Powering sustainability: the role of CSR and ESG in Commercial Powertrains

Navigating the intricate realm of sustainability, CSR and ESG in the Commercial Vehicle and NRMM sectors. Alex Woodrow, managing director, KGP Powertrain Intelligence reports for Construction Worx…

An Overview of Sustainability: Driving Powertrain Innovation (Part 1)

KGP's consulting services primarily revolve around Commercial Powertrains, with a focus on Commercial Vehicle (Truck and Bus) and Non-Road Mobile Machinery (NRMM) – mainly Ag, Construction and Material Handling. The global commercial vehicle sector is currently undergoing a significant shift towards achieving zero tailpipe noxious and GHG emissions, with numerous markets worldwide enacting legislation to enforce this transition. However, when it comes to NRMM, there is no unified legislative framework driving this change. To drive innovation requires companies to monitor their strategies and outcomes, but without legislative drivers this is more challenging.

Over the last decade of researching the future of NRMM powertrains and considering the various factors influencing their evolution, we identified Corporate Social Responsibility (CSR) and Environmental, Social and Governance (ESG) as the most pivotal catalysts and drivers of powertrain innovation. While these terms are sometimes used interchangeably, they have distinct meanings, both connected to the broader concept of sustainability.

CSR vs ESG vs Sustainability

CSR primarily concerns a company's behaviour and its sustainability practices. It is a self-regulated approach where organizations proactively adopt sustainable practices in their operations and decision-making.

Conversely, ESG revolves around the measurement and evaluation of these sustainability practices. It focuses on how companies assess and quantify their impact in relation to stakeholders (the social aspect) and ethical considerations (governance). Unlike CSR, ESG is externally regulated, emphasizing transparency and accountability in reporting these metrics.

In essence, while CSR guides a company's internal sustainability efforts and ethical conduct, ESG serves as the external framework for measuring and ensuring that these efforts align with broader social and governance expectations. Both CSR and ESG play critical roles in advancing sustainability and are essential factors in shaping the future of NRMM powertrains.

ESG and CSR have undergone remarkable transformations over the past three years, notably since the onset of the global COVID-19 pandemic. Presently, it has become common practice for major corporations to release annual Sustainability reports, encompassing both CSR and ESG aspects. However, the content and scope of these reports have traditionally been at the discretion of individual companies.

Nevertheless, the landscape is evolving, with the emergence of standardized frameworks for both CSR and ESG practices. We observe a growing trend in the adoption of these standards within the Construction Machinery sector and its neighbouring industries.

Why assess the industry’s adoption of Sustainability Measures?

When KGP examines the global outlook for alternative fuels in powertrains, we undertake a comprehensive analysis of various factors. These considerations are essential for assessing future adoption rates, understanding how company strategies may evolve, and determining the feasibility of different approaches, taking into account resource limitations. Many of these constraints are intrinsically linked to sustainability, which encompasses a combination of self-regulated and externally regulated practices. Consequently, we adopt a holistic perspective as we develop our powertrain and energy scenarios.

To provide a foundation for this article and inform our ongoing work, we conducted an in-depth evaluation of the CSR and ESG reporting as well as the strategies employed by 40 leading OEMs and Tier One suppliers in both the Commercial Vehicle and NRMM sectors. These 40 companies collectively represent more than 70% of global unit sales. We do not name the companies here but summarise them based on where their Headquarters are located and which industrial sectors they supply into. For each we then identified which sustainability methods, standards and guidelines they have adopted.

UN Sustainable Development Goals

The most widely adopted sustainability reporting measure to date are the UN Global Compact’s Sustainable Development Goals (SDGs). Adopted by all UN member states since 2015, these 17 goals were reported on by 33 out of the 40 companies we assessed.

Other Sustainability Reporting Standards, Measures and Frameworks

The steps they have each taken can be collated into four distinct, but often overlapping groups.

Accounting Methodology and Standards:

● GHG Protocol: This protocol establishes precise methodologies and standards for measuring emissions, climate impact, and renewable energy consumption. The GHG Protocol stands as the most widely used standard for greenhouse gas accounting globally. Developed by WRI (World Resources Institute) and WBCSD (World Business Council for Sustainable Development), GHG Protocol serves as the international benchmark for corporate accounting and reporting of emissions. It classifies greenhouse gases into three scopes (Scope 1, 2, and 3) based on their source.

– 10 companies reporting.

● EU Taxonomy: The EU Taxonomy sets criteria to determine the sustainability of activities across six thematic categories. It will serve as a vital classification system introduced in support of the European Green Deal, unveiled in 2020. Its core purpose is to provide clarity regarding which investments qualify as environmentally sustainable – 9 companies reporting

Sustainability Target Validation:

● SBTi (Science Based Target Initiative): SBTi validates companies' climate targets and offers sector-specific methodologies and guidance. - 15 companies assessed have adopted Science based targets in their latest reporting

Sustainability Performance Evaluation:

● RE100: This initiative assesses sustainability performance, particularly in achieving renewable energy goals.

● CDP (Carbon Disclosure Project): CDP evaluates companies based on reported achievements in sustainability. – 19 companies referenced CDP in their latest reporting.

Reporting Frameworks:

● TCFD (Taskforce on Climate Financial Disclosures): TCFD provides a framework for disclosing climate-related financial information. –20 companies reporting

● GRI (Global Reporting Initiative): GRI sets guidelines for comprehensive sustainability reporting. – 28 companies reporting

● IFRS (International Financial Reporting Standards): IFRS governs financial reporting, including aspects of sustainability.

● CSRD (Corporate Sustainability Reporting Directive)/ESRS (European Sustainability Reporting Standards): These standards pertain to sustainability reporting in the European context.

● SASB (Sustainability Accounting Standards Board): SASB offers frameworks for reporting on the achievement of sustainability targets and performance related to those targets. SASB categorizes activities into five key "sustainability dimensions": Environment, Human Capital, Social Capital, Business Model and Innovation, and Leadership and Governance. Sustainability accounting encompasses the measurement, management, and reporting of these activities. – 13 companies reported

Scope 3 Emissions reporting is still limited

However, it's Scope 3 emissions that pose the greatest challenge in terms of quantification and reduction. The GHG Protocol delineates 15 comprehensive categories of Scope 3 emissions, each representing a distinct facet of the company's supply chain and operations. These emissions extend beyond the company's direct and indirect control, making them more elusive to measure and mitigate effectively, the 15 categories are illustrated in the GHG Protocol’s infographic below:

Scope 3 - Category 11 encompasses emissions stemming from the utilization of goods and services sold by the reporting company within the reporting year. These emissions encapsulate the combined scope 1 and scope 2 emissions generated by the end users of the reporting company's products. End users encompass both consumers and business customers who employ the final products. For most industrial goods companies Scope 3 – Category 11 accounts for over 90% of their emissions. In Category 11, companies are mandated to account for the direct use-phase emissions of sold products. Additionally, they have the option to consider indirect use-phase emissions of sold products, particularly when these indirect emissions are anticipated to be substantial.

Category 11 encompasses the cumulative anticipated emissions over the entire lifespan of all relevant products sold within the reporting year, covering the entirety of the company's product portfolio. The GHG Protocol Product Standard offers guidance on accounting for life cycle GHG emissions emanating from individual products.

Introduction

Descriptions of scope 3 categories

Figure I shows the 15 distinct reporting categories in scope 3 and also shows how scope 3 relates to scope 1 (direct emissions from owned or controlled sources) and scope 2 (indirect emissions from the generation of purchased purchased electricity, steam, heating and cooling consumed by the reporting company). Scope 3 includes all other indirect emissions that occur in a company’s value chain. The 15 categories in scope 3 are intended to provide companies with a systematic framework to measure, manage, and reduce emissions across a corporate value chain. The categories are designed to be mutually exclusive to avoid a company double counting emissions among categories.

The GHG Protocol categorizes greenhouse gas (GHG) emissions into three distinct scopes. Scope 1 pertains to a company's direct emissions, originating from sources such as its facilities, offices, and vehicles. These emissions are within the company's immediate control and are relatively straightforward to measure and reduce.

Table I gives descriptions of each of the 15 categories. The Scope 3 Standard requires companies to quantify and report scope 3 emissions from each category.

In contrast, Scope 2 emissions encompass the indirect emissions linked to the energy that a company purchases or consumes. While still manageable, they require a more intricate assessment since they arise from sources outside the company's direct operations.

Estimating Scope 3 Category 11 annually, and understanding the rate at which they are being reduced is therefore most critical, but very challenging, as part of each OEMs portfolio, and is a major element of KGP’s current consulting projects. 18 out of the 40 companies assessed at least partially reported these emissions, but most used their own methods, making like for like comparison difficult at this point. This however presents an opportunity for industry to agree and define a common approach.

Based on research completed by KGP September 2023, with thanks to expert input from Nils Holta, Net Zero Advisor, Ecohz, Norway.