“Adopting environmentally friendly practices such as incorporating electric vehicles, investing in renewable energy, and implementing sustainable manufacturing processes are essential steps towards reducing the auto sector’s carbon footprint.”
ESG is increasingly important to automotive as the industry becomes more sustainable, but dealer networks face a range of practical challenges to meet the latest requirements.
Corporate approaches to environmental, social, and governance (ESG) standards have become pivotal in evaluating a company’s sustainability and societal impact. The UK’s auto sector is no exception and faces increasing pressure to address ESG concerns and adhere to the stringent requirements for Scope 3 emissions reporting.
Scope 3 reporting is a global reporting standard that seeks to measure avoided carbon emissions, and it is crucial as it encompasses indirect emissions, including those from the supply chain and product life cycle, which are often significant for automotive dealerships.
ESG factors refer to a set of criteria used by investors, consumers, and stakeholders to evaluate a company’s impact on the environment, society, and its governance practices. As a prominent player in the global economy, the motor sector has recognised the need to align with ESG principles for sustainable growth and stakeholder satisfaction.
So what does each element of ESG involve?
One of the primary concerns for the motor sector is its environmental impact. The production and operation of vehicles contribute significantly to carbon emissions, pollution, and resource depletion. Adopting environmentally friendly practices such as incorporating electric vehicles, investing in renewable energy, and implementing sustainable manufacturing processes are essential steps towards reducing the sector’s carbon footprint.
The automotive sector has a considerable influence on many areas of society, from job creation to inclusivity. Engaging in ethical labour practices, promoting diversity and inclusion within the workforce, and prioritising employee safety are all vital aspects of social responsibility.
Promoting road safety and advocating responsible driving behaviour can also have a positive impact on the community both in terms of safety and emissions.
Transparency, accountability, and ethical governance practices are crucial for gaining trust and confidence from stakeholders. Adhering to stringent ethical guidelines and ensuring compliance with the full range of industry regulations fosters a culture of integrity within the motor sector. Strong governance can also encourage long-term investment and financial stability for the business.
The impact of ESG is growing significantly, especially in the context of reporting under Scope 3 reporting standards, which relates to the emissions impact of the assets provided to downstream customers. OEMs, as well as the ultimate funders and users of the asset or vehicle, have to report on these emissions, effectively creating a double-accounting requirement in an attempt to prevent under-reporting.
The three areas in Scope 3 reporting are vehicle manufacturing, vehicle use (essentially WLTP), and end of life/recycling. However, Scope 3 requirements go much deeper, resulting in businesses having to make significant investments in the process. These requirements include:
• Product life cycle emissions: The entire life cycle of a vehicle, from production to disposal, contributes to Scope 3 emissions. Ultimately, dealerships need to be able to track and report the emissions of vehicles they have supplied related to vehicle use, maintenance, and disposal. Encouraging responsible vehicle use and well-thought-out disposal methods can mitigate their impact on the environment.
• Consumer engagement and education: Educating consumers about the environmental impact of their vehicle choices and providing information on responsible vehicle use can significantly reduce Scope 3 emissions. Dealer networks should actively engage with customers to promote eco-friendly driving habits and incentivise the adoption of low-emission vehicles.
One of the primary challenges faced by dealer networks is the availability and accuracy of data required for Scope 3 reporting. Gathering comprehensive and reliable data throughout the supply chain and product life cycle can be complex and time-consuming, as well as resource-hungry.
Collaborating with a wide variety of stakeholders across the value chain, including suppliers, manufacturers, and customers, is critical for accurate reporting. Establishing effective communication channels and engaging stakeholders in sustainability initiatives can be challenging and requires a concerted effort from all parties involved.
In addition, implementing sustainable practices and accurately reporting Scope 3 emissions can incur additional costs for dealer networks, and balancing financial considerations with the need for sustainability and compliance can pose a significant challenge, requiring strategic planning and budget allocation.
While there is yet to be a global regulatory reporting standard put in place, the European Sustainability Reporting Standards, the IFRS Sustainability Disclosure Standards, UK Climate-Related Financial Disclosures, and Global Reporting Initiative Standards are all impacting businesses across the sector. None are mandatory yet, but they are worth investigating in case they become so.
One thing is abundantly clear: ESG and its reporting is here to stay, and whatever standard or reporting regulations are ultimately in place, the underlying challenge for all businesses will be to demonstrate an ability to provide a process to accurately report in each key area, along with a framework to identify and monitor continual improvement.
The recent introduction of ISO 32210, which focuses on the provision of sustainable finance, has now provided a practical framework for any company involved in the funding of vehicles to put in place a ‘business as usual’ approach, with supporting processes to measure and achieve its ESG performance and ongoing improvement.
The key message here is that we can’t wait for the final mandate on ESG to be decided by the government or other regulatory bodies. We need to start working out how we can measure the impact of our core products on our customers. ESG won’t just impact the production of the Annual Report; it will have an increasingly important role in the ability of our businesses to raise investment and maintain access to both equity and debt funding.
Despite the practical challenges, integrating ESG and focusing on sustainability is not simply a necessity but an opportunity for the UK motor sector to drive positive change and foster a greener, more responsible future.
This article was originally written by Phil Gerrard and published in issue 27 of IMI MotorPro magazine.
