-specific systems to meet unique and evolving sustainability reporting requirements. In addition, the inflexibility of existing legacy ERP systems to integrate with new sustainability reporting systems. The use of DT in SR also leads to the complexity and cost of DT solutions relative to current and future organizational needs.
Human-related factors Accounting and finance professionals skilled in using technology in the finance function struggle to transfer those skills to sustainability data and there is a significant skills shortage globally regarding the use of DT for sustainability reporting.
Organizational Inactivity Another barrier to implementing DT is organizational inactivity. Decision makers struggle to justify the cost of sustainability systems, inadequacy of knowledge about the need and benefits of systems and incorporating such systems, difficulty in measuring the impact of sustainability risks on profitability per company, and lack of knowledge about the benefits of sustainability systems.
As sustainability and digitalization have gained increased attention that forces businesses to undergo transformation, manufacturing companies are also in the position to address the growing demand for sustainability from both the market and society as a whole. These types of industries usually deal with large machinery, digital and complex mechanical tools, as well as heavy transport equipment. Therefore, proper waste management is essential for these sectors to prevent environmental hazards. However, while the manufacturing sector is a fundamental part of the economic development in many countries, the transformation process has historically been characterized as slow and costly. One country that is intensively carrying out sustainability transformation is Norway. In 2021, Norway’s economic structure is dominated by oil and gas sectors at 28%, followed by the manufacturing and mining industry at 23%. To see the development of this transformation, we will present case studies of two companies that operate in different sectors.
The first company (Company A) is a subsidiary of an international plastic piping systems manufacturer based in Norway that produces various piping systems for applications such as heating, plumbing, water pressure, and electricity. Dating back to its environmental protection initiative in the mid-1980s, sustainability has been an integral part of the company’s strategy. Even before sustainability reporting became more common, Company A initiated environmental accounting in 2010 as a demonstration of its social responsibility. Since 2010, Company A has focused on measuring CO2 emissions in two of its manufacturing facilities, following the Greenhouse Gas Protocol. The primary objective of this accounting is to showcase the company’s efforts to reduce its carbon footprint. Besides, the management team consistently updates environmental metrics and objectives, ensuring ongoing improvement. Recently, Company A introduced its inaugural Environmental Product Declaration (EPD), providing detailed information on the environmental footprint of specific products throughout their lifecycle. This EPD adheres to the standardized requirements outlined in ISO 14.025 for Environmental Labels and Declaration Type III and applies to four product categories. Furthermore, the company maintains ISO 9001 and ISO 14.001 certifications, indicating its commitment to quality and environmental management. In addition to these standards, Company A must adhere to the European Regulation, Evaluation, Authorization, and Restriction on Chemicals (REACH) directive, further emphasizing its dedication to regulatory compliance and sustainability.
To help achieve a more sustainable and digitized supply chain, Company A uses information and advanced technologies as part of their transformation. For instance, the company implemented sensors for product lines that can provide data to the overall environmental assessment, accompanied by an economic evaluation of a product. Company A also uses machine learning to enhance the optimization of product line processes, improve energy efficiency in production, and reduce material usage by processing data provided through sensors. Additionally, the use of machine learning is being explored for quality control within the automated pipe production line.
In the Norwegian context, companies demonstrate a strong awareness of sustainability issues. Furthermore, products manufactured in Norway hold a distinguished status in the international market, assuring customers that production adheres to favorable working conditions for employees and complies with regulations aimed at minimizing the use of prohibited chemicals in materials. The case company exhibits a high level of digitalization and technology utilization, granting them a competitive edge over low-cost countries that rely more on manual labor.
Therefore in conclusion, industry 4.0 quickens the pace of digitalization, empowering businesses to respond to client needs and globalization. One of the ways is to implement the sustainability reporting that is essential, but despite obstacles including data security and complexity, just 50% of firms rarely use digital tools.
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