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Since 2017, automotive suppliers have lost 25% of their market capitalization, whereas other industries increased by >42% and the continuous rise in net debt is expected to more than double the levels of 2021. Additionally, the increased cost of capital is reflected in downgraded credit ratings.
In Europe, financial institutions are directing assets towards ESG to comply with regulations such as the EU Taxonomy and Sustainable Finance Disclosures Regulation (SFDR). The annual growth of global ESG assets under management is projected to continue. Apart from that, our analysis shows that ESG performance has positive financial impact as leaders in ESG ratings reduce their cost of debt by 0,6-0,9pp. However, on average only 1 out of 10 suppliers take advantage of ESG financing options..
To grasp ESG potential, automotive suppliers should act now: ESG top performers elevate ESG to a top priority for the C-level. The definition of ambitious targets and KPIs is crucial for reporting and equity. ESG strategy and transformation are more important than ever for automotive suppliers seeking to seize financial benefits and prepare for growth.
The current financial situation of automotive suppliers
The automotive supplier sector has lost ground versus other industries, making access to capital challenging ̶ especially in turbulent times. The automotive industry exhibits greater sensitivity to energy and inflation crisis, and the ongoing transformation towards EV, digitalization and software requires substantial investment. As supply disruptions put pressure on short-term financial performance, most suppliers act in short-term “task-force” mode to secure operational performance.
How ESG helps to unlock capital at reduced rates
Doing good in ESG pays off: ESG leaders (lower ESG risks) exhibit reduced cost of capital compared to followers and firms without ESG rating. A solid ESG strategy and management system with aligned target KPIs are crucial. ~80% of suppliers regard ESG as a top priority, but 70% have not yet started to implement specific measures.
28 – 42m€ p.a.
... can be saved on debt payments per supplier by seizing the advantages of a top ESG rating performance
Furthermore, financial institutions are directing assets towards ESG due to regulatory pressure – a growing opportunity for automotive suppliers. ESG assets on track are to exceed 50 trillion by 2024, representing >35% of the projected global volume. Rising customer expectations, evident in public and political opinion, are a further incentive for ESG. Automotive suppliers can capitalize on the rising supply of ESG assets.
Necessary internal actions to prepare the ground for implementation – especially bringing employees on board and convincing the key stakeholders – are putting ESG financing ambitions on hold.
How to win the race in seizing the benefits of ESG financing?
Our winning framework with three success principles brings together ESG strategy, transformation and organization to establish KPI reporting required for ESG finance.
To seize ESG financing benefits, automotive suppliers have to prioritize their ESG journey “from strategy through execution” by following these three steps:
- Define ESG strategy
- Start ESG transformation
- Operationalize ESG
Dr. Sebastian Weitz and Maximilian Nadicksbernd have also contributed to this report.
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