Autos & Transportation

The profitability of the Autos and Transportation sector is closely linked to the general health of the economy. The recent global economic recession decreased demand across the sector as new car sales, flights booked and goods transported declined.  Economic uncertainty has been compounded by rising fuel costs and the emergence of new regulatory requirements.  While demand has since rebounded, high fuel costs and strict regulations persist, presenting an opportunity for companies to competitively position themselves by strategically addressing sustainability issues rather than simply relying on volume and price increases.

Leading automotive and transport companies are investing in product and fleet upgrades that reduce transport and compliance costs, as well as meeting increased consumer demand for more sustainable products and services.  These industry leaders are proactively responding to major regulatory drivers like the EPA Tier 3 and CAFE Standards in the U.S. and the EU Emissions Trading Scheme in Europe.  However, there is room for improvement when it comes to disclosure, stakeholder engagement and board oversight of material sustainability issues.

This assessment covers 17 companies included in the Autos and Transportation sector, including four logistics companies, three airlines, two auto manufacturers, one motorcycle manufacturer, four train operators and three trucking companies.

The analysis that follows includes a summary of the sector’s progress within each of the four chapters of The Ceres Roadmap for Sustainability: Governance, Stakeholder Engagement, Disclosure and Performance. Within the Performance section—which covers operations, supply chain, transportation and logistics, products and services and employees—those issues that are of greatest relevance to the sector have been highlighted.

GOVERNANCE FOR SUSTAINABILITY

Top performing automotive and transport companies are broadly integrating sustainability across the business, ensuring that it is a company-wide priority with buy-in from the top. Of the 17 automotive and transport companies assessed, one-third reference explicit assignment of board oversight of sustainability issues, while two-thirds demonstrate some level of executive management oversight.  Five companies –Delta Air Lines, Ford Motor Company, General Motors, Southwest Airlines and United Continental – are in Tier 1 for having direct board and executive oversight of their sustainability strategy.

Companies who have designated board and executive oversight of sustainability issues are also starting to formalize that responsibility by linking executive compensation to sustainability performance.  Twenty-nine percent (5 companies) of the auto and transportation companies assessed, including Southwest and FedEx, link social and environmental performance targets to their remuneration policies, with safety representing the most frequent criteria.  FedEx discloses details on its short-term incentive plan, which includes diversity and governance criteria.

In addition to board and executive oversight, formal policy statements and management systems are essential elements of companies’ sustainability strategies. All 17 of the automotive and transport companies have established programs and policies to combat bribery and corruption, as well as whistleblower programs. While 88 percent of the companies (15 companies) tracked have a formal environmental policy, only 35 percent (six companies) have an Environmental Management System (EMS) that is certified according to ISO 14001. This is concerning, given the sector’s significant contribution to greenhouse gas emissions.  Ford Motor Company scores in Tier 1 for its corporate management systems and policies. The company discloses a strong environmental policy that adopts a precautionary approach to environmental challenges and its company-wide EMS is third-party certified.

STAKEHOLDER ENGAGEMENT

Frequent engagement with a diverse set of stakeholders is an effective means of gauging the impact of material sustainability issues. Half of the automotive and transport companies tracked are engaging stakeholders in some fashion. Three companies –UPS, Ford Motor Company and Southwest Airlines—engage investors with regularity on a diverse range of sustainability issues. And Ford Motor Company differentiates itself by disclosing specific priority stakeholder recommendations alongside actions taken by the company in response. For the rest of the sector, there is a clear opportunity to engage stakeholders across the entire value chain, and to integrate feedback into sustainability strategies.

DISCLOSURE

Sixty-five percent of the sector (11 companies) publish a sustainability report, but only four companies – Delta Air Lines, Ford Motor Company, Southwest Airlines and UPS – conduct their sustainability reporting according to Global Reporting Initiative (GRI) guidelines.  Ford Motor Company and General Motors also address sustainability issues within their financial filings, but this disclosure is still largely focused only on regulatory risks. Companies across the sector should be utilizing such reporting opportunities to ensure that sustainability policies, programs and progress are directly communicated to all shareholders.

PERFORMANCE

OPERATIONS
Across all sectors, sustainability leaders are working to mitigate their exposure to risks associated with climate change. These risks are magnified for auto and transport companies who, due to their outsized contribution to global emissions, are subject to strict regulatory requirements. One of the first steps is to develop a company-wide energy program with related targets and deadlines. Every company tracked in the Autos and Transportation sector has implemented some degree of greenhouse gas (GHG) emissions reduction activities. Forty-one percent of companies (seven companies) have established formal GHG emissions reduction targets and deadlines and 35 percent (6 companies) have established formal targets and deadlines to improve fleet efficiency. For example, Southwest Airlines aims to reduce its emissions 30 percent by 2025 (2005 baseline) and is the only company in the sector to disclose the percentage of its primary energy use that is derived from renewable sources. Given the sector’s high level of carbon intensity, companies across the sector should be disclosing comprehensive emissions-reduction strategies that apply across the company’s global operations.

A significant contributor to auto and transportation companies’ carbon footprints, particularly those of automotive manufacturers, are related to Scope 3 emissions—which encompass not only business travel and employee commuting, but also product usage and emissions emitted within the supply chain. Only 29 percent of the companies (5 companies) evaluated disclose any level of Scope 3 emissions, with the majority of companies reporting on the more easily calculated upstream emissions linked to business travel or employee commuting. The World Resources Institute’s (WRI) Greenhouse Gas Protocol, however, currently lists 15 categories of Scope 3 emissions.  One of the leaders in Scope 3 reporting for the sector is UPS, which currently reports on five Scope 3 categories and verifies its emissions according to ISO 14064-3, an internationally recognized standard. The calculation and disclosure of these emissions better positions companies to identify opportunities for emissions reductions.

Auto and transportation companies can also have considerable social impact. At a minimum, company-wide management systems addressing labor issues like freedom of association, discrimination and working conditions should be in place. Companies should also ensure that human rights practices are supported by universal standards, such as the Universal Declaration of Human Rights or the ILO Conventions. Ford Motor Company’s Code of Basic Working Conditions, which applies to all company, subsidiary and supplier operations, references both the UN Universal Declaration on Human Rights and the ILO Tripartite Declaration of Principles.

SUPPLY CHAIN
A commitment to sustainability includes extending policies and programs throughout a company’s global supply chain. This begins with supply chain policies and codes that are aligned with the company’s environmental and labor rights framework for its core operations. Of the 17 companies assessed, 41 percent (7 companies) disclose a general statement or a code of conduct defining their expectations for contractor or supplier working conditions.

Particularly for the manufacturing companies within this sector, setting clear expectations for suppliers is a critical strategy for ensuring that the company’s sustainability standards are carried throughout its value chain. For example, General Motors requires that its suppliers abide by the Automotive Industry Action Group's (AIAG) Global Working Conditions Guidance Statements, which contain policies on child labor, forced labor, freedom of association, harassment and discrimination, health and safety, wages and benefits and working hours.  Among the auto and transportation companies evaluated, however, only Ford Motor Company has clear programs to improve the social and environmental performance of its suppliers.  Ford requires 100 percent of its top tier suppliers to have an ISO 14001 certified management system and also has programs in place to consistently monitor its supplier performance and improve their environmental and social performance.

Recent regulatory actions are increasing requirements for these companies.  A provision in the Dodd-Frank Act, for example, now requires all companies publicly traded on U.S. stock exchanges using any of the four “conflict” minerals (tin, tantalum, tungsten and gold) to trace those minerals back to their source, publicly declare if any of the minerals were sourced in the Democratic Republic of Congo or an adjoining country, and, if so, disclose efforts taken to ensure the minerals were not linked to conflict. Conflict minerals present a unique and complex challenge for the manufacturing companies in this sector and will require a much more dedicated effort towards understanding, disclosing and mitigating sustainability impacts within the supply chain.

For the majority of the transportation companies within this sector, however, it is not their own supply chains, but rather their position as a vendor for other businesses that represents the greatest opportunity for sustainability improvements.

TRANSPORTATION
In light of the clear opportunities for cutting operational expenses, transportation and logistics companies are investing heavily in fleet upgrades and intermodal shipping to reduce fuel costs and consequently improve their environmental performance. An impressive 82 percent of companies (14 companies) have at least minimally implemented a program to improve fleet efficiency. Rail companies, such as Union Pacific and CSX, have invested in ultra low-emissions “Genset” diesel locomotives, which reduce GHG emissions by 37 percent and hybrid electric “Green Goats,” which reduce fuel consumption 16 percent.

Trucking and logistics companies like UPS have implemented proprietary IT systems that reduce truck idling time.  Initiatives like this have helped UPS improve its ground fleet fuel efficiency by 8 percent since 2007. Union Pacific’s continued fleet upgrades have reduced its GHG emissions from locomotives by 21 percent and increased gross ton miles per locomotive gallon by 12 percent since 2007. The company’s upgrades ensure compliance with EPA requirements and minimize the impact of fuel price increases on revenue.

PRODUCTS & SERVICES
In response to regulatory requirements (CAFE standards) and consumer demand driven by high fuel prices, U.S. automotive companies are making improvements in vehicle fuel efficiency. Many of the current advances are coming from existing and cost-effective technologies that improve the performance of cars powered by traditional internal combustion engines. Some of these technology improvements include turbocharged direct injection, advanced transmissions, electric power steering, low-rolling-resistance tires, turbo charging and variable valve lift and timing. For example, Ford’s EcoBoost technology, which is available on a variety of vehicles including the popular F-150, improves fuel economy while maintaining horsepower through a turbocharged, direct-fuel injected engine. Despite a modest price premium, the technology has been very popular with consumers, accounting for 40 percent of all 2011 F-150 sales.

U.S. automotive companies are also investing heavily in advanced technologies. Emerging from recent bankruptcy and restructuring, General Motors has been quick to catch up with sustainable product trends in this sector by developing hydrogen-powered vehicles as well as electric cars. In 2010, the company launched its plug-in hybrid car, the Chevrolet Volt. Continued production of electric and hybrid vehicles, along with innovative engine technology, positions U.S. automakers to increase market share amid rising gas prices.

In addition to such product innovations, logistic providers now offer the option for consumers to offset their carbon emissions. For example, UPS’s Carbon Neutral shipping program allows customers to offset the CO2 emissions generated by the transport of their packages within the United States. The company has also pledged to match the first USD $1 million of offsets purchased by its customers.

As consumer awareness of environmental issues becomes increasingly sophisticated, automotive and transport companies can demonstrate leadership in product design and service delivery and in doing so, take advantage of evolving consumer preferences impacting purchasing decisions.

EMPLOYEES
Effective employee engagement can help to attract and retain workers with highly specialized training in clean technology, sustainable design or environmental engineering. Companies are recognizing the importance of employee engagement to business success. For example, Ford identified employee-related issues (such as morale, wages, benefits, training, turnover, and demographics) as a high-impact area through its materiality assessment. Ford and UPS rank in the top tier for having broad employee engagement programs including environmental training, feedback surveys or employee-led networks and events.