How can manufacturers navigate new ESG regulations to achieve net zero?

New ESG regulations are changing manufacturing. With mandatory carbon reporting and financial penalties now coming into force, manufacturers can no longer treat sustainability as a box-ticking exercise. Most manufacturers are focusing on the wrong emissions. Around 70-90% of emissions sit within Scope 3, meaning supply chain visibility is now the biggest challenge on the road to net zero. Net zero can reduce costs as well as carbon. Digital twins, AI and virtual factory technology are helping manufacturers cut emissions, improve operational efficiency and prepare for increasingly strict ESG compliance. Prashanth Mysore explores in more detail

Sustainability has crossed from a voluntary reputational concern into a hard regulatory obligation backed by real penalties, and with 70 to 90% of your footprint hidden in mandates. The manufacturers who treat emissions as an operational discipline rather than a reporting chore will be the ones still standing when the deadlines arrive.

Three years ago, sustainability lived on a slide near the back of the annual report. Now it shows up in the first ten minutes of the board meeting, usually as a question about compliance risk, and usually from a director who is genuinely worried.

Here’s why that shift happened: sustainability stopped being voluntary. Europe’s reporting directive, the EU’s carbon border tax and a wave of disclosure mandates in the United States have turned a reputational nicety into a reporting obligation with real financial teeth. California’s SB 253 alone now carries penalties of up to $500,000 a year for non-compliance.

If you make things for a living, this affects you. And it affects you sooner than you probably think.

A few figures set the stage:

• 70–90% of a typical manufacturer’s footprint sits in Scope 3 — the supply chain and product use.
• 26× is how much larger supply chain emissions are, on average, than a company’s own operations.
• $335B is the carbon liability implied by recent upstream emissions across manufacturing, retail and materials.

These are not abstract. They tell you where to spend your attention before you spend a single dollar.

The real problem most manufacturers have

The pattern repeats everywhere. A manufacturer commits to a public net zero target with a date attached. Marketing is happy. The CEO gets a nice quote in a trade publication. Then someone in operations is handed the target and quickly realises the company has no idea where its emissions actually come from.

That is the true starting point for most firms. Not a lack of ambition. A lack of data.

You cannot reduce what you cannot measure. Yet most manufacturers measure carbon the way a child measures height — standing against a wall once a year and hoping for the best. Annual estimates built from utility bills are fine for a glossy report. They are useless for running a decarbonisation programme, because they tell you nothing about which machine, line, shift or supplier is driving the number.

The companies winning here treat emissions data the way they treat quality or throughput data: continuous, granular and tied to the physical process. That shift, from annual estimate to operational signal, is the whole game.

Where your emissions really live

If you remember one thing, make it this. For a typical manufacturer, 70 to 90% of the carbon footprint sits in Scope 3 — your supply chain and the use of your product after it leaves the dock.

This is uncomfortable, because Scope 3 is the part you control least. The steel you buy, the logistics that move your goods and the energy your product consumes over its life are hard to see and harder to change. CDP reports that supply-chain emissions are, on average, 26 times greater than a firm’s own operations. A small set of upstream relationships and a few downstream usage categories usually dominate the whole picture.

Do not ignore Scopes 1 and 2

That is where you have control. Scope 1 is what you burn directly: the gas in your boilers, the diesel in your fleet. Scope 2 is the electricity, steam and heat you buy. The GHG Protocol estimates Scope 2 alone represents at least a third of global emissions, which makes purchased energy one of the largest levers any manufacturer has.

Here is the simple way to think about the split. Scope 3 is where you have influence. Scope 1 and 2 are where you have authority. You can change your energy contract, electrify a process or reschedule production to cleaner hours without asking a single supplier for permission.

Regulators want these first, too. SB 253 requires Scope 1 and 2 reporting in 2026, a full year before Scope 3 obligations begin. The sequencing is handed to you: get your own house measured and assured, build the muscle, then push outward.

The regulations are no longer theoretical

Three regimes now matter to almost any manufacturer of meaningful size. All three crossed from proposal into live obligation in 2025 and 2026.

Regime	What It Requires	Timing and Teeth
California SB 253 / SB 261	Companies doing business in California above $1B revenue must disclose Scope 1, 2 and 3 emissions with third-party assurance. A $500M threshold applies to climate-risk reporting.	First Scope 1 and 2 reports due 10 August 2026; Scope 3 from 2027. Penalties up to $500,000 a year.
EU CSRD	Detailed sustainability reporting against European standards, including full value-chain emissions, with assurance.	The 2025 Omnibus package narrowed scope and shifted timelines, but the core obligation stands for large companies and many non-EU firms with EU operations.
EU CBAM	A carbon price on imported cement, iron and steel, aluminium, fertilisers, electricity and hydrogen.	Definitive phase began 1 January 2026; certificate purchases from 2027.

CBAM deserves a special mention for anyone with a global supply chain. Embedded emissions are no longer a voluntary metric — they are a regulated input into a financial obligation. In December 2025 the Commission proposed extending CBAM to roughly 180 downstream products from 2028. If you sell into Europe, your customers will soon need your carbon numbers whether you volunteer them or not.

A roadmap that actually works

Most roadmaps are just a list of nouns with arrows between them. Here is something more specific, drawn from programs that succeeded and a few that did not.

1. Start by measuring the real thing. Before you set a single target, connect to your machines, your meters and your manufacturing execution systems — not your accounting ledger. Know your footprint at the process level, in close to real time. When emissions appear on the same screen as cycle time and scrap rate, sustainability stops being a separate workstream and becomes part of how you run the plant.

2. Model before you build. The most expensive way to decarbonize is to rebuild the physical plant and discover afterward that the change did not pay off. Simulate it first. Prove the change in software, then build it once.

3. Treat the supply chain as part of your factory. Because most of your emissions are upstream, your suppliers are effectively part of your production system. Yet only about 15% of corporates have set a supply-chain emissions target—which tells you how much advantage is still available to those who move. Share data with key suppliers, design products with carbon intensity as a stated requirement and put emissions right next to price and lead time.

4. Tie it to the money. A plan that does not connect to the P&L will lose every budget fight it enters. The good news: a lot of carbon reduction pays for itself, because energy you do not consume is energy you do not buy. McKinsey found that by 2030 companies can, on average, cut 20 to 40% of emissions while also reducing production costs. Lead with the projects that cut cost and carbon together, then use the savings to fund the harder ones.

Where the technology earns its keep

Three capabilities turn that roadmap from aspiration into something you can deliver.

Process engineering: design the carbon out before the line exists. Most of a process’s lifetime energy is locked in the moment it is engineered. When you define equipment, cycle times and material flows, you are setting the energy bill for years. If carbon is a visible variable at that stage — sitting beside cost and throughput — engineers design more efficient processes almost as a matter of course.

The virtual factory: test the change in software first. Build a virtual model of the line, run the proposed change inside it and watch what happens to energy, throughput and cost together. You can test an electrified process, a new layout or a different schedule without touching a single bolt on the floor. In one documented case, a company cut energy costs by more than $100 million a year and emissions by 200,000 metric tons. A digital model also solves a problem the regulations are about to create: the same product built at two plants has two different footprints. A virtual factory lets you account for that honestly, plant by plant, and keep the numbers current as the real operation changes. That is the difference between a footprint you can defend to an auditor and one you cannot.

Industrial AI: turn the data into decisions. Instrumenting a plant produces more data than any person can watch. AI models can predict high-consumption events, shift energy-intensive operations into cleaner windows and flag equipment drift before it shows up on the bill. The IEA estimates widespread AI adoption could deliver around 8% energy savings in light industry by 2035, with plant-level case studies running higher. AI works best when it sits on top of the digital model, closing the loop between what you planned, what the plant is doing and what you do next.

These three reinforce each other. Process engineering decides what to build, the virtual factory tests it before you commit and industrial AI runs it well once it exists. And what used to be a toolkit for only the largest manufacturers is fast becoming accessible to the mid-market. If you assumed this was out of reach, it is worth checking that assumption again.

Prashanth Mysore is Senior Director for Strategic Business Development at DELMIA,