The global automotive industry is undergoing a profound transformation as it shifts from internal combustion engine (ICE) to electric vehicles (EVs). This transition is not only transforming the cars we drive, but is also propelling a far-reaching overhaul of automotive supply chains. As automakers work to build out new supply chains for EVs, they face a range of ESG risks and opportunities that will have significant implications for these companies and the value they create for shareholders.
The supply chains needed to manufacture the growing number of EVs are a significant source of material risk to automotive companies and their shareholders. When these risks are inadequately managed, they can result in penalties, lengthy litigation processes, operational disruptions and reputational harm. On the flip side, effective supply chain ESG management by automakers can unlock new business opportunities for long-term value creation. Furthermore, automotive supply chains represent a strategic lever for advancing the ESG goals of investor stewardship strategies, providing opportunities for institutional investors to advance their human rights, climate and environmental commitments across multiple industries within their portfolios.
A 2021 survey of 1,000 investment managers in the United States and the United Kingdom showed a broad recognition by investors of these risks, with 84% of respondents stating that risks related to supply chain sustainability and ESG standards are a financial threat to their investments, and 88% responding that supply chain sustainability standards will be a key criterion for investment decisions over the next ten years. However, the surveyed investment managers also expressed low levels of confidence in companies’ ability to meet the sustainability standards they have set for their supply chains, particularly when it comes to scope 3 emissions and labor practices.
As the EV transition accelerates, investors have a crucial role to play in bridging this gap within the automotive sector in order to ensure that automakers more effectively manage the ESG risks and opportunities within their supply chains. By constructively engaging with automotive companies on these issues, setting expectations for supply chain ESG risk management and disclosure, and allocating capital in ways that drive the industry towards greater sustainability, investors can mitigate financial risks and drive long-term value, as well as positive social and environmental outcomes, across their portfolios.
This briefing by the Lead the Charge network provides an overview of the different sources of risk and opportunities within automotive value chains that can affect the financial and ESG performance of investments. It also includes a selection of illustrative examples of effective investor engagement on supply chain ESG, from the automotive industry and beyond. Finally, it explains how the Lead the Charge Leaderboard can support investors to identify risks and opportunities in automakers’ supply chains, and offers a series of recommendations for investors that would like to proactively engage automotive companies to improve their supply chain ESG management.