Is Automobile Manufacturing Sustainable?

There has been growing pressure to transform the automobile industry in recent years. Legislature in the industry has been growing rapidly, with lawmakers taking a particular focus on carbon emissions. Manufacturers are required to reduce emissions through the manufacturing process as well as the emissions of the vehicle themselves. The value chain of car manufacturing is hugely impactful for an automobile’s ESG rating, in particular the principle of reusing and recycling resources and creating transparency in production. With this in mind, car manufacturers and suppliers are considering how to implement innovative solutions such as a circular economy, battery recycling, biodegradable components and sustainable processes in research, development and manufacture. Electric vehicles (EV) have taken the spotlight in paving the way for a sustainable future, with multiple manufacturers relying on EV development for the green transformation. 

Global EV sales are expected to grow by at least 50% year-on-year, compared to internal combustion engine predicted sales growth of just 2-5% according to Morgan Stanley. EV penetration globally has been projected at 4%, increasing to 31% by 2030, as falling battery prices will encourage consumers to opt for EVs. The impact on the global environment will be significant, as transportation is estimated to account for between 15-25% of global carbon emissions. Of these, road vehicles are responsible for roughly three-quarters of that share. Furthermore, the EV manufacturing process is conducive to a positive ESG rating, as EVs can be manufactured around 30% faster than Internal Combustion Engine Vehicles. This is because they require fewer parts and thus fewer workers, shifting jobs from manual labour to more technical roles, thus creating a more skilled workforce.

Decarbonisation in the automobile industry does not just stem from scope three emissions, as firms are starting to implement sustainability throughout the supply chain. At the beginning of this month, BMW announced a deal with steel producer Salzgitter to supply low carbon steel for all of BMW’s European plants, starting in 2026. This is the second of such an agreement, the first being with a Swedish start-up H2 Green Steel starting in 2025. Steelmaking is one of the biggest emitters of CO2 globally, with total greenhouse gas emissions (GHG) from the sector accounting for 7% – 9% of direct emissions from the global use of fossil fuels. As manufacturers globally aim to decarbonize their supply chains, demand for steel produced using fossil-free energy is expected to increase significantly. This contract reflects BMW’s expansion of efforts to combat climate change, aiming to expand the use of recycled and reusable materials by 50% by 2030. Salzgitter has a similar ethos to BMW, intending to gradually switch the production of steel to a hydrogen-based route, using hydrogen and green electricity to replace the carbon energy fuelled blast furnace process. Like BMW and many other automobile companies, Salzgitter aims to reduce CO2 emissions in steel production by 95%. This represents the start of a commitment by automobile companies to cut emissions right the way through the value chain, not just focusing on reducing automobile produced emissions.

 With the rise of automated intelligence within car manufacturing, companies have to ensure social responsibility and correct governance of digital value and data protection/security. Car manufacturers and suppliers need to define the digital functionality and technology required for sustainable EV and autonomous vehicle (AV) solutions. Meanwhile, these companies must implement strict guidelines to ensure data protection laws are not violated. 

Human capital is a high risk in the ESG sector – Tesla has been involved in controversies when threatening employees who were attempting to unionise. They have experienced great pressure to increase their social and governance responsibility. At the 2019 Impact Report, Tesla recognised the high risk of human rights issues on its cobalt supply chain, especially driven by the existence of child labour in the Democratic Republic of the Congo. Tesla attempted to show that it was working to increase transparency on its supply chain with an eventual goal to eliminate cobalt from batteries, however, so far these ambitions have not been met.

Overall, the ESG value of an automobile company depends on a diverse range of processes and inputs right the way through the value chain. BMW’s signalling by reducing high carbon steel is not just important at face value but represents and shift in the industry. Firms are beginning to understand that environmental value cannot be just produced with a shift to EV, but requires low environmental impact throughout the production and operation of the car. Historic and EV based car companies are in some cases getting left behind by relying too much on the outdated idea that EVs have an inherent positive ESG impact.

Analyst: Louis Christie

Sector Head: Philipp Jiang

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