Decarbonization, though a significant and urgent challenge, is just one piece of the broader transformation required for the European automotive industry to achieve sustainability.
To ensure long-term success, automotive companies must accelerate their efforts across a wider environmental, social, and governance (ESG) agenda.
With so many interconnected issues requiring action, there is a risk of fatigue and inertia. It’s often easier to launch another sustainability initiative or announce a new bold target than to follow through on existing commitments.
While it is crucial to acknowledge that ESG is not the sole concern especially given other pressing issues such as cost reduction, component shortages, and the competition for talent the automotive sector must still deliver on its ESG commitments.
Automotive companies that excel in these areas will be far better positioned to discover new sources of value, fuel their continued prosperity, transform at the necessary pace, and play a leading role in creating a sustainable future for everyone.
However, this success must be both comprehensive and consistent. If your business is sustainable only intermittently, can it truly be considered sustainable?
Sustainability is About More Than Decarbonization
The automotive sector has made significant strides in environmental performance in recent years.
Between 2006 and 2021, emissions from car manufacturing in the European Union dropped by over 45%. And from 2012 to 2021, CO2 emissions from new cars decreased by approximately 22%.
However, the journey toward decarbonization remains ongoing, with the sector still responsible for about 15% of total CO2 emissions in the EU.
The challenges facing automotive companies as they work toward net-zero emissions cannot be overstated, but carbon emissions represent only part of the ESG equation.
For instance, the automotive industry plays a significant role in biodiversity loss and desertification.
Globally, the sector uses about 30% of Brazil’s leather hides, which has been a primary driver of deforestation in the Amazon.
Automotive companies need to take further steps to minimize their impact on deforestation, considering forests, wetlands, and other vital habitats when designing and locating new buildings and production plants.
On the social side, several major automotive companies have proactively addressed human rights issues and worked toward improving pay and conditions within their supply chains.
But how many can claim to have a comprehensive strategy for addressing social sustainability? What could be achieved by making a positive impact on all the communities and societies in which your company operates?
Could pro-social activities become a visible and integral part of your business model?
Ultimately, environmental and social challenges are issues of governance. Whose needs are your company truly trying to meet, and how are those needs evolving?
Is it simply about satisfying shareholders, or is there more to consider? Transparent reporting makes it easier to assess and compare the impacts companies have.
Predictions indicate that global sales of internal combustion engine (ICE) vehicles will drop below 1% by 2040.
Yet, the transition to electrification alone is not enough. There isn’t enough lithium on Earth to meet the demand for batteries required to power all these electric vehicles, and lithium mining itself is far from an environmentally friendly process.
Also Read: Rising Costs of EV Batteries, Fuel Controversy in the Green Transition
In South America, lithium mining contributes significantly to desertification. Additionally, is it truly sustainable to scrap a five-year-old ICE vehicle to purchase a new electric one? This question is not easily answered.
The true transformation that will reshape sustainability in the industry is broader. It involves adopting circular economy principles: reform, reduce, reuse, and recycle.
For instance, currently, only 5% of lithium-ion batteries are recycled globally, but the World Economic Forum predicts that recycling could reduce the annual demand for raw materials by about 7% by 2030.
This is not just a battery issue. Many EVs are expected to reach the end of their lifespan by the 2030s. How will we manage this influx of vehicles?
What if circular economy principles were applied to vehicle maintenance and servicing?
For example, when having your oil changed, could other parts of your car, such as the windshield glass or leather seats, be replaced, recycled, and reused?
Several European OEMs have already adopted closed-loop recycling processes as part of their circularity strategies, with a focus on expanding remanufacturing business models.
Implementing these principles consistently, rather than intermittently, and making fundamental business model changes in an ever-changing environment can be challenging.
Key assumptions such as fuel prices, government incentives, tax policies, and consumer preferences can shift suddenly.
It’s essential to identify and monitor changes in the planning context and analyze their potential impact on business targets, plans, and timelines.
This approach will help highlight new problems and opportunities, enabling necessary course corrections while maintaining momentum.
Own Your Future
The sustainability agenda may often feel like something imposed on the organization, forcing executives to react.
However, the way in which companies engage with this responsibility is entirely within their control. Those companies that thrive will be those that embrace the challenge of transformation and take a proactive leadership role.
Leading does not necessarily mean being first, nor does it mean becoming an environmental activist.
What matters is finding a path that aligns with your business’s values, setting goals and targets that are authentic to your company’s heritage and current strengths, and working toward their achievement.
Transformation plans are more credible both to investors and employees when they reflect the commitment to doing what’s right and generating profit.
Also Read: 7 Key Reasons to Switch to Electric Vehicles for a Cleaner, Cost-Effective, and Exciting Drive
Philanthropy is important, but it is not the focus here. As noted, some may still need to make the leap in understanding that sustainability can be a driver of business success. This mindset shift is just one of many required from leadership.
While it’s not possible to list all the assumptions executives need to challenge, they will differ for each company. For example, many automotive brands with a heritage of luxury may see sustainability and luxury as incompatible.
Could they redefine luxury in a sustainable context, thereby maintaining their heritage while making it relevant for today’s world? Many are trying. Can they do so in a way that is seen as credible and not just greenwashing by critical voices?
For brands focused on affordability, challenging assumptions about the relationship between cost pressures and sustainability in the supply chain may be necessary.
If suppliers are pressured to reduce costs, can they still generate enough profit to invest in sustainability initiatives, such as reducing their carbon footprint or offering fair wages? How might the definition of affordability evolve to encompass sustainability?
The automotive industry is changing rapidly. As leaders look ahead, it’s vital to question assumptions about what is probable and possible.
Consider how today’s organization can create value in the future, while also embedding new sustainability-related assumptions in every decision.
By identifying new opportunities and risks and understanding the practical implications of current thinking, executives can build greater confidence in their strategies’ resilience.
Sustainability is central to what automotive companies produce, how they produce it, and how they generate profit from it.
Transformation will always introduce complex business and technical challenges, requiring the best mix of insight, skills, attitudes, and experience to resolve. The unique aspect of the sustainability transformation is that no company has navigated it before.
The proliferation of new technologies, jargon, problems, opportunities, targets, and competing internal projects can create a sense of overwhelming activity.
With numerous parallel workstreams, companies may struggle to turn strategy into practical, daily action. They often lack sufficient capacity, skills, processes, and tools to track and measure progress.
If sustainability remains a parallel initiative within the company’s operating model, transformation will be stunted.
Decarbonization is just one aspect of the transformation needed to make the automotive industry sustainable. To succeed in the future, companies must embrace a comprehensive ESG agenda, addressing a growing range of environmental and social challenges.
It is possible to pursue sustainability without sacrificing profitability, take control of your future, and simplify the process of transformation.