Nikkei Newspaper, August 15, front pageOur company was featured in aiESG, Inc. We analyzed the impact of the U.S.-China conflict on the supply chain of electric vehicles (EVs) using the services of "aiESG".

This report describes how we analyzed the supply chain of electric vehicles using our proprietary ESG evaluation service, aiESG, which has been selected as one of the "Forbes Asia 100" (100 companies to watch in Asia).

[Report Summary
...China is likely to be excluded from the electric vehicle supply chain in the U.S. in the future.
An analysis by aiESG found that both environmental and human rights ESG indicators would be worse than they are today if China were excluded from the supply chain and electric vehicles were manufactured.
The deterioration of ESG indicators may be attributed to an increase in parts supply from Mexico and other countries that have replaced China, as well as to the inclusion of many Latin American and African countries along the supply chain.

Background
Push to Exclude China from U.S. EV Supply Chain Accelerates

The Inflation-Reduction Act (IRA) enacted in the U.S. in August 2022 provides for a tax credit of up to $7,500 per vehicle if the electric vehicle is assembled in North America and 50% of the battery components are manufactured in North America. The percentage of battery components procured in North America is scheduled to increase to 100% by 2029.

With the importance of economic security being reaffirmed in many countries following Russia's invasion of Ukraine and the disruption of supply chains due to the spread of the new coronavirus, this law is expected to exclude China from the supply chain of electric vehicles in the United States. As a result, we and Nikkei Shimbun jointly conducted an analysis of what changes will occur in ESG assessments, such as environmental and human rights risks.

[Analytical Methods
Utilize "aiESG" service, which enables ESG evaluation for each product and service.

For the analysis, we used the "aiESG" service, which combines a database and our proprietary AI to perform a sophisticated and multifaceted ESG evaluation of each product and service.
The study examines how the present (2021) and future (2030) of electric vehicle manufacturing in the U.S. and the expected elimination of China from the supply chain will change in 29 items related to environmental and human rights risks.
For the procuring countries that will replace China in 2030, we set the ratio for each procuring country based on future forecast data from market research firms.

The 29 items include a full range of environmental risk items such as greenhouse gas (GHG) emissions affecting climate change and total water consumption (industrial wastewater) related to water resources, as well as human rights risk items such as forced labor, child labor, and industrial accidents and fatalities.
The reason for conducting a 29-item analysis is that companies in the automotive industry are now required to disclose their strategies and progress indicators for key ESG-related items in their annual reports due to the mandatory disclosure of sustainability information in securities reports. In addition, we took into account the background of the current situation in which more detailed disclosure of biodiversity-related information will be required in the future, such as with the establishment of the Task Force on Nature-related Financial Disclosure (TNFD).

Survey Results
Concerns that eliminating China from the supply chain will increase environmental and human rights risks

In 17 of the 29 items, or approximately 60%, the indicators were worse in year 30 than in year 21. In other words, the indicators reveal that the ESG burden will increase as a result of responding to the Inflation-Reduction Act (IRA) and eliminating China from the supply chain. (Figure 1)

Looking specifically at environmental risks, CO2 (carbon dioxide) emissions (-14.18% vs. 2009), GHG (greenhouse gas) emissions (-21.59% vs. 2009), energy use (-6.65% vs. 2009) However, the index worsened in 9 out of 18 items, including SO2 (sulfur dioxide) emissions (+16.94%) and PM10 (particulate matter) emissions (+2.01%), which lead to air pollution. In terms of human rights risks, the index worsened in 7 out of 10 categories, including low-wage work (+4.35%), child labor (+7.15%), and occupational accidents and fatalities (+11.89%).

The Inflation-Reduction Act (IRA) is supposedly designed to curb excessive inflation while at the same time speeding up energy security and climate change measures, but for electric vehicles, the law reduces greenhouse gas emissions but has negative social impacts, such as air pollutants and human rights. However, the indicators indicate that the law may reduce greenhouse gas emissions but have a negative impact on air pollutants, human rights and other social aspects.

[Discussion]
Supply Chain Expansion from North America to Latin America and Africa Contributes to Deterioration of ESG Indicators

The major difference between the 21-year and 30-year set data in this analysis will be the presence or absence of China in the supply chain. The analysis also looks at changes in indicators for each of the parts that make up an electric vehicle, such as the battery, motor, interior and exterior parts, and body, but the most significant impact is on the battery. will require manufacturing in North America, whereas the U.S., Canada, and Mexico will be the sourcing countries by year 30.

The "aiESG" ESG assessment traces not only the primary supply chain but also all supply chains beyond national borders from there. Therefore, with the United States, Canada, and Mexico as battery sourcing countries, the ESG assessment of the supply chain can extend to surrounding countries such as Latin America and Africa.

While human rights due diligence (human rights DD) efforts are being strengthened, particularly in Europe, this analysis found worsening indicators in 7 of the 10 human rights risk categories. A study by the International Labor Organization found that Mexico ranks 5th in the world for occupational injury risk. It is assumed that the change in the supply chain from China to Mexico and other North American countries has affected the deterioration of human rights risk indicators.
Similarly, in environmental risk, the ESG assessment, which traced the supply chain from China, Korea, and Japan to the U.S., Canada, and Mexico, and then to surrounding countries, may have affected the deterioration of 9 out of 18 indicators.

Summary
Major ESG challenges lurk in the trend away from EV production in China

The aiESG analysis, which traces supply chains across borders to the end, reveals that if China is excluded from the U.S. electric vehicle supply chain, both environmental and human rights aspects will deteriorate in the ESG assessment. The shift in the supply of batteries and other components from China to countries surrounding the U.S., such as Mexico, and beyond that to Latin America and Africa, is thought to have an impact on the deterioration of ESG indicators.

Through comprehensive ESG assessments of products and services, aiESG supports the development of products and services that conform to ESG perspectives and the formulation of marketing and branding strategies, including the identification of key items to watch from an ESG risk perspective.
If your company is facing challenges in developing ESG-conscious products and services and marketing strategies, please feel free to contact us.

Inquiry about our services:
https://aiesg.co.jp/contact/

*Related Article*.
The front page of the Nihon Keizai Shimbun newspaper featured the results of aiESG's analysis of EV.
https://aiesg.co.jp/topics/news/230815_nikkei/

aiESG selected for Forbes Asia 100 (100 companies to watch in Asia). 9/20 webinar to commemorate the selection!
https://aiesg.co.jp/topics/news/20230906_forbeswebinar/

aiESG Participates in the Task Force on Nature-related Financial Disclosures (TNFD) Forum
https://aiesg.co.jp/topics/news/2309_tnfd/