Opinion: The expanding landscape of sustainability reporting | Day 5

By Alwyn Hopkins, EY UK and Ireland sustainability leader (industrials and energy)

With high-profile regulation such as the Corporate Sustainability Reporting Directive and UK Sustainability Reporting Standards coming into effect or in the pipeline, emphasis on corporate reporting of sustainability performance such as climate impact continues to grow across industry sectors, including automotive and transport.

While sustainability reporting is not new, with regulatory requirements such as the EU Non-Financial Reporting Directive having existed for some time, the growing breadth of requirements means many businesses are having to revisit their approach.

This can include increasing the volume of ESG information they collect and disclose, or updating their processes for managing and sharing it.

Many reporting obligations extend far beyond environmental impact.  However, as climate change impacts continue to materialise and intensify, companies are facing particular scrutiny of their carbon footprint and the carbon emissions or their supply chain.

The reporting of greenhouse gas (GHG) emissions is used to measure the contribution of a business to climate change. The “GHG Protocol” defines three “scopes” of emissions: 1, 2 and 3.

These are defined as follows:

Scope 1: Direct emissions from owned or controlled sources. 

Scope 2: Indirect emissions, generated from purchased energy. 

Scope 3: All indirect emissions (not included in scope 2) that occur in the value chain of the reporting company, including both upstream and downstream emissions.

To put these into context, for an automotive Original Equipment Manufacturer (OEM), scope 1 emissions could be from an onsite combined heat and power plant, generating electricity for a factory. Scope 2 emissions could be electricity purchases from the grid. Scope 3 could include anything from emissions arising from the manufacture of purchased aluminium to the emissions associated with the use of sold vehicles.

Collating accurate emissions information for the purpose of reporting can be challenging. For example, gathering energy consumption or waste data from a large volume of sites can be resource-intensive, while scope 3 emissions information associated with upstream supply chain actors or use of sold products can be scarce.

Other regulatory requirements, such as the EU Carbon Border Adjustment Mechanism, which require emissions data collection in a specific format, then add another layer of complexity and demand more resource. 

As a result, many businesses are looking to technology or outsourced solutions to manage data gathering, aggregation, and reporting.

Meanwhile, some climate-related reporting goes beyond that of GHG emissions. For example, frameworks such as the Task Force on Climate Related Financial Disclosures (TCFD) require businesses to assess and disclose their climate-related risks and opportunities.

To illustrate this a potential risk for a logistics business could be physical, such as vehicle routes affected by extreme weather events, or a transition risk like new carbon pricing measures applied to emissions from the fleet.

A climate-related opportunity, meanwhile, could be additional revenue from offering electrified logistics at a price premium. These risks and opportunities create a corporate planning imperative within boardrooms to take ambitious action on decarbonisation – and increasingly, reporting frameworks such as CSRD are mandating companies to share their corporate climate transition plans.

However, in transport sectors, these climate transition plans are often sensitive to high-profile strategic considerations.

For example, for automotive companies, transition planning relies on the availability of low-carbon parts and consumer purchasing trends for electric vehicles (EVs).

Meanwhile, fleet operators face constraints from infrastructure availability and financial support to transition to a lower emission fleet. As well as being ambitious, targets and disclosures on decarbonisation planning need to be realistic and substantiated.

New anti-greenwashing rules – such as the EU’s Green Claims Directive – place a regulatory and litigation risk on businesses that are presenting vague, ambiguous, or potentially misleading ‘green claims’ to the market. These could include unclear decarbonisation commitments, or unsubstantiated claims about emissions performance.

Bringing all of this together, the challenges presented by regulatory requirements, strategic imperatives and greenwashing risk make coordinated corporate action on emissions more important than ever.

An effective strategy for monitoring, managing, and reporting corporate climate impacts, risks, opportunities should be a priority for companies operating within the automotive sector.

In summary, businesses should consider whether they have in place:

• Clear responsibility, accountability, and governance across GHG-related target setting, planning, compliance, and reporting
• Effective processes and controls to support their response to new substantiation and assurance requirements on disclosures
• The right financial, human, and technology resources to support the activity needed to meet commercial and regulatory decarbonisation requirements.