ESG in automotive: why does it matter?
The automotive industry has an important role to play in tackling the climate emergency and social injustices that our planet faces today.
Of course, automotive leaders are well aware of this and – as our latest C-Suite Barometer survey shows – they also consider ESG as essential to business growth. In this article, we look at some of the key drivers within ESG today and the value of an effective ESG approach.
Conversations around ESG tend to be motivated by a mix of four factors:
- stakeholder pressure,
- value creation,
- access to capital,
- compliance.
Company leaders are getting savvier about articulating a clear ESG business case to their stakeholders. As well as having altruistic benefits for the environment and wider society, a sustained focus on ESG can bring significant added value. Smart leaders recognise this ESG uplift.
ESG initiatives
ESG initiatives provide opportunities for companies to position themselves as employers of choice, to increase staff retention and engagement, to reduce operational costs, and to enhance their risk management, among many other benefits.
Access to capital
As investors and financial services firms align with the United Nations Principles of Responsible Investment (UNPRI) more money is becoming available to support projects that can demonstrate clear and measurable ESG outcomes, and for businesses that can clearly articulate their ESG credentials. This has the potential to lower the cost of capital through preferential interest rates as well as provide access to ESG linked bonds and other innovative financing solutions.
Regulatory framework
Regulation is also an important driver of change. Policymakers are trying to keep pace with changing attitudes towards ESG and nudge businesses towards improved ESG outcomes.
Still, compliance with ESG regulation should be a by-product of taking ESG seriously, not the main motivation for pursuing change. If ESG is approached solely with a compliance mindset, it can mean that significant added-value or financial benefits are missed.
Focus on automotive
There is no doubt that the automotive sector has above-average exposure to environmental risk. Exposure to social risks could become more relevant over the longer term due to changing consumer habits and increased scrutiny of potential accidents linked with autonomous driving and cybersecurity breaches.
Sizable investments in technologies and new products are already putting operating margins and free cash flow under pressure, but with this comes the opportunity to potentially recoup some of these costs through R&D and innovation tax breaks.
Consumer acceptance of electric vehicles will be key to manufacturers achieving CO2 targets and will depend on incentives by governments, improvement in vehicle performance, and infrastructure availability.
There is no doubt that we are seeing ESG rapidly rising up the corporate agenda. Yet there is still a tremendous way to go before businesses can claim to have truly ingrained ESG within their DNA.
And while a focus on ESG is essential to the safeguarding of the planet and society for future generations, it is also vital to businesses in safeguarding their own futures. In a more ESG-focused culture, the businesses that do not embrace these changes will increasingly find themselves irrelevant.
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Vesko Petkov Partner – UK Head of Automotive & Manufacturing
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