BMW, Mercedes, Audi, others race to make entire supply chain greener

This May, a U.S. government observatory atop Hawaii's dormant Mauna Loa volcano recorded history in the making. Scientists measured levels of atmospheric carbon dioxide that reached 415 parts per million. Not even the oldest core samples taken from glacial ice formed half a million years before the arrival of homo sapiens had trapped such high concentrations, they say.

What followed were weeks of extreme weather patterns that culminated in July as the hottest month ever recorded by the World Meteorological Organization. Nature seems to be telling mankind that it is living on borrowed time. Sensing the rising concern over what has been called a "climate emergency," Europe's automakers are hoping to ditch their image as polluters and go green.

Starting with CO2-neutral plants modeled on the likes of Audi's e-tron EV plant in Belgium, the ultimate goal is to eventually operate "zero-impact factories" that leave no ecological footprint.

"We don't need one strategy for running our business and a separate one for sustainability," Daimler CEO Ola Kallenius said. "We need our business model itself to be sustainable."

Some automakers have said they won't give contracts to suppliers that do not take sufficient action to reduce their environmental impact, including decarbonizing their entire businesses over the long term in keeping with the Paris Climate Agreement.

This landmark climate deal aims to minimize the global temperature increase from man-made emissions that is already 1 degree Celsius to well below 2C by 2050.  

This goal looks increasingly unrealistic without drastic action, the Intergovernmental Panel on Climate Change concluded last October. In a report that took almost three years to complete, the IPCC documented what trends such as the acidification of the ocean, the world's largest carbon sink, would mean for the survival of the human race.

Europe's governments are now analyzing plans to impose a blanket price on CO2 emissions for the remaining 55 percent of the economy thus far shielded from the EU's cap-and-trade emissions scheme, such as road transport. In other words, fleet emissions legislation for new cars -- while a key motivator underpinning automakers' EV plans -- is now no longer the sole regulatory risk influencing their carbon strategy.

"Roughly three quarters of all industry CO2 emissions are generated during a car's operation over its lifetime, but 18 percent still comes from the supply chain," said Luke Fletcher, senior analyst for investor research and autos specialist at Carbon Disclosure Project. "As sales of battery-powered vehicles displace their combustion engine rivals, that share will steadily become more important over time."

Still grappling with the aftermath of VW Group's diesel-cheating scandal, the VW brand began the new trend by promising that its first mass-market electric vehicle, the ID3, will be the first car delivered to European customers entirely carbon neutral. Any CO2 produced that cannot be avoided will be offset at additional cost via certified programs.

VW has already set up a carbon fund financed with an initial tranche of 50 million euros. Management is even considering playing an active role. "Eventually, we really want to co-develop these projects and define their goals jointly," Michael Liebert, head of sustainability for the brand, told Automotive News Europe.

Daimler, which reports say will face a German fine of more than 1 billion euros for diesel emissions fraud, has pledged that all new Mercedes-Benz plants will be carbon neutral from the start of operation while existing European sites will reach the same goal by 2022. Kallenius aims to link a portion of management pay to the achievement of these goals, even if the CEO won't specify how much.

A common first step is sourcing electricity from renewable sources, with BMW going the furthest among automakers. Already next year, all 31 global manufacturing plants from Mexico to Malaysia will source only green energy.
"Our vision is clear: sustainable mobility produced in a sustainable manner," former BMW CEO Harald Krueger told reporters shortly before stepping down last month. The company is due to update its long-term sustainability strategy next year.

Specialists such as consultancy South Pole, which counts VW Group as a client, can come to the aid of automakers looking to decarbonize their operations.

"We help create transparency by collecting CO2 data and ensuring it is reported properly. That way management can more easily target hotspots in their supply chain," said Michael Weber, director of business development at South Pole.

Figures are based on the GHG Protocol Corporate Accounting and Reporting Standard and are often audited by firms such as PwC and Deloitte just like a company's annual accounts, even if there are no laws in place to criminalize falsification.   

After the diesel scandal, experts argue automakers cannot afford another instance of lying about emissions. "All the discussions I have heard internally about sustainability and environment, automakers say they need to make sure it's real and can be proved -- otherwise it's not worth it," said Arthur Kipferler, a partner at automotive industry consultant Berylls Strategy Advisors.

The timing coincides with European cities stepping up restrictions on combustion engine vehicles or planning their outright ban. Such measures could rebuild lost trust at a time when senior auto executives privately complain about an "asymmetric war waged against individual mobility."

Part of the problem automakers face is that tailpipe emissions from road transport comprise about a fifth of the EU's overall greenhouse gas footprint. Making matter worse, it remains the only sector to thus far fail to curtail its carbon emissions since 1990.

Investor backlash

This has caused even central banks to put pressure on the industry indirectly, experts argue. Worried about significant effects on the economy from climate change, regulators are warning lenders and asset managers to take action to reduce their portfolio exposure to high-carbon clients.

"There's a revolution going on, because investors are now realizing that climate risks aren't at some distant point in the future but are affecting us now," said Georg Kell, who advises Volkswagen as head of its independent sustainability council. The former founding director of the world's largest voluntary corporate sustainability initiative, the UN Global Compact, argues that financial markets have finally woken up to the hidden costs inherent in the fossil fuel economy.

"They want to know whether companies are fit for the future and whether they have a plan to deal with the constraints of a low-carbon world," Kell told Automotive News Europe.

Fletcher's CDP estimates $4 trillion worth of assets are at risk from climate change by 2030. To help investors make more informed choices when allocating their capital along CO2 criteria, it surveys companies on their environmental impact. To do this they take the raw data produced by companies such as South Pole and make it comparable via standardized questionnaires.

Over 7,000 companies worldwide report to CDP on everything from deforestation and water security to greenhouse gases. These can include an exact breakdown according to three widely comparable metrics, called scopes, that measure emissions produced both directly by the company as well as indirectly from suppliers or retailers.

"Take upstream Scope 3 emissions in the supply chain, for example. This data may not be entirely accurate given the methodology is still evolving," Fletcher said. "But it's important to remember that this is primarily used by investors for benchmarking purposes, and from that perspective it is very robust as one company's data is directly comparable with another."

Experts say this will be crucial for European companies in the future. Calling last year's IPCC report a "wake-up call," the EU unveiled plans in November to become entirely carbon neutral by 2050. Brussels expects this roadmap will achieve three things: give businesses clarity to invest going forward; slash energy imports worth 266 billion euros annually by an estimated 70 percent; and reduce premature deaths caused by air pollution currently estimated at nearly half a million.
Polls indicate widespread support for these policies. Eco-friendly parties across Western Europe expanded their seats by nearly half in the EU Parliament following elections in May. In Germany, the Green Party is running nearly neck and neck with Chancellor Angela Merkel's conservatives for the first time in history.

This is being driven primarily by young people who are taking to the streets to demand change. Whether it is movements such as Fridays For Future or the Extinction Rebellion, today's youngsters are participating by the thousands in climate marches.

Teenage activist Greta Thunberg from Sweden, who sparked the Fridays For Future demonstrations, is now calling on adults to join their children in a global protest on September 20. These budding consumers are at an age when they are forming affiliations to certain brands. Automakers know they will have to address their concerns if they want to one day be on their shopping lists.

When asked why Volvo is retrofitting its car plants to be climate neutral by 2025, purchasing boss Martina Buchhauser said: "Our customers want us to be there."

In July, VW introduced a new sustainability rating for its 40,000 suppliers that could mean certain businesses no longer get contracts should they get a failing grade. Mercedes is following suit.  

To help facilitate this shift to a circular economy, automakers have banded together under the Drive Sustainability initiative to harmonize vetting criteria for parts manufacturers. Paperwork and red tape could be minimized for suppliers, saving them money, while enabling their customers to make more responsible choices. Some don't even need to be asked.

Robert Bosch, which provided emissions management software used by VW Group to cheat emissions tests, said in May it aims to eliminate all net new carbon emissions at its 400-plus global sites starting next year. Bosch claims this will cost it 1 billion euros through 2030.

The efforts have met with cautious approval from vocal longtime critics of the industry such as Greg Archer, UK director at advocacy group Transport & Environment. "I don't believe that it's really embedded deeply within the companies, but for me it's certainly a real change even if it is not yet irreversible," he said.

Recent scandals unsurprisingly mean that the motivations and sincerity of auto companies will be questioned. Attempts by automakers to shift the debate from a sole focus on tailpipe emissions to a more holistic "cradle to grave" approach, for example, could be seen as an attempt to put their combustion engine cars in a somewhat more flattering light when compared with EVs. Even the slightest miscommunication or out-of-touch remark can justify doubters' suspicions. Mercedes was forced to apologize on social media for making light of climate change after promising on Twitter that if this summer wasn't already a scorcher, its high-performance AMG GLA 45 would "heat things up" even further.

Protests planned

Fearing the industry would love nothing more than returning to business as usual, more than 15,000 protesters from Greenpeace and five other advocacy groups aim to the demonstrate at this month's Frankfurt auto show in favor of fewer cars clogging city streets.

One of them will be Jens Hilgenberg, a transport policy expert at Friends of the Earth Germany (BUND), who says the industry's claims that it will finally accept responsibility for the problems its products cause comes 10 years too late. While he welcomed the latest efforts, Hilgenberg believes the claims are at least partially an attempt to deflect attention away from rising fleet emissions driven by their shift away from cars to less-efficient SUVs.

"I would love to believe them, but experience tells me otherwise," Hilgenberg said. After all, other sectors are already further along, South Pole's Weber said. "This push cuts across industries, we see this a lot in consumer goods where companies are reacting to the 'Greta [Thunberg] Effect.' The heavy goods manufacturers have typically been slower."

CEOs from 200 different companies will travel to Brussels on November 1 to urge the newly constituted EU Commission to take concerted action on climate issues, but so far Toyota Europe boss Johan van Zyl will be the only automotive CEO joining them. At the end of the day however, companies ultimately serve the consumer and if their behavior changes, then so must the products offered.

Tesla played a key role in redefining what constitutes a socially responsible luxury performance car.

"It is just not acceptable anymore to your neighbors and your golf club buddies to destroy the environment," Berylls' Kipferler explained.

Audi's design chief, Marc Lichte, is seeing that shift in his own home. He spoke very personally when he described which consumers he has in mind with his upcoming line of high-quality vegan interiors made with recycled materials. "My eldest daughter is 15. She doesn't eat meat and tells me she doesn't want to sit down on a dead animal," he said. "And on Fridays she hits the streets to participate in the demonstrations."