Autos and Sustainability: From Compliance to Leadership

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.

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