1、Hungry for capital How automotive suppliers can capitalize on the benefits of ESG financingOctober 2022Strategy&|Hungry for capital 2ESG strategy and transformation are more important than ever for automotive suppliers seeking to seize financial benefits and prepare for growth.”Sebastian Jursch,Dire

2、ctor,ESG Leader Automotive,PwC Strategy&Germany Executive summary Automotive suppliers have lost market capitalization of 25%since 2017 Continuous rise in net debt to more than double the levels of 2021 Cost of capital has increased,reflected in downgraded credit ratings Leaders in ESG ratings reduc

3、e their cost of debt by 0.6-0.9pp Growing ESG financing landscape with 12%p.a.observed,especially in EU However,on average only 1 out of 10 suppliers take advantage of ESG financing optionsAutomotive suppliers hunger for capital at expensive ratesESG performance has positive financial impact ESG top

4、 performers elevate ESG to a top priority for the C-level Defining ambitious targets and KPIs is crucial for reporting and equity Launching ESG transformation is unavoidable to prepare for growthTo grasp ESG potential,automotive suppliers have to act nowStrategy&|Hungry for capital 3123Strategy&|Hun

5、gry for capital 4What is the current financial situation of automotive suppliers?1Strategy&|Hungry for capital 51 Representing average of 20 leading automotive suppliers from Europa,Asia and Americas Source:Strategy&analysisThe automotive supplier sector has lost ground versus other industries,makin

6、g access to capital challenging+60%+42%-25%Market capitalization(index 100)5020015010006/201706/201806/201906/202006/202106/2022MSCI all countriesMSCI industrialsAutomotive averageCovid crisisGeopolitical crisisEnergy crisisInflationPlus ongoing challenges,i.e.:labor crisis climate changeStatus quo:

7、Market dynamicsInsights Since 2017,automotive suppliers1 have lost 25%of their market capitalization,whereas other industries increased by 42%Automotive industry exhibits greater sensitivity to energy and inflation crisis(CAGR in 2022 of-5.4%versus-2.2%for MSCI)Ongoing transformation towards EV,digi

8、talization and software requires substantial investment Supply disruptions put pressure on short-term financial performance Most suppliers act in short-term“task-force”mode to secure operational performanceStrategy&|Hungry for capital 6Source:Company information,Strategy&analysisNet debt level(index

9、 100)Leverage ratio(net debt/EBITDA)2002020212022(Outlook)1.01.31.52.63.79191162Status quo:Net debt and leverageInsights Increasing net debt levels driven by declining business volumes and EBITDA since 2018 Recovery in 2021 leverage ratio has led to strong sales volume increase

10、 Reported margin decline of major suppliers in Q1/Q2 2022 indicating increase in leverage ratio and creating need for capital Small suppliers with 20 leading automotive suppliers from Europa,Asia and Americas among five ratings analysed(Refinitiv,MSCI,Sustainalytics,S&P,Bloomberg)analysed;estimated

11、debt for analyzed set of suppliers of 4.384m Source:MSCI,Sustainalytics,Refinitv,Bloomberg,Strategy&analysisDoing good in ESG pays off.”ESG seems to pay off for automotive suppliers leaders in ESG rating reduce cost of debt by 0.6-0.9pp and save 28-42m p.a.Multiple ESG rating performances leads to s

12、ame conclusion:Acting sustainably to reduce cost of debtESG rating leaderESG rating averageESG rating laggardNo ESG ratings availableAveraged WACC cost of debt(in%)28-42m p.a.can be saved on debt payments per supplier by seizing the advantages of a top ESG rating performance-30%3.0%2.2%3.1%2.8%-0.6p

13、p-0.9ppESG performance and estimated cost of debtInsights ESG ratings benchmark and consolidate quantitative KPIs and qualitative information ESG leaders(lower ESG risks)exhibit reduced cost of capital compared to followers and firms without ESG rating A solid ESG strategy and management system with

14、 aligned target KPIs are crucial 80%of suppliers regard ESG as a top priority,but 70%have not yet started to implement specific measures1 85%of suppliers do not actively engage with ESG rating agencies1Strategy&|Hungry for capital 10Source:Bloomberg Market Intelligence,projection for 2022-2026Global

15、 ESG assets under management(in trillion$)2077220262024202220202018EuropeUnited StatesRest of world+12%Status quo:Financial market transformationESG offers automotive suppliers a growing opportunity for capitalization.”Insights ESG assets on track to exceed 50 trillion by 2024,representin

16、g 35%of the projected global volume ESG growth of 12%projected to continue as asset managers comply with regulations such as the EU Taxonomy and SFDR Rising customer expectations,manifested in public and political opinion,are a further incentive for ESG Automotive suppliers can capitalize on the ris

17、ing supply of ESG assetsFurthermore,financial institutions are directing assets towards ESG due to regulatory pressureStrategy&|Hungry for capital 111 Indicative market pulse(reflecting number of companies assessing options)2 Effort to be considered depending on additional factors Source:Based on pr

18、evious assessments LowLowHighHighESG maturity2112Financial attractivenessQuick winsTrade-offsProjectsLater playsCarve-out2ESG-linked credts/loansTodays financing optionsFuture financing options(post ESG transformation)ESG fundingGreen bondsTraditional creditsTechnology leasingSustainable supply chai

19、n financeGreen(construction)loansIPO2Bubble size indicates individuals maximum transaction volumeEvaluating the financial attractiveness based on effort during set up and scenario-based interest calculationAssessing the ESG maturity by initial status quo assessment and scenario-based evaluation of r

20、equired financing options TypeTrend1Financing optionTraditional creditsESG-linked credits/loansTechnology leasingGreen(construction)loanSupply chain financeGreen bondsIPOCarve-out(M&A)ESG fundingRefinancingOtherEquityESG financing landscapeAutomotive suppliers should evaluate emerging financing opti

21、ons to bridge cost of ESG transformation.”An emerging ESG financing landscape has to be analysed,balancing financial attractiveness against ESG maturity goalsStrategy&|Hungry for capital 12Source:LBBW,FINANCE/F.A.Z.Business Media,Strategy&analysisESG finance feasibility and application(in%)ESG fundi

22、ngGreen bonds/loansESG-linked creditsGreen(construction)loanSustainable supply chain finance4556496374976445304239Technically feasibleApplied 2021Applied 2020Deep dive:Application of ESG financeInsights Clear gap emerges between feasibility(49%)and limited application 9%Complexity of financial produ

23、cts and required ESG data are cited as main reasons for limited practice Necessary internal actions to prepare the ground for implementation especially bringing employees on board and convincing the key stakeholders are putting ESG financing ambitions on holdESG financing options largely untapped du

24、e to lack of ambition and KPIs,creating a gap between opportunity and practiceHow to win the race in seizing the benefits of ESG financing?3Strategy&|Hungry for capital 14Source:Strategy&analysisStrategy-ledProcess-ledTransformation-ledESG strategyKPIsandESG initiativesESG organizationandgovernanceE

25、SG data warehouse and reportingSuccess principlesAutomotive suppliers should address ESG holistically,with a guiding ESG strategy.”Leaders set out an integrated ESG strategy Leaders define an ESG strategy,with clear ambitions and KPIs serving as a corporate North Star Leaders put ESG on the C-level

26、agenda,and ensure strategic fit and commitmentLeaders take action and measure progress Leaders break down the overarching strategic ambitions and KPIs into dedicated targets per function Leaders set out a precise transformation agenda and outline clear initiatives and projects,e.g.ESG financeLeaders

27、 embed ESG in organization and governance Leaders support their transformation agenda with a dedicated ESG unit to guarantee capacity and expertise Leaders align ESG to the overall governance and organizational structure to ensure visibility and swift decision making123The winning framework brings t

28、ogether the three success principles to establish KPI reporting required for ESG financeStrategy&|Hungry for capital 15Source:Strategy&analysisESG journeyShort-term adjustmentStart ESG transformationAct on quick wins,and establish KPI systems for assurance-ready reporting Medium-to long-term growthD

29、efine ESG strategyto set direction,define winning principles and identify ESG quick winsOperationalize ESGDetermine your ESG organization and pinpoint required skills within your organizationComments Determine your strategic approach to ESG and set explicit upfront ambitions and targets Swing into a

30、ction through setting out clear initiatives(e.g.ESG finance),and anchor ESG in governance and organizational structures Embed ESG in your organization and create empowerment and ownership for ESG Be aware:in turbulent times,frequent reviews of the strategy and transformation agenda allow possible re

31、calibration in response to a changing external environmentTo seize ESG financing benefits,automotive suppliers have to prioritize their ESG journey “from strategy through execution”Strategy&|Hungry for capital 16 2022 PwC.All rights reserved.PwC refers to the PwC network and/or one or more of its me

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36、 leadership and industry trends from Strategy&on a regular basisRobert BischofPartner,ESG Leader Europe PwC Strategy&Germanyrobert.bischof Dr.Sebastian WeitzManager,PwC Strategy&Germanysebastian.weitz Maximilian NadicksberndSenior Associate,PwC Strategy&Germanymaximilian.nadicksbernd Dr.Sebastian JurschDirector,ESG Leader Automotive PwC Strategy&Germanyjursch.sebastian