ESG and the automotive industry: reporting challenges

The automotive industry is on the brink of disruptive changes. Changes which will have a profound impact on industry ESG practices including reporting.

Influenced by numerous external factors such as developments in electric vehicle technology, heightened concern for carbon emissions, regulatory and industry shifts towards net-zero and clean energy, and ridesharing services, the industry is facing waves of transformation. This will translate directly into ESG strategies that can address these challenges, if not opportunities since many of these issues carry great potential for environmental or social impact.

Scope 3 emissions

The biggest challenge for ESG reporting in the automotive industry is greenhouse gas accounting. Scope 3 emissions data is hard to crunch for any industry but especially so for original equipment manufacturers (OEM). This stems from the same reason real estate struggles with ESG data on resource use and intensity. Scope 3 emissions calculations depends heavily on external factors such as supply chain and end usage.

Scope 3 emissions from the value chain are estimated to account for more than 90% of automakers’ greenhouse gas inventory.

Most OEMs fall behind in reporting on Scope 3 emissions. The few that do, like Daimler, take a ‘Use of sold product’ approach. To calculate the extensive Scope 3 emissions from end usage they use annual sales figures and assume annual average mileage. In reality, the vehicle may be used significantly more or less than the average used and any attempt at accounting for this will be a hypothetical approximation of usage patterns.

That’s downstream vehicle usage emissions. Let’s not forget that the industry’s Scope 3 also encompasses an extensive upstream supply chain. Accessing ESG data from these suppliers is no easy task.

What can companies do?

The life cycle assessment (LCA) approach to vehicle emissions is recommended instead of taking tailpipe emissions or emissions from the use phase. LCA looks at the entire footprint of a product from the raw materials stage right through to the end of life. This methodology shifts the focus to efficient, circular design from the get-go. It thereby facilitates more of a design thinking approach rather than a remedial approach (moving away from end-of-life recycling as a quick win).

End-of-life treatment is particularly important for the auto industry. Annually, end-of-life vehicles (ELV) produce more than 8 million tonnes of waste.

European automakers will be familiar with the End of Life Vehicles Directive which aims to prevent waste and pollution and increase the reuse or recycling of ELV materials. Circular design is a key concept in the effort to manage ELVs, with many companies like Toyota, Škoda, and General Motors committing to a zero waste-to-landfill campaign. LCA could be an opportunity to satisfy the requirements of the directive as well as to improve results on waste management.

Uncertainty clouds the future of emergent technologies. Because they depend a lot on regulatory support and industry adoption rates. Also, the rise of ridesharing or shared mobility options may grow to a point where demand drops for new vehicles.

Disclosures related to the governance and management of these developments are key to effective reporting. Energy efficiency is one area where a company must show progress. While the importance of Scope 3 emissions could decline due to EV penetration and electrification. But before that becomes the case, companies may use LCA to report on Scope 3 emissions.

How we help you

• We simplify the collection of ESG data in your organisation by offering one central platform to automate data collection with integrations into ERP, HRM, CRM, EMS etc.
• We facilitate data collection from your suppliers, contractors, and tenants, ensuring relevant information arrives in a complete and accurate manner. We will handle the burden of information exchange with multiple stakeholders.
• We conduct risk assessments of your value chain and set up a grievance mechanism that will automate the flow of data to our analytics platform.