India is setting its sights on achieving net-zero emissions by 2070, with the automotive and auto-ancillaries sector being a significant contributor to this ambitious goal. This industry currently constitutes 2.1 percent of the national GDP and is responsible for approximately 1.4 percent of India’s total greenhouse gas emissions.
As concerns about climate change continue to escalate worldwide, the automotive and auto-ancillary sector faces increasing pressure from customers, regulators, and investors to adopt sustainable practices. Regulatory policies related to sustainability have multiplied substantially in recent years, with around 900 such policies in effect today, compared to approximately 100 in the early 2000s. For instance, SEBI’s Business Responsibility and Sustainability Reporting (BRSR) format mandates ESG metric disclosure for all listed Indian companies.
Investments in sustainability have surged, with sustainability-focused funds experiencing a compound annual growth rate (CAGR) of 120 percent between 2019 and 2021, surpassing INR 10,000 crore in the first half of 2023. Over 180 Indian companies have also committed to decarbonization targets verified by the Science Based Targets initiative, emphasizing the reduction of Scope 1 and 2 emissions and encouraging suppliers to address Scope 3 upstream emissions.
The global trend of sustainability-led investing is gaining significant momentum, characterized by a 94 percent compound annual growth rate (CAGR) between 2019 and 2021, resulting in more than USD 600 billion in global investments in 2021. India is also following suit, witnessing a substantial surge in sustainability-led funds, with investments exceeding INR 10,000 crore in the first half of 2023, underscoring the imperative for the automotive industry to prioritize eco-friendly practices and initiatives to remain competitive in a rapidly evolving market landscape.
However, sustainability is not merely an obligation; it presents a significant business opportunity. Companies in the automotive sector can choose to go beyond compliance and actively create value by exploring new business avenues like remanufacturing, refurbishment, and repair. Moreover, sustainability-led efforts can lead to cost reduction and potentially increase valuation by 20 to 30 percent across EBITDA and multiples.
The path to sustainability in the automotive industry focuses on two crucial themes: energy decarbonization and material circularity. Energy transition is essential, given that grid power in India is projected to remain coal-based at around 57 percent by 2030. To address this, companies can explore scalable and cost-efficient alternatives such as rooftop solar and variable frequency drives (VFDs).
Material circularity is another avenue for growth, potentially increasing revenues by 10 to 20 percent, reducing costs by 5 to 10 percent, cutting virgin material usage by 20 to 40 percent, and reducing carbon emissions by 50 to 70 percent. Strategies such as recycling, refurbishing, reselling or renting, and repairing materials can prolong their lifespan within the system.
Promoting material circularity in India will require overcoming various barriers, including unorganized recyclers, high costs, low recovery rates for e-waste and reusable parts, and limited demand for recycled products. Supportive policies, improved recycling economics, and advancements in recycling technologies could gradually address these challenges.
To drive sustainability in the automotive sector, collaboration among stakeholders is crucial. Original equipment manufacturers (OEMs) can set decarbonization targets and provide support to their suppliers, while the government can strengthen reporting regulations and implement policies to promote a circular economy. Industry bodies can create sustainable frameworks and recognize leading suppliers in sustainability metrics, while private entities like financial institutions, energy providers, and private equity firms can create an enabling environment for sustainable transitions.
The automotive and auto-ancillaries industry, a cornerstone of India’s economy, contributes 2.1 percent of GDP, employs 5 million people, and accounts for 4.5 percent of merchandise exports. However, its emissions, both direct and indirect, contribute to 1.4 percent of India’s annual greenhouse gas emissions.
This growing emphasis on sustainability underscores the imperative for the automotive industry to prioritize eco-friendly practices and initiatives, not only as a response to global sustainability demands but also as a means to remain competitive in a rapidly evolving market landscape. India’s commitment to achieving net zero by 2070 adds momentum to the industry’s sustainability agenda. The study conducted by McKinsey for the Automotive Component Manufacturers Association of India (ACMA), titled ‘Mobility 360° – Sustainability for Competitiveness,’ highlights the escalating importance of addressing emissions throughout the automotive value chain. While the adoption of electric vehicles is expected to gradually reduce use-phase emissions, a notable surge in value-chain emissions is anticipated due to the increasing electrification and the use of materials such as aluminum and battery-active materials, known for their higher emissions.
To fully harness the benefits of zero-emission vehicles (ZEVs) and mitigate carbon emissions effectively, it is crucial to institute decarbonization initiatives spanning the entire value chain, with a specific focus on component-level emission targets. This approach necessitates OEMs extending their Scope 3 upstream decarbonization objectives to their suppliers.
