Why are firms in the automotive industry's global supply chains upgrading to more environmentally friendly production? Which actions are the firms taking? How do they monitor the risks in the supply chain and ensure that they are well managed? Through our analysis, we want to shed light on barriers that risk slowing down the green transition.

Regulations are the main driving force

Detailed regulations are the main driver for sustainability measures in the automotive industry’s supply chains. The EU REACH regulation requires firms to know about, monitor and report on the use of hazardous substances throughout the supply chain. The US regulation on the use of conflict minerals contributes to increased transparency and concrete actions in the supply chains. As these regulations require firms to be able to report data on specific sustainability risks in the entire supply chain, firms also develop structures and working methods that could be used to handle other risk types as well.

In addition to regulations, our analysis identifies two other strong motives for Swedish suppliers to the automotive industry to switch to more environmentally friendly production: attracting customers and employees. Whether the firm is perceived as a role model in the sustainability field is today decisive for customers’ choice of brands and employees’ choice of employer.

Joint systems for assessment and monitoring of the supply chains are developing

Most of the brand companies in the automotive industry collaborate on systems for assessment and reporting of suppliers and subcontractors. As early as the end of the 1990s, IMDS (International Material Data System) was developed. The purpose was to collect information about substances used in different components of a vehicle. The system is today the basis for companies’ REACH reporting.

In Europe and North America, respectively, there are also initiatives where the brand companies in the automotive industry collaborate on self-assessment questionnaires for suppliers and subcontractors. The questionnaire is designed to help brand companies evaluate suppliers’ sustainability risks and assess their own risks throughout the supply chain. Several supplier answers must be substantiated with third party certificates. We also find examples where brand companies require potential suppliers to achieve a sufficiently high score to become, or continue to be, suppliers.

Shortcomings in the monitoring of several supply chain sustainability risks

Despite regulations and expectations from both customers and employees, our analysis shows that companies have a weak monitoring of many sustainability risks when there are no specific governmental requirements. In the analysis, we found that many requirements from the brand companies’ disappear or are altered when propagated down the supply chain and that the information provided by suppliers is sometimes perceived to be of questionable quality.

The companies’ action focus on reducing greenhouse gas emissions

In recent years, the automotive industry has increasingly steered its sustainability work towards reducing greenhouse gas emissions in the manufacturing process. For the previous decades, the focus was on emissions occurring during the use of vehicles, i.e. emissions from the combustion of petrol and diesel. However, with electric vehicles tailpipe emissions disappear, meaning that companies can focus more on the sustainability of the manufacturing process.

The automotive industry now focuses on two specific actions – to increase the share of renewable energy and to increase the use of recycled plastic, steel and aluminum. These actions are taken in both the own operations and as requirements on strategic firms’ in the supply chain.

Two major barriers to the transition

In the analysis, we identify two barriers for the transition to green supply chains in the automotive industry:

• For the risk areas where there is a lack of specific state regulation, we see shortcoming in companies’ monitoring of environmental risks at individual firms in the supply chains.
• There is a need of harmonized methods and standards for measuring the environmental impact and emission of greenhouse gases. A consequence is that products cannot be compared in a credible way.
  

Companies are developing systems to deal with the barriers

The brand companies work actively to deal with the two barriers. Among other things, they are implementing modern IT solutions that compiles information on whole supply chains in digital clouds and blockchains. The purpose is to enable a better monitoring and an increased understanding of the sustainability risks, including actions taken to limit physical climate-related risks. However, the development is hampered by a lack of trusted information about subcontractors, including who they are and where they have their factories. The information is crucial for the brand companies to be able to assess the risk of, for example, hurricanes and flooding.

Several brand companies also request suppliers and strategic subcontractors to be evaluated by the non-profit organization CDP and their experts on climate and water issues. This enables a more transparent comparison of companies.

A difficult balancing act for the state – to be a driving force without supporting vested interests

The analysis shows that the state has been an important driving force by requiring reporting over certain sustainability risks in the companies supply chains. At the same time, this type of state regulation is often criticized because it can ‘force’ companies into specific technical solutions and priorities. A fundamental question is therefore whether the state should introduce more specific regulations to force better monitoring of sustainability risk in supply chains that are not clearly regulated today. The question becomes particularly relevant given that the state probably has even less knowledge than the industry about the actual risk the supply chains.

An alternative, and possibly a complement, to specific state regulation is more general regulation, requiring better management of all risk types. An advantage of this form of regulation is that the company keeps the responsibility for the actions and priorities. A relevant example of this form of regulation is mandatory reporting of environmental and human rights risks in the supply chains of larger companies based on due diligence. This form of regulation is already implemented in the French duty of vigilance and the European Commission has announces that it wants a similar legislation for the whole EU.

A difficulty for the state with both specific and more general regulation is that vested interests may affect their development and content. Specific regulation can directly benefit certain interests of stakeholders, while a general regulation tends to be influenced by values and priorities from the largest companies. To reduce the risk that vested interests will affect regulation, the state needs to increase its understanding of the market and its actors. This is something that we already has pointed out in a previous report ‘Traceability and labeling of sustainable metals and minerals (see Tillväxtanalys, 2019).

Policy areas of special concern for the Swedish state

It is generally not possible for a small economy such as Sweden to influence the development of global value chains, such as the automotive industry, on its own. For the Swedish state, it is hence important to improve the understanding of both the development in the market and how policy regulations may effect this development. This knowledge is a prerequisite for being able to act objectively and proactively in for example the EU policy processes, in international standardization and in independent initiatives. It is important to assess which barriers the state should address and which should be left to other actors to handle. To enable this, the state should regularly assess market developments as in this analysis.

Such assessments needs to be done for all industry sectors of great importance to the Swedish economy. These assessments not only will create knowledge, which can be used to influence international initiatives. They can also be used to improve existing policy measures and development of new policy measures to strengthen the competitiveness of Swedish companies.

In our analysis, we want to highlight four areas that we identify as particularly interesting to consider in order to promote the competitiveness of Swedish firms:

• Swedish firms generally do not have high ratings in CDP supply chain programs (see Chapter 5.2.2).
• The lack of coherence between the automotive industry´s prioritization of recycled materials as an action to reduce greenhouse gas emissions and Swedish R&D support, which is primarily aimed at reducing process emissions for the production of materials from virgin raw materials (see Chapter 5.3.1).
• Initiatives that exist, not least in the EU, concerning how the climate footprint of materials and products should be calculated (see Chapter 5.3.1 and 5.3.2).
• The situation of small firms when meeting more advanced sustainability requirements from both the state and larger firms (see Chapter 5.2.2).
  

The three first point’s concerns conditions that can be decisive for the competitiveness of Swedish companies in the transition to sustainably produced electric vehicles.