Transforming Hong Kong’s Manufacturing SMEs: Opportunities in the Low-Carbon Era

Tap into new customer demographics

• By building a green supply chain that incorporates sustainability practices into every stage of the product life cycle – sourcing raw materials, manufacturing, sales, transportation, logistics, use and recycling – you can showcase products in new ways, improve your corporate image and, in the long run, enhance your brand value.
• The manufacturing sector has relied heavily on price competition in the past, striving to increase profits by reducing production costs and attracting customers with lower prices. But a global study by Deloitte in 2023 revealed that over 60% of Gen Y and Gen Z are willing to spend more to support sustainable products¹. This reflects the growing concerns about environmental and social issues among consumers all over the world. They're not just price-conscious but value-conscious too, showing more loyalty to companies that align with their beliefs.

Attract investors

• International investors have started considering a company's ESG rating as a factor when evaluating its performance. Companies that improve their sustainability performance can also benefit from lower financing costs, because they may be able to take out loans with lower interest rates.

Align with listed companies

• Hong Kong has more than 360,000 SMEs, which account for 98% of all businesses in Hong Kong² . Many of these SMEs are part of the supply chain of a listed company. Listed companies that have to disclose their ESG information and commit to low-carbon transformation tend to work with SMEs that share similar values and meet sustainability requirements.

Meet potential regulatory requirements

• Major markets around the world are tightening the regulations on sustainability. For example, the European Union (EU) has introduced the Corporate Sustainability Reporting Directive (CSRD) and the European Sustainability Reporting Standards (ESRS). This means that in the future, companies that engage in economic activity with the EU, including SMEs, may need to disclose information related to sustainable development.

Implementing sustainability in business operations may lead to higher production costs at first. However, in the long run, it can improve overall production efficiency and enhance product value. If you plan your strategy carefully, understanding the value sustainability brings to your business and seeking cost-effective ways of incorporating it, you can turn sustainability into a competitive differentiator – going beyond cost and price during business negotiations.

Currently, ESG reporting standards place a lot of emphasis on environmental protection, because there is more objective and quantifiable data available in this area. But implementing ESG should also consider social responsibility (S) and corporate governance (G). For instance, many multinational companies now have stricter requirements for suppliers during procurement, such as upholding worker rights and complying with procurement procedures.

Financial constraints

'In recent years, the manufacturing sector has been under pressure to reduce production volumes while increasing production frequency, leading to rising costs. Additionally, raw materials prices and operational costs have increased.

Sustainability transformation requires additional investment in areas such as upgrading production equipment and implementing advanced emission models, which can be challenging with limited funds.'

• Governments and financial institutions have introduced sustainable financing programmes, including financing solutions with lower application thresholds, to meet the funding needs of businesses of various sizes.

Skills gap

'There's a lack of awareness within the company regarding sustainable development, and there is a shortage of skills needed to meet transformational needs.'

• In 2009, the Hong Kong and Guangdong governments jointly launched the Hong Kong-Guangdong Cleaner Production Partners Recognition Scheme. This scheme aims to recognise and encourage Hong Kong-owned factories in Guangdong Province to adopt cleaner production technologies and management systems.
• Award schemes (like the ESG Pledge) and professional certification bodies provide publicity, training, technical advice, audit and certification, brand building and corporate networking support to participating enterprises and organisations, helping them fulfil their sustainability commitments³.

Disclosure

'How can we enhance customers' and stakeholders' understanding of our company's sustainable development practices and achievements?'

• IIt's important to manage and report on your progress through ESG reporting and KPIs. Data analytics can help companies track ESG-related data, review and manage their sustainability performance, and respond more effectively to investors and stakeholders.
• SMEs can also apply for industry-recognised sustainability certifications from external organisations to demonstrate their commitment and performance in sustainability.