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1、Time for the rubber to hit the road:getting real about ESG in automotivePhoto by Zoe HazeltonKearney,OsloThe pressures risingFrom the UNs Task Force on Climate-related Financial Disclosures(TCFD),the Global Reporting Initiative(GRI),the Sustainability Accounting Standards Board(SASB),the EU Taxonomy
2、,and the Common Ground Taxonomy(CGT)collaboration between the EU and China to an ever-expanding suite of country-specific policies,firms are now being told what they must disclose and how this should be presented.Its a virtual alphabet soup.To add to the complexity,these requirements are not yet sta
3、ndardized(see figure 1 on page 2).What unites these approaches is the overarching goal to achieve transparency about the substance of ESG measures,thus preventing greenwashing and understanding risks to the companies business model.The EU has accelerated the pace of the transition to a greener econo
4、my in recent years,introducing several new policies that apply across all 27 of its member states.One notable development is the Corporate Sustainability Reporting Directive(CSRD),which will come into force in 2024.It affects all large companies,regardless of capital market orientation,and thus virt
5、ually the entire automotive industry,whether manufacturers or suppliers.The CSRD obliges companies to provide significantly more detailed and comprehensive non-financial ESG data(qualitative and quantitative/KPIs)as part of their management report,in an auditable form.The reporting mechanism is outl
6、ined by the planned European Sustainability Reporting Standards(ESRS),which lays out both mandatory disclosures on climate change and workforce and additional disclosures in eight categories from pollution and biodiversity to consumers and business conduct.Theres no getting away from ESG these days.
7、Bringing together three core sustainability areasenvironmental,social,and governanceESG is now increasingly high on the corporate agenda.Not only regulators,customers,and employees insist that companies commit and adhere to certain sustainability standards,but also capital markets and financial stak
8、eholders request clear ESG targets and reported progress on them.With the upcoming tightening regulations on ESG reporting the pressures only mounting,especially for industries with a large carbon footprint such as the automotive business.Is your company prepared for the future obligation to provide
9、 ESG evidence?As ESG has gathered momentum in recent years,pushing companies to create long-term value for all stakeholders,a variety of global crises and disruptions has also boosted interest in what companies are doing to combat ESG issues,such as fair labor practices,the circular economy,and the
10、net zero challenge,among many others.While ESG was historically assumed to be a job for“the next CEO”this is no longer the case as authorities around the globe have started to tighten regulations associated with ESG concerns.These cover not only how companies conduct themselves,but how they are expe
11、cted to report on their progress.Most companies are clear on what,but when it comes to how you get the engine out of neutral and let the rubber hit the road,too many are still at a loss.Which KPIs to report?How to set meaningful targets?How to compile the required data?In this paper,we look at the s
12、tate of implementing ESG in automotive today and introduce our holistic approach for future-proofing ESG management.Lets get the motor running.1Time for the rubber to hit the road:getting real about ESG in automotiveSources:EU Commission(2022),US Securities and Exchange Commission(2022),UN Principle
13、 for Responsible Investment;Kearney analysisFigure 1ESG requirements are tightening in Europe and abroadESG directivesRegulations in core marketsEuropean Union ESMA EFRAG European CommissionCSRD Corporate Sustainability Reporting Directive(effective in 2024)Companies will be obliged to follow clear
14、standards for ESG reporting including mandatory disclosure of KPIs for decarbonization and regarding workforce.Standard includes a compulsory audit and will later be supplemented by auto sector-specific standards.UN Guiding Principles on Business and Human Rights The OECD Guidelines for Multinationa
15、l EnterprisesCSDD Corporate Sustainability Due Diligence Directive(expected to become effective 2026)Companies will be obliged to adopt a business strategy compatible with a 1.5-degree global warming target.The strategy must be based on a mandatory due diligence regarding human rights and environmen
16、tal impacts along the firms supply chain.EU legislations International legislationsUnited States of America California Air Resources Board EPA SEC recently proposed rules to disclose scope 1 and 2 emissions and inform about ESG risks.Californias recent Climate Corporate Accountability Act requires s
17、cope 1,2,and 3 disclosure across value chain with auditing and assurance.Strengthening enforcement of environmental laws(for example,via SEC climate and ESG Task Force and incentive schemes such as Inflation Reduction Act(IRA)China China Enterprise Reform and Development Society Listed,state-owned c
18、ompanies are required to report on ESG by 2023.Common Ground Taxonomy(CN/EU)fosters taxonomy unification.ESG reporting risks,as China is catching up on ESG reporting requirements,focusing domestically.Plans were recently issued to establish law enforcement teams to strengthen ESG inspection.2Time fo
19、r the rubber to hit the road:getting real about ESG in automotiveAutomotive sector-specific requirements are currently being developed and are likely to be based on the ones established by the US SASB,in conjunction with the proposed Corporate Sustainability Due Diligence(CSDD),whichonce effectivewi
20、ll require certain companies to identify and take action on human rights and environmental issues in their complete value chain.It covers direct and indirect suppliers as well as own business activities and is applicable to products and services.In this its going beyond some national regulation,such
21、 as Germanys Supply Chain Act,for example.It also states that businesses must have a plan to meet the global warming target set as part of the Paris Agreement and sets out specific duties for company directors,adding personal responsibility into the equation.These new regulations require the compani
22、es concerned to change their course not only for reporting,but more importantly at the level of business activities(strategy,risk analysis,initiatives).In contrast,US regulators have been more inclined to focus on risk prevention.For example,the SEC(Securities and Exchange Commission)proposed rules
23、to disclose scope 1 and 2 emissions and inform about ESG risks.China requires listed,state-owned companies to report on ESG by 2023 and has designed state regulations that make greening a prerequisite for doing business.Overall,the number and strength of requirements on firms around the world is gro
24、wing significantly.As national requirements such as these are added into the mix,this will make ESG compliance an even more complex prospect for many businesses.Basically,its goodbye to greenwashing and hello to transparency,meaning its no longer possible to do the corporate equivalent of crossing y
25、our fingers behind your back and hiding behind grand statements or impressive targets.Investors scrutinize companies for ESG-related risks in their business model and push for clear transition plans to break down long-term targets.3Time for the rubber to hit the road:getting real about ESG in automo
26、tiveSources:expert interviews,MSCI,Hypovereinsbank,Bloomberg,Linklaters,ING,WEF,ERM Group company,ver.de;Kearney analysisFigure 2Capital markets are increasingly scrutinizing companies ESG effortsESG and capital marketsSustainability-linked loans(SLLs)Stock market performance5150505Jan-17
27、200202021Jan-18Jan-19Jan-20Jan-21MSCIGlobal SLL volume in$billion216ACWI sustainable impactACWI Loan margin decrease of about 0.1%to 0.2%for meeting ESG targets Often margin increase if sustainability performance behind expectation More than 25%better index performance of ACWI sustainable
28、 impact compared to ACWI ACWI sustainable impact includes companies that derive at least 50%of their revenues from products and services addressing environmental and social challenges(linked to the 17 SDGs defined by the UN)If in doubt,follow the moneyThis hive of legal and regulatory activity isnt
29、the only driver for change when it comes to ESG,however.“Green finance”has taken off as investors and financial institutions grow to appreciate the benefits of meeting the needs of business and the non-financial agenda at the same time(see figure 2).Measures such as the EUs Taxonomy Regulation,the G
30、reen Asset Ratio(GAR),and the Sustainable Finance Disclosure Regulation are increasingly aimed at amplifying green investment,while shareholder activists have also gotten in on the action,urging companies to speed up existing strategies or pursue new ones.Investors scrutinize companies for ESG-relat
31、ed risks in their business model and push for clear transition plans to break down long-term targets and also for a positive NPV in ESG measures.Then there are the company purse strings to consider.With companies increasingly looking to sustainability-linked loans(SLLs)as a way of financing their ES
32、G efforts,ratings agencies such as Sustainalytics,ISS ESG,CDP,and MSCI and credit bureaus provide the evidence needed to link interest rates with KPI measures and ESG scores,making borrowing more affordable for companies that are able to prove their sustainability mettle.According to our own Kearney
33、 ESG Value and Leadership Index,leading organizations can double their valuation premium.Answering the call for external“proof,”ESG ratings are starting to feed into regulations and are already driving investor decisions.Automotive players can use ESG evaluations as an opportunity for collecting inp
34、ut to the ESG function and communicating their equity stories to the capital markets.So while the lawmakers and regulators are pushing on one side for compliance,capital markets and other stakeholders are pulling on the other for sustainable development,giving corporate leaders yet more reasons to t
35、ake their ESG agenda up a notch(see figure 3 on page 5).4Time for the rubber to hit the road:getting real about ESG in automotiveSource:Kearney analysisStakeholderFigure 3Stakeholders have specific expectations and requirements regarding ESG and its reportingStakeholders for ESG and ESG reportingExt
36、ernalAuthoritiesOverviewInternal For example,EU,SEC,ISSB,national governments Rating entities For example,rating agencies,auditorsPublic For example,financial markets,consumers,politics,business partnersCompany For example,group,all subsidiaries/brands,functions,depart-ments,regions Define internati
37、onal and national(reporting)legislation(for example,CSRD,ESRS,CSSD)Take over target setting(for example,CO2 taxation)Leverage financial markets(for example,EU Taxonomy,GAR)Check compliance and establish financial penalties Measure companies ESG progress to determine their sustainability Identify ESG
38、 risks in business model Publish report that investors use to make decisions(for example,in light of the EU taxonomy)Charge premiums for non-ESG compliance Reluctant to invest into/buy from ESG laggards Implement sustainabili-ty strategy Clarify status quo Value ESG initiatives and want to be part I
39、ncreasing transparency on corporate performance in termsof sustainability(for example,CSRD required)Robust data/KPI usage required Continuous and transparent reporting expected Close scrutiny of ESG activities exercised Risk of reputational damage pending(“greenwashing”)Robust governance and data on
40、 progress(at all levels)requiredRole/involvementTrend in ESG requirementsLower standards/less requirementsHigher standards/more requirements5Time for the rubber to hit the road:getting real about ESG in automotiveHowever,in order to meet the requirements described at the beginning for a convincing E
41、SG equity story,a holistic approach is neededespecially in the case of more complex companies with different subsidiaries or business units.The key questions for business leaders now are,if youre not already leading,how exactly are you supposed to keep up,let alone get to the front of the pack?And h
42、ow do you communicate your efforts to the capital markets and financial stakeholders?Knowing what needs to be done and actually acting on it are often two completely different propositions.Added to this,in automotive many ESG executives struggle to embed its principles across the organization,despit
43、e clear mandates and ambitious targets.Bits and pieces of activity might be under way but bringing it all together to create confidence and trust in the capital markets,customers,and employees is the real challenge.There are too many gapsand finding the right spot to jump from isnt always obvious.Th
44、ats why we developed the Kearney ESG Compliance Management System(ECMS).Organizations around the world have already deployed effective management systems covering product and technical compliance,as well as commercial topics such as anti-bribery and anti-corruption.Designed to cover all the bases th
45、at matter and take the mystery out of ESG compliance,the ECMS is a framework were increasingly using across industries to apply the same principles and turn ambition into action.Are you prepared?Its a lot to take in,and the landscape is shifting faster than ever.We observe a great focus on ESG in th
46、e automotive industry.Virtually every automotive company has set(long-term)targetsfor example,with regard to CO2 emissions,resource use,recycling,or compliance with human rightsand report many good individual initiatives in all three sustainability areas.However,the“E”clearly dominates,both in terms
47、 of ambition level and measurability:E(environment),for example:Accelerated electrification of the product portfolio Achieving CO2 neutrality along the entire value chain Investment in charging infrastructure Switch to renewable energies in plants and offices Introduction of energy-and water-saving
48、programs in production Increasing the recycling rate of batteries Circular/recycled materials in vehiclesS(social),for example:Commitment to raw material procurement without child or forced labor Ensure occupational safety/further reduce occupational accidents Fair compensationG(governance),for exam
49、ple:Commercial and product compliance management Systemic ESG risk assessmentThe ECMS is a framework were increasingly using across industries to apply the same principles and turn ambition into action.6Time for the rubber to hit the road:getting real about ESG in automotiveSource:Kearney analysisFi
50、gure 4Our Kearney ECMS framework helps clients implement a comprehensive ESG transformationDimensionsValues and culture12345678ESG purpose,scope,and principlesCorporate ESG targetsKPIs and controlESG status review processCentral databaseRisk definitionESG leadershipESG transformation storyESG mindse
51、tTarget breakdown and ESG road mapSystem and process assessmentESG core processesTraceability across the value chainRisk management approachCore organizationCorporate branding and communication planESG codification Individual ESG targetsContinuous improvementESG functional enabling processesAutomate
52、d ESG reportingRisk steeringMultiplier networkTrainingTargetsMonitoring and improvementProcessesTechnologyOrganization and governanceCommunication and trainingRisk managementElementsFoundationalOur framework is set up to meet the relevant standards,such as:IDW EPS 980|ISO 37301:2021|COSO ERM IIIOper
53、ational2.Targets.As weve already discussed,clear(long-term)targets and time lines help to focus attention and effort.They are the signposts and guardrails that keep everyone on track and heading in the same direction.But what capital markets increasingly look for are transition plans breaking these
54、targets down for each part of the organization(business unit,function,plant,region,and so on)and adapted to each stage of the journey,for example how the organization will get from now to net zero.Individual ESG targets should also be set for board members and other senior executives.3.Monitoring an
55、d improvement.What gets measured gets done.Its about keeping on top of progress and understanding theres no fixed“end point.”Whats going right?Where can we do better?This needs a rigorous approach built around the right measures,the right interventions,and the right results,which becomes as much a p
56、art of organizational life as ESG itself.Doing this well and staying compliant means defining specific KPIs to measure your progress on ESG,reviewing these regularly,and continuing to sharpen your ESG processes,systems,and initiatives,bringing your goals within reach.Future-proofing ESG management,t
57、he Kearney wayOur ECMS is a holistic management system built around eight core dimensions,each of which tackles specific elements,making sure all aspects are covered and breaking the job into manageable chunks.Equipped to meet national and international standards such as IDW EPS 980,ISO 37301,and CO
58、SO ERM III,and based on our own extensive experience in managing compliance,it helps organizations form practical action plans to address these,and provide the documented evidence of compliance that authorities require(see figure 4):1.Values and culture.To have any chance of sustained success and al
59、ign business actions and decisions with ESG commitments,ESG has to become a core part of the organizations purpose,values,and culture.In other words,ESG has to be at the heart of everything,creating awareness,knowledge,and commitment throughout the organization.7Time for the rubber to hit the road:g
60、etting real about ESG in automotive4.Processes.This is when we get into the real detail.Do your ESG ambitions translate into the way your organization actually works?Its time to invest and put some core ESG processes in place.These should cover foundational principles such as keeping up with legal a
61、nd regulatory requirements and how your operations will change to minimize waste,reduce carbon emissions,and so on.Accompanying these,functional processes in areas such as procurement and engineering will likely need to be adapted.Finally,processes should be put in place to review progress and updat
62、e all ESG reporting mechanisms and stakeholders as needed.5.Technology.As weve already established,coming to grips with your data is a must,especially given the difficulty of tracking the vast web of ESG-related information needed to stay on the side of compliance.Auditors of ESG reports will scruti
63、nize for system-based non-financial data to show progress in the KPIs,whether its scope 3 emissions,utility usage,waste management,or something else.Advanced analytics tools help to aggregate the data across functions,subsidiaries,and regions from the ERP system(s).In addition,bespoke life cycle ass
64、essment(LCA)software and collaborative open data ecosystems such as Catena-X can help you understand,report on,and manage how your business,products,and value chain really do on the E,S,and G.6.Organization and governance.This is all about clearly defining roles,responsibilities,and resources as you
65、 go through the transformation,putting ESG at the heart of how youre structured,all decision-making,the way you operate and invest,and where your skills and competitiveness lie.Creating a dedicated ESG function dealing with ESG reporting and capital markets at the executive level is a must.Along wit
66、h a supporting core organization and a network of ESG champions,this person should have responsibility for driving the ESG agenda across the entire organization.7.Risk management.You also need to shore up your defenses,gaining a clear-eyed view of what ESG risks your business model is facing and how
67、 youll deal with the consequencesahead of the event.There are many ESG traps to fall into;here we make sure youre set up to do the right thing,avoid problems,and stay out of the headlines for the wrong reasons.This means clearly defining your ESG risks,including the consequences of failing to reach
68、stated targets,and their impact on your business,whether financial,legal,or reputational.By establishing a robust risk management process,we help you to monitor,manage,and mitigate all ESG-related risks.8.Communication and training.You cant assume that everyone in your company or value chain has the
69、 same level of knowledge,understanding,or capabilities to do whats necessary.Make the journey easier for all stakeholders by giving them the means to stay informed and ready for action.Key elements include a compelling narrative that clearly states the case for change and becomes part of the overall
70、 business story.Cascading ESG objectives and training initiatives to create both general awareness and specialist knowledge and skills throughout the organization will also secure buy-in,drive genuine engagement,and help you reach your goals.These details demonstrate the interdependence of the ECMS
71、dimensions;to reach the next level of ESG management and ultimately ensure compliance with the reporting requirements of the future,a holistic ESG transformation along the eight dimensions must be addressed.8Time for the rubber to hit the road:getting real about ESG in automotiveSource:Kearney analy
72、sisFigure 5Tier 1 suppliers express strong commitment to ESGESG commitments in the automotive industry Achieving carbon neutrality in procurement,production,and along the entire value chain Ensuring resource efficiency(for example,efficient energy management,sustainable water consumption)Enabling a
73、circular economy(for example,through systematic material analysis)E Safeguarding human rights(for example,prohibition of child labor,forced labor,human trafficking,and slavery)Ensuring safe working conditions(for example,in raw materials extraction)Responsible sourcing(for example,sustainable sourci
74、ng of resources,waste,and hazardous materials management)S Enabling transparency(for example,sustainability-relevant documentation,supplier monitoring,country of origin analysis)Applying a global product development code Ensuring a company-wide compliance management system(including efficient global
75、 risk management and internal control system)G(Non-exhaustive)Going from ambition to action in automotiveOver the past decade,original equipment manufacturers(OEMs)and tier 1 suppliers in the automotive industry have made their own ESG commitments,ranging from phasing out internal combustion engines
76、(ICEs)to producing net zero cars and achieving carbon neutrality along the entire value chain(see figure 5 on page 9).Of course,due to the industrys carbon-heavy history,automotive firms are under just as much if not morescrutiny from regulatory authorities,as well as their own customers,investors,a
77、nd other stakeholders.Quite simply,its not enough anymore to have a nicely worded page on your company website or to announce bold targets.You have to visibly demonstrate how they are being met.As such,many are actively investing in ESG to satisfy these expectations and remain competitive.Much of th
78、e investment is aimed at moving away from ICEs and toward all-electric or hybrid solutions.Certification is also becoming more sought after.The German technical inspection organization TV,which confirms whether vehicles across the country are roadworthy,has now added ESG ratings,certificates,and ins
79、pections to its portfolio,to help automotive businesses understand their position and where they need to improve.Its quite clear that when it comes to automotive,ESG is not just about meeting legal and regulatory requirements,its about transformationforming the industry of the future.For securing th
80、e required financial means,a convincing ESG equity story is crucial as financial markets base their decisions increasingly on ESG ratings;those that invest now reap the benefits as the industry transforms.9Time for the rubber to hit the road:getting real about ESG in automotiveLessons from leadersFr
81、om our own client work,we have observed that the organizations leading on ESG across all industries share some common characteristics and focus areas.A car manufacturing group has created a dedicated ESG function to be allocated to the CFO.The role profile includes monitoring for upcoming regulatory
82、 changes,defining ESG targets and KPIs,orchestrating the aggregation of KPIs across brands,compiling the ESG report and the ESG equity story,as well as communication to investors and ESG rating agencies.A clear overview of the organizations ESG risks and how to mitigate these is crucial.With our sup
83、port,a key automotive player set up a systematic and comprehensive ESG risk management approach throughout the entire organization.This included building a central database to assess supplier risks for each country in which it operates.By monitoring and evaluating risk in this way,the firm is able t
84、o make informed decisions about whereand whento source sustainable raw materials,for example for battery components.Clear targets and time frames relating to ESG priorities for the company and wider industry are also a core feature.A structured approach to compliance was the key to success when Kear
85、ney recently helped another key automotive player to address compliance requirements of the new German Supply Chain Act.An audit-proof compliance management system coupled with organizational initiatives and tools enabled the client to move forward.Underpinning all of this is the right technology.Ma
86、naging ESG effectively along the entire value chain means gathering,evaluating,and steering huge volumes of databoth quantitative and qualitative.This ranges from data on decarbonization and circularity to sustainable people management as well as corporate governance requirements.Leading companies a
87、pply AI-based solutions for extracting the information via an interface into the corporate ERP systems and make it audit-proof.Lets get goingWhen it comes to ESG and the upcoming reporting requirements,theres no time to lose,and were the experts who can help.We bring together five unique capabilitie
88、s:A deep automotive industry understanding from products to operations.We happen to be the original operations consultants,meaning well be with you all the way as you build ESG into the core of your business,using our experience in automotive to bring exactly what you need.Extensive experience in ES
89、G and sustainability.Our 100+global experts in ESG strategy and operations serve clients on more than 100 projects per year.And were the first management consultancy to be carbon neutral(since 2010)and pursuing science-based targets.Pragmatic ESG operating model implementation.We are the number one
90、consulting firm when it comes to compliance management in the automotive industry and can leverage more than 100 experts for leadership,change,and organization globally.Deep capital market expertise.From supporting PE funds in assessing their portfolio from an ESG perspective to supporting banks and
91、 insurance firms in sustainable assets,we know what capital markets are looking for.Ecosystem of specialized partners.Depending on your specific situation,we will be able to pull in the perfectly suited partner from law firms to ERP system specialists.10Time for the rubber to hit the road:getting re
92、al about ESG in automotiveManaging ESG effectively along the entire value chain means gathering,evaluating,and steering huge volumes of data.Marcus WeberPartner,Munich Doug MehlPartner,Detroit Angela HultbergGlobal Director of Sustainability,Copenhagen Christine SachsenederPartner,Munich The authors
93、 would like to thank Anna Frehse,Zhiyi Guo,Moritz Nasemann,Florian Schirk,and Hauke Sommer for their valuable contributions to this paper.AuthorsTo get started,a benchmarking workshop helps compare your existing structures and processes for ESG compliance with best practices within automotive and ac
94、ross industries.To take it one stage further,our readiness workshop will benchmark your ESG compliance systems against current and future requirements,helping you understand your risk profile.Based on the results of these workshops,we define a detailed action plan and get the organization aligned ar
95、ound this.Then,its about working hand in hand to implement and anchor the improvements identified,testing as we go using real-life cases to make sure they deliver lasting impact.Its time for the rubber to hit the road.Let us show you how.11Time for the rubber to hit the road:getting real about ESG i
96、n automotiveFor more information,permission to reprint or translate this work,and all other correspondence,please email .A.T.Kearney Korea LLC is a separate and independent legal entity operating under the Kearney name in Korea.A.T.Kearney operates in India as A.T.Kearney Limited(Branch Office),a br
97、anch office of A.T.Kearney Limited,a company organized under the laws of England and Wales.2023,A.T.Kearney,Inc.All rights reserved.Kearney is a leading global management consulting firm.For nearly 100 years,we have been the trusted advisor to C-suites,government bodies,and nonprofit organizations.Our people make us who we are.Driven to be the difference between a big idea and making it happen,we help our clients break