We are witnessing the beginning of a trend where buyers are asking suppliers to adhere to a higher level of environmental, social and governance (ESG) standards. This past June, Toyota asked Parts Makers to Cut CO2 3%.
“Toyota asked its main suppliers to reduce carbon dioxide emissions by 3% compared to a year earlier, Nikkei reports, without attribution. Request made to 300-400 “tier-one” suppliers, but could eventually affect about 30,000 companies Toyota deals with.” – Gareth Allan, Bloomberg
Regulatory bodies are already applying pressure to the private sector across Europe and similar measures are expected in the coming years to the U.S., further spurred by IPCC’s dire report published Monday and increased U.S. investment in clean energy and infrastructure.
Among major North America Automobile Manufacturing peers (Ford, GM, Stellantis & Tesla), Ford has the highest ESG Disclosure Score while TESLA, often thought of as the most environmentally friendly car manufacturer, has by far the worst ESG Disclosure Score among peers.
Bloomberg's ESG disclosure scores measure the amount of data a company reports publicly and doesn't measure performance.
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Many investors seeking alpha over longer time periods are finding homes in ESG-focused ETFs, green bonds and individual companies that rank higher on ESG factors. This is nothing new. However the availability and consistency of ESG reporting remains a limitation and a potential risk for those looking to expand and monitor their portfolios.
Climate-related data in particular allows a company to assess whether their objectives are supported by key stake holders in a supplier network by using SPLC<GO>.
Ford’s supplier’s average ESG disclosure score is 35.64% and even worse, 30.50%for environmental issues. This includes Ford’s top supplier, Magna, which falls below the average.
In a rare crossing of incentives, we anticipate investors and regulators to push companies for better ESG disclosures so they can consistently evaluate and compare performance data. The same data can be applied to evaluate the ESG ratings of supply chains to promote a more sustainable vendor network, as in the case of Toyota.
Disclosures, of course, are only the first step. Next, products like Bloomberg’s ESG scores continue the story by accurately ranking and ordering companies based on ESG metrics and make this information available for corporations and investors to make informed decisions. The final step- actual impact on factors that improve ESG scores over time, such as reducing GHG emissions- remains the greatest challenge for both the private and public sector.
