How to meet environmental, social and governance standards

Corporate approaches to environmental, social and governance (ESG) standards have become key to evaluating a company’s sustainability and societal impact. The UK auto sector faces increasing pressure to address ESG concerns and adhere to the stringent requirements for Scope 3 emissions reporting.

ESG Scope 3 reporting is becoming a global reporting standard that seeks to measure avoided carbon emissions, and 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 breakdown

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?

1. Environmental responsibility

One of the primary concerns for the motor sector is its environmental impact. The production and operation of vehicles contributes significantly to carbon emissions, pollution and resource depletion. Adopting eco-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.

2. Social responsibility

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 for all road users and emissions.

3. Governance 

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.

Scoping out the requirements

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 (predominantly 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-through 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.

Meeting the standards

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.

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 a consistent approach is inevitable and dealers should prepare accordingly.

One way street

One thing is abundantly clear: ESG and its reporting is here to stay and whatever standards or reporting regulations are ultimately in place, the underlying challenge for all businesses will be to demonstrate a consistent ability to provide an effective 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.

Phil Gerrard is Consulting Director with Finativ

This is an edited extract from IMI's new MotorPro magazine, received free as part of IMI membership.