Automakers and suppliers must hit decarbonization and ESG goals to succeed in the EV transition

For all the talk about the greening of transport by transitioning from internal combustion to battery electric propulsion, the automotive industry risks great damage to its business if it does not also become more sustainable in the process.

Automakers and suppliers that do not address sustainability and ESG issues may find themselves excluded from major markets.

Major companies in the S&P Global 1200 index may also face increased business costs as the price of carbon is expected to rise. Between the carrot of technology development to proactively decarbonize, and more so the stick of potential regulatory costs, carbon-pricing costs are expected to rise to more than $280 billion annually by 2025, according to S&P Global Sustainable1.

Most sustainability efforts within the automotive industry focus on the decarbonization process, such as cutting CO2 emissions. That's because the automotive industry accounts for a very large chunk of global CO2 emissions. For example, electrifying cars can bring down the lifecycle CO2 footprint of a vehicle by more than 60%.

However, many other steps in the manufacturing, recycling, and raw materials processes can also aid OEMs and suppliers in achieving their sustainability goals.

Regulation as a Driver of Change

Governments, especially in the US and European Union, have passed legislation and regulatory mandates that will encourage (if not require) the automotive industry to become more sustainable.

The batteries used in electric vehicles will fall under the EU Batteries Regulation and the American Battery Materials Initiative. With a material-recovery target for batteries at 95% being regulated by the EU, this battery mandate will play a big part in helping countries reach their goal of net zero. The regulations have already transformed the automotive industry, with some OEMs already having developed technologies that meet or even exceed the 95% target.

The Carbon Border Adjustment Mechanism (CBAM) is another regulation getting a lot of attention. The CBAM is a carbon tax on imported products that will spur OEMs to source for low-carbon materials to avoid paying the tax.

Industry actions toward decarbonization

Using renewable energy for production has become an important part of the OEMs' pursuit of the net zero goal. Green energy is now being used in the running of operations and many factories, and companies have also invested in smart real estate management where possible.

The greening of the production of steel and aluminum - raw materials that account for a large part of carbon emissions - is another major development. For example, 30% of BMW's global production of steel will be made from low-carbon steel from 2026, and Mercedes-Benz has already cut its aluminum carbon footprint by nearly 70%.

There's also a growing emphasis for the automotive industry to participate in the circular economy for materials and resources with its mantra of the 3Rs - "reduce, reuse and recycle." That includes investing in the recycling of electric vehicle batteries; governmental guidelines and incentives will ensure that the recycling process doesn't emit more carbon than the sourcing of virgin materials. Some governments, like China, have set very strict material recovery rates, such as 95% by 2035. But some OEMs have already risen to the challenge and developed technologies that meet or even exceed that target.

Turning Challenges into Opportunities

One of the major challenges in the sustainability journey is the massive cost of developing and implementing new decarbonization technology while building new infrastructure and simultaneously maintaining the legacy one. The automotive industry also faces supply chain challenges, as cutting the CO2 footprint requires close collaboration with all tiers of suppliers.

The opportunities, on the other hand, are very attractive for companies. Decarbonization can increase profitability by increasing efficiency through the optimization of resource use and manufacturing.

Proactive companies in the green transition can create new revenue streams. They can define the rules of the game through winning technologies and harvest the benefits first - leading to increased profits through the first-mover advantage.

Collaboration between OEMs, suppliers, and other players in the automotive value chain will be vital in reducing risk and accelerating progress. As the automotive industry adopts strategies to decarbonize and become more sustainable, it will reap benefits that may turn other industries green with envy.

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Related posts:
https://www.spglobal.com/mobility/en/research-analysis/fuel-for-thought-navigating-a-turbulent-world-energy-climate.html

https://www.spglobal.com/mobility/en/research-analysis/fuel-for-thought-as-the-industry-goes-electric-expect-shakeout.html

https://www.spglobal.com/mobility/en/research-analysis/electric-vehicle-batteries-mining-esg-ceraweek.html

This article was published by S&P Global Mobility and not by S&P Global Ratings, which is a separately managed division of S&P Global.