The Industrial sector may sound boring, yet it encompasses so many seemingly disparate sub-sectors that it’s a vital piece to the ESG puzzle in the UAE. What unites its sub-sectors when it comes to ESG is a focus on value chain partnerships for both social and environmental progress, while also emphasizing the importance of enterprise-wide ESG strategies for environmental improvements and talent retention. For instance, in the UAE and GCC more generally, heavy industries are vital to the region’s economy and social sustainability, yet these industrial players also face complex decarbonisation challenges primarily related to their production processes.
| Key ESG Drivers for Industrial Sector |
|---|
| Investor Sentiment: Many investors, particularly those focused on socially responsible investing (SRI), require industrial companies to take action on emissions, renewable energy, and ethical sourcing, especially in material supply chains like mining. |
| Legal & Regulatory: Governments are enforcing stricter environmental, labor, and governance standards. These are often embedded into national industrial strategies like the UK’s ‘Invest 2035’ or the UAE’s ‘Operation 300 Bn’, both of which set high ESG expectations. |
| Stakeholder Demands: Consumers, employees, suppliers, communities, and regulators now expect ethical and sustainable operations. PWC highlights the need for strategic partnerships that deliver mutual ESG benefits. |
| Competitive Advantage: Embracing ESG helps industrials attract talent, enhance reputation, and unlock market opportunities. Focused investment in R&D is key to staying ahead of Net Zero targets. |
| Risk Management: ESG blind spots can expose companies to legal fines, brand damage, and climate-related supply chain disruptions. Proactive ESG action helps mitigate these escalating risks. |
While the task to embrace ESG may seem complex, sub-sectors in the Industrial Sector can get to grips with some key ESG trends to get started in their own organization, as illustrated in the table below:
| Industrials Sub-sectors | Tertiary Categories | ESG Issues / Trends |
|---|---|---|
| Capital Goods | Aerospace & Defense | Attracting female talent |
| Building Products, Construction & Engineering | Reducing embodied emissions of products | |
| Electrical Equipment | Using responsibly sourced minerals and metals. Environmental data, stewardship, and Environmental Product Declarations (EPDs) | |
| Industrial Conglomerates | Strong value chain-focused ESG strategies. Greener manufacturing taking the lead | |
| Machinery | Circular economy, machinery refurbishment, and lifecycle approaches to machinery design, operations, and decommissioning | |
| Trading Companies & Distributors | Trading Companies & Distributors | Industry engagement and enterprise-wide ESG strategies, partnerships |
| Commercial & Professional Services | Commercial Services & Suppliers | Attracting diverse talent, reducing supply chain emissions and energy use of services |
| Professional Services | Board competency on ESG issues, diverse Boards, employee engagement, and retention |
ESG is increasingly mission-critical to industrial companies. This is because industrials often play a vital role in the realization of end products across virtually every other sector. The sector, therefore, is coming under increasing pressure to have its house in order when it comes to ESG excellence. This includes a focus on carbon footprints, worker conditions, and ethical governance practices.
These focuses influence everything from how companies operate to how they are perceived by investors, regulators, and the public. The sector’s pressure to transition to more sustainable business models brings forth a myriad of changes, particularly around energy consumption and supply, with a trend towards fully electric solutions. This is often to meet the increasing energy performance standards required by energy performance certificates (EPCs). This brings huge costs; however, the price of inaction is a failed business spurred by the risk of ‘stranded assets’, such as production or manufacturing assets that are no longer viable in more sustainable economies as nations grapple with the climate transition.
According to PWC, a good ESG strategy for aerospace players must ‘respect the natural environment, respond to social trends such as DE&I, and ensure independent oversight on ESG matters’.
In the last few decades, the aerospace and defense industry has failed to attract diverse employees, especially women, and therefore missing out on a huge talent pool. This is mainly due to entrenched societal issues that deter women from pursuing Science, Technology, Engineering & Mathematics (STEM) careers, worsened by the low levels of women in most of the globe’s armed forces. In fact, diversity and ESG policies more broadly are no longer a nice-to-have; they’re increasingly seen as a license to operate.
For instance, according to DLA Piper, ‘Directors face growing legal risks related to their oversight of ESG issues, including accusations of negligence and breach of fiduciary duties. Claimants are leveraging ESG non-compliance to challenge directors, with litigation funders driving claims to force settlements.’
Recognizing the importance of sustainability and responsibility, companies are harnessing technology, including AI tools, to track, report, and measure the impact of their ESG and business initiatives. One area in focus is understanding the environmental impact of building materials by taking a lifecycle approach to product development. This often means products must be redesigned from the ground up, offering industrial ESG leaders a chance to harness innovation to get ahead. For instance, harnessing environmental data for better electrical products is allowing leaders like Schneider Electric to cut industrial costs, helping their clients attract ever more climate-conscious (and wallet-conscious) real estate developers and end users.
Recently, Pfleiderer, a producer of wood-based products, was rated very highly by Sustainalytics for its championing of sustainable European building materials. Sustainalytics also voted them as ‘Low risk’ for ESG risk given their focus not only on innovation but also on their strong governance-led approach to meeting Forest Stewardship Council (FSC) and Programme for the Endorsement of Forest Certification (PEFC) guidelines. Pfleider’s coordinated value chain approach to reducing CO2 emissions, which Pfleiderer has been implementing for many years, includes ‘ambitious goals laid down in our ESG framework’. In the area of materials, the company is committed to increasing the proportion of recycled wood, procuring the thinned and residual wood used exclusively from suppliers who verifiably work according to FSC or PEFC guidelines and also manufacturing at least 10 percent of their production volume of particleboard using bio-resins. Leading on sustainable products is a no-brainer for ESG leaders. It’s also an opportunity to differentiate: With 68% of companies in the building products industry offering sustainable products, most still do not report how much revenue they generate from their sustainable solutions. A data-driven approach will therefore build more trust with clients, but also enhance client acquisition.
Operation 300bn aims to develop the UAE’s industrial sector and enhance its role in stimulating the national economy. One of its specific aims is to stimulate innovation by accelerating advanced technology adoption across the industrial value chain to upgrade systems and solutions, boost productivity, and forge competitive advantages in new areas. To do this, it is focused on raising the industrial sector’s contribution to the UAE’s GDP from AED 133 billion to AED 300 billion by 2031. The strategy is aligned with national goals and international commitments relating to advancing sustainable economic growth, deploying clean energy solutions, driving industrial innovation, and promoting responsible consumption and production. While Industrial sector ESG metrics are relatively new to the region, Operation 300Bn is an opportunity for leaders to win. For instance, the strategy includes the launching of a framework for partnerships with industrial sectors to develop standards and taxonomies.
The industrial sector is such a wide sector that it’s impossible to succeed in all ESG areas instantly. Yet ESG leaders in the Middle East can certainly harness partnership opportunities presented by the UAE’s Operation 300Bn Industrial Strategy to become the dominant forces in industrial sustainability. By being proactive in co-creating an ESG framework for the sector in the region, data-driven, climate-conscious players can catalyze business growth while meeting UAE Net Zero ambitions. Furthermore, as lifecycle considerations come under the spotlight, ESG leaders should get to grips with the requirements of the UAE Circular Economy Policy 2021-2031. This groundbreaking policy, which aims to support the private sector in adopting clean production methods, therefore offers industrial companies a great place to start on their ESG journey.
