Automotive News Canada - November 2022 - 25

simply long-term returns and long-term
risks captured in present-value reporting.
Companies are seeing increasing reputational
costs from their own operational
failures, increasing third-party risks from
unethical suppliers and outsourcers, as
well as increases in investor lawsuits and
in supply-chain disruptions. The benefits
of striving for sustainable value chains
and supply chains include built-in resilience,
increased
information and trans "
To
determine so-called
parency and improved risk identification.
Furthermore, risk-mitigation practices will
only help an organization withstand disruptions
and adverse events in the long term.
Q: How will we measure progress in ESG? How will we ensure
companies keep their pledges while reporting transparently and
authentically?
Nguyen: What gets measured, gets managed, but also garbage-in-garbage-out.
Leading organizations must develop good governance, good
data management, strong monitoring controls and verifiable and auditable
data to ensure value creation and risk management is measurable
and reportable. The role of auditors is changing to include closer scrutiny
of non-financial risks and regulators and regulations are evolving to
demand more transparency and accountability in qualitative metrics.
Make no mistake, green PR and " greenwashing " are very real things
as more and more companies get called out in very public headlines
when they fail to live up to their public sustainability commitments. A
couple automotive brands made headlines this summer - one related to
repeated violations of child labor laws at their United States subsidiaries
and one related to climate-change lobbying and lingering emission-testing
scandals. The reputational costs have become increasingly high as
more investors and consumers want to spend their money with companies
that they believe align with their values.
Q: What advantages do Canadian companies, or the Canadian
economy have in embracing the ESG ethos in their corporate culture
and operations?
Nguyen: One of the key advantages of Canadian companies and the
Canadian economy is that we have a very strong labor force - workers who
are educated and experienced in the skilled trades. A strong ESG ethos in
corporate culture and operations promotes talent retention and organizational
resilience. Innovation, whether it involves deploying technology or enhancing
operations, will help to withstand some of the global and cross-border
supply shocks now experienced by many companies. Organizations need
people and robust processes to power innovation and success.
On the other side, Canadian companies must also recognize they are
part of a global supply chain and an international market, and therefore
must be prepared to better understand their relationships and their
vulnerabilities outside the Canadian borders. An increasing number of
major U.S. companies are demanding that their suppliers, vendors, outsourcers,
and business partners operate sustainably, track their carbon
emissions, and obtain an ESG-rating certification to continue to do business
with them. The new normal is changing too rapidly and is expected
to keep changing. Canadian automotive companies of all sizes must be
able to correctly scan the horizon and be prepared for what is likely and
probable and minimize the impact of these changes. Companies that
hold obsolete inventory run the risk of being off-side, falling behind or
holding obsolescent - and it can happen quite quickly.
Q: What are the most important actions that companies can take
now as the auto industry gradually embraces ESG principles?
Nguyen: Companies must be able to assess upcoming risks and evaluate
if they are able to properly address those risks and succeed. And if they
" Scope 3 " emissions outside
their own organizations...many
organizations must map out
their supply chains to gain a
clearer line of sight into their
third-party relationships.
"
cannot, they must act today. If you look at
emerging regulation trends, whether it is
disclosure requirements for financial statements
related to carbon-emission footprints
in a value chain or regulations evolving
out of Europe, particularly in Switzerland
and Germany, more regulators are moving
towards the idea that companies need to
be held accountable at the top of the supply
chain. This means there will continued,
downstream pressures and a cascading
effect on all companies, whether they are
parts manufacturers or automotive retailers.
Companies are increasingly held accountable
for ethical and safe labor practices, enforcing anti-bribery and anti-corruption
governance, and improving their environmental and climate impact.
Because standards for net-zero emission requirements and human-rights
violations are not yet universally adopted, many companies do not have
the mechanisms to track and assess this data. To determine so-called
" Scope 3 " emissions outside their own organizations, or to monitor ethical
supply chains, many organizations must map out their supply chains
to gain a clearer line of sight into their third-party relationships.
Many companies are surprised that a supplier's code of conduct is not
sufficient to identify and deter forced labor and child labor in their supply
chains. To move toward a sustainable solution to these issues, organizations
first need to build those transparent reporting mechanisms.
Q: Given that the pressures on the auto industry are imposed by
short-term thinking (think monthly sales reports), how does the
industry adapt to a long-term initiative like ESG?
Nguyen: By reframing sustainability as long-term value creation, it
becomes clear that short-term reporting needs and long-term planning do
not have to be mutually exclusive. An organization can ensure long-term
success by incorporating long-term targets and monitoring progress in
the short-term. Companies must rethink how they operate and shift from
reacting to remediating. Operational efficiencies, operational excellence,
risk management and technology transformation are the " hows " of managing
sustainability issues and driving better performance and returns.
Q: Can ESG grow without widespread cooperation from governments?
For instance, will ESG become much more significant in
regional trade agreements?
Nguyen: Governments and regulators are notoriously slow to move. In
fact, multinational organizations have the resources, geographic footprints,
and de facto power greater than any single government or non-government
organization. Multinational brands and U.S. supply chains are at
the forefront of the sustainability and ESG movement that will impact
Canadian companies. We can forever motivate a donkey to move forward
by hanging a carrot in front of it. If the donkey still refuses to move, we
might urge it forward with a stick. The primary point of this article is that
companies must rely on the power of the sustainability and ESG " carrots "
- value-creation, risk mitigation and long-term success - rather than wait
for the " stick " of regulatory enforcement and cooperation.
ABOUT THE PANELIST
Y NGUYEN
Head of Sustainable Risk Advisory and North American
Sustainable Supply Chains at BDO
Y Nguyen, CPA, CA, CIA and CSSCP, leads sustainability enablement and
business resilience for BDO and specializes in bespoke and value-added
sustainability risk-advisory solutions for clients of all verticals.
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