Communicating effective ESG performance – lessons for the automotive sector

While automotive players face increasing pressure from governments and regulators over their ESG (Environmental, Social, and Governance) performance, it’s not always clear exactly how these issues resonate with consumers and investors.

From a consumer standpoint, for example, how many car buyers truly understand how “green” BEVs (battery electric vehicles) actually are, and the circumstances in which they might not be? Do they simply care that their next car is better for the planet than the last one, or are they also concerned about the overall environmental conduct of the brand that they’re buying from? And what about the Social and Governance side – are these even a consideration?

Questions like these matter because they feed into the thorny issue of how OEMs communicate their ESG performance.

Consumer considerations: 

If we consider consumer trends, AlixPartners’ own research has shown that increasing numbers of car buyers cite ‘positive environmental impact’ as a reason for considering a BEV. Furthermore, over a quarter (27%) would be willing to pay a small premium (up to 10%) for the perceived environmental benefit of owning one.  

It’s less clear whether it’s the sustainability of the brand or just the car itself that consumers are interested in, as shown in the recent success of Chinese OEM BEVs in Europe. However, some small-scale studies have suggested that how automotive customers perceive the eco-friendliness of a vehicle brand can influence more generally their perception of that brand, which could even include future purchase intention. 

What about broader sustainability trends?

Studies indicate purchase behaviour has become more sustainable. Nearly two-thirds (61%) of people say sustainability is an important consideration when buying a car. It’s not a huge leap to argue that consumers might be taking more of an interest in the overall sustainability performance of automotive brands when they part with their cash.

Regarding other elements of an organisation’s ESG performance, we’re also seeing the premises of consumer behaviour linked to the Social reputation of companies – a trend we expect to grow in the coming years.

Investor expectations:

So how exactly does this impact ESG performance and reporting, and what does it mean from the investor standpoint?

Firstly, it’s clear that, despite the lack of defined global ESG standards, ESG has become increasingly important in the world of investing. Global ESG-related Assets Under Management (AUM) now account for one-third of all AUM and are expected to reach $41 trillion in 2022.

The good news is that third-party ESG ratings, which are crucial to ESG investing, show that the automotive sector is less exposed to ESG risk than many other industries, such as construction and energy (although sectors in the upstream supply chain – including mining and steel – raise cause for concern).

While there is significant variation across automotive OEM and supplier ESG performance – and clear opportunities for the worst-in-class to improve – the broader issue is that the lack of standardised ESG ratings systems and the abundance of different ratings methodologies can obscure the picture when it comes to communicating ESG progress and performance.

A need for clarity for both groups: 

This causes issues for consumers and investors alike. For example, a certain company might have very different ESG ratings under different systems and methodologies. While this can allow them to cherry-pick the rating system that puts them in the most positive light when communicating with stakeholders, it makes it harder for consumers and investors to be sure about who is truly leading the way in ESG performance. For companies themselves, there is a risk that ESG strategies may become opportunistic – guided by one particular rating system and the positive PR that may ensue – but at the expense of long-term credibility.

ESG reporting in many areas also lacks clarity. As illustrated in our analysis below, in territories such as the U.S. and Europe, automotive OEMs tend to have clearer targets relating to areas such as alternative fuels, sustainable supply chains or waste management. However, other environmental aspects such as air quality (perhaps due to an inherent assumption that by transitioning to BEVs, or use of green energy, that air quality will naturally increase) and environmental conservation often lack such clear targets.

Given that consumer trends seem to be shifting towards sustainability-driven purchases, there would appear to be clear opportunities for OEMs who can communicate more effectively on ESG performance, including actions they are driving throughout their supply chain.

This means being clear about ESG targets and the actions being taken to achieve those goals. In addition, while the existence of numerous different ESG ratings methodologies does add to the risk of opportunistic ESG strategies, these ratings systems clearly matter. The key, therefore, is to look for ways to improve your ESG rating without either incurring significant costs or damaging credibility.

Five ways automotive players can improve ESG ratings: 

• Publish your ESG policies. Being transparent about your ESG practices (self-reporting) is a quick win. Many third-party ratings agencies only use public information to assess companies.
  
  
• Integrate ESG roles. A small corporate office ESG team can quickly create standards, collect existing best practices and stimulate health and safety, HR and environment communities.
  
  
• Adopt existing, recognized standards, rather than developing your own. Widely recognised frameworks, such as the UN’s 17 Sustainable Development Goals, are better understood and interpreted by external agencies than in-house, developed frameworks.
  
  
• Understand and measure what you can improve. ESG ratings must be linked to internal KPIs and performance monitoring which make sense for the whole organisation.
  
  
• Evolve your customer brand experiences to better incorporate E, S, and G. Demonstrate the steps your organisation is taking to enhance your ESG performance: the actions you are taking in local areas to aid job creation, or the safeguards to ensure ethical behaviours and set human rights protections.

Direct action now – often in some of the most distant reaches of the value chain – could dramatically reduce reputational risk, which could bring about strong repercussions with consumers as they – and investors – search for the clearest picture possible of the ESG pioneers in the automotive industry.