Oliver Zipse · Joachim Hornegger Thomas Becker · Markus Beckmann Michael Bengsch · Irene Feige Markus Schober Editors

# **Road to Net ZERO**

Strategic Pathways for Sustainability-Driven Business Transformation

Road to Net Zero

Oliver Zipse • Joachim Hornegger Thomas Becker • Markus Beckmann Michael Bengsch • Irene Feige Markus Schober Editors

# **Road to Net Zero**

**Strategic Pathways for Sustainability-Driven Business Transformation**

*Editors* Oliver Zipse BMW AG Munich, Germany

Tomas Becker BMW AG Munich, Germany

Michael Bengsch BMW AG Munich, Germany

Markus Schober Friedrich-Alexander-Universität Erlangen-Nürnberg Erlangen, Germany

Joachim Hornegger Friedrich-Alexander-Universität Erlangen-Nürnberg Erlangen, Germany

Markus Beckmann Friedrich-Alexander-Universität Erlangen-Nürnberg Nuremberg, Germany

Irene Feige BMW AG Munich, Germany

ISBN 978-3-031-42223-2 ISBN 978-3-031-42224-9 (eBook) https://doi.org/10.1007/978-3-031-42224-9

Tis is an Open Access publication.

Friedrich-Alexander-Universität Erlangen-Nürnberg

© Te Editor(s) (if applicable) and Te Author(s) 2023

**Open Access** Tis book is licensed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons license and indicate if changes were made.

Te images or other third party material in this book are included in the book's Creative Commons license, unless indicated otherwise in a credit line to the material. If material is not included in the book's Creative Commons license and your intended use is not permitted by statutory regulation or exceeds the permitted use, you will need to obtain permission directly from the copyright holder.

Te use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specifc statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use.

Te publisher, the authors, and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. Te publisher remains neutral with regard to jurisdictional claims in published maps and institutional afliations.

Tis Springer imprint is published by the registered company Springer Nature Switzerland AG Te registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland

Paper in this product is recyclable.

# **Foreword**

When I was asked to write the foreword for this book, I hesitated. As the president of the Club of Rome, I am a staunch believer that the twenty-frst century business, political and academic leadership must be much bolder and deeply systemic to face today's complex challenges.

As a BMW Sustainable Mobility Advisory Council member, I have consistently pushed the company to go further in its sustainability approach, not only as a vehicle manufacturer but also as a mobility provider, because I fundamentally believe that this is a company that can be a transformational mobility leader through its incredible engineering prowess and engrained social and environmental values.

To be honest, what has intrigued me most about this book is the process itself and the openness of the contributors in sharing their insights through a series of testimonials and interviews with BMW Chairman Oliver Zipse. Tis is a book that brings together the foundations for change to meet the twentyfrst century needs for people, the planet and prosperity: dialogue, trust building, knowledge exchange, integrated non-linear thinking and acting. Room still remains for more expansive thinking on a complete shift in consumption patterns overall and on the move from circular to regenerative value chains; nevertheless, it is a sound exploration of net zero strategy building through an optimized industry–university partnership. Importantly, it is anchored in the most fundamental element of shifting from thought leadership to action by embracing co-design principles anchored in experimentation and learning, with clear examples of implementation practices, reporting and progress measurement.

Tere is no singular pathway to net zero and there most certainly is no silver technological bullet, especially without governance and economic transformation at the same time. But *Road to Net Zero: Strategic Pathways for Sustainability-Driven Business Transformation* serves as a window into how BMW has developed its sustainability strategy since 1973, when it became the frst automotive manufacturer worldwide to add the position of Environmental Ofcer to its roster. Tis book is a practical guide full of lived experience and refections on how to put into place a net-zero strategy whilst struggling as a company with complexity and twenty-frst century pressure points.

What this book shows is that an automotive manufacturer and an innovative university can have a meaningful dialogue and set of programmes around industrial transformation and societal needs with a joint desire to address wicked problems and learn together as they move towards net-zero objectives.

In 1979, in his introduction to 'No Limits to Learning: Bridging the Human Gap', a report to the Club of Rome, Aurelio Peccei, Italian industrialist and founder of Te Club of Rome, said, 'innovative learning is a necessary means of preparing individuals and societies to act in concert in new situations, especially those that have been and continue to be, created by humanity itself. Innovative learning, we shall argue, is an indispensable prerequisite to resolving any of the global issues'.

Te exchanges and experiences across this book follow the tradition of innovative learning. Tis is a virtuous circle for change, where we take the time to write down what has worked and what hasn't, where we put in place exchanges and testimonials to ensure, as Aurelio Peccei says, that 'we learn what it takes to learn we should learn—and learn it'. Let us not forget that Peccei was an industrialist who understood the importance of innovation and deep systems change as fundamental pillars for human evolution. When Peccei spoke these words of wisdom almost 50 years ago, he already felt time was running out. Tat we needed to learn fast.

Today, we defnitely do not have the luxury of time to get our net-zero journey wrong. 'No Limits to Learning' followed in the footsteps of the seminal report to the Club of Rome, 'Te Limits to Growth', published in 1972 and showing that economic growth could not continue at the pace and scale predicted without pushing humanity beyond the planetary boundaries. Tat serious tipping points could occur in the 2020s. Here we are, ffty years later, amid a series of social and environmental tipping points and encapsulated in a poly crisis where the urge for knee-jerk short-term solutions abound, and yet we know that any decision made now has a multitude of serious long-term impacts. One example is shifting our dependency on gas from Russia to Africa or the Middle East due to the Ukrainian invasion rather than phasing out fossil energy and tripling investments in renewables and efciency measures. How can we ensure that our short-term frefghting reactions at all levels of society, from political to business decision making, build in long-term resilience to future shocks and stresses—not only to increasing climate impacts but also to wars, democratic and geopolitical instability, the migration of peoples and deep value chain disruptions? How do we all stay the course on our net-zero journey, when faced with so many short-term distractions?

Universities and industrial ecosystems have a fundamental role to play across today's societal fabric, serving as the light post for transformation, and we deeply need brave leadership and honest conversations to ensure that virtuous circle of change.

Now, of course, the challenge is to translate the wisdom across these pages—the 'learn it' part—into application, and that is my call to the authors of this publication and to Oliver Zipse and Joachim Hornegger as leaders in their own right. Use the depth of insight you have gained to transform not only your own institutions but also your own ecosystems and value chains globally.

Do stay on course. Address our global challenges head-on as the ultimate transformational experiment of our time. Let's shift our climate challenge from the greatest existential risk to humanity to the greatest opportunity for people, planet, and prosperity.

Sandrine Dixson-Declève

Co-President, Te Club of Rome Chair, the Economic and Societal Impacts of Research & Innovation Working Group, DG R&I, European Commission Member, BMW Sustainable Mobility Advisory Council Munich, Germany

# **Acknowledgements**

On behalf of the editors, we sincerely appreciate the opportunity to unite diverse perspectives and inspiring facets of sustainability-driven business transformations in this edited volume. Te work embodies a collaborative efort between academia and industry, illuminating the critical inquiries on the Road to Net Zero.

First and foremost, our profound thanks extend to all the key contributors to this edited volume. Your wealth of expertise and experience, sourced from both dedicated research and in-depth business practice, has greatly enriched the depth and breadth of this edited volume. Beyond synthesizing the relevant research aspects, your readiness to share your perspectives on sustainabilitydriven business transformation within each chapter has provided invaluable insights that will guide readers as they navigate the complexities of achieving a net-zero future.

We also express our heartfelt gratitude to the diligent individuals working behind the scenes—the internal and external reviewers and providers of feedback, proofreaders, designers, and the publishing team—who have committed their time, critical acumen, and attention to detail.

Tis edited volume wouldn't be as special without the support of Sandrine Dixson-Declève, Co-President of the Club of Rome, whose foreword sets the tone for this edited volume, stimulating readers with her thoughtful perspectives and underscoring the importance of collective action to achieve a netzero future. We are privileged to have your wisdom, experience, and counsel on the frst pages of this book.

Lastly, our thanks extend to you, the readers, and the broader sustainability community. Tis dynamic community, including its critical voices, consistently propels research and practice forward. We are grateful that you have joined us on this collective learning journey.

With deep gratitude, Te Editors Oliver Zipse, Joachim Hornegger, Tomas Becker, Markus Beckmann, Michael Bengsch, Irene Feige and Markus Schober

# **About This Book**

Sustainability is no longer simply a trend, customer preference, or political goal. It is the new benchmark aligning strategic objectives and measures in the automotive industry. To embark on a sustainable transformation, companies must adopt a science-based management approach, integrating various disciplines. Tis book is the culmination of insightful discussions among distinguished leaders from both academia and industry, collectively committed to driving the sustainability transformation of the automotive sector.

Recognizing that developing strategic pathways for sustainability-driven business transformation necessitates Pioneering Pathways, underpinned by strong university-industry partnerships (Chap. 1), every path towards achieving net-zero emissions commences with Setting the Course for Net Zero (Chap. 2) by translating climate science into actionable political and corporate targets.

Te pursuit of ambitious climate targets propels us to the next stage— Crafting Corporate Sustainability Strategies (Chap. 3) and elaborating on Te Future of Corporate Disclosure (Chap. 4). Subsequently, the transformational journey extends across the value chain, encompassing topics such as Creating Sustainable Products (Chap. 5), Transforming Value Chains for Sustainability (Chap. 6), and the pursuit of Sustainability in Manufacturing (Chap. 7). Along every path to net zero, Te Power of Technological Innovation (Chap. 8) emerges, which, within the automotive industry, is defned, among other things, by the potential of novel drive systems. Finally, the end of each pathway marks the beginning of a new dawn, refected in Chap. 9—Te Road to Net Zero and Beyond.

By collating extensive thematic expert conversations and a comprehensive synthesis of research within each subject area, this book presents pivotal guiding questions that will drive the transformation towards sustainability. As an essential read for decision-makers, strategists, business developers, engaged citizens, and educators alike, this book ofers valuable insights for navigating pathways towards a more sustainable future.

# **Contents**






# **About the Editors**

**Prof. Dipl.-Ing. Oliver Zipse** is Chairman of the Board of Management of BMW AG since 2019. He joined BMW AG in 1991 and has held various responsibilities within the company in development, technical planning and production in Munich, South Africa and the UK. He holds a Dipl. Ing. Degree from the Technical University of Darmstadt and an Executive MBA from the WHU Koblenz and Kellogg School of Management Evanston/USA. In addition, he is an honorary professor at the Technical University of Munich.

**Prof. Dr.-Ing. Joachim Hornegger** is President of the Friedrich-Alexander-Universität Erlangen-Nürnberg (FAU), Germany and former Chair of Pattern Recognition at the Faculty of Engineering (FAU). During his professional career, he was a guest researcher at the Massachusetts Institute of Technology (MIT) and the Computer Science Department at Stanford University. In addition to his research activities, he held various positions in the medical technology industry at Siemens Medical Solutions.

**Dr. Tomas Becker** is Vice President of Sustainability and Mobility at BMW AG, Germany. After studying business administration at the University of Cologne (Germany), he completed his doctorate at the University of Witten/Herdecke (Germany) before working as an environmental policy ofcer at the Federation of German Industries (BDI) and later as Deputy Managing Director of the German Association of the Automotive Industry (VDA).

**Prof. Dr. Markus Beckmann** holds the Chair for Corporate Sustainability Management at FAU Erlangen-Nürnberg, Germany. Prior to his appointment at

#### **xx About the Editors and Contributors**

FAU, he worked as an assistant professor of social entrepreneurship at the Centre for Sustainability Management, Leuphana University of Lüneburg (Germany). His research focuses on sustainability management and social entrepreneurship, as well as business ethics and corporate social responsibility.

**Michael Bengsch** works in the Corporate Strategy Department for Sustainability and Mobility at BMW AG, Germany. He studied electrical and computer engineering at the Technical University of Munich (Germany).

**Dr. Irene Feige** is Head of Climate Strategy and Circular Economy at BMW AG, Germany. After studying economics at Vienna University of Economics and Business, she completed her doctorate in economics at the University of Innsbruck, while also taking part in research stays in Cambridge (US), Beijing and Shanghai. During her career at BMW she has taken on several positions in corporate strategy, communication and research.

**Markus Schober** works in strategy consulting for the automotive industry and is a start-up entrepreneur. Previously, he worked for several years as university-industry relations manager at FAU Erlangen-Nürnberg, Germany. He studied Industrial Engineering & Management at FAU Erlangen-Nürnberg and East China University of Science and Technology, Shanghai.

# **Contributors**

**Jennifer Adolph, M.Sc.** Research Associate at the Chair for Corporate Sustainability Management at Friedrich-Alexander-Universität Erlangen-Nürnberg, Nuremberg, Germany

**Tomas Becker, Dr.** Vice President Sustainability and Mobility at BMW AG, Munich, Germany

**MarkusBeckmann, Prof. Dr.** Head of the Chair for Corporate Sustainability Management (Full Professor) at Friedrich-Alexander-Universität Erlangen-Nürnberg, Nuremberg, Germany

**Lothar Czaja, Dr.** Postdoc at the Chair of Industrial Management at Friedrich-Alexander-Universität Erlangen-Nürnberg, Nuremberg, Germany

**Irene Feige, Dr.** Head of Climate Strategy and Circular Economy at BMW AG, Munich, Germany

**Tomas M. Fischer, Prof. Dr.** Head of the Chair for Accounting and Management Control (Full Professor) at Friedrich-Alexander-Universität Erlangen-Nürnberg, Nuremberg, Germany

**Jörg Franke, Prof. Dr-Ing.** Head of the Institute for Factory Automation and Production Systems (Full Professor) at Friedrich-Alexander-Universität Erlangen-Nürnberg, Erlangen, Germany

**Veronika Grimm, Prof. Dr.** Head of the Chair of Economic Teory (Full Professor) at Friedrich-Alexander-Universität Erlangen-Nürnberg, Nuremberg, Germany

**Jürgen Guldner, Dr.** General Program Manager Hydrogen Technology at BMW AG, Munich, Germany

**Nico Hanenkamp, Prof. Dr.-Ing.** Head of the Institute of Resource and Energy Efcient Production Machines (Full Professor) at Friedrich-Alexander-Universität Erlangen-Nürnberg, Fuerth, Germany

**Joachim Hornegger, Prof. Dr.-Ing.** President of Friedrich-Alexander-Universität Erlangen-Nürnberg, Erlangen, Germany

**Torsten Ihne, M.Sc.** Research Associate at the Institute for Factory Automation and Production Systems at Friedrich-Alexander-Universität Erlangen-Nürnberg, Erlangen, Germany

**Peter Lamp, Dr.** General Manager Battery Cell Technology and Fuel Cell at BMW AG, Munich, Germany

**Lena Ries, M.A.** Research Associate at the Chair for Corporate Sustainability Management at Friedrich-Alexander-Universität Erlangen-Nürnberg, Nuremberg, Germany

**Markus Schober, M.Sc.** University-Industry Relations Manager at Friedrich-Alexander-Universität Erlangen-Nürnberg, Erlangen, Germany

**Jonathan Townend** Head of Group Accounting & Reporting & Taxes at BMW AG, Munich, Germany

**Kai-Ingo Voigt, Prof. Dr.** Head of the Chair of Industrial Management (Full Professor) at Friedrich-Alexander-Universität Erlangen-Nürnberg, Nuremberg, Germany

**Sandro Wartzack, Prof. Dr-Ing.** Head of the Chair of Engineering Design at Friedrich-Alexander-Universität Erlangen-Nürnberg, Erlangen, Germany

**Peter Wasserscheid, Prof. Dr.** Head of the Chair of Chemical Engineering I – Reaction Engineering (Full Professor) at Friedrich-Alexander-Universität Erlangen-Nürnberg, Erlangen, Germany

**Oliver Zipse, Prof. Dipl.-Ing.** Chairman of the Board of Management of BMW AG, Munich, Germany

**Gregor Zöttl, Prof. Dr.** Holder of the Professorship of Economics (Industrial Organization and Energy Markets) at Friedrich-Alexander-Universität Erlangen-Nürnberg, Nuremberg, Germany

# **List of Abbreviations**


#### **xxiv List of Abbreviations**



# **List of Figures**


**xxvii**

#### **xxviii List of Figures**


# **1**

# **Pioneering Pathways Universities and Industry as Collaborative Learners on the Road to Net Zero**

**Joachim Hornegger and Oliver Zipse**

# **1.1 A Collaborative Approach**

Tis book is the outcome of a joint experiment—an experimental exercise in university–industry relationship building between our institutions: BMW and Friedrich-Alexander-Universität (FAU). To be sure, our institutions have always had good and trusting relationships between individual experts—long before our time in leadership roles. People at BMW and FAU have been involved in joint research projects, joint student mentoring, guest lectures, expert advice, talent exchanges, and more. In fact, we admire these multifaceted forms of collaboration based on individual expertise or serendipity. But we felt there could and should be more.

Could we somehow extend our collaborative relationships to jointly address aspects of one of the dominant challenges of our time, namely the sustainable transformation of organisations? How could we make this happen? Could we create an inspiring and inclusive journey for many? We wanted to start small but with a sustainable perspective. We wanted to start informally but with measurable results. We wanted to use pragmatic approaches with scientifc rigour and practical relevance. Above all, however, we wanted to invite others

J. Hornegger (\*)

FAU Erlangen-Nürnberg, Erlangen, Germany e-mail: praesident@fau.de

O. Zipse BMW AG, Munich, Germany to join us on our journey on 'Te Road to Net Zero'.1 Te time to do so is now. So feel free to aim even higher: Be inspired.

# **1.2 Be Inspired**

Our ideas grew over a business lunch. Wouldn't it be great, we wondered, if our teams could be part of our conversation, join the journey, and experience the same inspiration and learning that we had experienced at our frst lunch? As a frst step, we invited a range of experts from across our organisations to participate in a series of conversations on topics involving sustainabilitydriven business transformation, with Mission Net Zero in mind. It was inspiring to see the level of interest and engagement. Despite the pandemic, a total of nine conversations took place over the course of 2021. From FAU:


<sup>1</sup> In the remainder of this book, we employ capital letters when using the phrase "Road to Net Zero" to denote our understanding of sustainability-driven business transformation.

Te BMW Group was represented by Prof. Oliver Zipse, Chairman of the Board of Management of BMW AG, who was joined by:


We all truly enjoyed the discussions, had them recorded, and initially published some short excerpts on the BMW website.2 Te feedback motivated us to go one step further. We decided to publish them, with some additional context, to inspire others to join our journey and do better, dig deeper, engage and elaborate further.

Tis book does exactly that. It will not pave the Road to Net Zero. Instead, it will show you that your contributions, deep conversations, collaborative work, and commitment are needed to take the necessary steps. Tis book is not written as a blueprint solution to the challenge of our time (in fact, you may feel that it often only scratches the surface), but it aims to outline a Road to Net Zero and create collective engagement. Tis book is not a political statement from BMW or FAU. It is what it is: a collection of edited expert conversations, framed by some foundational thoughts and complemented by our ideas about the next steps. It can serve as a primer for shaping industry– university relationships, starting with matchmaking (or should we say 'speed dating') of experts from both worlds—academia and industry—driven by a common mission and committed to bridging their individual spheres of knowledge. Conversations can help build trusting relationships; they are the gateway to deeper discussions, constructive mutual criticism, promising projects, and joint steps that pave the Road to Net Zero.

Our shared concern about climate change was the catalyst for our conversation. Now, we would like to invite you, the reader, to listen to our frst exchange. Te dialogue is about getting to know each other, exploring our positions and commitments, fnding our common understanding and working out the complementarities of our institutions as a frst step. You will fnd that we are beginning to feel our way along a road that was previously only imagined—an experience that has been equally fascinating, at times eyeopening and encouraging. We have identifed a shared passion for open challenge-based collaboration, a shared interest in the promise and pitfalls of measurement (how can science help?), and confdence in the ability of our

<sup>2</sup>https://www.presstopic.bmwgroup.com/en/sustainability-dialogues

organisations to work fruitfully together on the sustainability challenge. Tis is where we started.

# **1.3 Expert Conversation on Joining Forces for Sustainability-Driven Transformation**


*Hornegger*: What is driving this development?

*Zipse*: Climate change is one factor, but sustainability is much more than climate change. Tere are several reasons for this: First, all resources are fnite. So, if you are a major car manufacturer like us, you have to create a broader awareness, and you have to manage the resources. In addition, today, everything can be measured—through very cheap sensors, through the digitisation of our world. And when it's measured, it's transparent. Sustainability has a lot to do with transparency. Tese are some reasons why we decided to take the next step in our sustainability strategy.

Sustainability is an issue that afects every part of society. On a global scale, it afects every country, and science and scientifc progress have a crucial role to play in understanding what it really means, in all its implications, in all its systemic features. What kind of role can science—and FAU in particular—play in making progress, in understanding what sustainability really means?


*Hornegger*: Why is setting goals so important?


*Hornegger*: How do you make this overlap work?

*Zipse*: I like the idea of science-based management. Our strategy is very much linked to an initiative called 'Science-Based Targets'. Why is this important? Because today, you can measure almost anything. You can immediately correlate the efects of your management decisions with facts. So, good solutions are always measured against other good solutions based on evidence. Tat is why I am working—also as a member of the Fraunhofer Society—to build a bridge to science. Of course, this day here at the FAU is also very symbolic of building this bridge because being successful in science and being successful as an organisation are highly correlated.


dents. I can still remember that grading was the biggest hurdle, you know, that you have to get good grades at the end …


*Hornegger*: I am all ears. What are these rules?


*Hornegger*: Is there still an ingredient missing?

*Zipse*: At the end of the day, of course, you have to love working with people.

Tat applies equally to managers and university presidents. I see that here—

you know, you work with bright young minds, and you want to involve them. I think those are very important ingredients.

Now, to come back to your question. I see a lot of opportunities to work together, especially in the engineering section, where everything is a technical application. Industry is a technical application. In fact, there is a strong connection as we combine knowledge discovery and academic processes with engineering applications in industry. I think there is also a strong link in training, in education, and in industrial projects. We should strengthen this bond in general—not only in Germany. Of course, we also have links with universities in Asia and universities in the United States. But we can do that here in Bavaria, frst of all. We have enormous knowledge at the FAU, and we should use it.


*Hornegger*: For example?

*Zipse*: Let's consider a workshop with 30 people. What do you normally do? You make a big introductory statement, and then you break into subgroups. Ten everyone has to leave the room … and then you bring them back together and you do it again. If you use a modern videoconferencing system, it takes just one click to randomly divide the whole 30 people into six subgroups. You also know that you have exactly 15 minutes to discuss, and then you get them back. Tis is a hugely efcient tool for organising bigger groups. Didn't we know it before? Well, we knew it, but we were not quick to use it.

*Hornegger*: Sometimes you need a disruption to change.


# **1.4 Outline of the Book**

For the authors of the chapters in this book, the Road to Net Zero is a shared journey that requires discourse and learning. Guided by the same North Star, there are diferent, sometimes even competing, views on the precise route. Given the ambition of the goal and the complexity of the terrain, no single actor has the perfect solution. Terefore, the journey together requires joint eforts, the search for a balance between diferent objectives and smart ideas rather than pre-determined answers. It was with this in mind that the expert discussions between FAU and BMW, which form the core of each chapter in the book, were conducted. In designing the book, we were aware that we could not claim to be able to cover all the topics related to the sustainable transformation of organisations and companies towards Net Zero. Rather, the selection of topics refects the thought processes that emerged from the expert conversations and that we would like to share with you.

Furthermore, the authors believe that the Road to Net Zero should not be understood as a linear process but rather as an iterative one, where each imperfect step, each iteration, represents an improvement in climate change mitigation. Similar to innovation processes, the overall vision is approached step by step, and the achievement of each iteration marks the beginning of a new cycle. Again, this is refected in the choice of topics and the structure of the book, as shown in Fig. 1.1.

Overall, the Road to Net Zero, as described in this book, is organised into three thematic clusters. Chapters 2–4 deal with issues that mainly concern corporate strategy, from setting sustainability goals to integrated strategy formulation and integrated reporting. Chapters 5–7 deal with the operational aspects of an OEM (Original Equipment Manufacturer or carmaker) in the automotive sector, where, in addition to product development, the upstream and downstream supply chains play an increasingly important role, as does carbon-neutral production. Te third and fnal group of topics, in Chap. 8, looks at the technological developments that will signifcantly shape and drive the transformation of the automotive industry in the future. Te fnal chapter concludes the book with a management summary and a research agenda.

After decades of climate monitoring and climate impact research, and with the growing awareness of the immense challenge facing humanity, the Paris Agreement represents the most important agreement to date showing how all nations can work together to responsibly mitigate climate change in the future. Te Paris Agreement was therefore chosen as the starting point for this book. Looking at the Paris Agreement from the perspective of an organisation

**Fig. 1.1** Outline of the Road to Net Zero

or business, several questions arise: What are key climate science foundations that inform the Paris Agreement? How can the 1.5 °C target be achieved not only by sovereign states but also by individual companies and organisations? How can national climate targets be broken down to lower organisational levels to set sustainability targets that refect the current scientifc projections? How do you set targets as a company or organisation that wants to transform its business model and operations in a way that is credible and responsible to both the climate and its employees? Tese and other challenges to setting sustainability targets are refected in the second chapter of the book, 'Setting the Course for Net Zero', by Markus Beckmann, Gregor Zöttl, Veronika Grimm, Tomas Becker, Markus Schober, and Oliver Zipse.

In the past, it was considered sufcient for any company to set sustainability goals separate from its corporate strategy—often referred to as corporate social responsibility measures. However, today's rapidly accelerating climate change requires a paradigm shift. Strategies that demonstrate a high level of maturity do not treat sustainability as a stand-alone add-on; rather, they integrate it into the way a company creates value. Achieving real lifecycle improvements requires integrated thinking that considers the entire value chain, not just the company's operations. Tis type of integrated approach to sustainability permeates the entire strategy process. Te process extends from strategy formulation, which requires reliable target setting, through strategy implementation, which needs an integrated management approach, to strategy evaluation, which calls for new ways of measuring and reporting. In the third chapter, 'Crafting Corporate Sustainability Strategy', Markus Beckmann, Tomas Becker, and Oliver Zipse outline how integrated thinking changes the entire strategy process.

Te statement 'What gets measured, gets done' refects the fact that the Road to Net Zero for companies and organisations is decisively infuenced by new ways of reporting. As interest in a company's sustainability strategy and performance grows, reporting on purely fnancial indicators is no longer suffcient to satisfy all stakeholder interests. While traditional reporting is primarily aimed at investors and thus provides information on the company's fnancial performance, today's companies require a broader focus on nonfnancial, sustainability-related aspects to meet the information needs of other stakeholders, such as employees, governments, or society. Te transition to non-fnancial (sustainability) reporting has gradually evolved from voluntary standards with poor comparability to regulatory requirements for greater transparency. In the fourth chapter, 'Te Future of Corporate Disclosure', Tomas M. Fischer, together with Oliver Zipse, Jennifer Adolph, Jonathan Townend, and Markus Schober, examine the transition from conventional to integrated reporting, while refecting on recent legislation, the challenges of measuring and selecting non-fnancial and fnancial key performance indicators (KPIs) and the balancing of diferent stakeholder interests.

Reliable and credible sustainability targets, an integrated strategy and integrated reporting provide the roadmap for the path to Net Zero. With the introduction of electric vehicles, the majority of lifecycle emissions will shift from the use phase to the production phase. As a result, circular value chains play a key role in the operational transformation towards Net Zero and thus determine the second cluster of topics in the book. Te transition to a circular economy starts with a new way of thinking about product development. Together with Oliver Zipse and Lena Ries, Sandro Wartzack opens the book's second thematic cluster with Chap. 5, 'Creating Sustainable Products'. Te authors refect on design for recycling, the replacement of scarce resources with secondary materials, and the introduction of natural materials, especially in interior design. Changes in consumer behaviour and the appearance of products with eco-efcient footprints are also discussed.

Te discussion on sustainability in product development leads to the challenge of sourcing scarce and valuable resources. In particular, battery manufacturing and electric drivetrain manufacturing require materials that are available only in limited quantities and from only a few countries around the world. Tis increases the need for closed-loop supply chains where secondary materials can enter production. In addition, the Road to Net Zero depends heavily on suppliers far upstream in the supply chain, as science-based targets create responsibilities for the OEM throughout the entire supply chain. In addition to eco-efcient sourcing, the social dimension of raw material production must also be considered. In the sixth chapter, 'Transforming Value Chains for Sustainability', Kai-Ingo Voigt, Lothar Czaja, and Oliver Zipse refect on these diverse challenges and show ways forward with practical examples from BMW and suggestions for future research.

Following the value chain downstream, a green factory can be seen as another crucial step in the transformation towards Net Zero at the operational level. Optimising production has been the focus of researchers and practitioners for more than two decades. Today, there is a consensus that sustainable manufacturing must cover the three dimensions of economic, environmental, and social aspects. While in the past the shift towards operational excellence was mainly driven within a factory, an integrated strategy approach now requires consideration across system boundaries again. Te BMW iFactory is an example of a value-added network that is not simply a new production facility but combines lean systems, digitalisation technologies, and circular production processes to address the three dimensions of sustainable production. In the seventh chapter, 'Sustainability in Manufacturing', Nico Hanenkamp and Oliver Zipse together discuss the fundamentals of sustainable production and the latest advances in energy supply, circular processes, and manufacturing technologies.

Certainly, technological innovation provides new opportunities and impetus for further transformations on the Road to Net Zero. For this reason, Chap. 8, 'Te Power of Technological Innovation', forms the third thematic cluster of this book and the ending/starting point of the Road to Net Zero, illustrated in Fig. 1.1. Technological innovations can trigger new strategies and goal adjustments that can take the continuous improvement cycle into a new round. Te authors Jörg Franke, Peter Wasserscheid, Torsten Ihne, Peter Lamp, Jürgen Guldner, and Oliver Zipse systematically analyse the drivetrains of the future. From the electric drivetrains to synfuel internal combustion engines (ICEs) and fuel cells, the authors discuss challenges and opportunities for each technology and outline possible future developments.

Ultimately, just as the development of new technological innovations depends on collaboration, so does an organisation's overall efort to move towards Net Zero. Terefore, in addition to a research agenda, the fnal chapter of the book, 'Te Road to Net Zero and Beyond,' authored by Markus Beckmann and Irene Feige, initially provides a summary of the preceding chapters, discussing shared themes and insights. It then extends its discussion beyond the Road to Net Zero, and in the outlook, delves into the relevance and value of university–industry partnerships, accentuating the importance of collaborative eforts in achieving Net Zero objectives. It explores innovative forms of collaboration to address this complex and time-critical global challenge and to jointly identify strategic pathways for sustainability-driven business transformation in the automotive industry.

Are you ready to join us on the Road to Net Zero? We would love to take you on our journey so that we can grow and learn from each other.

**Open Access** Tis chapter is licensed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons. org/licenses/by/4.0/), which permits use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons license and indicate if changes were made.

Te images or other third party material in this chapter are included in the chapter's Creative Commons license, unless indicated otherwise in a credit line to the material. If material is not included in the chapter's Creative Commons license and your intended use is not permitted by statutory regulation or exceeds the permitted use, you will need to obtain permission directly from the copyright holder.

# **2**

# **Setting the Course for Net Zero Translating Climate Science into Political and Corporate Targets**

**Markus Beckmann, Gregor Zöttl, Veronika Grimm, Thomas Becker, Markus Schober, and Oliver Zipse**

# **2.1 Introduction**

In 2015, a historic accord was reached in Paris, uniting 195 nations and the European Union in a collective commitment to climate action. Te Paris Agreement set an ambitious target—limiting global warming to well below 2 °C compared to pre-industrial levels (Paris Agreement, see United Nations (UN), 2015). Despite the ensuing struggles with implementation and the limitations inherent in such a broad international pact, the Paris Agreement represents a monumental global breakthrough, embodying the goal of attaining net zero emissions and providing a roadmap for joint international environmental stewardship.

Tis book serves as an exploration of that roadmap and how businesses can contribute to it by charting the path known as the 'Road to Net Zero'. Terefore, as the frst thematic focus of this book, Chap. 2 sets out the broad

M. Beckmann • G. Zöttl (\*) • V. Grimm FAU Erlangen-Nürnberg, Nuremberg, Germany e-mail: gregor.zoettl@fau.de

T. Becker • O. Zipse BMW AG, Munich, Germany

M. Schober FAU Erlangen-Nürnberg, Erlangen, Germany

Veronika Grimm contributed to this chapter exclusively through the expert conversation in Sect. 2.4.

context and objectives of this journey, outlining the background for sustainability transitions steered by businesses towards a climate-friendly future. While subsequent chapters examine the role of businesses in detail, this chapter frst focuses on the interplay of climate science, policymakers, and corporations needed in setting the course for a decarbonised future.

Te structure of the chapter is designed to guide readers through the multifaceted aspects of this complex topic. Section 2.2 lays the foundation with a brief overview of fundamental climate science. A basic understanding of these fundamentals is crucial to understanding the urgency and scope of the task at hand. Section 2.3 charts the evolution of global climate policy, taking readers along the path that led to the Paris Agreement. It elucidates why the pursuit of net zero emissions necessitates a profound shift away from current mainly fossil-fuel-based economies towards a sustainable, low-carbon future. Section 2.4 zooms in on the role of national and supranational policymakers. Teir role in crafting regulations and incentivising changes is vital in propelling the world along the Road to Net Zero. Engaging with these basics, Sect. 2.5 features the expert conversation of Prof. Dr Veronika Grimm, FAU Chair of Economic Teory and Member of the German Council of Economic Experts, Prof. Oliver Zipse, CEO of BMW Group, and Dr Tomas Becker, VP Sustainability & Mobility at BMW. Tey shed light on the intricate balancing act between regulation, infrastructure support, and the strategic and technological imperatives of businesses. Finally, Sect. 2.6 delves into the science-based frameworks for setting, measuring, and reporting climate targets at the corporate level in line with the Paris Agreement before Sect. 2.7 concludes.

# **2.2 A Brief Review of Selected Climate Science Insights**

A basic understanding of climate science fundamentals is helpful for grasping the complexities of climate change and the pressing need for mitigative action. Te aim of this section is to encapsulate some of these rudiments, especially those relevant to the Road to Net Zero, as elaborated upon in this book. While the idea of 'following the science' is indeed crucial, it is important to acknowledge that science is an iterative feld that progresses through a constant exchange of ideas and testing of theories. Science does not provide static answers; rather, it generates ever-evolving explanations that are refned over time based on new evidence and understanding. Tis concept of iterative refnement and learning applies equally to climate science.

Te Intergovernmental Panel on Climate Change (IPCC) exemplifes this process of scientifc collaboration and consensus building. Composed of three working groups, the IPCC does not engage in original research; instead, it synthesises the global body of climate research to provide policymakers and the general public with comprehensive assessments of the scientifc consensus on climate change (IPCC, 2021b). Working Group I assesses the physical science basis of climate change; Working Group II addresses the vulnerability of socio-economic and natural systems to climate change, the negative and positive impacts of climate change, and options for adapting to it; and Working Group III assesses options for reducing greenhouse gas emissions and otherwise mitigating climate change (IPCC, 2021a).

Central to understanding climate change is recognising the role of carbon dioxide (CO2) and other greenhouse gases (GHGs) in heating our planet. CO2 and its equivalents trap heat in the Earth's atmosphere, thus afecting global temperatures (Shakun et al., 2012). Prior to the frst industrial revolution, the emissions and absorptions of greenhouse gases were in balance, resulting in relatively limited alternating CO2 concentrations and temperatures. However, increasing anthropogenic (i.e. human-made) actions, such as industrial and economic activities, have disrupted this delicate balance of the global carbon cycle. Te burning of fossil fuels releases carbon from the ground into the atmosphere, while land use changes (such as deforestation and the conversion of wetlands into agricultural land) also emit carbon and reduce the Earth's natural capacity to absorb carbon. As a result, the concentrations of CO2 in our atmosphere have been rising and, in turn, have been warming the planet (IPCC, 2023; Prentice et al., 2012).

Accurately measuring the historical and current levels of GHG emissions, including CO2, is a complex but crucial part of climate science. By 2022, atmospheric CO2 concentrations had reached around 421 parts per million (ppm), more than 50% higher than pre-industrial levels (National Oceanic and Atmospheric Administration, 2022). Tis increase in CO2 concentrations corresponds to a warmer planet, with the average surface temperature estimates from 2011 to 2020 indicating the Earth was already approximately 1.1 °C warmer than during the pre-industrial period (1880–1900) (IPCC, 2023, p. 4).

Climate science has harnessed such historical data to construct and validate advanced simulation models for predicting future temperature levels. In IPCC reports, these future simulations rely on varying emission scenarios, also known as shared socio-economic pathways. Tese scenarios contemplate different potential socio-economic and technological developments. For each scenario, simulation models can anticipate future GHG emissions and the corresponding shifts in global temperature (IPCC, 2021c).

Comprehending the spectrum of these temperature variations is vital for assessing the potential ramifcations of climate change. Tese consequences are extensive, permeating almost all aspects of our lives. Tey encompass increased frequency and intensity of heatwaves, extended droughts, unpredictable precipitation, escalating biodiversity loss, intensifed wildfres, invasive species, forest loss, rising sea levels, melting ice caps and glaciers, ocean acidifcation, vanishing coral reefs, heat-related illnesses and mortality, the spread of vector-borne diseases, and heightened food insecurity (IPCC, 2022).

Given these threats, a protracted discourse has emerged regarding the critical levels of global warming beyond which humanity would face severe and dangerous climate change. Within the IPCC, two such goals have gained specifc attention: the 2 °C threshold and the more recent 1.5 °C target. Te 2 °C target, frst proposed in the 1970s by economist William Nordhaus, later garnered political recognition in the 1990s. By the time of the IPCC's Fourth Assessment Report (AR4) in 2007, this target had become a commonly referenced goal in policy discussions. However, the AR4 did not explicitly endorse the 2 °C target but instead presented a range of possible outcomes based on diferent emission trajectories. It highlighted that a global temperature rise of 2 °C above pre-industrial levels would have serious impacts, including an increased risk of extreme weather events, signifcant biodiversity loss, and a higher likelihood of tipping points in the Earth system (IPCC, 2007). Te IPCC's Fifth Assessment Report (AR5), published in 2014, further reinforced these fndings (IPCC, 2014). Consequently, the IPCC was tasked with preparing a special report on the impacts of global warming of 1.5 °C. Tis report, published in 2018, clarifed that the impacts at 1.5 °C of warming are signifcantly less than at 2 °C and underscored the need for rapid, far-reaching, and unprecedented changes in all aspects of society to achieve this more ambitious target (IPCC, 2018).

In its most recent synthesis report, published in 2023, the IPCC underscored the signifcance of this shift towards the 1.5 °C goal because the latest stage of climate science suggests that dangerous forms of global warming are likely to occur at lower levels of global warming than previously anticipated 'due to recent evidence of observed impacts, improved process understanding, and new knowledge on exposure and vulnerability of human and natural systems, including limits to adaptation' (IPCC, 2023, p. 15). One specifc concern is the potential for the climate system to reach tipping points and trigger self-enforcing feedback loops. Such tipping points, including the melting of Arctic sea ice or the thawing of permafrost (which releases methane), could contribute to further warming, even if anthropogenic emissions were fully eliminated.

Te quest to prevent these catastrophic impacts led the IPCC to study the probable efects of limiting global warming to 2 and 1.5 °C above preindustrial levels. Teir analyses provide the scientifc basis for these temperature goals, which are now central to global climate policy.

Emerging from this research is the concept of a 'carbon budget'. Tis is the aggregate amount of CO2 emissions that can be discharged into the atmosphere while still maintaining a likely chance of limiting global warming to a specifc temperature target. Te size of the remaining carbon budget varies depending on whether the goal is to limit warming to 2 or 1.5 °C. In its latest synthesis report, the IPCC estimates the remaining carbon budgets from the beginning of 2020 to be 500 Gt CO2 (for a 50% likelihood of limiting global warming to 1.5 °C) and 1150 Gt CO2 (for a 67% likelihood of limiting warming to 2 °C) (IPCC, 2023, p. 21). At the 2019 emissions level, this budget would be almost fully utilised for the 1.5 °C goal and roughly a third would be utilised for the 2 °C goal by 2030.

Terefore, climate science illustrates that achieving both the 2 °C and the 1.5 °C goals is feasible only with a massive and rapid decarbonisation of the economy. Regardless of whether the target is to limit warming to 2 or 1.5 °C, global emissions must reach 'net zero' at the culmination of this process. Tis term implies that any emissions discharged into the atmosphere must be ofset by equivalent removals, either through natural processes (i.e. by absorption by natural sinks, such as plants and the ocean) or human-made technologies, such as carbon capture and storage.

However, a crucial point to emphasise is that achieving net zero emissions by a specifc year is not sufcient to stay within a specifed carbon budget. What matters for climate stabilisation is the accumulated emissions over time, which means the actual reduction pathways on the way to net zero. Tis means that if emissions are reduced too slowly in the early years, then faster reductions will be needed later to stay within the carbon budget. Tus, while a net zero target sets the end goal, the pace at which emissions decrease on the Road to Net Zero is just as crucial (IPCC, 2021c).

In summary, understanding the basics of climate science is key to appreciating the challenges of climate change and the urgency of taking action to mitigate its worst impacts. As science evolves, so too must our responses to it. Te Road to Net Zero, for example, is not just about reaching a destination; it is also about how swiftly we embark on that journey and how many iterations (cf. Chap. 1; Fig. 1.1) we will need to do so. Te following section discusses the evolution of this journey in the global climate policy debate.

# **2.3 Global Climate Policy: The Road to Paris and Beyond**

Te origins of global climate policy can be traced back to the 1972 United Nations Conference on the Human Environment and the ensuing establishment of the United Nations Environment Programme (UNEP). Te conference, hosted in Stockholm, provided the foundation for international environmental cooperation (Bodansky, 2001). Recognising the potential threat of climate change, UNEP, in collaboration with the World Meteorological Organization (WMO), formed the Intergovernmental Panel on Climate Change (IPCC) in 1988. Tis independent entity was tasked with assessing scientifc literature and furnishing crucial scientifc information to the climate change process.

Te Earth Summit of 1992 in Rio de Janeiro heralded the establishment of the United Nations Framework Convention on Climate Change (UNFCCC)—a pivotal international treaty devoted to addressing climate change. Te UNFCCC, grounded in scientifc insights suggesting that human-made greenhouse gas (GHG) emissions could infuence global temperatures, was adopted with the ultimate objective of preventing 'dangerous anthropogenic interference with the climate system' (UNFCCC, see UN, 1992, Article 2). While the UNFCCC aimed to stabilise atmospheric GHG concentrations to preclude dangerous warming, it did not specify the level at which this stabilisation should occur.

Te UNFCCC came into efect on March 21, 1994, and today enjoys near-universal membership. Te 198 nations that have ratifed the Convention regularly convene for global climate conferences, referred to as the Conferences of the Parties (COPs). Tese ongoing conferences highlight how the history of global climate policy has been shaped by the dynamic interplay between emerging insights from climate science and political negotiations on a global scale. Climate policy is informed not only by fndings from climate science but also by political evaluations and decisions that extend beyond the realm of science (e.g. when discussing what impacts count as dangerous or how burdens should be distributed).

Political negotiations concerning climate change have encompassed a broad array of topics. As the impacts of climate change become increasingly evident, more attention is devoted to questions of adaptation, protection of the most vulnerable, assisting developing countries with the transition and debates about fnancial compensations for countries most afected by global warming. While these topics are pertinent and relevant for international political negotiations, the following review is specifcally focused on the policy discussion on limiting global warming, the emergence of global science-informed targets and, consequently, on selected milestones for setting the trajectory for the Road to Net Zero discussed in this book.

Te Kyoto Protocol, adopted in 1997 at the third Conference of the Parties (COP 3) in Kyoto, Japan, marks the frst signifcant milestone in global climate policy. For the frst time, it introduced legally binding obligations for developed countries to reduce GHG emissions, thereby sparking international cooperation on climate change mitigation. Tese so-called Annex I countries (including the EU, Canada, Australia, New Zealand, and Russia) committed to substantial reductions in their greenhouse gas emissions—a 5% reduction compared to the 1990 level, with the target period set between 2008 and 2012. However, countries like China, India, Brazil, and Indonesia ratifed the treaty without agreeing to binding targets. By establishing the principle that nations bear common but diferentiated responsibilities concerning climate change, the Kyoto Protocol laid essential groundwork for subsequent climate agreements, including the Paris Agreement (Bodansky, 2001).

From a more technical perspective, the Kyoto Protocol is also noteworthy for its defnition of the most relevant greenhouse gases (the seven Kyoto gases), encompassing not just CO2 but also methane (CH4), nitrous oxide (N2O), hydrofuorocarbons (HFCs), perfuorocarbons (PFCs), sulphur hexafuoride (SF6), and nitrogen trifuoride (NF3). Tese latter six gases have their warming potential translated into CO2 equivalents when determining emissions and emissions reductions. Te Kyoto Protocol is also notable for its adoption of market mechanisms, such as emissions trading, the clean development mechanism (CDM), and joint implementation (JI). Tese innovative tools provided fexibility in how countries could fulfl their commitments (Barrett, 2005). Despite this, the Kyoto Protocol faced criticism for various limitations, including the absence of some major emitters (including the USA, which refused to ratify) and challenges in achieving its targets (Barrett, 2005).

While the Kyoto Protocol defned reduction targets for GHG emissions, it did not include a specifc temperature or GHG concentration target to specify what 'dangerous interference' with the climate system implies. Tis began to change with the Copenhagen Accord, which was developed during the 15th Conference of the Parties (COP15) in Copenhagen in 2009. Te Copenhagen Accord, refecting advances in climate science and political assessments of climate impact, was the frst instance of a global temperature target being explicitly mentioned in an international climate policy document. Te Accord stated that 'deep cuts in global emissions are required […] to hold the increase in global temperature below 2 degrees Celsius' (Copenhagen Accord, see UNFCCC, 2009, p. 5). Nevertheless, a notable point is that the Copenhagen Accord did not formally establish the 2 °C target and lacked legal bindingness. Te 2 °C target was ofcially adopted the following year, at COP16 in Cancun, which culminated in the Cancun Agreement.

Arguably, the most signifcant milestone in charting the Road to Net Zero thus far is the Paris Agreement, enacted at the subsequent COP17 in 2015. Te Paris Agreement not only reafrmed the 2 °C goal but pushed further, aiming to limit global warming to 1.5 °C if possible. While the Paris Agreement encompassed various important aspects, such as matters of adaptation, loss and damage, and climate fnance—thereby emphasising the need for responses to climate change to extend beyond mitigation eforts alone (Klinsky et al., 2017)—the following features and implications of the Paris Agreement are particularly relevant for the Road to Net Zero, as they specify its purpose, destination, group of travellers, and travel model.

First, in terms of the purpose of the Road to Net Zero, the Paris Agreement (see UN, 2015, p. 3) established a global commitment to prevent dangerous climate change by keeping global warming 'well below 2 °C above preindustrial levels and pursuing eforts to limit the temperature increase to 1.5 °C above pre-industrial levels'. Te Paris Agreement thus represents a signifcant, though still insufcient, step forward in recognising the urgency of the climate crisis (Rogelj et al., 2016), with the inclusion of the 1.5 °C goal refecting current climate science insights regarding the risks associated with warming above this threshold.

Second, in relation to the common destination of the journey to Net Zero, the Paris Agreement was the frst global treaty to complement a temperature goal with a long-term goal of achieving net zero emissions by the latter half of the century. Tis goal of achieving net zero emissions had not been explicitly included in global climate agreements prior to the Paris Agreement. Te Kyoto Protocol and other earlier agreements focused primarily on setting specifc, near-term targets for reducing greenhouse gas emissions from developed countries, rather than stipulating a long-term global goal of achieving net zero emissions. However, while the concept of net zero emissions has become central to discussions on how to achieve the temperature goals of the Paris Agreement; notably, the phrase 'net zero emissions' does not appear verbatim in the text of the Agreement. Instead, the Agreement states that Parties aim to reach 'a balance between anthropogenic emissions by sources and removals by sinks of greenhouse gases' in the second half of the century (Paris Agreement, see UN, 2015, p. 4).

Tird, regarding the group of travellers embarking on the journey to Net Zero, the Paris Agreement includes commitments from all countries to reduce their emissions. Unlike the Kyoto Protocol, which legally mandated emission reductions for developed countries only, the Paris Agreement brought together all countries, including major emitters like the United States and emerging economies such as China and India. Te Agreement requires all nations, regardless of development status, to set, report on and revise their climate goals. Tis global responsibility refects the rising emissions from developing countries and underscores a shared duty for climate action (Bodansky, 2016). It also explicitly states that the journey to Net Zero is a challenge of a global nature.

Fourth, in terms of the mode of travel, the Paris Agreement defnes the journey to Net Zero as an iterative, continuous learning process. Contrasting with the Kyoto Protocol's top-down approach, where international targets were imposed and enforced on nations, the Paris Agreement encouraged a bottom-up approach. In this arrangement, each country develops its own climate plan—the so-called Nationally Determined Contributions (NDCs) detailing its emission reduction targets and adaptation strategies. Intended to foster fexibility and national ownership of climate commitments, the concept of the NDCs is to engage countries in a regular review process, in which each country's NDCs are reviewed and updated every 5 years in what is known as the 'Global Stocktake' (Paris Agreement, see UN, 2015, pp. 18–19).

Te regular review process of the Paris Framework is intended to ensure that eforts to address climate change are progressively scaled up. Despite this intention, critics argue that without a legally binding enforcement mechanism, the Global Stocktake relies excessively on international peer pressure and goodwill to drive increases in ambition, with a lack of legally binding mechanisms to enforce climate action (Bodansky, 2016). Irrespective of this criticism, an important point to note is that, despite its historic character, the Paris Agreement was not a breakthrough that resolved all issues. On the contrary, the Paris Agreement marked the beginning of continuous follow-up negotiations, with the operational details for the practical implementation of the Paris Agreement agreed upon at the UN Climate Change Conference (COP24) in Katowice, Poland, in December 2018—colloquially referred to as the Paris Rulebook—and fnalised at COP26 in Glasgow, Scotland, in November 2021.

So, what are the key implications of the Paris Agreement for the Road to Net Zero as discussed in this book? It is difcult to overstate that Paris represents a fundamental departure from previous agreements by defning the long-term net zero-emission goal instead of short-term incremental reductions. Te net zero goal is an absolute target that difers qualitatively from relative reductions. To achieve this distinct target, merely improving the efciency of fossil-fuel-based technologies will not be enough. Instead, companies and the entire economy need a radical transition towards extensive decarbonisation. Tis necessitates a shift in energy sources, technologies, products, value chains, infrastructure, regulation, and much more.

Moreover, by afrming the global commitment to the 2° goal and the ambition to achieve the 1.5 °C goal, the Paris Agreement has anchored the concept of a remaining carbon budget in the global policy discourse. Tis implies that not only the long-term Net Zero goal matters but that ambitious reduction pathways are needed to align with Paris. Tis requires rapid and far-reaching emissions reductions.

Te Paris Agreement's commitment to a bottom-up approach invites individual countries to formulate and submit their NDCs. Tis indicates that paths to Net Zero may difer between countries. So far, however, these national pledges are far from sufcient. In fact, a report by the UNFCCC in 2022 warned that the combined climate pledges of all 193 parties to the Paris Agreement would result in about 2.5 °C of warming by the end of the century (UNFCCC, 2022). More ambition is therefore needed. Consequently, with countries needing to step up their eforts, the spotlight now falls on the climate policies that can be enacted at the national level, a topic the subsequent Sect. 2.4 delves into. Meanwhile, multinational corporations aiming to align their operations with the Road to Net Zero must efectively navigate this complex policy terrain. Science-based frameworks can assist these companies in developing long-term strategies that consider diverse national climate policies. Tis is particularly pertinent, as the Paris Agreement demonstrates the evolutionary nature of global climate policy, refecting the ever-evolving insights provided by climate science. Terefore, taking an active role on the Road to Net Zero and preparing for prospective regulations are greatly aided by a science-based approach, a topic that we will examine further in Sect. 2.6.

# **2.4 The Role of National Policy Frameworks and Governance Mechanisms**

As discussed above, the Paris Agreement employs a bottom-up approach, encouraging all nations to propose their NDCs. Internationally, this necessitates negotiations on how these national eforts collectively align with the vital emission reductions needed to adhere to the 2 or 1.5° goal (Rogelj et al., 2016). Conversely, on a national level (and supranational level, in the case of the EU), the challenge extends beyond setting ambitious emission reduction targets to formulating the domestic policies that will facilitate these reductions.

Accordingly, national governments and supranational entities like the European Union fnd themselves navigating a complex and challenging landscape. On the one hand, they must determine their fair share of the globally agreed climate goals, even in the absence of sanctions for non-compliance. Tey must also devise policy instruments that can efectively catalyse rapid and signifcant emission reductions. On the other hand, they must simultaneously consider the potential costs associated with these mitigation measures, their impacts on local populations and their implications for economic innovation and competitiveness.

In this situation, policy frameworks and governance mechanisms that promote sustainable innovations and ofer signifcant economic value for domestic companies are highly desirable, even in the absence of clear implementation roadmaps and sanction mechanisms. Conversely, it becomes much more challenging to justify other climate measures that, while crucial to upholding a fair national contribution to the agreed-upon climate goals, impose substantial mitigation costs at the national level and do not provide dynamic benefts in terms of innovativeness and competitiveness for domestic companies. Terefore, domestic policymakers strive to enact climate policies that balance ecological efectiveness, economic efciency, and legal and administrative feasibility while maintaining political acceptability.

Te subsequent analysis will spotlight the actions taken by the EU and Germany as examples of concrete policy measures employed to balance these diverse objectives.

At the core of the EU's climate policy plans lies the European Green Deal, which was proposed and introduced in 2019 (see European Commission, 2023a). It includes the goal of reducing net greenhouse gas emissions by at least 55% compared to 1990 levels by 2030 and provides a roadmap for transforming the EU into a carbon-neutral continent by 2050. Te Green Deal encompasses a wide range of specifc goals, such as the sustainable use of resources (known as the Circular Economy Action Plan; see European Commission, 2023c), as well as specifc sustainability goals and emission targets for diferent sectors, including the mobility and the building sectors (see European Commission, 2023d). However, in addition to these emission reduction goals, the Green Deal explicitly aims to promote innovation and competitiveness among domestic frms and industries by fostering the development of products and markets for clean technologies. Tese goals have been enshrined in the European Climate Law, which came into force in July 2021 (European Commission, 2023f; European Climate Law, see European Parliament & European Council, 2021). Nonetheless, the ultimate responsibility for implementing most of these ambitious policy goals lies with the individual national governments within the EU.

Governments have a wide range of policy tools at their disposal to implement specifc emission reduction targets. Here, we provide an overview of the most important and prominent instruments adopted in Germany. We categorise these instruments into three groups: (1) market-based instruments that assign a proper price to external costs; (2) direct support instruments designed to promote the development and adoption of sustainable technologies and products, including infrastructures; and (3) traditional regulatory approaches, also known as 'command-and-control measures', which involve the direct prohibition of specifc polluting technologies or products.

# **2.4.1 Market-Based Instruments to Directly Internalise External Costs**

Te fundamental idea behind these policy tools is to impose a market price on activities that have a detrimental impact and cause damages borne by society as a whole, rather than directly afecting producers or consumers involved. External costs occur when the cost of these damages is not fully refected in the market prices faced by the market participants directly involved. Marketbased instruments are designed to correct this mismatch and impose prices that properly refect the external costs caused (Pigou, 1920).

Two popular market-based mechanisms are available for reducing GHG emissions: carbon taxes and cap-and-trade systems (Baumol & Oates, 1988). A carbon tax imposes a fee per unit of emissions, encouraging businesses to reduce emissions to lower their tax burden. Tis mechanism sets a certain price on emissions, but the emissions reduction is uncertain. Conversely, capand-trade mechanisms set a frm limit on total emissions (the cap). Entities can then buy and sell emissions allowances (the trade), which provide certainty on emissions reduction but variability in cost. While a carbon tax eliminates carbon price volatility, cap-and-trade ensures meeting the target, but at the disadvantage of volatile carbon prices (Tietenberg, 2006).

An important policy instrument of this kind is the European Union Emissions Trading System (EU ETS). Te system was launched in 2005 as a cap-and-trade mechanism with the aim of pricing GHG emissions and limiting total emissions (for detailed information on the functioning of the EU ETS, see, for example, European Commission, 2023e). Currently, the EU ETS covers emissions from electricity production, energy-intensive industries (such as iron, steel, cement, glass, etc.), and some parts of aviation and maritime transport. Overall, the EU ETS covers approximately 40% of the current GHG emissions in the EU (European Commission, 2023e). In December 2022, the EU Parliament and the EU Council agreed to strengthen the EU ETS.

Also in December 2022, the EU Parliament and the European Council agreed to extend the ETS to emissions occurring in the transport and building sectors that were so far not included in the EU ETS (European Parliament, 2022). Germany had already introduced a national CO2 price for these sectors. Te corresponding law (Brennstofemissionshandelsgesetz, see Deutscher Bundestag, 2022a) was introduced in 2019 and became efective in 2021. Tis system is phased in by a period of yearly increasing emission prices and then transitions into a cap-and-trade system. Te prices for CO2 emissions increase in several steps from 25 €/ton CO2 in 2021 to 45 €/ton by 2025, which correspond to 0.07 and 0.11 €/l gasoline, respectively (see, for example, Umweltbundesamt (UBA), 2022). In this early phase, the system thus implements de facto a CO2 tax. From 2026 on, a switch to an emission trading system is planned, however within a price corridor between 55 and 65 €/ ton CO2 (Brennstofemissionshandelsgesetz, see Deutscher Bundestag, 2022a).

Market-based instruments that aim to internalise the external costs of emissions can be powerful tools to combat climate change (Stavins, 2003). When properly established, emission targets or carbon taxes can lead to an efcient achievement of climate goals within a closed economy (Baumol & Oates, 1988). However, the reality is that neither the EU nor its member states operate in isolation. Climate change is a global problem, but market-based mechanisms are typically implemented on a relatively small, national, or European scale within the framework of open economies. In response to this, the EU proposed the EU Carbon Border Adjustment Mechanism (CBAM), a policy that mandates importers of specifc goods into the EU to pay for the carbon emissions embodied in those goods. Te CBAM is designed to prevent carbon leakage, a phenomenon that occurs when companies relocate their production to nations with less stringent climate policies (European Commission, 2023b).

Part of the EU's 'Fit for 55' package, the CBAM will apply to a range of products, including cement, iron and steel, aluminium, fertilisers, and electricity. Advocates of the CBAM anticipate that it could help diminish GHG emissions by encouraging other countries to adopt more rigorous climate policies. Te mechanism also aims to shield EU industries from unfair competition arising from nations with laxer climate regulations. However, the CBAM has faced its share of criticism. Some critics argue that its implementation could be challenging and potentially spark trade disputes with other countries or—if the coverage is incomplete—may lead to the relocation of value chains outside the EU (Garnadt et al., 2020; Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung, 2020). Tere are also concerns that the CBAM could disproportionately impact developing countries that depend on the export of carbon-intensive goods.

Te CBAM is thought to address the challenges market mechanisms face when carbon prices vary across countries and sectors. In an ideal setup, there should be a global uniform carbon price for all market participants (Nordhaus, 2019). Trough the thorough implementation of such mechanisms, we could in principle address climate emissions cost-efectively. Te idea is that if emission targets are reliably announced, they could provide strong long-term incentives to trigger the necessary investments and spur innovation in technologies and infrastructure, such as green energy generation and hydrogen or electric mobility charging stations (Aldy et al., 2010).

However, global carbon prices are currently absent. Moreover, there can be additional market or government failures, which could arise from political uncertainty, imperfect fnancial markets, administrative and transaction costs, limited appropriability of innovative activities, or network efects. Failures may occur, for example, when governments unexpectedly adjust carbon prices for political reasons, when green start-ups struggle to secure venture capital, when network efects afect infrastructure, or when innovation rents cannot be fully appropriated.

Politicians, tasked primarily with the welfare of their domestic populations, navigate this complex terrain. While market-based instruments represent a powerful option to tackle climate change (Stern, 2007), integrating such mechanisms with other policy tools may be advantageous from both a national and a European perspective. Tis approach would help address the limitations of a single-policy method and potentially enhance the efectiveness and efciency of climate change policies (Goulder & Parry, 2008).

# **2.4.2 Direct Support Instruments for Sustainable Technologies and Products**

A second category of policy tools directly incentivises the adoption and development of technologies and solutions crucial for mitigating greenhouse gas emissions. Economically, this approach is especially sensible for nascent technologies. Early-stage technologies frequently confront challenges, such as high costs, infrastructure defciency, and market uncertainty, that could impede their development (Jafe et al., 2002). Government subsidies can help overcome these barriers, driving 'directed technical change' towards greener technologies that can not only correct market failures related to environmental externalities but also stimulate innovation and economic growth (Acemoglu et al., 2012). However, note that such subsidies must be carefully designed to ensure they are cost-efective and do not lead to unintended consequences.

A prime example of such an instrument is the German Renewable Energy Sources Act (Erneuerbare-Energien-Gesetz or EEG; see Bundesministerium für Wirtschaft und Klimaschutz, 2023). First introduced in 2000, the EEG has seen several revisions to adapt to changing market conditions and technological advancements. Its primary objective is to support the expansion of renewable energy generation and reduce the country's dependency on fossil fuels. Te EEG provides a stable and long-term framework for the development of renewable energy projects by guaranteeing minimum compensations for electricity generated from renewable sources. Tose guaranteed compensations typically are granted for a period of 15–20 years, for most renewable projects they are determined in tender procedures. Te EEG covers a wide range of renewable energy technologies, including wind power, solar power, biomass, hydropower, and geothermal energy. It establishes specifc compensation guarantees for each technology, also considering factors such as the installation size, technology type, and regional resource potential.

Largely as a result of the Renewable Energy Sources Act (EEG), the proportion of gross electricity consumption in Germany derived from renewable energy sources has seen a signifcant increase in recent years. Te share rose to 41% in 2021 and further escalated to 46% in 2022 (Umweltbundesamt (UBA), 2023b). However, it is critical to recognise that the reported electricity consumption of 549 TWh in 2022 (UBA, 2023c) constitutes merely a fraction of Germany's total energy consumption, which approximates around 2500 TWh (UBA, 2023a). Currently, the largest portion of energy consumption is non-electric energy, which is predominantly utilised in the mobility and heating sectors. Tese sectors are expected to undergo major electrifcation in the coming years. While the electrifcation process is expected to considerably boost energy efciency, and the current version of the EEG-2023 proposes highly ambitious expansion paths, especially for wind and solar power (Erneuerbare-Energien-Gesetz, see Deutscher Bundestag, 2023, §4), it still presents a formidable challenge to fully cover the drastically increased electricity needs with German domestic renewable energy sources.

Germany also makes serious eforts to promote sustainable products that are considered to contribute signifcantly to low-emission scenarios, particularly in the mobility sector. Since 2016, the German government has implemented a fnancial incentive programme called the 'Umweltbonus' to promote the purchase of battery electric vehicles (BEVs) and fuel cell electric vehicles (FCEVs). As of 2023, the programme provides subsidies of up to 4500 € for smaller cars and 3000 € for medium-sized cars. From 2024 onwards, these subsidies will be reduced, with only smaller cars eligible for purchase subsidies (Presse- und Informationsamt der Bundesregierung, 2022). Additionally, all newly registered BEVs and FCEVs are exempted from the vehicle tax until 2030 (equivalent to approximately 100–200 € per year; see Bundesministerium der Finanzen, 2023). Finally, since 2017, substantial support programmes have been introduced to incentivise the installation of private and publicly accessible charging points for BEVs throughout Germany with a total volume of 1100 Mio. €. Public support programmes for installing charging points for FCEV are also in place, focused on commercial vehicles and requiring the usage of 100% green hydrogen, currently resulting in signifcantly smaller support volumes as observed in the case of electric charging points (Bundesministerium für Digitales und Verkehr, 2021).

# **2.4.3 Traditional Regulatory Approaches: 'Commandand-Control Measures'**

Finally, a third category of governance mechanisms, known as command-andcontrol measures, imposes mandatory regulations and standards to regulate emissions and promote sustainable practices (Tietenberg & Lewis, 2018). From an economic perspective, these instruments are typically perceived as the least efcient. However, under certain specifc circumstances, commandand-control tools can be relevant and may even provide a superior alternative to market-based instruments. Factors such as transaction costs, administrative costs, possibilities for strategic behaviour, or political costs can infuence this preference (Newell & Stavins, 2003). Similarly, mandatory uniform standards in environmental regulation might be economically justifed and ofer 'efciency without optimality', for example, when transaction costs make marketbased mechanisms impractical (Baumol & Oates, 1988, p. 159).

A prominent example of command-and-control instruments are the regulations and laws to realise the German Coal Phase-Out. Te goal is to eliminate Germany's dependence on coal for energy production and transition to cleaner and more sustainable sources of power. Te corresponding law has been efective since 2020 (Kohleverstromungsbeendigungsgesetz; see Deutscher Bundestag, 2022b). One essential feature of this law is the prohibition of constructing new coal-fred power plants in Germany. Additionally, it includes a precise timeline for phasing out existing coal-fred power plants with the aim of shutting down all coal-fred power plants by 2038 at the latest. Tis includes both hard coal (anthracite and bituminous coal) and lignite (brown coal) power plants. Owners of existing coal plants are compensated for exiting the market.

Command-and-control mechanisms also play a signifcant role in the regulation of emissions within the German and European mobility sectors. At the EU level, emission standards have been set to reduce the environmental impact of vehicles and improve air quality. Tese standards, known as EURO-Norms (currently EURO 6), limit the amount of pollutants, such as nitrogen oxides, particulate matter, and carbon monoxide, emitted by vehicles. Further regulations explicitly limit the average feet emissions of the greenhouse gas CO2. Since 2020, this has been governed by Regulation (EU) 2019/631 (see European Parliament and European Council, 2019). Te standards have been progressively tightened over the years, with each new iteration introducing stricter emission and measurement limits. Recently, as part of the EU's 'Fit for 55' package, concrete plans are in place to enforce zero emissions for new passenger cars and vans from 2035 onwards. However, to date, the feet emission targets pertain solely to tailpipe emissions and do not account for emissions related to manufacturing the vehicles. As the transition towards electric mobility shifts emissions from the use phase to the production phase, there is increasing momentum to consider all CO2 emissions throughout the entire life cycle of those vehicles (see European Parliament, 2023).

Te aforementioned compilation of policy frameworks and governance mechanisms represents the most prominent initiatives driving Germany's sustainable energy and mobility transition as described in this chapter. Tese policies and mechanisms play a central role in shaping the country's renewable energy landscape and fostering the integration of sustainable transportation solutions. However, it is crucial to acknowledge that this overview does not provide a comprehensive survey of all relevant measures implemented in Germany. Te measures supporting and guiding towards a successful energy and mobility transition indeed encompass a diverse range of additional strategies and initiatives that all contribute to the ongoing transformation. In sum, policy measures across the spectrum, from market-based mechanisms to supportive subsidies and command-and-control regulations, all have strengths and limitations in managing environmental issues in practice. Te preferability of each approach depends on the specifc context and requires careful economic and policy analysis to determine the most efcient and efective combination of measures.

# **2.5 Expert Conversation on Economic Climate Policy: Between Technological Openness and Regulation**

# **What Are the Challenges and Opportunities of Sustainability as a Corporate Strategy?**


# **Do Politics and Industry Approach Sustainability from Diferent Perspectives?**

*Grimm*: In a way, one can get the impression that the industry is now taking the side of the people who protect the climate and have fought for a long time—also in the streets—against climate change much more ambitiously than the politicians are doing at the moment. At least, it seems that industry can be faster in some way. Politicians have to fght for goals, have to fght for the implementation of certain regulations. Are the regulatory frameworks already working? Do companies have the right incentives to advance towards sustainable business?

*Zipse*: I think it is good advice to have very close contact and a trusted relationship to politicians, because we actually share the same framework about our future path. Politicians are elected by members of society and our customers are part of that same society. So, actually, we share the same basis for our strategies. Where we need more intense discussion is about the speed of transformation. Sometimes, industry wants to move ahead. Sometimes politicians want to move faster. I think speed is everything and the right acceleration. Let me take you through one example. For the transport sector, electromobility is the dominant approach to bringing down CO2: Te car's emissions directly factor into feet regulation for new cars. Yet, acceptance of new electric vehicles by new car buyers and thereby the impact on the emissions of the transport sector are directly linked to the charging infrastructure. Without this ramping up fast, the decision to go for 0 g/km in new cars by 2035 could lead to lower new car sales and, consequently, to further ageing of the EU car feet—the opposite of what is needed. Tat is why we have strongly urged to discuss how quickly the charging infrastructure in 27 European states can increase realistically and how one can set a target on the emissions of cars while at the same time agreeing on the path of charging infrastructure growth in the European Union. Yet, today, we still see a strong fragmentation of the EU markets: where infrastructure availability is highest, so is the BEV share—and vice versa. Terefore, we need a very thorough evaluation of the relation between supply-side regulation and demand-side prerequisites when the decision to go for 0 g/km in 2035 will be re-evaluated in 2026.

#### **How Does Charging Infrastructure for Electromobility Afect Target Setting?**


strategy could one have, maybe to scale infrastructure up in a foreseeable way and also to co-fnance it. It does not have to be the case that the state provides all the funding, but maybe there are interested investors who can put their money into it, because it could be a good business model. As soon as heavy-duty mobility based on hydrogen accelerates, a lot of money could be invested.


# **How Does International Competition Shape the Market for Zero-Emission Mobility?**


increasing quota of zero-emission vehicles, be it fuel cell or battery electric. A similar approach could have been taken towards quotas of hydrogen not at the vehicle side but at the infrastructure side. Hydrogen, for example, would then have had to be used in proportion to mineral oil production. We would have a diferent automotive industry today had such a choice been made. It is all about policy choices.


#### **How Does Consumer Behaviour Infuence Decision-Making Towards Sustainability?**


consumer decides to vote for in terms of a political party and what the consumer decides to buy can be very diferent. Hence, basing one's product strategy on political elections is a very dangerous thing to do. People buy cars for many reasons, emotional reasons, cost reasons, and factual reasons, and I think you always have to observe and detect changes in customer behaviour. Customers do not change their behaviour overnight. Electromobility is a good example to support my point of view. It has taken more than 10–15 years, and there is still a lot of mistrust: Where are the charging points? How much will it cost me? Does the battery last long enough? Range anxiety; you have all that.


#### **Is the International Infrastructure Ready for New Sustainable Vehicles?**


trucks and personal vehicles at the same time. Tis development is in contrast to electromobility, which started with small cars.


What I found compelling about hydrogen is the fact that we are already developing infrastructure for this kind of cases: we are currently using hydrogen mainly inside our buildings and factories, for example in the Leipzig plant, but also in the United States, where we use hydrogen for the internal logistics system.

*Grimm*: Why is that?

*Zipse*: If you want to become emission-free, the easiest way to do it is within closed systems, so we already have some experience in that area and it works really well for us. We are not just at the beginning of this technology. Hydrogen is one of the few elements that can be used with or without methane as an energy storage medium, so it can substitute or be combined with natural gas—which you cannot easily do with electromobility. Tis is the point at which individual mobility may choose the fuel cell as a drive system, particularly where you do not have access to a charging point or where hydrogen is set as a substitute for methane and where it will be more efcient to use it directly than generating electricity from hydrogen. Tat will be the case in many places, such as Japan. Tey will not have the same extensive charging infrastructure that we can build up here in Germany.

#### **What Is the Status of Hydrogen Infrastructure Development?**


now there is pressure to expand the infrastructure. With hydrogen development, it is more simultaneous. Regarding hydrogen, we are talking about cars and vehicles, and at the same time, there is a debate about infrastructure.

For heavy-duty mobility, there is still a debate about whether you can do it with battery electric vehicles, which I doubt. Tere are many problems involved if you want to realise long-distance transport. It is very efective to scale up hydrogen mobility by implementing or scaling up the logistics frst. I see that there is an ongoing debate on prioritising and frst using hydrogen in heavy industry, where it is needed in the chemical industry. And I think there's a big group of people who argue very much that battery electric vehicles will do it in mobility, which I doubt.


carbon-intensive the energy mix is, but if you think about mobility in terms of the emission trading system, carbon intensity plays an important role. I think it would be wise to extend it.


#### **How Can Carbon-Pricing Mechanisms Be Developed on a European Level?**


are possibilities, but it is very difcult to discuss these matters. Of course, there are diferent groups in society with diferent interests.

*Becker*: Looking at fuels, it shows that a trading system could provide a visible incentive for producers to decarbonise their products. For example, blending hydrogen-based synfuels into petrol could keep products afordable for customers. Tis example could then support a political debate—but that seems to be very controversial at the moment.

# **How Can Private Investments Support a European Green Deal?**

*Grimm*: I think it is relatively easy to agree on targets, for example, climate neutrality by 2050 or 2045. However, it is very difcult to agree on the path, the mechanisms, and the regulation that will get us there. Tere are diferent perspectives on this issue. One part of the discussion focuses on the CO2 price and market-oriented measures. Another part of the discussion emphasises that the state has to play a much more important role, that public spending has to be increased a lot in order to achieve climate neutrality. Tis is a misconception because investments in the private sector are just as necessary. Private investments account for 85% of total investments in Germany. So, in total, there is only 15% public investment compared to 85% private investment. However, increasing public investment will be difcult to steer in the right direction because of the ferce debate going on about what is the right way forward. Which sectors should be decarbonised frst?

*Zipse*: And what is your opinion on that?


# **2.6 Science-Based Targets: Opportunities and Challenges of Setting Emissions Targets at the Company Level**

Te preceding expert conversation underscored the interconnectedness of national policies, market regulation, and corporate actions in navigating the Road to Net Zero. Achieving alignment with the evolving climate science and policy necessitates that corporations not only comprehend what is expected of them, but that they also dispose of robust methodologies to evaluate—and where needed, enhance—their mitigation strategies. With this in mind, this section turns its attention towards the concept of Science-Based Targets (SBTs) for ambitious GHG emission reductions. Tis is even more relevant, as the EU will require companies from 2024 onwards to report on their strategy for achieving compatibility with the 1.5° target using 'science-based' methods.

As underscored in Sect. 2.3, global climate policy has fostered a collective commitment to the Net Zero goal and the aim to limit global warming to well below 2 °C. Tis commitment requires ambitious emissions reduction trajectories that align with the 1.5 or 2 °C goal, respectively. SBTs provide a framework to translate these broad reduction pathways into tangible, corporate-level action plans. Leveraging insights from climate science, corporations can discern the specifc degree of decarbonisation necessary for their unique context.

Te objective of the SBTs is to ofer clear directives for corporate climate action and enhance transparency regarding the alignment of emission reductions with the Paris Agreement. However, the methodology for establishing SBTs is multifaceted and continuously evolving. Te goal of this review is not to delve deeply into these complexities, but rather to furnish an overview of the overall rationale and highlight pertinent considerations for its application, critical assessment, and future development.

#### **2.6.1 The Science-Based Target Initiative: Origin and Mission**

Around the time when the Paris Agreement was adopted, the CDP (Carbon Disclosure Project), the United Nations Global Compact, the World Resources Institute, and the World Wildlife Fund formed the Science-Based Target Initiative (SBTi) to develop a standard to derive GHG reduction targets that are aligned with the 2 °C or, respectively, with the well below 2 °C temperature goal of Paris at the company level (Bjørn et al., 2022). More recently, the SBTi increased its ambition level to focus on the 1.5 °C target.

Subsequently, the fundamental premise of SBTs at the individual (corporate) level has evolved into a pragmatic, data-informed, target-setting method and validation under the SBTi enabling businesses to align their strategies with the Paris Agreement's objectives. In 2021, more than 2000 companies from 70 countries, accounting for 35% of global market capitalisation according to the SBTi Progress Report, have either committed to setting SBTs or have already had their SBTs approved (SBTi, 2022). Tis number continues to grow, with more than 4000 companies setting targets by the end of 2022 (SBTi, 2023a).

Te mission of the SBTi is to drive 'ambitious climate action in the private sector by enabling organizations to set science-based emissions reduction targets' (SBTi, 2023a). Te SBTi seeks to accomplish this mission by providing a framework and guidelines for businesses to set and validate their GHG reduction targets. Facilitating a process to independently assess and validate companies' targets, the SBTi provides an external assessment of corporate emission reduction targets and promotes transparency by publicly recognising companies that have set science-based targets. What the SBTi does not do (and does not intend to do) is to verify the reported data and actual business performance.

As a multi-stakeholder initiative, SBTi's funding relies on target validation fees and contributions from various corporate and charitable entities. Given its standing as a private non-proft organisation with substantial global infuence, there has been a discussion regarding the absence of a public entity or policy to carry out the functions of the initiative (see Bjørn et al., 2022; Lister, 2018; Marland et al., 2015; Trexler & Schendler, 2015). Despite facing initial criticism (cf. Trexler & Schendler, 2015), the SBTi has nevertheless evolved as the globally most acknowledged framework for setting emission reduction targets.

#### **2.6.2 The Science Base of the SBTs**

Te SBTi aims to mobilise 'the private sector to take the lead on urgent climate action' by 'enabling organizations to set science-based emissions reduction targets' (SBTi, 2023a). But what exactly constitutes the ʻscience' in Science-Based Targets?

Te labelling of targets in the political and business arena as ʻScience-Based' might initially seem contradictory, as 'operational targets are socio-political choices' (Andersen et al., 2021, p. 2). While climate science can delineate the phenomena, causes, and repercussions of global warming, the decision to halt or control climate change involves normative judgements that go beyond the scope of science. Accordingly, the IPCC's 4th assessment report (IPCC, 2007, p. 64) stressed that defning what constitutes a 'dangerous anthropogenic interference with the climate system' is only partially rooted in science 'as it inherently involves normative judgements'.

Against this background, the Paris goals of limiting global warming are ʻscience-based' in the context of being scientifcally informed but politically determined. Climate science asserts that the hazards of global warming rise sharply beyond 1.5 and 2 °C. However, the aspiration to avert these risks, as codifed in the Paris Agreement, is a value-based choice informed by scientifc fndings, but ultimately decided politically.

In crafting science-based targets for corporations, the SBTi takes the political commitment to the Paris Agreement's goals as its starting point. Under this framework, corporate emission reduction objectives are deemed ʻsciencebased' if they align with 'what the latest climate science says is necessary to meet the goals of the Paris Agreement' (SBTi, 2023c, p. 5). Te ʻscience' in these targets maps the path required to achieve the globally accepted Paris objectives. Tis necessitates that the SBTs be quantifable, measurable (Andersen et al., 2021) and guided by a methodology anchored in the emission reductions that climate science prescribes to fulfl the Paris goals. Importantly, as these targets are linked to the 'latest climate science', advances in climate science, such as revised estimates of the remaining carbon budget, could necessitate updates to SBTs and amplify the level of ambition required for climate action.

#### **2.6.3 Which Emissions Count? Clarifying the Scope and Base Year for SBTs**

Before explaining the diferent types of SBTs and how to calculate them, it is important to clarify the scope of emissions that companies need to consider according to the SBTi. Here, the SBTi leans on the carbon accounting methodology defned in the GHG protocol (see World Resources Institute [WRI] and World Business Council for Sustainable Development [WBCSD], 2004). Tis protocol categorises Scope 1 emissions as direct GHG emissions 'from sources that are owned or controlled by the company' (GHG Protocol, see WRI and WBCSD, 2004, p. 25), such as from combustion, production, or chemical processes. Scope 2 refers to indirect GHG emissions caused by energy consumption (including electricity, steam, heating and cooling energy), and Scope 3 refers to GHG emissions caused by activities neither controlled nor owned by the company. Scope 3 thus includes emissions that occur in a company's value chain, both upstream and downstream (GHG Protocol, see WRI and WBCSD, 2004, p. 25). In the case of automotive original equipment manufacturers (OEMs), this can include emissions from battery production (upstream) or vehicle emissions from customer cars (downstream).

In setting SBTs as per the latest guidelines, companies are required to cover a minimum of 95% of their Scope 1 and Scope 2 emissions (SBTi, 2023b). Te situation with Scope 3 emissions is more intricate, as their obligatory inclusion relies on various other factors, which will be elaborated subsequently.

# **2.6.4 Different Types of Science-Based Targets**

As the Road to Net Zero is a marathon and not a sprint, companies need targets that allow them to plan for both the immediate next steps and the long-term journey. Accordingly, the SBTi provides diferent types of SBTs.

**Near-term targets** focus on rapid and deep emission reductions that cover a minimum of 5 years and a maximum of 10 years from the date the target is submitted for validation. Near-term targets must be aligned with a 1.5 °C scenario. For most companies, this implies halving emissions by 2030. In addition to Scope 1 and 2 emissions, near-term emissions must cover at least 67% of all Scope 3 emissions if these indirect emissions account for more than 40% of a company's life cycle GHG inventory. For many companies, this is the case. To illustrate, after signifcant reductions of its Scope 1 and 2 emissions, BMW's Scope 3 emissions account for much more than 90% of its total emissions. Companies that have less than 40% Scope 3 emissions are encouraged to include them voluntarily.

**Long-term targets** indicate the degree of emission reductions that companies need to achieve by 2050 or sooner. Long-term targets must cover a minimum of 30 years from the date the target is submitted for validation and must be aligned with a 1.5 °C scenario, which means that most sectors must achieve at least a 90% reduction in absolute emissions by 2050 (or 2040 for the power sector) compared to a base year. For long-term targets, companies must cover at least 95% of their Scope 1 and 2 emissions and at least 90% of their Scope 3 emissions (irrespective of their relative share).

**Te net zero standard** is a newer benchmark established by the SBTi and provides guidance to substantiate the path for a company to reach a science-based 'net zero' status. Apart from committing to long-term and short-term reductions (90%), companies are obligated to neutralise any remaining emissions. Tis entails utilising permanent carbon removals and storage methods (including nature-based solutions, such as restoring forests, soils, and wetlands, or technical solutions, such as direct-air capture) to counterbalance the fnal <10% of residual emissions that cannot be eliminated. Note that ofsetting emissions through compensation measures that merely avoid emissions elsewhere (e.g. more efcient cook-stoves) are deemed insuffcient (SBTi, 2023d)*.*

#### **2.6.5 Different Methods and Sector Approaches for Determining Necessary Reduction Levels**

Te crux of the SBTi, albeit intricate and somewhat complex, lies in the methodologies used to determine the exact emission reductions required to attain a specifc ambition level. Previously, the SBTi ofered calculation tools based on accepted target-setting methods from various sources, including public organisations, companies, and academia, resulting in a total of seven methods (Bjørn et al., 2021). More recently, however, the SBTi has refned its recommendations for Scope 1 and 2 emissions targets to two methods, focusing on either absolute reductions (company-wide) or relative reductions (emission intensities, such as per ton of product or per dollar of revenue) (Bjørn et al., 2022, p. 55).

Regardless of the method, the underlying approach considers the extent of emission reductions needed by all companies to achieve a particular temperature goal. In the SBTi's early framework versions, companies could align their ambition level with a 2 °C or well below 2 °C trajectory. However, given the recent warnings from climate science (cf. IPCC, 2018), the SBTi has raised its framework's ambition to aim for the 1.5 °C goal. Consequently, whereas the 2 °C or well below 2 °C pathway-aligned SBTs were previously approved, since mid-2022, the SBTi only approves SBTs consistent with the 1.5 °C pathway (SBTi, 2023b, p. 4).

With the new ambition level of 1.5 °C in mind, let us come back to the absolute and relative reduction approach. Te former approach focuses on an absolute decrease in emissions, irrespective of a company's size, production output, or revenue. Known formerly as the ʻabsolute contraction approach' (ACA), this method applies broadly across sectors (with exceptions like agriculture) and demands that absolute emissions decrease by an amount at least consistent with the cross-sector pathway. For the 1.5 °C goals, this equates to most sectors reducing their Scope 1 and 2 emissions by a minimum of 4.2% annually (SBTi, 2023b, p. 3).

Contrarily, relative or 'intensity' approaches set emission reduction targets relative to a specifc business metric, such as per unit of production (physical intensity) or per revenue unit (economic intensity). Tis approach enables companies to decrease greenhouse gas emission intensity while accommodating business growth. Te SBTi employs corresponding pathways to model the necessary emission intensity reductions to align with the 1.5 °C goal, generally applicable for Scope 3 emissions.

Nevertheless, emission intensity and the scope for its improvement vary by sector, as do absolute emissions and their potential for reduction. Decarbonising power generation through a shift from coal to gas or solar, for instance, is simpler than decarbonising aviation, which relies on kerosene. Acknowledging the diverse mitigation opportunities and challenges that various sectors face, SBTi methodologies incorporate the Sectoral Decarbonisation Approach (SDA), using sector-specifc emission scenarios from the International Energy Agency (IEA). Applied to the absolute reduction approach, the sector-specifc reduction approach prescribes absolute reduction targets for specifc sectors like agriculture or iron and steel. Similarly, the sector-specifc intensity convergence approach applies relative reduction logic to sector-specifc pathways. For the food, land use and agriculture sector (FLAG), there are even commodity-specifc reduction pathways that model the necessary emission intensity reductions for commodities like beef, rice, leather, or dairy to align with the 1.5 °C goal (SBTi, 2023b, p. 6). Te EU's CSRD reporting requirements foresee targets to be set in absolute terms. So, from 2024 onwards, the choice for European companies is efectively limited.

Tis overview underscores the multitude of methods for setting an SBT, creating signifcant complexity. In response, the SBTi provides small and medium-sized frms (SMEs) with a simplifed procedure that ofers fexibility. Even large corporations have some leeway in choosing their base year, target format (near-term or long-term), scope (optional for Scope 3 emissions) and, most importantly, the methods to defne their target. Some academics see this diversity of methods as a strength, contending that 'there is not a single SBT method that is best in all sectors and company situations' (Aden, 2018, p. 1095). However, others criticise the potential for lack of comparability and for companies to choose less challenging targets (Bjørn et al., 2021; Freiberg et al., 2021). Against this backdrop, the SBTi continuously refnes its methodology and provides more sector-specifc guidance, yet questions persist about potential future refnements to the methodology.

#### **2.6.6 Benefts and Challenges of Science-Based Targets**

So far, setting SBTs has been voluntary. While the SBTi predicts widespread adoption, citing innovation theory that rapid difusion occurs when a critical mass of early adopters is reached (SBTi, 2022), it remains to be seen whether the majority of companies will set SBTs without legislative pressure.

Independent of the further development and dissemination of the SBTi framework, research indicates two areas of potential positive impact from setting SBTs: corporate climate action and regulatory alignment, as well as public policy.

Regarding corporate climate action on the Road to Net Zero, the SBTi ofers direction to companies, and through its validation, potentially encourages more ambitious corporate climate action regarding GHG reduction. For strategic direction, companies need operational targets for their planning because what gets measured gets done (cf. Chap. 1). Tis is particularly important when considering long-term strategic investments. For instance, in the automotive industry, the development and implementation of a new car platform with a projected lifetime of more than 20 years can be considered. To prepare adequately for the future, companies fnd it valuable to anchor their strategies in precise assumptions (cf. Chap. 3).

When it comes to potential incentives for more ambitious climate action and actual emission reductions by companies, the existing research is not conclusive. Initial studies, such as those by Freiberg et al. (2021) and Bolton and Kacperczyk (2023), have explored the impact of the SBTi on emissions reductions, but the results are largely inconclusive for making generalisable claims due to various infuencing factors afecting targets and a company's climate ambition (Bjørn et al., 2022, p. 61). Nonetheless, companies that report SBTs for emission reduction appear to invest more than do companies that merely set internal targets (cf. Bjørn et al., 2022; Freiberg et al., 2021).

In terms of potential business benefts, science-based targets equip companies to better align with not only the present but also future regulatory environments. As discussed in Sect. 2.4, policymakers are currently implementing various policy instruments at the national level, creating a fragmented regulatory landscape for companies operating across borders. While it remains uncertain whether and how these diverse regulatory approaches will converge, it is evident that the Paris Agreement and its reduction targets will persist as a global benchmark guiding future implementation. By aligning their operations with this global goal, science-based targets can provide a universally relevant framework amid a disjointed regulatory landscape, thus reducing regulatory risk and uncertainty.

Regarding the evolution of public climate policy, both research and recent policy developments indicate a potentially positive impact of SBTs on public policy. Whereas early critics, such as Trexler and Schendler (2015, p. 933), argue that SBTs 'will only further delay policy', Marland et al. (2015) disagree with the claim that SBTs are just another distraction from solving the real problem and point to the importance of bottom-up initiatives in a democracy as a means of developing regulations from the dialogue that emerges. Especially in the absence of public policy, Banda (2018, p. 387) argues that 'private climate governance could help embed rules of public international law in the domestic sphere and drive up State ambition over time'. Similarly, recent policy developments in corporate sustainability reporting, such as the CSRD, illustrate how the voluntary GRI reporting framework and other voluntary standards have evolved over two decades into a new policy (cf. Chap. 4).

Terefore, while it is clear that private sector initiatives can stimulate public policy development, these frameworks alone cannot meet the challenge of achieving the 1.5 °C target without corresponding regulations and instruments, as discussed in Sect. 2.4. Furthermore, critics contend that the SBTi requires fnancial contributions from companies for registration and consultation, questioning the monetary independence of the initiative. Despite these criticisms, no other current framework that translates global climate goals to the corporate level has gained equal recognition or refnement.

Te ongoing critiques of the SBTi underscore the fact that the SBT framework is still maturing and would beneft from further evolution and refnement. A key aspect of the SBTi's future progress involves enhancing the target-setting methodology. As of 2023, sector-specifc guidance remains absent for several sectors, including iron and steel, chemicals, and oil & gas. Even with the guidance available for other sectors, the multitude of methods can result in potential misuse and a lack of transparency. Moreover, while SBTs diferentiate between near-term (2030) and long-term (2050) targets, discussion is ongoing regarding the establishment of medium-term targets, especially concerning the necessary emissions reductions between 2030 and 2050. Ultimately, future enhancements are required to strengthen the comparability, guidance, and transparency of SBTs.

Finally, any methodology that sets reduction targets for carbon emissions will depend on the quality of the underlying GHG data and accounting. Currently, the SBTi leans on the carbon accounting methodology defned in the GHG protocol. Although widely used as the de facto global standard for carbon accounting, this methodology has several weaknesses. In particular, Scope 3 emissions pose signifcant challenges. Teir measurement, due to the complexity of global supply chains, can be fraught with errors and potential bias.

Te Protocol's allowance for using secondary or averaged data instead of specifc emissions data (GHG Protocol, see WRI and WBCSD, 2004) often opens the door for the evasion or manipulation of Scope 3 measurements. Consequently, companies may strategically choose what to report. For instance, if a company has a supplier whose actual emissions greatly exceed the industry average, the company can reduce its reported emissions by using that averaged data. On the other hand, if a company invests in improving supplier performance, thereby lowering the industry average, competitors can exploit these industry averages to report emission reductions without making substantial changes to their own processes. Tis level of fexibility not only weakens the integrity of Scope 3 measurements but also does little to spur sincere decarbonisation eforts (Kaplan & Ramanna, 2021).

Consequently, the efectiveness of SBTs may be curtailed by these inherent limitations in carbon accounting as long as they continue to align with the GHG Protocol. Terefore, future improvements to the SBT framework should not solely focus on refning target-setting methods, but should also explore innovative approaches in carbon accounting. Tis could potentially involve adopting systems such as the proposed E-liability accounting system, which advocates for the use of inventory and cost accounting practices to accurately measure GHG emissions across corporate supply chains (Kaplan & Ramanna, 2022).

# **2.7 Conclusion**

Te Road to Net Zero symbolises a collective expedition requiring diverse entities to contribute their unique inputs, with a shared destination in sight. Tis chapter's objective was to lay the groundwork for this journey, detailing the climate science and policy contexts underpinning the Road to Net Zero, ahead of subsequent chapters that delve into the specifc roles of and actions taken by corporations.

Climate science provides the essential scientifc underpinnings (Sect. 2.2), while global climate policy, as exemplifed by the Paris Agreement, fosters a collective commitment to limit global warming to well below 2 °C and target net zero emissions (Sect. 2.3). National policymakers have various tools at their disposal to establish and execute national emission reduction goals (Sects. 2.4 and 2.5), and for corporations, Science-Based Targets (SBTs) ofer a framework to synchronise their climate initiatives with global policy objectives (Sect. 2.6).

Refecting upon this foundational chapter, we highlight fve signifcant takeaways that encourage further discourse:


Te Road to Net Zero thus embodies a collective endeavour wherein companies play an indispensable role but it also necessitates an enabling environment fortifed by public policies and robust science. Te subsequent chapters of this book will explore the transformative changes that companies can engender in their business strategy, reporting, products, value chains, production, and technology. Starting this exploration, Chap. 3 '*Creating Corporate Sustainability Strategy. From Integrated Tinking to Integrated Management*' will discuss these ideas in greater detail. A novel and more integrated perspective is required to navigate the challenges of the Road to Net Zero and other sustainability issues.

# **References**


**Open Access** Tis chapter is licensed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons license and indicate if changes were made.

Te images or other third party material in this chapter are included in the chapter's Creative Commons license, unless indicated otherwise in a credit line to the material. If material is not included in the chapter's Creative Commons license and your intended use is not permitted by statutory regulation or exceeds the permitted use, you will need to obtain permission directly from the copyright holder.

# **3**

# **Crafting Corporate Sustainability Strategy From Integrated Thinking to Integrated Management**

**Markus Beckmann, Thomas Becker, and Oliver Zipse**

# **3.1 Introduction**

Te aim of sustainability is to ensure that present and future generations can thrive within the ecological boundaries of our planet (Stefen et al., 2015). As the climate crisis illustrates, however, a linear economy that depletes our natural resources and contributes to global warming threatens to destroy the "safe operating space" (Rockström et al., 2009, p. 472) that allows humanity to thrive. Sustainable development thus requires a change in our current economic model. A diferent, circular, more equitable, and net-zero future is needed.

Since strategy "is about shaping the future" and "moving from where you are to where you want to be" (Mckeown, 2016, pp. xxi, xviii), a sustainable future requires *Crafting Corporate Sustainability Strategy* in an efective way. On the Road to Net Zero outlined in this book, *strategy* is an important step that connects the previous Chap. 2 and the following Chap. 4 (cf. Fig. 1.1). Chapter 2 introduced the idea of *Science-Based Target Setting* as a means of translating the global challenge of combating climate change to the level of individual company contributions. Science-based targets provide a common

M. Beckmann (\*)

FAU Erlangen-Nürnberg, Nuremberg, Germany e-mail: markus.beckmann@fau.de

T. Becker • O. Zipse BMW AG, Munich, Germany language for what it means for a company to be on a Paris-aligned Road to Net Zero. Nevertheless, the targets themselves do not tell a company what that journey looks like. Developing a specifc road map and getting all business functions on board to embark on it is what strategy is all about.

Te purpose of this chapter is to discuss how companies can craft this type of corporate strategy by systematically integrating sustainability into their strategic analysis, goals, processes, and learning. Te chapter is structured in three sections. Section 3.2 starts with a short overview of the strategy concept in management and then considers the drivers that push or pull businesses to consider sustainability before it continues with diferent options for integrating sustainability. Te remainder of that section then discusses the diferent steps of the strategy process and how sustainability interacts with it. Section 3.3 presents the expert conversation between Prof. Oliver Zipse, CEO of BMW Group, Dr Tomas Becker, VP Sustainability & Mobility at BMW, and Prof. Dr Markus Beckmann, FAU Chair for Corporate Sustainability Management. Section 3.4 then discusses an outlook on the future of integrated sustainability strategies before Section 3.5 concludes with a link to the next Chap. 4 on the *Future of Corporate Disclosure.*

# **3.2 Strategy Development and Sustainability: Past and Present**

In everyday language, strategy describes a plan of action or policy designed to achieve desirable ends with available means. In business, strategy "can be defned as the determination of the basic long-term goals and objectives of an enterprise" (Chandler, 1962, p. 13). Traditionally, strategy research distinguishes between strategy content and the strategy process (Rajagopalan et al., 1993). A prominent approach to structuring the strategy process is to distinguish between its four phases: (1) environmental scanning, (2) strategy formulation, (3) implementation, and (4) evaluation of its performance (Wheelen et al., 2017) (similarly David, 2011, who integrates environmental scanning as a part of strategy formulation). Sustainability requires a systematic integration in each phase. We will discuss each step in more detail below.

Analytical tools, such as Porter's (Porter, 1979, 2008) fve forces or Barney's (Barney, 1997) VRIO framework, serve to structure strategy development from a top-down perspective. By contrast, scholars such as Mintzberg and Waters (1985) argue that strategic plans rarely unfold as intended; rather, strategy patterns emerge from the bottom up through individual action and adaptation. While this idea of emergent strategy helps to understand the complexity of strategic learning, for the sake of brevity, this chapter focuses on the planned and deliberate integration of sustainability into strategy.

To survive and thrive in the marketplace over the long term, a frm's strategy is to maximize competitive advantages and minimize competitive disadvantages. Wedding sustainability with a frm's strategy can occur at three hierarchical levels: corporate, business, and functional (Wheelen et al., 2017). Conventionally, a corporate strategy is related to the overall direction of the frm; therefore, it asks where to compete to achieve stability and growth, whereas business strategy focuses on the competitive positioning of products and services in the relevant markets, and functional strategy focuses on leveraging resource productivity by developing distinct competencies in specifc functions such as production, marketing, or procurement. At all three levels, sustainability can infuence the goals and constraints of a company's strategy.

Various drivers, which can be grouped in diferent ways, are available for companies to consider sustainability in their strategy (Engert et al., 2016; Mefert & Kirchgeorg, 1998; Oertwig et al., 2017; van Marrewijk & Werre, 2003). Tese include external/internal drivers, push/pull factors, market/nonmarket forces, direct/indirect drivers, or supportive/hindering factors (Engert et al., 2016), with some factors falling into several categories simultaneously. One familiar example is customer demand, which acts as an external driver, a market force, and a pull factor (representing an opportunity if realized). Regulation and legal compliance are other external drivers, but they represent non-market forces that act as push factors (posing a risk if ignored). A specifc example is the EU's ban on the sale of new petrol and diesel cars from 2035, adopted by the EU Parliament in February 2023 (European Parliament, 2023), which will drastically change the business context for the automotive industry. Other external drivers include investor expectations, transparency requirements, and fnancial market pressures, which can act as both push and pull factors. Internal factors can include the potential for cost reduction through eco-efciency gains, top management vision, or employee motivation for sustainability. Supportive internal factors include a responsible organizational culture, professional risk management, competence in quality management that seeks continuous improvement, and a strong capacity for innovation. Hindering internal factors include a lack of resources and competencies, short-termism, and weak leadership. Barriers can also be external, such as poor regulation or a lack of customer demand for sustainable oferings.

Because the specifc combination of these sustainability drivers looks diferent in diferent contexts and for diferent businesses, companies have integrated sustainability in a variety of ways that refect diferent levels or styles (Baumgartner & Ebner, 2010) or geographic approaches (Burritt et al., 2020). For simplicity, this chapter distinguishes between three types of strategic sustainability considerations: stand-alone, complementary, and integrated. In a *stand-alone sustainability strategy*, a company addresses social and environmental issues in a way that is not linked to the frm's corporate or business strategy. Here, the company may address sustainability as an intrinsic add-on (for example, by philanthropic projects unrelated to its core business), or it may respond to generic external expectations that are irrelevant to its competitive strategy. In a *complementary sustainability strategy*, sustainability complements the creation of competitive advantage, yet without challenging the existing corporate and business strategy (for example, with eco-efciency strategies that generate cost benefts but leave the company's product portfolio and overall mission untouched). Finally, *integrated sustainability strategies*, which use sustainability considerations to challenge and potentially redefne a company's corporate strategy (where to compete) and business strategy (how to gain competitive advantage), have the most profound leverage but also the highest level of complexity. In the automotive industry, this could include considerations about changing the powertrain technology portfolio, building secondary material ecosystems, or ofering mobility as a service. Finally, within these integrated strategies, companies can integrate sustainability from a more instrumental perspective as "a strategic and proft-driven corporate response to environmental and social issues" (Salzmann et al., 2005, p. 27) or go further and defne positive external impact as the purpose of their organization (Bansal & Roth, 2000; Van Zanten & Van Tulder, 2021). Strategy then becomes not only about long-term competitive advantage but also about the "why" and "how" of thriving in the marketplace.

While a list of sustainability drivers and strategy types paints a rather static picture, the idea of sustainability *maturity* or *stages* draws attention to the evolution of a sustainability strategy over time. Maturity models range from the simple distinction of two levels (e.g., laggard vs. leader, Hahn (2013)) to fve-stage models (e.g., initial, managed, defned, quantitatively managed, and optimizing, as introduced by Verrier et al. (2016)). Despite these diferences, the maturity perspective highlights the external and internal dynamics that infuence sustainability strategies. From an external perspective, sustainability maturity refects the constant evolution of external drivers of sustainability. Regulations change, new technologies emerge, competitive pressures shift, and new customer and investor expectations arise. Tis is especially true for sustainability drivers. On the one hand, the factual urgency of challenges, such as climate change, biodiversity loss, or resource depletion, is increasing. On the other hand, changes in stakeholder awareness of environmental and social issues drive the political salience and institutional regulation of ecological and social issues. In the automotive industry, for example, increasingly strict regulations on feet CO2 emission or human rights due diligence illustrate how this evolution of external requirements demands a corresponding maturity of sustainability integration within the company.

Similarly, an internal perspective on sustainability maturity emphasizes the importance of organizational competencies and their development over time (Dyllick et al., 1997). In the past, in the early stages, many companies responded to sustainability challenges or external criticism with rather limited and often defensive strategies (Mefert & Kirchgeorg, 1998) because they lacked the knowledge and resources to address the issues. However, by investing in early-stage practices, such as environmental compliance, companies gain knowledge, expand their capabilities, and can use them to implement eco-efciency gains or eventually develop new products and even new markets.

In corporate practice, the idea of sustainability maturity can describe how the focus and scope of sustainability management have changed over the past decades. To illustrate, consider the automotive industry and its evolving focus from cleaner production via cleaner products to sustainable value chains. In 1973, when BMW became the frst automotive company ever to appoint an environmental ofcer, one of BMW's motivations was to respond to the challenge that its manufacturing processes created vibrations that afected the neighboring community. Consequently, the initial focus of sustainability management was local, rather reactive, and focused on the company's own manufacturing operations. Nevertheless, establishing systematic environmental management led to signifcant improvements in *cleaner production* and created valuable eco-efciency capabilities. In the ensuing decades, BMW has consistently continued to reduce its manufacturing emissions and improve resource efciency, and it now bases its sustainability strategy on the "LEAN. GREEN.DIGITAL." principle for all of its plants. To reap the sustainability benefts of these competencies, BMW plans to have its Debrecen, Hungary, plant operational by 2025 as the company's frst carbon-neutral factory.

While cleaner production initially focused on local emissions and employee safety in a company's own operations, the *cleaner product* perspective has since shifted the focus to the environmental performance of a product during its use. For the automotive industry, customer expectations and regulatory requirements have demanded signifcant improvements in fuel efciency and on-road emissions. Tis includes both CO2 emissions, which contribute to global warming, and pollutants, such as particulate matter or nitrogen oxides, that afect local communities. In response, companies have invested in cleaner and more efcient drivetrain technologies, including improvements to internal combustion engines and the development of new powertrain technologies, such as plug-in-hybrids, battery electric vehicles, and hydrogenpowered cars. Tese new products and product portfolios refect how deeply sustainability considerations are now being integrated into business strategy. To remain competitive, lead in terms of sustainability, and meet future regulatory demands, companies are formulating strategic targets for their own products. In the case of BMW, the company committed to reducing CO2 emissions per car and kilometer driven by at least half of the 2019 levels by 2030 (BMW, 2021).

In addition to taking responsibility for a company's production and products, mature sustainability strategies today also manage the company's responsibility for its value chain. Creating a *sustainable value chain* further extends the scope of the sustainability strategy from internal processes to the entire life cycle. Tis includes environmental and social issues, including human rights, both upstream (such as labor and environmental questions in the extraction of raw materials) and downstream (disposal and recycling). Companies are embracing value chain responsibility (Baier et al., 2020) for the ethical sourcing of critical resources, and they are responding to external drivers, such as customer expectations and increasing regulation (e.g., the German or EU supply chain due diligence regulation).

In the automotive industry, a strategic approach to sustainable value chains is also needed to meet the ambitions of a net zero future. To date, emissions targets have mostly focused on tailpipe emissions; that is, the direct CO2 emissions of a car on the road. Te transition to electric or hydrogen mobility can eliminate these emissions during the use phase, but it shifts the focus to emissions at other stages of the life cycle. Tese include the energy and emissions of battery production, the sourcing conditions (including human rights impacts) for critical battery and drivetrain materials, such as lithium, cobalt, nickel, and rare earth elements (Schmid, 2020), the sourcing of electricity for car usage, and the recycling of batteries.

A value chain-oriented sustainability strategy goes hand in hand with the idea of circularity (Ellen MacArthur Foundation, 2013). Closing the loop (for example, through the use of secondary materials) is critical to reducing emissions and securing the availability of scarce resources. While a value chainoriented approach can increase the sustainability impact and business benefts, it also increases complexity. Tis type of holistic sustainability strategy must involve all related corporate functions (e.g., production, R&D, procurement, logistics, and marketing), collaborate with partners along and across the value chains (e.g., suppliers, data providers, and auditors), and allow partnering with non-market stakeholders (e.g., the charging infrastructure for electric mobility) (Beckmann & Schaltegger, 2021). Against this background, sustainability has implications for virtually all aspects of management, thereby requiring a much more integrated approach to strategy. Indeed, sustainability requires a systematic integration of all steps of the strategy process: (1) environmental scanning, (2) strategy formulation, (3) implementation, and (4) evaluation of its performance (David, 2011; Wheelen et al., 2017).

In the frst step, *environmental scanning* gathers information about the relevant external environment (such as natural resources, regulation, and industry analysis) and internal environment (such as the organization's current capabilities). Te case of climate change illustrates the importance of systematically including sustainability aspects at this stage. For companies, climate change poses a variety of risks, ranging from regulatory risks (e.g., bans on internal combustion engines) and supply chain risks (e.g., water scarcity in raw material production) to physical risks (e.g., the impacts of extreme temperatures on the operability of battery electric vehicles). Terefore, a thorough and, where possible, scientifcally based understanding of the climate system is key to subsequent strategy development. An example of an increasingly critical environmental parameter is the remaining carbon budget, which humanity must not exceed to limit global warming, as agreed upon in the Paris Agreement. For many companies, non-market actors, such as the Intergovernmental Panel on Climate Change (IPCC), are now becoming relevant stakeholders.

Since climate change is not the only sustainability challenge, environmental scanning is needed to capture the full range of social and ecological issues of strategic relevance. Moreover, companies cannot address all issues simultaneously and with equal emphasis. In fact, any strategy requires the prioritization of what matters most. Materiality analysis is a relevant tool for this type of prioritization (Whitehead, 2017). In the feld of sustainability, materiality analysis is often based on the combination of a company's internal perspective (what matters to the company) and the external assessment of its stakeholders (what matters to the world). While win–win issues (such as eco-efciency) may have direct fnancial materiality, "tensioned topics" that (still) lack a business case but have a societal impact (Garst et al., 2022) may have strategic business relevance in the medium and long terms. Tis idea of "dynamic materiality" (Kuh et al., 2020) highlights that the environmental scanning phase requires a more systematic interaction with diverse stakeholders, including both market stakeholders, such as customers, investors, and suppliers, and non-market stakeholders, such as scientists, NGOs, and regulators.

Te second phase of the strategy process, *strategy formulation*, consists of several steps. First, a company clarifes its mission (Wheelen et al., 2017) to consider where sustainability considerations can signifcantly shape its understanding of why it exists and operates in the market. For the sake of brevity, however, we focus on the two steps of formulating *strategic objectives* and the *strategic plans* needed to achieve them.

In the context of sustainability, current integrated approaches to strategic objectives increasingly use the formulation of *Science-Based Targets* (SBTs). In the case of the climate debate, SBTs ofer an emerging approach to align corporate emissions with the temperature target of the Paris Agreement (Bjørn et al., 2022). SBTs are gaining in importance for several reasons. For the overall goal of combating climate change, the appropriate allocation of the remaining carbon budget to individual sectors and companies is important. Appropriately identifed SBTs could thus help promote global emission reductions. For companies, however, having reliable targets that allow them to plan and that are respected by external stakeholders is important. Te more robust SBTs and their underlying methodology, the better companies can use them to quantify sustainability goals and track their implementation. While SBTs for climate change have received the most attention to date, the basic idea is also relevant to other sustainability issues, such as biodiversity. In any case, the formulation of specifc SBTs requires intensive stakeholder engagement to translate global system goals to the corporate level (Andersen et al., 2021).

As a critical next step in strategy formulation, companies develop *strategic plans* (Wheelen et al., 2017) that outline how the mission and strategic objectives will be achieved. For an integrated sustainability strategy, this step is characterized by additional complexity due to the assumption of responsibility for the entire value chain. In the case of a climate strategy that formulates SBTs, companies need to consider emissions along the entire value chain. Tis requires disaggregating total emissions into Scope 1 emissions (arising from the company's own operations), Scope 2 emissions (arising during the production of energy procured by the company), and Scope 3 emissions (arising in the value chain) (Kaplan & Ramanna, 2021). For strategic planning, a signifcant diference exists in terms of the actions taken to reduce these emissions. For Scope 1, companies need to understand and change their own operations; for Scope 2, they can change their energy procurement; and for Scope 3, they need to engage with their suppliers and incentivize or actively help them to decarbonize their processes. To illustrate, BMW has already contractually agreed with more than 400 suppliers to use 100% green electricity by 2022. Similarly, pilot projects are pioneering the production of CO2 reduced steel, as this production replaces coal with natural gas, hydrogen, or green electricity (BMW, 2022). Strategic planning for sustainability therefore requires a much deeper interaction with suppliers and other stakeholders. Stakeholder engagement can be used to identify the biggest levers for CO2 reductions and to analyze the feasibility of measures outside a company's organizational boundaries.

In the third phase, *strategy implementation*, strategic plans are put into action. In traditional business strategy, this phase involves implementing programs and tactics, allocating budgets, and carrying out the procedures to get the job done (Wheelen et al., 2017). While this is also true for sustainability, an integrated sustainability strategy adds complexity and requires an even more integrated management approach. Because sustainability has multiple dimensions that interact and cannot be managed in silos, it requires the alignment of diferent departments and the organization of cross-functional collaboration (Baier et al., 2020). To do this, companies need adequate data and information. An integrated management approach to sustainability therefore relies on appropriate indicators that are measured, shared, analyzed, and made available throughout the organization, and even to value chain partners. In addition, an integrated approach to management allocates resources and incentives in a way that is aligned with long-term sustainability goals. To ensure that improvements in one sustainability dimension are not incurred at the expense of other sustainability or business objectives, integrated management is needed to identify potential trade-ofs and to provide guidance on how to address them (Baumgartner & Ebner, 2010). Since sustainability measures are often investments in future benefts, an integrated management approach is also needed to align individual budgets and incentives with these long-term goals. Measurable sustainability indicators then become performance criteria for management compensation.

Te fnal phase of the conventional strategy process is the *evaluation and control* phase, which monitors performance. At the same time, the evaluation phase does not end the strategy process; rather, it provides feedback for an iterative engagement with all previous phases (Wheelen et al., 2017). Tis feedback and control is an important internal function for the company. In the case of an integrated sustainability strategy, the evaluation phase also generates information for reporting a company's sustainability performance to an external audience. Over the past few decades, sustainability reporting has evolved from a voluntary practice to a de facto standard and subsequently to a regulatory requirement for most multinational companies. However, until recently, most companies reported their ESG indicators in separate reports, which did not give the indicators the same prominence and assurance as fnancial data. However, in an integrated sustainability strategy that aligns diferent stakeholders and sustainability dimensions with business strategy, aligning these diferent perspectives by marrying sustainability and fnancial reporting becomes important. Tis is what integrated reporting is all about (Churet & Eccles, 2014). For investors, integrated reporting is about providing the transparency needed to make sustainable investment decisions. For companies, its aim is to overcome internal silos and strengthen an integrated approach to strategy and management (Higgins et al., 2019). So far, however, integrated reporting has not yet become the new reporting norm. When BMW combined its Annual Report and Sustainable Value Report for the frst time in an integrated BMW Group Report in 2021, it became the frst premium automotive company worldwide to do so. Given the dynamic developments in sustainability reporting standards and regulations, it still remains to be seen which specifc frameworks and reporting approaches will evolve. Crafting corporate sustainability strategy for the future will therefore interact with the future of corporate disclosure (see Chap. 4).

# **3.3 Expert Conversation on Integrating Sustainability into Corporate Strategy**

# **What Are the Drivers for Integrating Sustainability into Corporate Strategy?**


*Beckmann*: What are these four drivers?

*Zipse*: First, society is changing. Environmental issues are constantly changing, and society has a diferent awareness of them today than it did 40 years ago. Te second point is policy and regulations. Regulatory policies are changing and getting much harder for the industry. Te third point is that our fnancial system is much more targeted toward ecological and sustainable performance. Tat's a new aspect and a quickly accelerating one.

*Beckmann*: What is the fourth key driver of sustainability?

*Zipse*: Last but not least, the fourth sustainability driver is changing customer behavior. Our customers' desire to buy a product, to spend money, is very much linked to a sustainable image and a sustainable product substance. Terefore, all four of these drivers make us rethink, or forward think, how we develop our corporate strategy. As the essence of all these four points, we are putting sustainability right into the core of our corporate strategy.

*Beckmann*: Can you give an example?

*Zipse*: Sure. Take our transition to integrated reporting. As of 2021, we no longer issue separate reports. Terefore, we no longer have one report for the business and fnancial community and another report for NGOs and society. Tere is only one report. Having an integrated report is also a disciplinary tool. Whatever we do and communicate must be verifable, measurable, and true. In the automotive industry, we are the frst company to combine the sustainability report with our regular BMW Group report into a single report. Tis is a signifcant step for us—and it also shows that sustainability is not a fxed target but constantly moving.

#### **An Integrative Approach: How Does It Afect Management?**


two consecutive products, which brings us to 2040. So, whatever we do today has to be market ready for the entire product life cycle. Tat is why leapfrogging into the future is so important now.


*Beckmann*: So the principles of circularity are important.

*Becker*: Absolutely. All of this is good, and we need to do it. But to credibly demonstrate what we have achieved, we now need to build up the reporting, target setting, and steering mechanisms so that we can subject our environmental footprint numbers to the same level of scrutiny as our fnancial numbers with our certifed account. Tis is why integrated reporting is so essential. An integrated approach to sustainability is a massive challenge, because it goes far beyond our own organization. It extends into our supply chain. Tis is something we are actively tackling at the moment.

#### **What Value Does Sustainability Deliver as an Overarching Corporate Strategy?**


*Zipse*: What is the short and simple answer?

*Beckmann*: Te quick response is that you have the business benefts of managing the risks, costs, revenues, and license to operate. As you just described, companies need to respond to changing regulations to maintain their license to operate in the marketplace. Regarding risk management, ignoring sustainability can lead to litigation risks, operational risks, reputational risks, and so on. Ten, you can manage costs. When you reduce waste, you conserve sources. After all, waste is, by defnition, wasteful. In manufacturing, material and energy efciency can save money and go hand in hand with lean management. Finally, you can be more attractive to the stakeholders you want to work with, such as employees, investors, and, of course, consumers. Products with greater sustainability can help attract consumers, drive innovation, and create new market opportunities.

*Zipse*: How is the long answer diferent?


benefts? How can you compare or even put a price tag on diferent options, given the uncertainties of future regulation, charging infrastructure, or market demand?


products gives consumers more choices of tasty and sustainable products. At the same time, the company continues to ofer meat-based products, but aims at higher standards by focusing on more animal welfare-oriented production. In this way, the company is developing valuable options for success in the food market of the future. In a way, this is what sustainability is all about: acting in ways that increase our options for the future. For companies, this may mean disrupting their current business models.

#### **How Can We Close the Gap Between Intentions and Behavior When It Comes to Sustainability?**


car. So, the trick is to understand, acknowledge, and serve these diferent needs simultaneously. Our answer is that your product development, your production strategy, and your marketing strategy have to be fexible. We serve 196 markets, and it will come as no surprise that each market behaves diferently. Even within one market—say the European market—we fnd huge diferences in buying or customer behavior. Customers in Oslo typically behave diferently than those in Sicily. However, we serve them as the same company. Flexibility in all your processes and the ability to react quickly to market changes are key.

# **To What Extent Do Diferent Stakeholder Needs Change Sustainability Goals?**


sustainability issues are systemic in nature. Tey are not specifc to one company but relate to the industry as a whole. From a strategic perspective, many of these issues have a pre-competitive character. Tey are relevant to the industry as a whole but are not necessarily a source of individual competitive advantage. Few customers understand or care about the details when it comes to technical issues, such as the banning of certain hazardous substances or adoption of specifc technology standards. However, customers do care when a major scandal occurs in the industry. In extreme cases, the entire industry gets a bad name, such as in the Dieselgate scandal. Tere is a need to work together on industry-wide solutions, such as shared standards.


#### **Would an Ecosystem Approach Be a Strategy for Rapid Technological Development?**

*Beckmann*: You talked about infrastructure for charging, city management, parking, and trafc management. If you try to create solutions here, you are operating and innovating in an ecosystem. What role does cooperation play here?


# **How Can Corporate Sustainability Goals Contribute to Society?**

*Beckmann*: You just talked about the importance of working across the entire value chain with your new technologies. You need to work with your value chain partners to manage the cost, complexity, and life-cycle impacts of new technologies. But when we discussed sustainability drivers earlier, the frst one you mentioned was changing societal attitudes. Stakeholders representing this shift are NGOs, social movements, and think tanks. Do you see a diference in the way you work with those partners—not just talking to or listening to them, but incorporating their ideas, opening up the innovation process, and piloting solutions—compared to the way you work with the traditional customer or frst, second, or third tier suppliers in the value chain?


*Beckmann*: Can you give us a specifc example?

*Becker*: Take the wiring harness, which is mostly copper. How do we need to install it so that it can easily be removed before the vehicle is scrapped and gets shredded into tiny particle size? To move this agenda forward, you need to fnd the right solutions with diferent value chain partners and across industries. Finally, there is an important systemic factor. All decarbonization eforts would beneft greatly if CO2 prices were predictable and would reliably change the price ratio between primary and secondary materials. As you can see, these things are very much intertwined. We have to understand this and accept that not everything is certain and predictable today. Our task is to maintain our ability to steer economically and efciently as we move forward.

*Zipse*: Our products are a collection of 16,000 parts from more than 4000 suppliers—and we are responsible for them. Te Supply Chain Act has put that into legal terms. Consequently, if a problem emerges, everybody has the right to say, "You are the aggregator of this car. I'm holding you responsible for the supply chain behind it." Suddenly, the aggregator, as the seller of that car, has to fgure out how to organize responsibility across the entire supply chain.

# **Does a Common Language for the Entire Industry Help?**


freedom to actively develop the company and actively manage other factors. In order to secure this freedom to act, the company must remain proftable at all times. You cannot take a break for 3 or 4 years. Only with proft responsibility do you have the strength to put resources into innovation and the next step of sustainability.

#### **Is Integrated Reporting the Key to a Unifed Strategy?**


# **3.4 The Future of Integrated Strategies: Challenges, Opportunities, and Key Questions**

Integrating sustainability into strategy has important implications for all steps of the strategy process. Sustainability raises additional questions for a company's situational assessment, strategy formulation, strategy implementation, and strategy evaluation and control. Tis integration goes hand in hand with new opportunities, challenges, and future questions that arise at the intersection of sustainability and other megatrends.

# **Challenges of Integrated Sustainability Strategies**

Sustainability highlights additional social and environmental realities, their systemic interdependencies, and the role of the diverse—and often conficting and changing—stakeholder expectations related to them. Against this background, the integration of sustainability into strategy can be discussed in light of the challenges of strategizing in a world characterized by the features of volatility, uncertainty, complexity, and ambiguity (VUCA) (Bennett & Lemoine, 2014).

**Volatility** mirrors the fact that sustainability is a moving target. Social issues, such as human rights concerns in the deep value chain or the massively burgeoning issue of biodiversity conservation, are emerging as material issues that were not as apparent on the radar screen a few years ago. In the area of sustainability, volatility is driven by both rapid changes in the physical environment (as the efects of climate change and ecosystem degradation reach local and global tipping points) and disruptions in the social environment (as customer expectations shift, regulations change rapidly, or new environmental activist groups emerge). In recent years, the pace of change has accelerated, not slowed, thereby increasing the volatility of sustainability issues.

**Uncertainty** refers to how easily (or not) we can predict the future. Sustainability increases the difculty of predicting the future with confdence because of its multiple systemic interdependencies, which often behave in nonlinear and surprising ways, including displaying irreversibility. A highly relevant example is the current and future changes in our climate system. Many companies have committed to a climate strategy in line with the Paris Agreement by pledging to reduce emissions in line with the 2 or 1.5 °C target. As discussed above, a fully integrated sustainability strategy benefts from SBTs that translate the remaining global carbon budget to the company level. However, as global warming brings us closer to critical tipping points (such as the thawing of permafrost or the dieback of the Amazon rainforest), climate dynamics may change signifcantly. In fact, each IPCC report updates the remaining carbon budget by incorporating the latest physical science and other aspects, such as economic growth and the degree of decarbonization achieved. Tis multifaceted uncertainty creates difculties for companies today in setting a robust SBT that allows for long-term planning while recognizing the uncertainty associated with the climate and its future evolution. Given the difculty of accurately predicting long-term systemic interdependencies, sustainability therefore adds to the uncertainty that strategy must address.

**Complexity** refects the number of factors that strategy must consider, their breadth and diversity, and their interactions. As complexity increases, comprehensive analysis of the environment and understanding the big picture become more difcult. In the context of sustainability, one reason for complexity is the multidimensional nature of sustainability. To illustrate, consider the United Nations Sustainable Development Goals (SDGs). Te SDGs include 17 goals and 169 more specifc targets. To measure the achievement of these targets, the UN has defned 231 unique indicators (United Nations Statistics Division, 2022). Complexity arises from the challenge of generating, collecting, and sharing these comprehensive types of data—and, more importantly, analyzing how the diferent factors relate and interact. By highlighting additional factors, sustainability increases the complexity of strategy development.

**Ambiguity** can be defned as a lack of clarity about how to interpret a situation. Ambiguity arises when competing interpretations are possible. It occurs when information is incomplete, fuzzy, or contradictory. In the context of sustainability, ambiguity often emerges when companies deal with diferent stakeholders who have diferent interpretations of the same issue and whose expectations go in opposite directions. Ambiguity also arises in the aforementioned intention–behavior gap, where customers demand sustainable products but do not actually purchase them. An integrated strategy must make sense of this type of conficting information. More importantly, it must reconcile conficting stakeholder views in a way that overcomes perceived tradeofs through innovation (Beckmann et al., 2014). Because the multi-stakeholder orientation and multi-dimensionality of sustainability increase the likelihood of incomplete and conficting information, sustainability can add ambiguity to an integrated strategy.

# **Opportunities for Integrated Sustainability Strategies**

While the discussion of the VUCA world often focuses on its challenges, the idea of strategy is to play an active role in shaping a company's future context in a way that unlocks new opportunities. Sustainability can create opportunities across all VUCA dimensions. Volatility means that rapidly changing stakeholder expectations and emerging sustainability issues create new search felds for innovation. Moreover, management research has long embraced the notion that uncertainty creates opportunities for leadership and entrepreneurship as both represent practices of uncertainty absorption (Bylund & McCafrey, 2017; Waldman et al., 2001). According to this logic, sustainability leadership and sustainable intra- and entrepreneurship can provide companies with a competitive advantage in navigating the VUCA world. Companies with authentic and credible sustainable purposes will have an easier time mobilizing this potential. Complexity emphasizes that companies can combine a broader set of factors in their innovation process, allowing the companies to rethink inputs, processes, and outputs in new ways. Finally, the ambiguity that arises from conficting stakeholder views and incomplete information can represent an opportunity to build novel business models and stakeholder networks that actively align previously competing interests.

Based on a proactive response to the VUCA world, an integrated sustainability strategy can deliver the multiple business benefts discussed at the beginning of this chapter. An integrated sustainability strategy can lead to technology and process optimizations that result in cost savings, improved performance, and increased resilience. By responding to future customer needs, sustainability can add a price premium to a product, increase customer loyalty, and open up new markets. Similarly, an integrated sustainability strategy can serve to improve employee appeal, attract sustainable fnancial investments, and increase supply chain resilience. At the corporate level, sustainability can secure a company's license to operate and strengthen its competitiveness. At the industry level, driving more sustainable value creation secures the license to operate across the entire ecosystem. To achieve these benefts, the integration of sustainability into strategy must be based on intensive learning, innovation, and change management. An added beneft of a successful integrated strategy is therefore the improvement of organizational agility and adaptability.

# **Future Questions for the Alignment of Integrated Sustainability Strategies**

Integrated strategies focus on the long-term alignment of sustainability and business objectives. Tis type of alignment raises several follow-up questions related to both sustainability-specifc aspects and other megatrends in business.

# **How Can Sustainability Strategy Be Aligned with Diferent Time Horizons?**

Sustainability requires a long-term perspective. An integrated sustainability strategy requires aligning this long-term view with more short term-oriented decisions and structures. Tis raises questions such as: How can long-term sustainability goals be aligned with short-term incentives? What are the appropriate governance structures to promote long-term thinking? What kind of reporting can align quarterly disclosures and fnancial markets with the necessary investments in sustainability transformation? How can path dependencies be broken (e.g., when retroftting existing infrastructure, such as old factories) while ensuring proftability? What kind of change management is needed to align the transformation of business models, corporate processes, and individual competencies?

# **How Do You Align an Integrated Sustainability Strategy Across Fragmented Markets?**

While many sustainability challenges are global in nature, market expectations and the regulatory requirements to address them difer from region to region. At the same time, multinational companies that operate in some or all of these regions face the challenge of formulating an integrated strategy that addresses this diversity while maintaining internal consistency. Tis raises questions such as: How will external sustainability requirements diverge or converge over time? How can companies align a global strategy with a fragmented regulatory and market landscape? How can the diversity of diferent strategy contexts be used as a source of experimentation, innovation, and scaling?

# **How Do You Align Your Sustainability Strategy with Your Value Chain and Other Business Actors?**

Sustainability is a race that no company can win alone. For example, decarbonizing a product footprint requires collaboration across the entire value chain. Similarly, improving the working conditions of raw material suppliers, such as in the case of cobalt mines, is a challenge that transcends a single industry and benefts from the cooperation of diferent actors. In this context, integrating sustainability into strategy often requires working with other frms, including competitors, to engage in "co-opetition" (Brandenburger & Nalebuf, 2021). Tis raises questions such as: How can companies collaborate with competitors on pre-competitive sustainability issues? How can collaborative strategies be reconciled with the need to respect antitrust rules? How can novel forms of antitrust policies foster sustainability cooperation? How can pre-competitive strategies be aligned with companies' search for individual competitive advantage? How can collaboration with non-industry partners foster competitive advantage? What are appropriate criteria for measuring and monitoring the success of sustainability partnerships?

# **How Do You Align Sustainability Strategy with Digital Transformation?**

Digital transformation is a megatrend with enormous relevance for an integrated sustainability strategy. Sustainability requires the generation and analysis of new types of data, such as real-time carbon product footprints. In addition, to drive sustainability across the entire value chain, data must be shared across business partners. Tis raises questions such as: How can digitization increase the transparency and reliability of environmental and social performance data? What forms of data exchange are appropriate to make information accessible across the value chain? What are the incentives for data sharing while addressing security and privacy concerns? What role can digital industry data platforms play in reducing transaction costs and improving data quality? How can digitization engage previously silent stakeholders (e.g., by giving voice to workers or communities) in the supply chain? How can companies create a competitive advantage through digital platform solutions for sustainability?

# **3.5 Conclusion**

Integrating sustainability into strategy creates signifcant opportunities to transform companies into change agents for a decarbonized, circular, resilient, and more socially just economy. Tis integration ofers ample opportunities for businesses and their future market success. Realizing this potential requires a systemic integration of sustainability throughout the strategy process. In this endeavor, sustainability is a moving target. Consequently, integrating sustainability into strategy is not a one-time decision. It is the frst step on a continuous journey.

How can sustainability be integrated into corporate strategy? We would like to highlight fve takeaways from this chapter that invite further discussion:

1. To survive and thrive in the marketplace over the long term, companies need to move from stand-alone sustainability strategies to integrated sustainability strategies that redefne a company's corporate strategy (where to compete) and business strategy (how to achieve competitive advantage).


On the Road to Net Zero, however, a company's strategy journey matters not only to the frm and its investors, but also to other stakeholders, including nature and future generations. Terefore, creating transparency about a company's sustainability ambitions becomes increasingly important, as do the results achieved. For this reason, the next chapter, Chap. 4, focuses on *Te Future of Corporate Disclosure*.

# **References**


Barney, J. B. (1997). *Gaining and sustaining competitive advantage*. Addison-Wesley.


https://ellenmacarthurfoundation.org/towards-the-circular-economy-vol-1 an-economic-and-business-rationale-for-an


**Open Access** Tis chapter is licensed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons license and indicate if changes were made.

Te images or other third party material in this chapter are included in the chapter's Creative Commons license, unless indicated otherwise in a credit line to the material. If material is not included in the chapter's Creative Commons license and your intended use is not permitted by statutory regulation or exceeds the permitted use, you will need to obtain permission directly from the copyright holder.

# **4**

# **The Future of Corporate Disclosure Non-fnancial KPIs, Sustainability and Integrated Reporting**

**Thomas Fischer, Jennifer Adolph, Markus Schober, Jonathan Townend, and Oliver Zipse**

# **4.1 Introduction**

Crafting integrated strategies and pursuing integrated thinking (cf. Chap. 3) require new approaches to corporate reporting in order to provide stakeholders with relevant information about a company's business activities. In general, corporate disclosures should fulfl the information needs of stakeholders, minimise information asymmetries and enable better investment decisions by investors, thereby leading to a more sustainable allocation of capital (cf. Bonsón & Bednárová, 2015; Cormier et al., 2005; Deegan, 2002; Moratis, 2018). Corporate reports are also an important tool for communicating and internally steering the implementation of business strategies.

Te development of new digital technologies and the rapidly changing business environment further infuence corporate reporting. Tese trends may shift stakeholder expectations; therefore, companies will be challenged to meet the changing demands on corporate reporting (Barrantes et al., 2022). At the same time, the reporting and disclosure of intangible assets are

T. Fischer (\*) • J. Adolph

FAU Erlangen-Nürnberg, Nuremberg, Germany e-mail: wiso-controlling@fau.de

M. Schober FAU Erlangen-Nürnberg, Erlangen, Germany

J. Townend • O. Zipse BMW AG, Munich, Germany becoming increasingly important (Eierle & Kasischke, 2023; Haller & Fischer, 2023). In an environment characterised by high levels of volatility, uncertainty, complexity and ambiguity (VUCA), companies face various changes, such as the emergence of new business models. To adequately assess their situation, companies need to measure their ability to deal with these challenges (Duchek, 2020).

Another development relevant to the area of corporate reporting is the emergence of new regulatory requirements. To address the major challenges of climate change at a societal level, the European Union announced its EU Green Deal, a comprehensive set of plans that represent the need for the transformation of the economy and society (Council of the European Union, 2022). As part of the EU Green Deal, new sustainability reporting requirements have emerged for companies (e.g. EU Taxonomy, Corporate Sustainability Reporting Directive [CSRD]). To respond to these new requirements, companies can apply various strategies.

As described in Chap. 3, *Crafting Corporate Sustainability Strategy*, to stay on track on the Road to Net Zero, companies need to implement efectively integrated strategies that place sustainability at the heart of their corporate and business strategy. In addition to information on how environmental factors may afect a company's business activities, the need to provide reliable information on the environmental and social impacts and risks of business activities has become a major trigger in developing reporting standards in the EU. Tus, Chap. 4 is dedicated to new ways of reporting and leads into Chap. 5, *Creating Sustainable Products*, which looks in more detail at the transformation of the actual business operations.

Te main objective of the remainder of this chapter is to provide an overview of how new forms of reporting have evolved over the last two decades, the reasons for this development and the implications for practice in implementing the new reporting standards. Section 4.2 shows the evolution from voluntary to mandatory sustainability reporting standards and from separate sustainability reporting frameworks to a combination of sustainability and fnancial reporting in an integrated report. Section 4.3 outlines the current legal regulations in the EU regarding non-fnancial reporting. Te illustrative example of the BMW Group in Sect. 4.4 demonstrates the transition from the prior generation of separate reports to today's integrated sustainability reporting. Te expert discussion between Prof. Oliver Zipse, Chairman of the Board of Management of BMW AG, Jonathan Townend, BMW Group's Head of Accounting and Prof. Dr Tomas M. Fischer, Chair of Accounting and Controlling at FAU Erlangen-Nürnberg, focuses on the practical challenges of integrated reporting (Sect. 4.5). Section 4.6 discusses current and future reporting challenges arising from the present and diversifying regulatory environment. Finally, the conclusion in Sect. 4.7 summarises the key takeaways from the chapter.

# **4.2 New Ways of Reporting**

In the context of reporting, the defnition of the scope of relevant information has changed signifcantly over the years. Before the 1970s, corporate reporting focused on a company's fnancial performance (Navarrete-Oyarce et al., 2021). As investors want to make their decisions based on reliable corporate information, fnancial reporting has been regulated early on by national governments to ensure this reliability and comparability. Following the United Nations (UN) Brundtland Report in 1987 (Brundtland, 1987) and the introduction of the 'Triple Bottom Line' (TBL) concept by John Elkington in 1994, the scope of corporate reporting began to broaden. In addition to fnancial information, environmental, social and governance (ESG) aspects of corporate activities became increasingly important as more investors considered these factors when evaluating a company (Alniacik et al., 2011; Böcking & Althof, 2017). Tis has created a need for frameworks and standards that can be used to incorporate ESG issues into corporate disclosures in a concise and practical manner.

In 1997, the Global Reporting Initiative (GRI) was founded initiated by a multi-stakeholder initiative of companies, NGOs, audit frms, governments and others. Its aim was to develop an easy-to-use and standardised reporting framework that integrates economic, environmental and social aspects to enable informed decision-making by establishing specifc metrics for sustainability issues (GRI, 2022). Te GRI released its frst global sustainability reporting guidelines in 2000 (GRI, 2022; Rowbottom & Locke, 2016). While only a few companies were listed in the GRI reporting database in the early years, companies increasingly adopted the framework with each revision of the guidelines in 2002 (G2), 2006 (G3), 2013 (G4) and 2015 (GRI Standards). Today, GRI is a globally disseminated framework and is recognised as a mature voluntary reporting standard (Chersan, 2016; GRI, 2022). Early on, GRI joined forces with international institutions such as the OECD, the UN Environment Programme and the UN Global Compact, a strategy that contributed to its success. For some time, however, GRI was considered difcult to compare with conventional fnancial reporting and therefore less investor-friendly, as the GRI framework was designed for a broader group of stakeholders than investors, such as society, employees, government or the media. In 2009, GRI announced that it would adjust its stakeholder focus to better meet the information needs of investors (Eccles et al., 2010; Rowbottom & Locke, 2016), creating a more integrated and comprehensive view of reporting.

Te rationale for the GRI's revised audience was that other emerging and competing reporting guidelines focus on investors as a company's key stakeholder group. One example is the Carbon Disclosure Project (CDP), which was established in 2000 to transform environmental reporting by making climate-related environmental impacts measurable. By developing an independent scoring methodology, CDP measures the progress of companies or cities in their climate action and transparency. Each year, a ranking is produced and made available to the public. In 2022, CDP assessed 15,000 companies and claims to operate the world's largest environmental database (CDP, 2022).

Another reporting initiative was the British Accounting for Sustainability (A4S) Project, initiated by the former Prince of Wales in 2004. Te so-called Connected Reporting Framework developed by the A4S difered signifcantly from the GRI in that it combined the fnancial indicators with considerations on sustainable corporate governance and linked these to a company's strategy and risk assessment (Druckmann & Freis, 2010; Rowbottom & Locke, 2016). South Africa has been equally important in the development of an integrated reporting format for fnancial and non-fnancial (i.e. sustainability-oriented) information. Te frst standard for an integrated report was introduced in 2002 with the King II governance code, which became mandatory for all companies listed on the Johannesburg Stock Exchange in 2010. Tis was the frst time in the world that a regulatory body decided that integrated reporting should replace the previously often separate disclosure of fnancial and sustainability information (Brady & Baraka, 2013; Rowbottom & Locke, 2016).

Tere are many reasons for regulating sustainability-related disclosures. For example, mandatory non-fnancial disclosure can reduce information asymmetry if organisations present a holistic, and therefore more realistic and more complete picture of their diferent areas of organisational performance (Cormier et al., 2005; Du et al., 2010). In this way, non-fnancial reporting becomes an efective tool for legitimising an organisation's activities towards its stakeholders and society (Bonsón & Bednárová, 2015; Deegan, 2002; Lock & Seele, 2015). However, this information needs to be credible, as sustainability information is easily at risk of being discredited as 'greenwashing' or 'information overfow' (Marquis et al., 2016; Velte & Stawinoga, 2017). If done properly, sustainability reporting can be benefcial to the organisation itself, as it increases organisational transparency and contributes to organisational development (Diehl & Knauß, 2018).

Driven by the economic and fnancial crisis in 2008, various initiatives in the US and the EU started to consider new regulations to make reporting more comprehensive and integrated. However, the plethora of reporting frameworks available globally posed a challenge to the goal of improving regulatory requirements, as each framework had its own philosophy and focus. Despite the lack of international recognition of the Connected Reporting Framework, its representative, the former Prince of Wales, was able to launch a multi-stakeholder initiative at the annual A4S Forum, where companies, standard setters, UN representatives, investors and audit organisations jointly discussed a new internationally accepted reporting framework. As the parties involved agreed that sustainable management at the corporate level requires the combination of fnancial and non-fnancial reporting, a joint body—the International Integrated Reporting Council (IIRC)—was fnally established in 2010 with the intention of developing the Integrated Reporting Framework (IRF) (Druckmann & Freis, 2010; Rowbottom & Locke, 2016). As of August 2022, the International Financial Reporting Standards (IFRS) Foundation assumed responsibility for the IRF (cf. IFRS Foundation, 2022b, p. 2).

Te aim of the IRF is to guide organisations in the preparation of an integrated report (IR) as a new, comprehensive reporting format (cf. IFRS Foundation, 2022b, p. 2). Te IRF focuses on a company's stakeholders, with particular attention given to investors and creditors to enable a more efcient and productive allocation of fnancial capital (IFRS Foundation, 2022b). Diferent types of capital are considered, such as fnancial, manufactured, intellectual, human, social, relationship and natural capital (IFRS Foundation, 2022b). Tis approach enables integrated thinking and business actions focused on long-term value-creation interdependencies (IFRS Foundation, 2022b). Companies can use the IRF to clearly communicate how their business activities lead to the creation, preservation or erosion of value over time, taking either a short-, medium- or long-term perspective. Figure 4.1 illustrates how the BMW Group applies this (reporting) process of transforming value from input capitals into output capitals.

Te IRF proposes seven guiding principles that form the basis for the preparation and presentation of integrated reports (IFRS Foundation, 2022b). Tese relate to the strategic focus and future orientation of the report, the connectivity of information, the management of stakeholder relationships, the principle of materiality, the reliability and completeness of the report and its consistency and comparability (IFRS Foundation, 2022b). With regard to the content of the reporting, the IRF defnes eight interrelated elements: an

**Fig. 4.1** Elements in an integrated report to explain a frm's value creation, preservation or erosion as applied by the BMW Group (BMW AG) (2021, p. 57)

overview of the organisation and its embeddedness in the external environment, governance structures, a description of the business model, the risks and opportunities of the business operations, the strategy and resource allocation to achieve the organisation's objectives, the organisation's performance, an outlook on future challenges and the basis for preparation and presentation (IFRS Foundation, 2022b).

To date, mandatory use of the IRF is required in South Africa and Japan, but it has not become the global industry standard (Trelfall et al., 2020, p. 21). In the European Union in particular, the legislative landscape imposes diferent legal requirements on its member states, as the next section illustrates.

# **4.3 The Current Legislative Landscape in the EU**

In the EU, some countries had implemented mandatory reporting standards for social and environmental aspects early on, such as France in 2001 or the Scandinavian countries in the 1990s (Hess, 2007; Hofmann et al., 2018). In 2014, the EU Non-Financial Reporting Directive (NFRD) introduced mandatory reporting requirements with the aim of promoting harmonisation, transparency and comparability (Directive 2014/95/EU, see European Parliament and the Council of the European Union, 2014). Since fscal year 2017, certain large companies in EU member states have been required to provide additional 'non-fnancial information' in their annual disclosures. In its most basic sense, non-fnancial reporting focuses on data other than fnancial data (Baumüller & Schafhauser-Linzatti, 2018; Loew & Braun, 2018). In detail, however, the relevant content relates to environmental, social and governance aspects, often referred to as 'ESG factors' (cf. Baumüller & Schafhauser-Linzatti, 2018; Loew & Braun, 2018). Tese ESG factors have gained particular importance since the fnancial crisis in 2007/08, especially in the fnancial industry. Indeed, there are even ofcial recommendations on ESG criteria for fnancial products, such as the Statement on Disclosure of ESG Matters by Issuers of the International Organization of Securities Commissions (IOSCO, 2019) or rankings based on ESG criteria, such as the Fitch Ratings ESG Relevance Score (Fitch Ratings, 2019). According to a study by Union Investment (2021), 78% of all large-scale investors in Germany consider sustainability issues in their investment decisions.

To steer investment towards sustainable business models at the regulatory level, the EU taxonomy for sustainable activities initially set requirements for large listed companies with more than 500 employees, which are obliged to disclose non-fnancial information under Article 19a or 29a of the Directive 2013/34/EU (Böcking & Althof, 2017). As the European Commission has pointed out, the 'disclosure of non-fnancial information is vital for managing change towards a sustainable global economy by combining long-term proftability with social justice and environmental protection. In this context, disclosure of non-fnancial information helps the measuring, monitoring and managing of undertakings' performance and their impact on society' (Directive 2014/95/EU, L 330/1). However, the legislation itself was criticised by public and private actors for still leaving much room to manoeuvre and interpretation, thus weakening the intended comparability and credibility (cf. Baumüller & Schafhauser-Linzatti, 2018; Global Compact Network Deutschland e.V. & econsense, 2018; Loew & Braun, 2018; Velte, 2017). In parallel, another point from the EU Action Plan for fnancing sustainable growth, 'Strengthening sustainability disclosure and accounting rule-making' (European Commission, 2023), was addressed by a revision of the mandatory reporting approach by the European Commission and resulted in the EU CSRD (Directive 2022/2464/EU) in 2022 (European Parliament and the Council of the European Union, 2022).

Te revised mandatory reporting legislation will change the future scope of the required disclosures for preparers and users. Te CSRD regulations will be applied in four stages (Directive 2022/2464/EU, see European Parliament and the Council of the European Union, 2022) and the CSRD is expected to apply to 50,000 companies (European Commission, 2022).

In terms of the content of CSRD disclosures, companies will be required to report information on environmental (E), social (S) and governance (G) issues regarding several pre-defned subtopics, such as climate change mitigation, workforce or business ethics and corporate culture (Directive 2022/2464/EU, see European Parliament and the Council of the European Union, 2022). Information on these aspects must be disclosed if it meets the principle of 'double materiality'. Tis requires companies to report information necessary to understand (1) the company's impact on sustainability matters ('inside-out' perspective) *and/or* (2) how sustainability matters afect the company's business development, performance and position ('outside-in' perspective). More precisely, either one or both of these conditions must be met for sustainability aspects to be reported under the CSRD, thereby broadening the scope of reporting content.

With respect to those ESG issues deemed material, companies are required to disclose information on (1) the business model and strategy; (2) timebound sustainability targets and GHG reduction plans, including progress in each reporting year; (3) the role of the supervisory and management bodies with respect to sustainability aspects, including incentive schemes; (4) policies and due diligence processes, including the results of these policies; (5) principal risks and how they are managed; and (6) performance indicators relevant for disclosure. Furthermore, Article 19a (2) of Directive 2013/34/EU is expanded, for example, by introducing the new term 'resilience' and requiring companies to disclose related information (Directive 2022/2464/EU, L322/24, see European Parliament and the Council of the European Union, 2022). Another change in reporting requirements concerns information on intangible assets, which have become an important driver of company value (Fischer & Baumgartner, 2021).

Independent of the new EU regulations, other standards and frameworks for sustainability disclosure continue to exist. Some frameworks, such as the GRI, IRF or CDP, are explicitly mentioned in the CSRD to 'minimise disruption' to companies (Directive 2022/2464/EU, L 322/29, see European Parliament and the Council of the European Union, 2022). In 2021, the European Commission appointed the European Financial Reporting Advisory Group (EFRAG) as a technical adviser for the development of the European Sustainability Reporting Standards (ESRS). Te ESRS will follow a modular structure and will be divided into cross-cutting standards and topical standards (representing the ESG topics) (EFRAG, 2022).Te frst set of the ESRS draft contains a total of 12 modules with 82 disclosure requirements and specifed data points (equivalent to Key Performance Indicator [KPIs]). Two modules are available for cross-cutting standards (ESRS 1 + ESRS 2), fve modules for environmental topics (ESRS E1–ESRS E5), four modules for social topics (ESRS S1–ESRS S4) and one module for governance topics (ESRS G1) (EFRAG, 2022). Te ESRS are intended to become the primary and partially binding framework for reporting under the CSRD.1

Another change introduced by the CSRD compared to the NFRD is the requirement to publish sustainability information electronically in accordance with the European Single Electronic Format, which has been applicable for fnancial information since 2020 (Directive 2022/2464/EU, see European Parliament and the Council of the European Union, 2022). Furthermore, sustainability information must be part of the management report and be subject to limited assurance by external and independent auditors. Having sustainability-related information prominently displayed in the management report as one of the frst chapters of each fnancial report takes us a step closer to marrying non-fnancial (sustainability) information and fnancial information. As highlighted by the EU Parliament in a press release, the CSRD is a milestone as '[f]inancial and sustainability reporting will be on an equal footing […] [to enable better] comparable and reliable data' (European Parliament, 2022).

Te complexity of reporting in the EU increased further in 2020 with the implementation of the EU taxonomy, which is applied by companies in their reporting starting for the fscal year 2021 (Regulation (EU) 2020/852, see European Parliament and the Council of the European Union, 2020). Taxonomy is a classifcation system for sustainable economic activities as one tool of the EU Action Plan on Financing Sustainable Growth (2018) and the EU Green Deal (2019). It is intended to provide a frame of reference for investors and companies that recognises corporate activities as environmentally sustainable if they make a substantial contribution to at least one of six environmental objectives of the EU taxonomy: (1) climate change mitigation, (2) climate change adaptation; (3) sustainable use and protection of water/ marine resources; (4) transition to a circular economy; (5) pollution prevention and control; or (6) protection and restoration of biodiversity and ecosystems. Te EU taxonomy is intended to be a 'transparency tool' (European Commission, 2021, p. 1), as it aligns the fnancial value of a frm's corporate activities with reporting on specifc environmental criteria. However, the EU

<sup>1</sup>Te Commission has adopted the Delegated Act on the frst set of European Sustainability Reporting Standards (ESRS) for use by all companies subject to the Corporate Sustainability Reporting Directive on July 31st 2023 (EFRAG, 2023; EU Commission, 2023).

taxonomy is expected to be revised over time to include other economic sectors that are currently outside its scope (European Commission, 2021). As a result, the regulatory requirements for corporate sustainability reporting will continue to change and expand.

In practice, the merging of fnancial and non-fnancial reporting has not taken place from 1 year to the next, but is the result of a longer period of transformation, as the following case of BMW illustrates.

# **4.4 Integrated Reporting in Practice**

Companies that started to voluntarily apply sustainability-related frameworks early to extend their mandatorily disclosed fnancial information have achieved a good starting position to launch integrated reporting. Tis becomes obvious in the case of BMW, which has continuously developed its sustainability reporting since the 1970s and made it part of the strategy process.

In 1973, BMW became the frst company in the automotive industry worldwide to appoint an environmental protection ofcer. After the turn of the millennium, the frst sustainability report, the 'Sustainable Value Report', was introduced for the fscal years 2001 and 2002. Even before the introduction of that report, BMW had already published reports on the environmental impacts of its operations and the measures taken to counteract them. When BMW began publishing its voluntary Sustainable Value Report, it initially did so on a bi-annual basis and, subsequently, beginning in 2012, on an annual basis (Value Reporting Foundation, 2022a). While the frst reports did not follow specifc reporting standards, the company has, since 2005, adopted the GRI standard for sustainability reporting and has voluntarily committed to the highest GRI application level ('comprehensive option') since 2008 (BMW AG, 2021). Considering that, according to a CSR-reporting ranking in Germany, only three major German corporations (Daimler, BASF and BMW) have committed to the highest GRI application level in their sustainability reporting as of fscal year 2020 (Institut für ökologische Wirtschaftsforschung and future e.V.—verantwortung unternehmen, 2022), this further supports the company's pioneering role in German industry and led to BMW being recognised by the Carbon Disclosure Project (CDP) in 2014 (BMW Group, 2014). With regard to auditing, BMW has strengthened its credibility by committing to a voluntary limited assurance audit of its sustainability report since 2013 (BMW Group, 2021). BMW claims to be the frst premium car manufacturer in the world to fnally complete the transition from separate sustainability reporting to a fully integrated report (BMW AG, 2021). BMW's integrated reports for the fscal years 2020 and 2021 follow the voluntary framework of the International Integrated Reporting Council, the Integrated Reporting Framework (BMW AG, 2021, 2022b).

According to BMW's own statements in the context of a case study published by the Value Reporting Foundation (2022a), integrated reporting appears to be just another logical step in a continuous process of transformation across the entire company. Te organisational perspective changes when sustainability becomes the core of corporate strategy. Ten there no longer seems to be a need for a separate sustainability strategy (cf. Chap. 3), but sustainability becomes a central factor in corporate decision-making as part of an integrated corporate strategy. Tis gives rise to a new perspective on value creation, the so-called Integrated thinking, which views 'sustainability, social impact and economic and business success as mutually dependent' (Value Reporting Foundation, 2022a, p. 14).

In the following expert dialogue between Prof. Oliver Zipse, Chairman of the Board of Management of BMW AG, Jon Townend, BMW Group's Head of Accounting and Prof. Dr Tomas M. Fischer, Chair of Accounting and Controlling at FAU Erlangen-Nuremberg in Germany, the implications of implementing integrated reporting at BMW Group are discussed and refected upon in more detail.

# **4.5 Expert Conversation on the Implementation of Integrated Reporting at BMW Group**


started more than 20 years ago to set a greater number of concrete goals, make them transparent and report on them to the outside world. We have had a sustainability report since 2001 reporting on a wide range of measures.


range of numbers that are more technical. Tere are also interdependencies between these fgures. If you look at a CO2 fgure in our non-fnancial reporting, it's not just one person sitting at a desk calculating the CO2 fgure. You've got to look at the cars we sell, the type of cars we sell. You've got links to the engineering department. A lot more players are involved, and it's important that every involved colleague knows what the other one is doing. You have to work as a team. Last year, we had a long discussion about the responsibility for non-fnancial reporting. You have to make sure that the dependencies and the responsibilities are 100% clear. It's about making sure that every single player on the team is running in the right direction and fully understands the implications of his/her role.

*Fischer*: And in this team play, who is driving the process? Is it still the CFO? *Townend*: Te CFO is driving the process, because what you realise is that we're dealing with fgures. Tey may not be euros, but they're still fgures. And if you look at which department within a company is really best placed to understand how numbers are consolidated, how an internal control system ensures the quality of those fgures, it is the accounting department.

So, we have a very important role to play. But as I mentioned, the technical side of the fgures—kilowatt-hours, CO2 or other aspects of the whole process chain—really requires experts. Among others, we work closely with Tomas Becker (BMW VP Sustainability, Mobility) and his team on the environmental fgures. And, of course, we work closely with our colleagues in HR on the social metrics, the diversity metrics and the training and other metrics, as well as with the legal department on the governance issues.


well trained are our employees? We want to see progress year on year. And this whole framework of integrated reporting is a good indicator that we are a good investment.


Tat's just one factor that, if you don't make it transparent, the outside world, the investors, may not even know that we are better than we are actually required to be. You have to be an attractive investment, an attractive employer and an attractive carmaker for customers—and that is the whole framework in which we operate.


the same due process, care and attention to quality that we know from fnancial reporting.


*Fischer*: So less is more?


tum over the last month or year. We now have diferent levers for reporting and also for disclosure when it comes to discussing the impact that a company has. We have a strictly microeconomic or even a segmental perspective in fnancial reporting and in the integrated report. And the issue that you have raised is more on a higher aggregated basis; so, for example, the discussion about the environmental or social footprint is not only done at the corporate level, but also at the sector level. And the interesting thing is that I also see emerging discussions—for example, among macroeconomic experts—that we need new KPIs, new metrics, to determine whether a business period was successful.

Te acronym KPI, for example, is then translated as a 'Key Purpose Indicator'. Tere is an initiative, the Value Balancing Alliance, which says, 'OK, at the end of the day, you have the environmental footprint or the social footprint, perhaps in combination with cash fow or dividend payments', but then it is all about the transformation of resources and the process of creating value for the stakeholders. Tat is coming more and more into focus.

*Zipse*: Do you expect integrated reporting to become the standard for all industry players in the near future?


# **4.6 The Future of Reporting: Opportunities, Challenges and the Role of Integrated Reporting**

Together with an integrated strategy, the Integrated Reporting Framework is leading the way in the sustainability-driven business transformation of companies. Tis is illustrated by the BMW Group case presented in the previous sections.

As described in Sects. 4.2 and 4.3, the regulatory framework for reporting has evolved from voluntary sustainability reporting (GRI) and climate reporting (CDP) to integrated reporting (IR) and the new mandatory EU reporting framework (CSRD) and standards (ESRS), as well as the EU's classifcation system (EU taxonomy).

Navigating this dynamic regulatory landscape presents a number of opportunities and challenges, which are explored in the following section. Further, the future role of integrated reporting is discussed.

#### **4.6.1 Opportunities of New Ways of Reporting**

A major opportunity ofered by the new ways of reporting is that they afect the process of developing an integrated strategy, integrated decision-making and management (cf. Chap. 3). Tis can be observed in both the Integrated Reporting Framework and the new EU reporting regulations.

Te Integrated Reporting Framework has emerged as part of a management philosophy called Integrated Tinking (cf. IIRC, 2019; Value Reporting Foundation, 2022b).As a 'multi-capital management approach' (IIRC, 2019, p. 5), it thus pursues '[l]inking purpose and values to strategy, risks, opportunities, objectives, plans, metrics and incentives throughout the organization […] [to enable] better decision-making' (IIRC, 2019, p. 5). Terefore, integrated reporting, as one of the principles of Integrated Tinking, provides the opportunity to build a bridge between strategy and the assessment of sustainability performance that spans all areas of an organisation and consequently leads to integrated decision-making.

Te impact of applying integrated thinking principles to strategy and reporting can be seen in the case of BMW Group. BMW Group's objective in adopting the integrated reporting format for its annual report was to provide a clear and comprehensive insight into the BMW Group and to explain the organisation's activities in a transparent, comprehensible and measurable way (BMW AG, 2022a). With its integrated report, BMW Group explains its corporate strategy aimed at achieving both fnancial and non-fnancial targets (e.g. earnings before tax (EBT) margin, share of electrifed cars in total deliveries and reduction of CO2 emissions per vehicle produced) (BMW AG, 2022a). Tus, in the described case, the integrated report, on the one hand, serves to communicate the strategy internally and externally to diverse stakeholder groups. On the other hand, it serves as an internal management tool to monitor and control the achievement of objectives, and it can be used as a basis for informed decision-making in the company's strategy process.

Although the EU's new mandatory reporting framework (CSRD) and the development of European sustainability reporting standards (ESRS) are not based on any specifc management philosophy, they have the potential to impact how companies communicate their strategies to stakeholders. Te recent changes will also afect the company's decision-making processes and business activities. Tis can be exemplifed by the following two aspects:

First, a change in responsibility and in the attention paid to sustainability matters is to be expected at the individual level among management executives and in bodies such as management or supervisory boards. In the past, sustainability reporting did not always receive the same level of attention from a company's management and board level as fnancial reporting attracted. Tis is expected to change with the introduction of the ESRS (cf. EFRAG, 2022), and will be in line with the basic idea of the CSRD in terms of aligning the relevance of fnancial reporting and sustainability reporting (Zülch et al., 2023).

Te revised draft of the ESRS 2—General Disclosures, published in November 2022, not only covers frm disclosure on 'the elements of its strategy that relate to or afect sustainability matters, its business model(s) and its value chain' (EFRAG PTF-ESRS, 2022, p. 10), as well as reporting standards on the assessment of sustainability matters. It also names an obligation to provide information on the governance of this disclosure.

Regarding governance, it demands disclosure on 'whether, by whom and how frequently the administrative, management and supervisory bodies, including their relevant committees, are informed about material impacts, risks and opportunities […], the implementation of sustainability due diligence and the results and efectiveness of policies, actions, metrics and targets adopted to address them', as well as how they 'consider impacts, risks and opportunities when overseeing the undertaking's strategy, its decisions on major transactions and its risk management policies' (EFRAG PTF-ESRS, 2022, p. 9). Further disclosure on whether 'incentive schemes are ofered to members of the administrative, management and supervisory bodies that are linked to sustainability matters' (EFRAG PTF-ESRS, 2022, p. 9) also seems to have become part of the reporting standards. In addition, the ESRS draft states disclosure requirements on 'how the interests and views of its stakeholders are taken into account by the undertaking's strategy and business model(s)' (EFRAG PTF-ESRS, 2022, p. 12) to account for the aspect of impact.

On the one hand, these new disclosure standards can certainly be seen as a challenge with respect to their implementation. On the other hand, the increased responsibility of management and supervisory individuals and bodies can be regarded as an opportunity to raise awareness among the management about sustainability matters and the associated opportunities and risks.

Second, the new reporting regulations will further accelerate the transformation and governance of sustainability-driven business models. Although non-fnancial information cannot be directly expressed as a monetary value, it could afect how stakeholders perceive a company's fnancial performance over time (cf. Böcking & Althof, 2017, p. 246). Sustainability aspects have an impact on an organisation's opportunities, risks and the future going concerns of its business model. Moreover, sustainable business development can be benefcial for organisational resilience (cf. Schmidt & Strenger, 2019, p. 483). Sustainability risks can increase reputational risks, as they are highly relevant to society and subject to various regulatory developments. Consequently, sustainability reporting on ESG issues can contribute to reputation risk management (Bebbington et al., 2008, p. 337f.). Non-fnancial KPIs are therefore early risk indicators and should be considered in an organisation's strategy (cf. Böcking & Althof, 2017, p. 249). Integrating sustainability considerations can ensure long-term proftability, thereby enhancing a company's shareholder value (cf. Schmidt & Strenger, 2019, p. 483). As a further implication of regulatory reporting requirements, mandatory sustainability disclosures increase compliance sensitivity (cf. Bachmann, 2018, p. 233).

In addition to the opportunities and potential for sustainability-oriented corporate development through new forms of reporting, operational and regulatory challenges remain that need to be addressed.

#### **4.6.2 Challenges of New Ways of Reporting**

One of these remaining challenges is the operational implementation of the new reporting framework and standards. A 'CSRD readiness' ranking analysed by Zülch et al. (2023), which takes into account 160 management and sustainability reports of companies listed in the DAX, MDAX and SDAX, supports the assumption that companies that have previously engaged in sustainability reporting on a voluntary basis are better prepared for the implementation of the new reporting requirements and standards in the EU. Most of the ten top-ranking companies apply several recognised international standards for sustainability reporting and have a sustainability report integrated into their management reports.

With regard to 'CSRD readiness', two groups of companies emerge. Tose that have been less advanced in sustainability reporting will now be challenged to defne and establish responsibilities, strategies and processes to implement the regulatory requirements and increase personnel capacity to do so. Te other group of companies has already voluntarily implemented standards, perhaps even including an integrated reporting framework and audits. Tis second group of companies will have to consider how to deal with their advanced reporting formats in light of the new regulations, as the integration of the sustainability report into the management report under the CSRD seems to be of limited scope compared to the Integrated Reporting Framework (cf. Zülch et al., 2023). However, if organisations exclude specifc, detailed, stakeholder-oriented sustainability information from their integrated report, they will face the question of where to publish this information. Barrantes et al. (2022) therefore expect that organisations will continue to use separate sustainability reports in the medium term, but will eventually fnd ways to restructure them and to increasingly link them to corporate reporting content (cf. Barrantes et al., 2022, p. 90).

Another important challenge is the reporting of 'key intangible resources' in the context of sustainability reporting, which is refected in a recent publication by Haller and Fischer (2023). In conventional fnancial reporting, the discussion about reporting of intangible resources, such as data, reputation, brand names or relationships, has become increasingly important because intangible resources can have a direct monetary impact on a company's net worth, as well as a strategic, indirect impact on a company's future opportunities, risks and competitive advantages. Consequently, inadequate representation of intangible assets can lead to an information gap in the management report, leaving room for interpretation that could potentially create a gap between book value and market value.

Tis issue becomes even more relevant in the context of sustainability reporting, as sustainability issues are predominantly intangible in nature and can directly and indirectly afect a company's opportunities and risks to create, preserve or erode value. Te CSRD therefore contains, for the frst time in reporting history, a regulatory impulse to report on 'key intangible resources'. However, as Haller and Fischer (2023, p. 82) point out, in the CSRD, the EU considers and regulates under the term 'key intangible resources' only those intangible resources on which a company is materially dependent as part of its value creation activities (outside-in perspective). According to Haller and Fischer (2023, p. 83), this understanding of 'key intangible resources' does not seem to be in line with the fundamental principle of double materiality on which the CSRD is based. Considering only reporting regulations on 'key intangible resources' that might afect the company's business development, performance and position (outside-in perspective) leaves in question how to deal with information on 'key intangible resources' that would impact the company's activities on sustainability issues (inside-out perspective). In addition, the CSRD does not provide a categorisation of 'key intangible resources'. Both aspects—the lack of a defnition and a categorisation of intangibles for external reporting—will decrease the comparability of related corporate disclosures (Haller & Fischer, 2023).

#### **4.6.3 The Future Potential of Integrated Reporting**

In terms of reporting format, the introduction of the CSRD changes corporate reporting in the EU insofar as the CSRD intends that companies include sustainability information in the management report of the annual report (cf. Baumüller et al., 2021).

Although this frst step towards integrated reporting does not seem to be comparable with an Integrated Reporting Standard under the IR Framework, the legislative development in the EU can be credited with a certain push towards integrated reporting (see Barrantes et al., 2022, p. 90). Furthermore, the International Sustainability Standards Board (ISSB) has committed to additional development of the IR framework towards an international corporate reporting framework (cf. IFRS Foundation, 2022a), which speaks for the future relevance of the IR framework. In order to ensure the future global recognition of diferent reporting frameworks, the CSRD already states that the ESRS to be developed shall be consistent with the future basic reporting standards of the ISSB (Directive (EU) 2022/2464, L 322/29, see European Parliament and the Council of the European Union, 2022). Whether the CSRD will be able to achieve its objectives remains to be seen, as does the role the GRI Standards, the Carbon Disclosure Project or the Integrated Reporting Framework will play alongside the ESRS in the future.

On the one hand, an international trend is evident towards greater harmonisation of reporting frameworks and standards, which could lead to more homogeneous reports. On the other hand, the possibilities ofered by digitalisation are encouraging a trend towards customised reporting formats. As the main target group for reporting expands from shareholders to various other stakeholders, such as employees, NGOs or sustainability experts, diferent information needs are growing (Barrantes et al., 2022). Whether this will be met in the future by adapting the communication format of reporting, such as an online platform with a search function, or by maintaining the diversity of diferent reporting frameworks also remains an open question for the future.

# **4.7 Conclusion**

Corporate reporting is currently evolving faster than ever before. While companies must satisfy the information needs of diverse stakeholders, including employees, customers, media or experts, they are required to adapt their reporting processes to meet new legal requirements, such as the CSRD or the EU taxonomy. In addition, the landscape of voluntary frameworks intended to strengthen integrated thinking is currently undergoing adjustments to enhance the comparability of disclosure globally.

On the regulatory side, the most fundamental change in the EU is the introduction of the CSRD, which, in contrast to the previous NFRD, integrates sustainability reporting as a mandatory part of the management report and imposes an audit requirement with limited assurance. In addition, the information to be reported on environmental (E), social (S) and governance (G) aspects must comply with the principle of double materiality. Tis enlarges the scope of reporting content, as the non-fnancial information is considered material if the impact of the company's operations on sustainability aspects is high ('inside-out perspective') and/or these sustainability issues afect the company's business development, performance and position ('outside-in perspective'). Implementing the CSRD and the EU taxonomy for classifying a company's sustainable economic activities challenges conventional corporate reporting and requires a change in internal reporting processes. While the objective of integrated reporting remains desirable for policymakers and stakeholders, some companies may fnd it difcult to embed this type of integrated thinking in their business in the short term. Still, to achieve the potential of integrated reporting, it is prudent for managers to proactively initiate the required internal transformation of the related processes, even if this will take some time to materialise.

Tis chapter concludes with fve takeaways that could stimulate further discussion:


On the Road to Net Zero, strategy and reporting are the starting and ending points of operational business activities. Tus, the following three chapters will focus on related operational business areas that will enable the internal sustainability transformation. Chapter 5, *Creating Sustainable Products*, will further elaborate the paradigm shift in product development towards a circular economy.

# **References**


*KoR Zeitschrift für internationale und kapitalmarktorientierte Rechnungslegung, 22*(2), 86–91.


Public-439/EFRAG-welcomes-the-adoption-of-the-Delegated-Act-onthe-frstset-of-E?AspxAutoDetectCookieSupport=1


Directive 2006/43/EC and Directive 2013/34/EU, as regards corporate sustainability reporting: Directive (EU) 2022/2464.


www.integratedreporting.org/wp-content/uploads/2021/12/VRF\_ITP-Main-120721.pdf


**Open Access** Tis chapter is licensed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons license and indicate if changes were made.

Te images or other third party material in this chapter are included in the chapter's Creative Commons license, unless indicated otherwise in a credit line to the material. If material is not included in the chapter's Creative Commons license and your intended use is not permitted by statutory regulation or exceeds the permitted use, you will need to obtain permission directly from the copyright holder.

# **5**

# **Creating Sustainable Products The Road to Circularity**

**Lena Ries, Sandro Wartzack, and Oliver Zipse**

# **5.1 Introduction**

Central to the circular economy (CE) is the shift from a linear cradle-tograve system following a "take-make-use-dispose" approach toward a cradleto-cradle system following a lifecycle approach (Lieder & Rashid, 2016). Tis implies the consideration of a product's entire life cycle along the value chain, including the extraction of raw materials, parts supply, manufacturing, distribution, and use, as well as end-of-life and waste management (Ellen MacArthur Foundation, 2013; Farooque et al., 2019). Tus, product design follows the principles of "design to redesign," where technical parts circulate in a closed system, and to "design out waste, pollutants, and emissions," where biological nutrients return to the biosphere (Murray et al., 2017). In the automotive industry, electric vehicles are discussed as a key technology for reducing greenhouse gas emissions (Li et al., 2019). In light of this transition from combustion vehicles toward the electrifcation of vehicles, the manufacturing phase and the downstream supply chain, rather than the use

L. Ries (\*)

FAU Erlangen-Nürnberg, Nuremberg, Germany e-mail: lena.ries@fau.de

S. Wartzack FAU Erlangen-Nürnberg, Erlangen, Germany

O. Zipse BMW AG, Munich, Germany phase, are decisive for the carbon footprint, as the manufacturing process of batteries for electric vehicles is highly energy intensive (Morfeldt et al., 2021). Tus, a lifecycle perspective is highly important for the creation of sustainability impact (Ries et al., 2023). Products must support circular strategies, such as maintenance, reuse, remanufacturing, or recycling, by intention, thereby emphasizing the importance of the designer's role (den Hollander et al., 2017).

On the Road to Net Zero outlined in this book, the actual implementation starts with product design once an integrated strategy and reporting scheme have been developed. Based on the principle of "what gets measured gets done" (see Chap. 1), the *Future of Corporate Disclosure* (see Chap. 4) enables companies to identify potential areas for improvement in their operations and products, including their sustainability performance. By integrating these insights into their product design processes, companies can create circular products that meet customer demands, corporate vision, and regulatory requirements.

Te main objective of this chapter, *Creating Sustainable Products*, is to highlight the importance and implications of circular design on product and service development and to discuss the challenges faced by manufacturing companies in altering user behavior. Te remainder of this chapter is organized into three sections. Section 5.2 starts with a short overview of the circularity concept. It then elaborates on three key implications of circularity for changing product design, service design, and user behavior. Tis is followed, in Sect. 5.3, by a conversation between Prof. Oliver Zipse, Chairman of the Board of Management of BMW AG, and Prof. Dr-Ing. Sandro Wartzack, Chair of Engineering Design at FAU Erlangen-Nürnberg. Both experts refect on sustainable product appearance, globally varying customer expectations, and future advances in circular product design from a practitioner's perspective. Section 5.4 then gives an outlook on the future challenges of circular design before Sect. 5.5 concludes with a transitional link to the following Chap. 6 on *Transforming Value Chains for Sustainability.*

# **5.2 Pathways Toward Circular Design**

A linear economy causes many of our current environmental problems, including natural resource depletion, biodiversity loss, and global warming (Rockström et al., 2009). For example, the extraction and processing of raw materials are responsible for 90% of global biodiversity loss and 50% of greenhouse gas emissions (International Resource Panel, 2019, p. 8). Tese environmental problems have presented the managers of manufacturing companies with immense difculties. Climate change and resource scarcity in particular are placing manufacturing companies under increasing pressure to cope with new environmental regulations, resource price volatility, and supply chain risks (Gebhardt et al., 2022; Lieder & Rashid, 2016). One regulation proposed by the European Commission in 2020 is the Circular Economy Action Plan, which targets product design, the value retention of products and materials, and waste prevention (European Commission, 2022a). As a result, manufacturing companies now need to reconsider their conventional take-make-waste approaches (Geissdoerfer et al., 2017).

Taking a closer look at the automotive industry, 14% of global greenhouse emissions are attributed to transportation, and they keep rising (PWC, 2007). Tis is the result of two issues. First, current estimates indicate that the world feet of vehicles will triple by 2050 compared to the base year 2000. Second, this feet is aging, especially in developing countries, and is therefore not complying with stricter emission regulations (Mamalis et al., 2013). To tackle the environmental impact of the industry, companies need to adhere to increasing environmental regulations. For example, the new EU Battery Regulation, which is expected to come into force in 2023 (see European Parliament, 2023), for the frst time, will set out rules concerning the entire life cycle of a product in terms of "production, recycling and repurposing" (European Commission, 2022b). In terms of production, new traction batteries for electric vehicles will have to be labeled to disclose their carbon footprints. In addition, value chain actors (except SMEs) will have to disclose that raw materials are responsibly sourced from a social and environmental point of view as part of a due diligence policy. Finally, the new digital battery passport, as well as stricter collection and recycling quotas, will foster reuse and recycling eforts (European Parliament, 2023).

As another example, the EU Commission has recently revealed its plans to revise the end-of-life vehicle (ELV) directive, which was initially enacted in 2000 (European Commission, 2023). Tis announcement marks a signifcant shift in the regulations that have governed ELVs for over 20 years. Te proposed revision aims to bring about substantial changes in the way ELVs are collected, treated, and recycled, with the ultimate goal of aligning with the objectives of the European Green Deal. By encouraging the automotive industry to embrace a sustainable approach to car design and production, this initiative seeks to ensure consistency with the broader environmental goals of the European Union.

# **5.2.1 The CE Approach Offers a Paradigm Shift**

In this context, scholars, politicians, and practitioners are promoting CE as a new paradigm that ofers great potential (Mhatre et al., 2021). It ofers new business opportunities to create value and employment while reducing material costs and price volatility (Kalmykova et al., 2018). Moreover, circular strategies can foster resource security (Stahel, 2016) and cut global greenhouse gas emissions by 63% by 2050 (Circle Economy, 2019). While the concept of CE was introduced by Pearce and Turner (1990), they used it to describe the relationship between the economy and nature, where nature provides inputs for production and serves as a sink for waste outputs (Geissdoerfer et al., 2017). Tis contrasts with the modern understanding of extending the life of resources (Blomsma & Brennan, 2017). Te most prominent defnition of CE currently in use has been provided by the Ellen McArthur Foundation (Kirchherr et al., 2017), which describes CE as "an industrial system that is restorative or regenerative by intention and design […]. It replaces the 'end-of-life' concept with restoration, shifts towards the use of renewable energy, eliminates the use of toxic chemicals, which impair reuse, and aims for the elimination of waste through the superior design of materials, products, systems, and, within this, business models" (Ellen MacArthur Foundation, 2013, p. 7). Tis defnition highlights the importance of design to a CE in which the whole product life cycle, from design to end-of-life management, is considered (Farooque et al., 2019). Moreover, it shows how the understanding of CE is infuenced by industrial ecology (Graedel & Allenby, 1995) and the cradle-to-cradle philosophy (McDonough & Braungart, 2003).

Te cradle-to-cradle philosophy distinguishes two separable cycles: a biological cycle and a technical cycle. In the biological cycle, biodegradable materials provide nutrients for nature after use. In the technical cycle, the products and materials circulate in closed-loop industrial systems through processes such as reuse, repair, remanufacturing, and recycling. Consequently, waste no longer exists. Te Ellen MacArthur Foundation visualizes this approach in the so-called butterfy diagram (Ellen MacArthur Foundation, 2019). Tus, in a closed-loop system, healthy and renewable resources are complemented with technical processes to retain product and material value over time. Tree main principles guide the life cycle thinking of a CE: the frst is to preserve and enhance natural capital, the second is to optimize resource yields, and the third is to foster system efectiveness (Ellen MacArthur Foundation, 2015).

#### **5.2.2 Different Frameworks for CE Operationalization: Slowing, Closing, Narrowing, and R-Strategies**

Manufacturing companies are considered pivotal for implementing a CE based on their potential to decouple value creation from resource use (Blomsma et al., 2019). As such, they can improve product use, extend product lifetime, and close materials fows, among others, through diferent circular strategies (Bocken et al., 2016; Potting et al., 2017). A variety of frameworks exist to operationalize CE principles for manufacturing companies. Bocken et al. (2016) describe three product design strategies, namely slowing resource loops (product durability and life-extending services), closing resource loops (recycling), and narrowing resource fows (resource efciency), to manage material and product fows over time. Geissdoerfer et al. (2018) extend these strategies with intensifying resource loops (increased product use), and dematerialization of resource loops (substitution of product utility by service and software solutions).

Another approach to operationalizing a CE is to use the so-called R-strategies. While some authors distinguish between the three R's of reduce, reuse, and recycle (Ghisellini et al., 2016; Reike et al., 2018), others describe up to ten diferent R-strategies (Potting et al., 2017). While the former only addresses material fows, the latter includes a system perspective that addresses, for example, the rethinking of product use (Stumpf & Baumgartner, 2022). All varieties of the R-framework share a hierarchy that ranks the diferent R-strategies based on their value retention potential (Kirchherr et al., 2017; Reike et al., 2018). Strategies that aim at a useful application of materials are at the bottom of the hierarchy, while strategies that aim at extending product or component life are in the middle, and strategies that aim at intelligent production and use are at the top of the hierarchy (Stumpf & Baumgartner, 2022). An overview of the ten comprehensive R-strategies by Potting et al. (2017) is illustrated in Fig. 5.1, based on the visualization by Stumpf and Baumgartner (2022) and explained as follows: While *recovering* refers to energy, *recycling* describes the processing of materials to obtain the same or a lower quality of the material. Tus, these strategies address the material level and build the third cluster with the lowest priority for circularity. Strategies that extend product or component life comprise *repurposing*, which describes the use of products or components for a diferent function. Moreover, *refurbishing* (i.e., restoring and updating old products) and *remanufacturing* (i.e., using components of discarded products in a new product with the same function) are classifed as

**Fig. 5.1** R-strategies increasing circularity (own illustration based on Potting et al. (2017, p. 5) and Stumpf and Baumgartner (2022, p. 6))

life-extending strategies. Lastly, *repairing* defective products and *reusing* discarded products in good condition complement this cluster. Te top cluster of smarter product use and manufacture comprises *reducing*, which implies an increase in efciency in the manufacturing process or product use. Moreover, *rethinking*, which describes intensifying product use, and *refusing*, which implies making a product redundant by abandoning its function or by ofering the same function with a radically diferent product, are based on business model innovation.

# **5.2.3 Three Implications for Design**

Implementing the diferent R-strategies entails three implications for design: a change in product design, a change in service design, and a change in user behavior. Products need to be designed to embrace circular strategies (Bakker et al., 2014). However, circular products do not fulfll their potential if they end up in a drawer or landfll. Tat is why, in addition to changing the product design, manufacturers need to design new service oferings for reuse, repair, refurbishment, remanufacture, repurposing, and/or recycling (Revellio, 2022). Tese services must also be made attractive to the user if they are to actually be used (Amend et al., 2022), thereby emphasizing the role of the user and user behavior. Naturally, these three levels are interrelated, and tradeofs can occur among and within the three levels when aiming for circular design.

#### **5.2.3.1 First Implication: A Change in Product Design**

Te Inertia Principle guides circular design following the hierarchy of the R-strategies: "Do not repair what is not broken, do not remanufacture something that can be repaired, do not recycle a product that can be remanufactured. […] [R]eplace or treat only the smallest possible part in order to maintain the existing economic value of the technical system" (Stahel, 2010, p. 195). Tis implies a product design for recirculation, endurance, and efciency (Boyer et al., 2021).

At the product level, two key elements are important for the design dimension of *recirculation* (Boyer et al., 2021). First, increasing the fraction of a product that comes from used products (i.e., the input of recycled materials) (Linder et al., 2017) is also described as a design to reduce the embodied impact during production (Tecchio et al., 2017). Tis refers to the *recycling* strategy of the third cluster. Second, the fraction of recirculated outputs is relevant (i.e., how much of the product ends up being recirculated at the end of its functional life) (Boyer et al., 2021). In this context, the design for a technological cycle, the design for a biological cycle, and the design for disassembly and reassembly are relevant (Bocken et al., 2016). Tus, beyond the *recovering* and *recycling* strategies, the strategies of *refurbishing*, *remanufacturing*, and *repurposing* are important for a recirculated output, as they ensure reduced residual waste at the end of the functional life (Tecchio et al., 2017). An example of circularity in product design is BMW's "iVision Circular," a vehicle that is made as much as possible from secondary materials and is 100% recyclable at the end of life (BMW Group, 2021). Moreover, connectors and screws, instead of welds, are used where materials meet to facilitate easy disassembly. Te potential of recirculation regarding carbon savings is promising. In China, BMW's joint venture works with local recycling companies to recover several materials, such as nickel, lithium, and cobalt, from spent high-voltage batteries and return them to the battery production cycle (BMW Group, 2022). According to BMW, this can save up to 70% of CO2 emissions compared to using newly procured raw materials.

Another important product design dimension is *endurance*, which describes a product's ability to retain its value over time (Boyer et al., 2021). Tis requires, on the one hand, designing products for long life, including design for attachment and trust and design for reliability and durability. On the other hand, product design must ensure extended product use by including designs for maintenance and repair, designs for upgradability and adaptability, and designs for standardization and compatibility (Bocken et al., 2016; den Hollander et al. 2017). Design for modularity is also pivotal, as it allows the separation of modules of valuable parts that contain technology from those that do not (Krikke et al., 2004). Likewise, it facilitates the use of instruction manuals for self-repair (Amend et al., 2022). Tus, product endurance mainly relates to the circular strategies of *repairing*—designing for product life extension—and *rethinking*—designing for long-life products.

Designing for the *efciency* of materials and resources during use stems from eco-design, and thus is not exclusive to the notion of CE (Tecchio et al., 2017). Tis type of design addresses the *reduce* strategy of the frst cluster. An example of eco-efcient design in the automotive industry is lightweight design, which leads to a reduction in overall vehicle weight and increased fuel efciency. Te designers of BMW's frst battery electric vehicle, the i3, used a carbon fberreinforced plastic body, which reduced weight by 50% compared to the use of steel in conventional car bodies (W. Zhang & Xu, 2022). Note that while this material increases efciency during the use phase of the car due to the reduced weight, it hinders recycling at the end of life because of the material mix of plastics and carbon fber. Moreover, it shifts emissions to the energy-intensive production of carbon fbers unless the production processes are powered by renewable energy, as in the case of BMW. Tis is an example of a trade-of in circular design on the product level and between life cycle stages.

In practice, the Circular Design Guide, developed collaboratively by the Ellen MacArthur Foundation and IDEO (Global Design & Innovation Company), provides methods and tools to help designers apply design thinking and circular design (Ellen MacArthur Foundation, 2017). To quantify product circularity, Linder et al. (2017) critically reviewed diferent metrics, such as the Material Circularity Indicator (MCI) developed by the Ellen MacArthur Foundation, the Cradle-to-Cradle (C2C) certifcation framework developed by the Cradle-to-Cradle Products Innovation Institute, or a circularity metric for products based on life cycle assessment (Scheepens et al., 2016). However, acquiring the necessary data for impact assessment can be difcult, and research must take on the challenges of developing accessible, unbiased, and easy-to-use tools (Boyer et al., 2021).

#### **5.2.3.2 Second Implication: A Change in Service Design**

Product-service systems (PSSs) are a type of business model that integrates tangible products and intangible services into a solution bundle to better satisfy customer needs (Mont, 2002). Based on their increasing servitization, PSSs are transitioning from a product focus toward providing services, product access, and performance (Tukker, 2004). Examples of this type of PSS are product-sharing systems, such as car sharing or appliance sharing (Bressanelli et al., 2018). Tis transition toward PSSs is relevant from an economic and environmental perspective (Tukker, 2015), as the design logic for PSS favors retaining product ownership to allow assessment of the total cost of ownership and designing for circularity (Tietze & Hansen, 2017). Terefore, PSSs are considered a means of dematerialization by paving the way for a more closedloop, resource-efcient, and climate-friendly economy (Yang & Evans, 2019).

Te use of PSSs has two implications for service design. First, the manufacturing companies need to design or form collaborations to ofer additional services that can extend product lifetimes and close resource loops. Tese include services for maintenance, repair, upgrades, updates, take-back management, and waste handling processes (Lüdeke-Freund et al., 2019). Tese services need to be designed from a consumer-centric perspective, as discussed in the next section on user behavior. For example, circular services need to be included in a service contract (Amend et al., 2022), as users expect manufacturers to cover these costs (Mugge et al., 2005). Examples of these services in the automotive industry are the so-called re-factories of Renault in France and Spain, where used vehicles are refurbished, individual parts are remanufactured, traction batteries are repaired, and second-life applications are found for them (Groupe Renault, 2020).

Te second requirement is that the manufacturing companies need to ofer new PSS business models aimed at smarter product use (*refusing* and *rethinking*), such as product sharing (Bressanelli et al., 2018). In a sharing system, the service provider owns the product and therefore retains the responsibility for maintenance and repair, whereas diferent users can sequentially utilize the product and pay for this access (Tukker, 2004). Tese business models aim at intensifed utilization, and respective metrics assess how often a product gets used (Boyer et al., 2021). However, their circularity impact depends on a change in user behavior (Tukker, 2015). For example, the potential of carsharing business models to contribute to CO2-emission reductions depends on the number of privately owned vehicles that are substituted for the carsharing business model (Harris et al., 2021). Te authors revealed that this is hardly the case at the moment due to rebound efects. For example, BMW found that the extent of environmental benefts depended on how services like car sharing were integrated into urban mobility ecosystems. Tus, the benefcial efects of on-demand mobility were very city-specifc and depended on innovative and holistic transportation planning. Tis is why currently substituting private combustion engine cars for electric cars is the most CO2 saving solution if the cars are charged with renewable energy. Changing user behavior is key to a positive circularity impact of service business models.

# **5.2.3.3 A Tird Implication: A Change in User Behavior**

Te consumer's contribution to a CE has received little academic attention; however, as with products and services, user behavior must change from linear to circular (Selvefors et al., 2019). In a CE, the consumers have three roles (Shevchenko et al., 2023): First, they must select and buy a circular-oriented product or service rather than a conventional one. Second, they must not only use but also maintain and update the product. Lastly, they must discard the product through an appropriate channel for reuse, remanufacture, or recycling. Selvefors et al. (2019) describe these three phases from a user perspective, focusing on product exchange between users as obtaining the product (buying, trading, receiving products as gifts, leasing, subscribing, renting, borrowing, or co-using), using the product (utilizing, adjusting, repairing, repurposing, storing), and then resigning ownership of the product (gifting, trading, selling, returning a product to the provider, ending a lease or subscription contract, returning rented or borrowed products, or ending co-use). Based on this approach, the authors deduce user-centric design principles, including design for extended use, design for pre- and post-use, design for exchange, and design for multiple use cycles (Selvefors et al., 2019).

Terefore, research highlights the changing role of the consumer, who becomes a caretaker of the object in a CE (Rogers et al., 2021). Tis is similar to the notion of a pro-sumer (Kohtala, 2015) or pro-user (Stahel, 2019), who co-create products. In practice, however, evidence suggests that a tremendous gap exists between what people claim to do and how they actually behave. For example, 77% of European respondents said they undertake eforts to repair products, but 45% did not seek information on repairability (Parajuly et al., 2020). Terefore, designing for behavior change with the intent of infuencing or promoting certain user behavior is pivotal for the implementation of a CE (Wastling et al., 2018). In this context, understanding the intrinsic (e.g., knowledge, motivation, habits, values) and extrinsic (e.g., norms, monetary incentives, infrastructural constraints) attributes that drive human behavior is important (Parajuly et al., 2020). By comparison, the car today is already one of the products that is kept alive for a long time by the established secondhand market, as well as by repairs.

To facilitate this behavioral change, two services are key. First, operational support is a service that supports the user in an efcient and durable product operation, such as training or performance monitoring (Kjaer et al., 2019). For example, well-designed repair manuals can help extend the product lifetime by aiding users in repairing rather than replacing a damaged product (Amend et al., 2022). Tus, operational support provides relevant knowledge and education on efcient product use. Second, behavioral support nudges users to act sustainably, thereby overcoming motivational challenges by setting and achieving goals (Ries et al., 2023). Tis can be achieved, for example, through positive feedback, gamifcation (e.g., repairability scores), monetary incentives, or a supporting community (Bovea et al., 2018; Valencia et al., 2015). Beyond fostering circular behavior, designing out adverse user behavior is equally important, as this can result in quicker wear and tear and decrease product longevity (Bressanelli et al., 2018). For example, in the case of a performance business model, customers might misuse products, thereby increasing maintenance costs, as these are covered by the provider (Reim et al., 2018). Tis link between pricing logic and user behavior emphasizes the need to understand how the pricing logic incentivizes certain behavior (Ries et al., 2023). For example, car-sharing pricing based on the minutes driven rather than on the distance driven is likely to incentivize fast, and therefore potentially unsafe, driving. Hence, the proper design of service contracts and pricing logic of service ofers are pivotal for creating the desired circular behavior.

#### **5.2.4 Implementation Challenges**

For many companies, implementing circular strategies has not been easy (Lieder & Rashid, 2016), and this is especially the case with manufacturing companies (Lopes de Sousa Jabbour et al., 2018). In 2020, only 8.6% of the global economy was circularity oriented (Circle Economy, 2019, p. 8). One challenge is the required value network perspective, which requires enhancing relationships with supply chain actors, customers, and other service partners (Centobelli et al., 2020) to ensure the provision of additional services and PSS (Barreiro-Gen & Lozano, 2020). Compared to other industries, diverse services and PSSs are already associated with cars, from rental agencies and car repair workshops to used-car markets. Nevertheless, achieving full circularity requires additional collaboration. We will return to this idea in Sect. 5.3. Other barriers relate to governmental issues (e.g., the lack of standards), economic issues (e.g., the uncertainty regarding the proftability of circularity strategies), technological issues (e.g., design challenges in creating or maintaining durability), knowledge and skill issues (e.g., lack of skills), and management issues (e.g., lack of support from the top management) (Govindan & Hasanagic, 2018).

Currently, the focus of corporate eforts is centered on circular strategies involving reducing and recycling that combine environmental and economic benefts, particularly unilaterally, and it neglects the variety of circular strategies and an ecosystem approach (Barreiro-Gen & Lozano, 2020). For this reason, holistic implementation of circular strategies cannot be achieved solely through product design (Korhonen et al., 2018) and technological innovation (Suchek et al., 2021); it also requires stakeholder network (Evans et al., 2017) and learning (Bocken et al., 2018) perspectives. Tis also relates to the scope of the CE. While some perceive the CE as the operationalization for companies to implement sustainable development (Ghisellini et al., 2016; Murray et al., 2017), others perceive circularity as one archetype of sustainable business models (Allwood et al., 2012; Bocken et al., 2014). In a narrow sense, CE focuses on solutions that combine reduced environmental impact (resource efciency and waste reduction) with increased economic value (customer value and growth). However, focusing only on these two dimensions the ecology and the economy—fails to address all three dimensions of sustainability (Pieroni et al., 2019). Terefore, circular business models, being narrowly understood, might not always be sustainable. For CE to contribute to sustainable development, it must broaden its scope "from closed-loop recycling and short-term economic gains, towards a transformed economy that organises access to resources to maintain or enhance social well-being and environmental quality" (Velenturf & Purnell, 2021, p. 1453).

# **5.3 Expert Conversation on Sustainability in Product Development**

# **Why Is It Important for BMW to Concentrate on Sustainability?**

*Zipse*: Perhaps the most important ingredient in purchasing behavior is brand. We at BMW say that having a strong brand is very important—a brand with an innovative image, because the world very much links innovation with sustainability. We are convinced that most solutions for sustainable products come from innovation. Terefore, the impact of sustainability on brand image is the most important impact we have here.

*Wartzack*: What does this mean for product design?

*Zipse*: In addition to regulatory compliance, consumer behavior, and societal changes, it is about creating a brand image that remains attractive to current and future customers. We make sustainability one of the most important aspects of our product development because when it comes to products, you have to live up to what you say. You can talk a lot about what you want to achieve in the future or what your goals are. In product development, however, you have to put your words into action. People can experience your product, they can touch it, and of course they can drive it. People believe in your product strategy when they can see it.

#### **What Is Your Customer Group?**


#### **What Are the Biggest Changes in Material Choice in Product Design, from a Conservative Focus on Cost and Functionality to a More Sustainability-Driven Approach?**


*Wartzack*: With natural materials, you need reliable data. Why don't engineers like to design with wood, for example? Because it is very difcult to predict the behavior of wood, given its irregularities, such as knotholes. Tat is why design with natural materials is very difcult for the designer. But we have to diferentiate. On the one hand, there are parts of the car in the main crash load path, where I would still use steel and aluminum, which are very recyclable. On the other hand, there are other parts, such as door systems or bulkheads, where biomaterials and biocomposites could be used. You can fnd concept cars in which the entire outer shell body is made of biocomposite materials. Te key is to use the right material in the right place.

# **How Important Is Weight Reduction for Car Design?**


# **How Can We Get More Natural Materials into Cars?**


consumes less energy over its life cycle. However, we are increasingly seeing a secondary efect: if the car is lighter, less material is needed for its manufacture. If you look at the world today, it is all about resource efciency. Today, humanity extracts around 100 billion tons of raw materials from the planet each year.

*Wartzack*: Tat seems to be the inconvenient truth.


#### **What Would You Say Makes a Particular Material Sustainable?**


are very important for Apple products. Even older people buy iPhones despite the availability of mobile phones designed specifcally for that age group. It's all about how much people love using your product. Tey like the design, the interaction, and the experience. Customers want to feel emotional about their products, and the integration of sustainable materials, the implementation of sustainable production, and sustainable supply chains are key arguments.


# **How Eco-Friendly Will a BMW Look in the Future?**


#### **How Have Recycling Approaches Evolved Over the Past Decades?**


*Wartzack*: Why is that?


#### **How to Best Balance Between Natural Materials and Recyclability?**


that, at the end of the day, the wine has a better carbon footprint than the wine from Italy, which comes in small batches. Accuracy of data is key, so a lot of data analysis needs to be conducted to precisely measure and compare life cycles. Te peak of recyclability and LCA approaches was in the 1990s, but today, we have completely new possibilities with AI. Tis is an emerging area of research.

*Zipse*: Wine is a very good example. Normally, one would assume that the Italian wine—or even better, a German wine—would have the best LCA because of the short transport distance. But this evidence is too simple. You learn from your mistakes: Ten years ago, we would have assumed that ride hailing was clearly good for the climate in cities.

*Wartzack*: And it is not?


# **Is It Worth Paying More for Natural Materials?**

*Zipse*: We would if the entire life cycle efect was taken into account. At the end of the day, our cost base has to be in line with customer behavior. Customers today are extremely cost sensitive, even in the premium segment. Tis is not a one-size-fts-all answer, but if the market and consumers recognized a full life cycle efect, we would consider spending more money on it. We did this with carbon fber, which was mainly produced using renewable energy sources in the i3. Of course, the carbon fber structure was much more expensive than a normal steel structure. But we are open to making these bets for the future if we see evidence that it will have an overall life cycle efect that is acknowledged.

#### **Is the Strategy Applied to the i3 Involving a Whole Structure Made from Carbon Fiber a Role Model for the Future?**

*Zipse*: I think we have learned a lot about the use of carbon fber. It is not necessarily scalable to very high volumes. Electromobility is now going to be a mass market segment, so an entire structure made of carbon fber does not seem appropriate. However, you can see in the iX that the side frame is made from carbon fber. We use it in certain structures where it makes sense, but there will not be another full carbon-fber car body in the next few years. Product development is really one of our core competencies, and there are many exciting technological developments in the pipeline for the future.

# **5.4 The Future of Sustainable Product Development**

As discussed in the Expert Discussion (Sect. 5.3), design for circularity is increasingly becoming the lynchpin of product development. While this paradigm shift ofers many new opportunities for life cycle optimization, customer satisfaction, new business opportunities and recycling, it also presents challenges that need to be addressed. Tis section highlights two key aspects of the future of product development in the light of design for circularity.

#### **5.4.1 Digital Technologies as Enablers of CE**

Digital technologies, such as the Internet of Tings (IoT), Big Data, Artifcial Intelligence (AI), and Blockchain, can enable manufacturing companies to transition toward a CE (Chauhan et al., 2022). Te support of digital technologies allows the collection of product lifetime information and the prediction of product condition and health status. Tis fosters the optimization and automation of business processes, thereby enabling diferent circular strategies (Alcayaga et al., 2019). Research suggests that the joint adoption of circular strategies and digital technologies increases frm performance (Lopes de Sousa Jabbour et al., 2022). For example, the digital product passport ofers the possibility of storing static product information, such as material composition, disassembly instructions, and end-of-life handling, on a chip or sensor (Lopes de Sousa Jabbour et al., 2018). In addition, the passport can collect dynamic data, such as the product's history and alterations, during the product's life cycle (Hansen et al., 2020). Tus, a digital product passport enables the sharing of relevant data to facilitate diferent circular strategies, such as *recycling*.

In addition, regarding the second cluster of Fig. 5.1 (see Sect. 5.2), addressing lifetime extension, digital technologies can help to relocate used products and ofer possibilities for the establishment of marketplaces in which former owners and second-hand buyers can trade products to enable the *reuse* strategy (Liu et al., 2022). Similarly, tracking and tracing product location and quality facilitates the harvesting of functioning modules or parts (Hansen et al., 2020). Regarding the *repair* strategy, the IoT and AI enable conditionbased maintenance, which assesses the physical condition of a machine or product and deduces maintenance actions to prevent failure based on the derived insights (Ingemarsdotter et al., 2021). Tis has the potential to increase product performance, uptime, and lifespan (Alcayaga et al., 2019). Furthermore, algorithms and robotics can support efcient disassembly, depending on the quality of the product and its parts, for *refurbishing* or *remanufacturing* (Hansen et al., 2020; Kerin & Pham, 2020). Lastly, just as in the case of the reuse strategy, marketplaces based on platform technologies can enable *repurposing* by transforming wastes or byproducts created in one industry into production inputs for other industries (Liu et al., 2022).

Additionally, to *reduce* the environmental impact of products at the product development stage, designers can use simulation methods. Similarly, modeling tools can help to better understand the sustainability impacts of decisions made in product design (e.g., the choice of the material composition for the product) by testing multiple interactions between the environmental, social, and economic dimensions (Jaghbeer et al., 2017). In addition, other technologies, such as the digital twin, ofer the opportunity to predict and control carbon emissions by optimizing the manufacturing process (C. Zhang & Ji, 2019). Regarding *rethinking* and *refusing* strategies, ofering new services and altering user behavior is key. Digital technologies can help to change user behavior, such as supporting an efcient and sustainable use to foster longevity, by monitoring and incentivizing user behavior (Bressanelli et al., 2018) and enabling operational and behavioral support (Ries et al., 2023).

#### **5.4.2 Better Together: The Need for Broadening Perspectives**

As mentioned earlier, extending the implementation of circular strategies cannot rely only on product design (Korhonen et al., 2018) and technological innovation (Suchek et al., 2021). Instead, a shift is needed in doing business to expand impact assessment and address the whole product life cycle, including end-of-life and social aspects (Farooque et al., 2019). Te organizational boundaries also need expansion to embrace stakeholder collaboration along the value chain (Evans et al., 2017).

Evaluation of the sustainability impact of circular business models requires analysis of a variety of efects and trade-ofs between and within lifecycle stages early on. First, rebound efects can cause detrimental sustainability efects (Kjaer et al., 2019). For example, circular strategies can lead to lower prices, less time consumption, or more accessible services that, in turn, increase demand, ultimately leading to an increase in resource consumption, waste, and emissions (Castro et al., 2022). Negative consumption-based shifts between life cycle stages (Kjaer et al., 2016) or trade-ofs within one or between diferent design elements (Ries et al., 2023) can also occur. For example, energy consumption might increase as maintenance processes are optimized based on digital technologies (Halstenberg et al., 2019). Lastly, rebalancing efects might arise. Tese describe, for example, the activity of relocating bicycles with the help of vehicles and staf to compensate for asymmetric use patterns in product sharing (Bonilla-Alicea et al., 2020). Tus, a thorough understanding of the life cycle is necessary, complemented with an understanding of underlying assumptions regarding behavior, for any analysis of the sustainability efects produced by circular business models (Niero et al., 2021).

Tis understanding must consider both the environmental impact and the social impact, thereby extending the scope of CE to embrace all sustainability dimensions. While sufcient indicators are available for social life cycle analysis, most studies have focused on indicators related to health and safety at the workplace of focal companies while neglecting value chain actors and consumers (Kühnen & Hahn, 2017). Digital technologies can help to consider the social dimension of sustainability in these assessments. For example, a combination of digital technologies can help to analyze product stewardship (i.e., health and safety efects on the user) (Ries et al., 2023). Examples are injury prevention (Moreno et al., 2017), breakdown avoidance (Lim et al., 2018), safe driving (Haftor & Climent, 2021), and healthy living (Valencia et al., 2015). Blockchain technology can further increase the willingness of value chain actors to share confdential social data needed for these assessments (Rusch et al., 2022).

Tis aspect relates to the expansion of boundaries embracing collaboration. While the integration of stakeholders and coordination among partners in the business ecosystem become a crucial skill in the transition toward a CE (Santa-Maria et al., 2022), the development of ecosystems and value co-creation within them, based on connectivity and interactivity, poses a challenge for many companies (A. Q. Li et al., 2020). A business ecosystem for circularity comprises a set of actors that include producers, suppliers, service providers, end users, collectors, disassemblers, recyclers, policymakers, and members of civil society organizations who contribute to a collective outcome (Konietzko et al., 2020). Building this ecosystem requires that manufacturers engage with regulatory bodies to develop better circular strategies (Awan et al., 2021), but they must also interact with collectors, dismantlers, and recyclers to increase efciency and reduce recycling costs (Parida et al., 2019).

Product collectors, dismantling companies, and recyclers are crucial actors in a circular supply chain (Lüdeke-Freund et al., 2019). Feedback and circular involvement from the end-of-life phase to the product design phase of the OEM are important for comprehensive leveraging of circular potentials (Hansen & Revellio, 2020); however, the information fow usually ends with the user (Blömeke et al., 2020). Manufacturers, users, reverse logistic providers, dismantling companies, and recyclers can overcome these defcits by forming connections through smart devices and digital platforms, thereby increasing collection, dismantling, and recycling efciency (Liu et al., 2022). By facilitating collaboration and automation, digital technologies can improve product disassembly and recycling and contribute to economic feasibility (Blömeke et al., 2020). One example of this type of a new data ecosystem in the automotive industry is Catena-X, where diferent value chain actors are currently building a platform to enable the crucial information exchange on product history and the state of health of the vehicle and its components (Mügge et al., 2023). Implementing new technology advancements for an optimized data exchange might have the potential to support the formation and expansion of circular business ecosystems.

Establishing and tightening relationships can create a common understanding among diferent stakeholders and foster circular strategy implementation (Schöggl et al., 2020).

# **5.5 Conclusion**

Te CE addresses current challenges of resource scarcity, global warming, and economic volatility. To operationalize this abstract concept, the ten R-strategies of refusing, rethinking, reducing (smarter product use and manufacture), reusing, repairing, refurbishing, remanufacturing, repurposing (extend the lifespan of products and their parts), recycling, and recovering (useful application of materials) are widely recognized. Teir implementation has implications for design.

How does one approach design for circularity? We want to highlight fve takeaways from this chapter that invite further discussion:


dismantlers, and end-of-life vehicle recyclers. A new mindset is necessary that fosters openness to collaboration and lifecycle thinking.

Circular design, such as the use of recyclable or renewable materials and the development of new services to close resource loops, starts with product and service innovation, but it needs to embrace many diferent functions within a company and a variety of actors across organizational boundaries spanning an automotive ecosystem. Tis results from the need to shift organizational thinking from a product to a PSS, from a production to a lifecycle, and from an individual to a collaborative approach. Te next stage (Chap. 6) on the *Road to Net Zero* focuses on *Transforming Value Chains for Sustainability.*

# **References**


unleashing potentials. acatech/Circular Economy Initiative Deutschland/ SYSTEMIQ.


systems. Case: making water tourism more sustainable. *Journal of Cleaner Production, 114*, 257–268. https://doi.org/10.1016/j.jclepro.2015.05.075


**Open Access** Tis chapter is licensed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons license and indicate if changes were made.

Te images or other third party material in this chapter are included in the chapter's Creative Commons license, unless indicated otherwise in a credit line to the material. If material is not included in the chapter's Creative Commons license and your intended use is not permitted by statutory regulation or exceeds the permitted use, you will need to obtain permission directly from the copyright holder.

**6**

# **Transforming Value Chains for Sustainability Closing the Loop in the Age of Electromobility**

**Kai-Ingo Voigt, Lothar Czaja, and Oliver Zipse**

# **6.1 Introduction**

In the face of increasing global warming and extreme climatic conditions, 196 parties signed up to the Paris Agreement with the goal of limiting global warming to well below 2 °C compared with preindustrial levels, requiring netzero emissions by 2050 (United Nations Framework Convention on Climate Change, 2022). Te use of renewable energy and electromobility is essential for a transition to a carbon-free economy (Weimer et al., 2019). Current fossil-based road transport is the largest contributor to global warming within the transport sector, creating signifcant potential through the deployment of electric vehicles (Basia et al., 2021). Here, rechargeable lithium-ion batteries (also known as Li-ion batteries or LIBs) are currently the most favorable technological solution for the electric vehicle (EV) market (Weimer et al., 2019).

While EVs can ofer several sustainability benefts, creating new and transforming existing automotive value chains to enable this transition is a formidable task. On the Road to Net Zero outlined in this book, *Transforming Value Chains for Sustainability*, thus marks a critical step that connects the previous chapter (Chap. 5) and the following chapter (Chap. 7). Chapter 5

K.-I. Voigt (\*) • L. Czaja

FAU Erlangen-Nürnberg, Nuremberg, Germany e-mail: wiso-industry@fau.de

O. Zipse BMW AG, Munich, Germany introduced the general idea of the circular economy and its potential for *Creating Sustainable Products*. Chapter 6 now takes a deep dive into the EV battery value chains to review and discuss the complexity, potential, and challenges of what it means to strive to keep materials in a continuous cycle.

Since batteries and battery technologies are an essential part of modern electric vehicles, both the automotive value chain and the automotive battery industry must become a complex overall system in which the players' steps are interlocked and comprehensively regulated. At present, the Li-ion battery value chain still follows the approach of the traditional linear economy (Di Persio et al., 2020). In the context of meeting climate targets, the European Commission has also expressed the need for change in the battery industry. It commits to creating a competitive and sustainable battery value chain that adheres to circular economy principles, while developing high environmental and social standards. To achieve this, the battery production and recycling chains need to minimize their environmental footprint. Requirements for the safe and sustainable production, reuse, and recycling of batteries will play an essential role (Bielewski et al., 2021).

Te purpose of this chapter is to provide an in-depth look at how the automotive industry's transition to electromobility is leading to far-reaching implications for the EV battery value chain. Te chapter is divided into fve sections. Section 6.2 sets the scene with a brief review of resource scarcity as a relevant strategic background for the circular economy. Section 6.3 then takes a detailed look at the diferent steps of the EV battery value chain, but without focusing on circularity yet. Section 6.4 presents the expert conversation between Prof. Oliver Zipse, Chairman of the Board of Management of Bayerische Motoren Werke (BMW) AG, and Prof. Dr. Kai-Ingo Voigt, Chair of Industrial Management at FAU Erlangen-Nürnberg. Section 6.5 returns to the EV battery value chain with a circularity perspective and discusses the technology and value chain steps for closing the loop in the EV battery life cycle. After giving an outlook on the challenges of circular EV battery value chains in Sect. 6.6, the chapter concludes in Sect. 6.7 with key takeaways and the link to the following chapter (Chap. 7) on *Sustainability in Manufacturing.*

# **6.2 In the Age of Resource Scarcity**

Te EV market is moving from a predominantly policy-driven market to one where organic customers are the most signifcant factor. In many countries, supply is a greater barrier to adoption than demand (BloombergNEF, 2022). Based on the market size of electric mobility of 142 GWh in 2018, the battery market for EVs is expected to increase 16-fold in size by 2030, with a compound annual growth rate of 26.3% (World Economic Forum, 2019). Tese developments pose signifcant challenges to the industry, not only by covering material demand for vehicle production but also in proceeding with the vehicles after their end-of-life (EoL).

Regarding material demand, Germany (and thus the German industry, in particular) is almost entirely dependent on imports for fossil fuels, metallic raw materials, and many industrial minerals. Tere are many risk factors, ranging from political instability in some producing countries to strategic trade restrictions. In addition, companies are increasingly confronted with delivery difculties, supply bottlenecks, and the risk of delivery disruptions. Increasing demand for raw materials from the developing and emerging countries is also leading to stronger competition on the raw materials market. Tis applies, in particular, to raw materials that are required for new technologies in the automotive industry, electronics, or environmental technology felds. High prices, price fuctuations, and supply bottlenecks are burdening the German economy. Companies are forced to diversify their sources of supply, hedge price risks, and substitute raw materials that are becoming scarcer (DIHK, 2022).

With regard to the battery market, which is particularly relevant for electromobility, the global battery market can be divided into primary and secondary batteries, with a ratio of 1 to 3. Whereas, in primary batteries, the chemical reaction is not reversible and the battery is designed only for a single use, the chemical reaction in secondary batteries is reversible. Tis reversible chemical process allows secondary batteries to be repeatedly charged and discharged. With a market share of almost 50% each, lead-acid and Li-ion batteries shared the global battery market for secondary batteries in 2019 (Zhao et al., 2021). Te technical characteristics make Li-ion batteries particularly interesting for traction batteries in EVs. Although the basic principle is always the same, countless diferent Li-ion battery solutions are available, depending on the chemical composition and design.

Te production of automotive Li-ion batteries uses many materials not previously required in the automotive sector. Moreover, battery use leads to six times higher mineral demand for electric vehicles than for conventional vehicles (International Energy Agency, 2018). Tis poses challenges for the industry regarding the continuous material supply of precious metals and rising demand (International Energy Agency, 2018). While some materials can be delivered without any problems, the so-called critical resources sometimes cause great difculties.

Given the current trends and developments within battery chemistry, cobalt, graphite, lithium, manganese, and nickel are seen as critical battery raw materials and will be briefy presented (Bobba et al., 2020). Within the critical resources, cobalt, lithium, and graphite are assigned a further increased risk compared with nickel and manganese (Vereinigung der Bayerischen Wirtschaft, 2021).

Cobalt is mainly extracted as a by-product of copper and nickel mining. Te Democratic Republic of Congo remains the leading source of mined cobalt as of 2021, accounting for 70% of global cobalt production. Subsequent processing occurs mainly in China, which has over 90% of the global refning and processing capacity (U.S. Geological Survey, 2022). Tis strong focus on mining and processing in two countries leads to a high risk for the supply chain of cobalt (International Energy Agency, 2021). China is the leading consumer of cobalt, with a strong focus of 80% on the rechargeable battery industry. Tere is an increasing trend to reduce the cobalt content within the battery chemistry (U.S. Geological Survey, 2022).

Te security of the global lithium supply has recently become the highest priority of technology companies. Australia, Chile, and China account for 95% of the world production. Te supply of two types of resources can be distinguished: the brine-based lithium sources from Chile and China and the spodumene ore from Australia. Te type of resource also diferentiates the subsequent processing and refning. China dominates the market in terms of hard-rock mineral refning facilities for spodumene ore, with 45% of total refning capacity. In contrast, 32% of the refning capacity is located in Chile and 20% in Argentina, with a focus on refning lithium from brine operations (U.S. Geological Survey, 2022). In the supply area, no major issue for the battery supply chain is found in the short- and medium-term future (Huisman et al., 2020). Despite recent developments in sodium-ion batteries, no largescale material substitutes for lithium are expected in automotive batteries any time soon (U.S. Geological Survey, 2022).

Overall, 79% of the global graphite production is ensured by China, which accounts for one-quarter of the available amorphous graphite and threequarters of the fake graphite (U.S. Geological Survey, 2022). China also dominates the downstream processing of spherical graphite. Te graphite for Li-ion battery production has high requirements in terms of fake size and carbon content (Bobba et al., 2020). China therefore occupies a dominant position, and this strongly hinders any diversifcation of the supply chain. In addition to natural graphite, synthetic graphite powder and secondary synthetic graphite from machining graphite shapes have come increasingly to the fore (U.S. Geological Survey, 2022).

Indonesia, the United States, the Philippines, and Russia accounted for 75% of the world's nickel production in 2021 (U.S. Geological Survey, 2022). Li-ion batteries have high purity requirements for nickel and resort to nickel sulfate, which can be synthesized from Class 1 products with a purity of over 99.8% (International Energy Agency, 2021). Nickel already has a welldeveloped supply chain due to its versatile use in the past. Li-ion batteries comprise only a tiny part of the demand mix (International Energy Agency, 2018). Nevertheless, over the past 5 years, strong developments can be seen in the Asia/Pacifc region (International Energy Agency, 2021). Here, Indonesia and the Philippines account for 50.7% of the global supply.

South Africa, Gabon, and Australia ensure the supply of manganese, providing 71.5% of the world production. No substitute is expected in Li-ion battery technology (U.S. Geological Survey, 2022).

In summary, in the age of resource scarcity, the supply of raw materials for electromobility, which will become increasingly important in the future, can be assumed to pose major challenges for the automotive value chain and trigger major change processes. In addition, the automotive industry is confronted with another major challenge: Even if electromobility is just picking up speed at present, researchers expect a huge annual volume of old battery returns by 2040. Concepts and techniques for the sustainable use of old Li-ion batteries are therefore just as much in demand as the value chains that are adapted and modifed to meet these raw material challenges.

# **6.3 Value Chain Transformations**

Te automotive Li-ion batteries value chain spreads its process steps globally. Te mining of materials, the following processing, and the batteries' production are distributed worldwide depending on availability, expertise, and production costs. While procuring critical raw materials is mainly located in the southern hemisphere, the subsequent processing and production of the cells occur in Asia. Usually, the fnal assembly of the modules and the EV battery takes place at the original equipment manufacturer (OEM), concentrated in Asia, the European Union (EU), and the United States. Te single steps of the linear value chain can be divided into four phases: Te extraction and procurement of materials with subsequent processing describe the upstream (Phase 1). In the midstream (Phase 2), the individual cell components are manufactured and assembled into a battery cell. Te downstream (Phase 3) takes place at the OEM and includes the assembly of the battery cells into modules and packs, including their battery management system and auxiliary systems. Tis is followed by integrating the battery system into the electric vehicle. Te end-of-life (Phase 4) describes the fourth phase, consisting of the removal from the EV and the subsequent second life or recycling of the valuable materials (Ciulla et al., 2021; Lebedeva et al., 2017). Te frst steps, including material procurement, processing, and component and cell production, are cost-driven; therefore, they are subject to global competition. Subsequently, the focus lies on the application and the specifc customer requirements, which leads to a value orientation in the downstream area (Steen et al., 2017).

Te high demand for Li-ion batteries is refected noticeably in the upstream process step in the demand for raw materials. Te raw materials required for Li-ion batteries are further subdivided into their criticality based on expected demand, natural occurrence, and production capacities. As discussed above, the literature defnes cobalt, graphite, lithium, manganese, and nickel as critical materials. By nature, there is strong dependence on individual mineralrich countries and regions, which leads to cooperation with countries with diferent labor conditions and standards of human dignity (Ciulla et al., 2021).

Te extracted raw materials in their original form must be further processed and refned for use in production. Depending on the material, diferent purity and particle size requirements apply. Tese specifc requirements must be met in order to be able to produce cell components. In 2020, the majority of the global processing capacity was in China (52%) and Japan (31%), highlighting the strong dependence on the Asian region (Bobba et al., 2020).

Te subsequent midstream, starting with component production as the third step, is also dominated by China. Overall, 60% of manufacturing occurs in China, followed by Japan and Korea (Ciulla et al., 2021). Together, they cover around 85% of global component production, consisting of positive and negative electrodes, separators, electrolytes, and housing (Bobba et al., 2020). Te valuable production of the electrodes consists of the successful coating of the carrier foil and follows a six-step process (Heimes et al., 2018).

Cell production describes the assembly of the components and is the fourth step of value creation. Like the previous one, this step is also strongly dominated by the Asian market. To minimize this regional domination, companies like BMW Group have already made decisions to locate and develop battery cell production in Europe and North America. Te individual components are assembled into a battery cell representing the smallest unit. Te assembly, including fnal fnishing and testing, follows a seven-step process (Heimes et al., 2018). In general, the resulting production costs are divided into three phases: electrode production (39%), cell assembly (20%), and cell fnishing (41%) (Kuepper et al., 2018).

Te downstream is described by battery pack manufacturing and subsequent integration into the electric vehicle. Tis step takes place at the automotive OEM. For this purpose, several cells are combined to form modules, which are then bundled as a battery system. In addition to the modules, the battery system includes several mechanical and electrical components, such as housing, electronics, and a battery management system. Te downstream phase concludes with the fnal assembly of the battery in the vehicle.

After reaching the minimum battery capacity and its end-of-life, the battery is removed from the vehicle. Tis is followed by the disposal or recycling of valuable components. Due to the increasing importance of this step for the fulfllment of a closed loop, the linear recycling process chain will be discussed in more detail in the following section.

#### **6.3.1 Recycling of Lithium-Ion Batteries (LIBs)**

Te phases of the battery life cycle can mainly be divided into production, use, and recycling, including disposal (Fan et al., 2020). While the focus in the past was clearly on the frst two phases, the latter will become increasingly important as the signifcance and demand for Li-ion batteries grow. Te methods for dealing with LIBs are time-delayed due to the increase in battery demand; therefore, they must be established on an industrial scale. Te increasing demand for raw materials can also be better met by additional recycling (Fan et al., 2020). Nevertheless, the recycling of LIBs is an emerging feld that has not yet defned standardized and fnal processes (Neumann et al., 2022). Tis is also refected in the literature, as most publications and research activities deal with necessary substeps within the recycling chain, but hardly examine the holistic chain with its supporting processes. Te literature describes several approaches for future process steps concerning a holistic circular economy, but still shows considerable gaps between academic approaches and industrial reality (Neumann et al., 2022). Te circular economy challenge has been identifed as one of the pressing tasks and accelerating trends. Te basis for the circular economy is the linear process fow for the recycling of spent Li-ion batteries on an industrial level.

In general, the process can be divided into four phases: Te reverse logistics of the EV packs (Phase 1), the pretreatment of the EV packs to break them into enriched materials (Phase 2), the metallurgical treatment by recycling methods to preserve the specifc materials (Phase 3), and the reintroduction of the pure materials into the market (Phase 4). Te aim is to extract the valuable materials from the used batteries and return them to production. Current approaches focus mainly on recycling valuable and scarce materials mostly found in cathodes, such as cobalt, lithium, and nickel (Hua et al., 2020). In the future, the recycling of anodes and electrolytes should be included to increase the economic feasibility and sustainability of battery recycling. Te necessary process steps are mostly academic approaches and far from industrial reality, but have gained increasing attention in recent years (Neumann et al., 2022). Tese developments are fundamental to ultimately speaking of recycling all parts and a holistic circular economy (Neumann et al., 2022).

# **6.3.2 Reverse Logistics (Phase 1)**

Te foundation for a successful and holistic recycling strategy is laid by reverse logistics (Voigt & Tiell, 2004), which is responsible for taking the used batteries out of circulation and transporting them to the subsequent recycling steps. Te substeps of reverse logistics can be divided into material collection and sorting and transport and handling.

At present, no uniform and large-scale processes exist for collecting and sorting spent EV batteries. Standards and specifcations are missing to enable the holistic recycling of all spent batteries in the future (Steward et al., 2019). In theory, the necessary steps are known and follow a simple sequence. Te end-of-life vehicles must be collected as soon as the vehicles are taken out of service at the dealership or scrap yard. Tis is followed by transport to the disassembly plant, where they might be stored for some time. Here, the batteries are separated from the vehicle and collected (Steward et al., 2019). Tere are two main challenges at this stage: the heterogeneity in size and design and the diference in battery chemistries. To prevent a mix of materials and to increase the recycling efciency of the subsequent metallurgical treatment, attention must be paid to ensure uniform battery chemistries. Te lack of labels with essential information on the characteristics and composition of the batteries makes uniform sorting difcult, indicating that mandatory labeling will be essential in the future (Neumann et al., 2022).

Te dismantled batteries are then transported to the recycling facilities for further processing. Due to the inherent dangers of Li-ion batteries, special safety requirements are imposed for further transport and handling. Te hazards result from the high energy density and the toxic and fammable substances inside the battery. Te greatest danger comes from thermal runaway, which is a cascade of uncontrolled exothermic reactions. Tis can be triggered by external heat sources, external and internal short circuits, or mechanical stresses and can lead to the ignition of the entire battery. For this reason, severe restrictions are placed on shipping quantities, safe packaging, size specifcations, labeling requirements, and regulations for safety testing. Tese signifcantly afect transport costs, determined primarily by transport distance, transport volumes, capacity utilization, and additional safety precautions. On average, transport costs account for 41% of the total recycling costs and greatly infuence the proftability of recycling. Tey also harm the balance sheet in terms of emissions, especially carbon dioxide (CO2) emissions (Neumann et al., 2022).

#### **6.3.3 Pretreatment (Phase 2)**

Te second phase comprises the pretreatment, intended to prepare the batteries for the material extraction process. Valuable components and materials must be separated and enriched based on diferences in various physical properties (shape, density, and magnetic properties). Tus, higher recovery rates, lower energy consumption, fewer safety risks, and fewer environmental threats can be achieved. Te pretreatment consists of a series of chemical and physical operations within the individual steps of discharging, disassembly, crushing, and separation (Hua et al., 2020).

Te residual energy present in the spent batteries can lead to short circuits, resulting in explosions during the pretreatment process. Te tiniest sparks can cause the ignition of volatile organic compounds during the crushing process that can lead to a fre. To counteract this danger to man and machine, batteries are frst discharged and thereby stabilized (Neumann et al., 2022). Various industrial methods are available for discharging, with the brine method (salt-water-based baths) and the ohmic discharge method (controlled discharging via external circuits) being the most commonly used (Hua et al., 2020).

Te second step in pretreatment is the disassembly of the EV packs. Here, the battery system is disassembled from the pack level to the module and cell levels. Te aim is to achieve an initial rough presorting of the components to maximize economic benefts. First, the battery framework is opened, and the electrical connections between the components are cut. Te mechanical connections between the components and the base are then released, and the electronic parts are removed. Finally, the spent battery cells are exposed. Te lack of standards for the design and confguration of battery packs complicates any machine automation of the disassembly steps. Widely varying designs and confgurations still require a high level of human involvement and manual handling (Hua et al., 2020).

Crushing is a further refnement of batteries at the cell level. In coarse shredding or fne crushing, the granularity of the materials is reduced for the subsequent processing steps. To reduce pollution and the risk of thermal runaway, the battery shredding or crushing processes can be carried out in an inert gas environment using carbon dioxide. Alternatively, crushing can be performed in a lithium brine to neutralize the electrolyte and avoid gas emissions (Hua et al., 2020).

Te crushed materials, the so-called "black mass," are then separated in a multistage separation process. Te main focus is the separation of the metallic particles (casing, copper, and aluminum foil) from the black mass. Te latter consists of a mix of the active materials from the anode and cathode. It is the most valuable battery cell component and is to be maximally recovered in pretreatment (Neumann et al., 2022). Te materials can be separated based on their diferences in physical properties, such as size, density, ferromagnetism, and hydrophobicity. Tis is done in a multistage physical separation process consisting of multiple crushing and sieving steps, magnetic separation, and/or fotation (Hua et al., 2020).

# **6.3.4 Metallurgical Treatment (Phase 3)**

Te third phase of the recycling process describes the metallurgical treatment of the previously obtained enriched materials. For this purpose, the following metallurgical technologies are available, difering signifcantly in their design, properties, and degree of maturity: hydrometallurgy, pyrometallurgy, a mixture of both, biohydrometallurgy (bioleaching), and direct recycling (Hua et al., 2020). While the frst two have already reached a sufcient level of technological maturity for industrial implementation, the latter two are still at the laboratory stage and have only demonstrated their technological feasibility under research conditions (Neumann et al., 2022).

Pyrometallurgical technology is based on the thermal treatment of spent batteries. A high-temperature furnace reduces the valuable metal oxides to a mixed alloy (Neumann et al., 2022). Tis process can be divided into three steps: preheating, plastic burning, and valuable metal reduction. Te frst two steps describe the thermal treatment, which frst evaporates the electrolyte, thereby reducing the risk of explosion. Tis is followed by the burning of organic materials (e.g., plastics). Finally, at a temperature of 800–1000 °C, the materials are smelted and reduced to an alloy of valuable materials, such as copper, iron, cobalt, and nickel. Te resulting slag contains lithium, aluminum, and calcium (Hua et al., 2020). Extensive pretreatment is not necessary. Nevertheless, the output alloy must be posttreated and the materials preserved. Also, the slag should receive posttreatment to avoid discarding resources. Te method is not economically interesting for batteries that do not contain cobalt and nickel (e.g., lithium ferrophosphate [LFP] batteries).

Hydrometallurgical technology is based on the leaching and extraction of valuable metals from spent LIBs using water-based solutions. Te pretreated battery materials undergo a multistage process, with the following key procedures: leaching, precipitation, and solvent extraction (Hua et al., 2020). First, black mass is leached using mineral acids. Te resulting leachate is precipitated of impurities to subsequently recover the valuable materials in a multistep solvent extraction process. By varying the pH of the acid used, manganese, cobalt, and nickel can be extracted successively in the form of salt mixtures. Te fnal precipitation enables the lithium to be obtained as a salt mixture (Neumann et al., 2022).

Te techniques of pyrometallurgy and hydrometallurgy can be combined to increase the recycling yield. Te alloy resulting from pyrometallurgical treatments is refned using a hydrometallurgical process to isolate the metals. Tis allows a higher recovery rate for nickel and cobalt and increases the process robustness and fexibility to chemistry changes. However, this method does not solve the problem of slag, which remains unused as a waste product (Roland Berger, 2022).

Biohydrometallurgy uses microorganisms to recover valuable materials from spent batteries and ofers a cost-efcient and eco-friendly alternative to the abovementioned approaches. As one of the biohydrometallurgical processes, bioleaching has gained a further attention in LIB recycling (Roy et al., 2021). Chemolithotrophic and acidophilic bacteria serve as the processing microorganisms. Iron ions and sulfur are energy sources used by these microorganisms to produce metabolites in the leaching medium (Moazzam et al., 2021). Te microorganisms' activity produces organic and inorganic acids. Tese are applied to leach metals by converting the insoluble solids into soluble and extractable forms (Moazzam et al., 2021). Tey can dissolve several metals, such as cobalt, copper, lithium, manganese, and nickel. Nevertheless, this technology is still conducted only on a laboratory scale and is very timeconsuming due to the time for cultivation of the microorganisms. After 10–15 days, the metals can be extracted with 80–95% efciency (Roy et al., 2021).

Direct recycling recovers materials without afecting their original compound structure and decomposition (Hua et al., 2020). Te fundamental idea lies in the refreshment and reactivation of active materials with still functional morphology. Te capacity and properties lost through cycling can be restored, rather than breaking down active materials into their components for subsequent resynthesis. Te methods used for this are still under research. Tey include thermal reactivation methods, hydrothermal relithiation, electrochemical methods for relithiation, short high-voltage pulses, and exposure to high lithium moieties, including re-sintering (Neumann et al., 2022). Te active cathode material is recovered from the black mass without smelting or leaching (Roland Berger, 2022). Tus, the number of processing steps required to resynthesize the cathode materials can be reduced, lowering the environmental impact. It is currently the only process that enables economically viable LFP and lithium manganese oxide (LMO) cathode recycling. When selecting input materials, care must be taken to ensure uniform cathode chemistry. Like bioleaching, direct recycling is still limited to the laboratory scale, but it holds great potential for the future (Neumann et al., 2022).

# **6.3.5 Reintroduction into the Market (Phase 4)**

After successfully extracting and recycling the pure materials, the raw materials can be put back into circulation in the fourth phase. Tey are again available as raw materials for new batteries and other products and must be distributed to the respective manufacturers.

With CO2 emissions arising from both the manufacturing and recycling of batteries, the decarbonization of the automotive industry poses a crosscompany challenge, as the vast majority of the ecological footprint is created in the supply chain. Tis creates the need to share emissions-related data across the value chain. Several digital solutions are currently emerging to address this need. With the ecosystem-based SiGreen approach for exchanging emissions data, Siemens developed a solution for efciently querying, calculating, and passing on information about the real CO2 footprint of products. Tis allows emission data to be exchanged along the supply chain and combined with the emission data from one's own value chain to create a real CO2 footprint for products. Tis not only increases transparency in the automotive value chain, but also opens up new opportunities for making it more sustainable (Siemens, 2021). In the automotive industry, Catena-X emerges as a digital industrial data platform that allows OEMs and suppliers to share life-cycle-oriented data along the entire value chain (Catena-X, 2023). On the Road to Net Zero, Catena-X aims to establish standardized measurements to document real carbon data that refect the real processes and location factors over the supply chain. In addition, Catena-X seeks to facilitate the data needed to improve traceability, efciency, and circularity across value chain steps. As sustainability requires a transformation of entire industries, such digital ecosystems and new forms of data sharing will be crucial for fostering the value chains of the future.

# **6.4 Expert Conversation on Sustainability in the Supply Chain**

#### **Is Supply Chain Transparency the Key to Sustainability?**


*Voigt*: What role does the value chain play in this regard?

*Zipse*: Over 85% of our added value in the car is not manufactured or sometimes not even designed by us. It is designed by the supply chain and our partners. However, at the end of the day, you are responsible for aggregating all these supply chain components into a fnal product. So, there is a specifc responsibility for any car manufacturer to be knowledgeable about the status of the supply chain, specifcally when we talk about emissions, most prominently CO2, and that you are aware of whom you give contracts. It is for this reason that we have implemented very close rules of conduct for all our supply chain members and rules about the transparency of what they are doing.

#### **How to Establish Standards in a Contract Culture?**


#### *Voigt*: Could you give an example?


#### **How Can Suppliers Contribute?**


### **How Can Autonomous Driving Improve Sustainability?**


Do you have any scientifc evidence of how autonomous driving could improve sustainability?

*Voigt*: I have been working in the automotive industry academically for 20 years, but I have not conducted any research on this topic myself, nor have I read any market study on how car-buyers are reacting to this. In all the discussions about electromobility and autonomous driving, the customer is barely mentioned. Tat is surprising, because a company has to produce products and services for customers, and the customer's desire should be the starting point.

# **How Can Customer Needs Be Integrated in the Process?**


process. It is not a contradiction. Quite the opposite: If you neglect the customer, you are not even contributing.


#### **Can Industry 4.0 Contribute to a More Sustainable Future?**


research. In our factories, Industry 4.0 is the standard, which has a big impact on sustainability issues. Now, we are going to the next step: Te Internet of companies—let's call it Industry 5.0.

*Voigt*: I see the link to our value chain discussion…


# **6.5 Closing the Loop**

Coming back to the manufacturing and recycling of batteries, the linear value chain for Li-ion batteries is currently the dominant approach in the industry (Di Persio et al., 2020). Recent developments regarding future demand and supply, sustainability, and compliance with climate targets require closing the linear chain to a closed loop. Tus, the circular economy approach will have to be pursued, which is inevitable for future sustainable development. Te circular economy is an economic system based on avoiding waste and promoting the continuous use of resources rather than sourcing new materials in the current linear economy. It focuses on waste management and aspects related to material reduction, reuse, recycling, and responsible manufacturing. It aims to develop new industries and jobs, reduce emissions, and increase efciency in the use of natural resources.

In the transportation and power sectors, the circular economy is seen as a signifcant near-term driver of compliance with the Paris Agreement on climate change. Te closed-loop approach would allow for a 30% reduction in CO2 emissions from these sectors (Zhao et al., 2021). In the near future, a large number of Li-ion batteries will be retired and become part of the waste stream (Hua et al., 2020). To maximize the value of end-of-life batteries, they will be reused in various forms, such as remanufacturing and repurposing into new systems. In the fnal step, the valuable materials are to be extracted through recycling in order to be returned to the initial steps of the cycle (Hua et al., 2020).

Te stages of the battery life cycle in a circular economy, and thus the sequence of steps in the value chain, consist of two interrelated cycles. First, the primary life cycle includes all steps up to the use of the battery in the vehicle and ends with recycling. In addition, the secondary life cycle will become increasingly important, which describes the reuse of the used EV batteries in new applications, the so-called "second life" (Gernant et al., 2022). Tis combination is intended to achieve the maximum yield from the materials and eforts expended, thereby reducing the relative resource consumption and emissions over the life cycle and maximizing the return on carbon investment incurred to produce it (Niese et al., 2020). Regardless of whether a battery has only completed the frst life cycle or also through the second life cycle, the recycling of the batteries and thus the extraction of valuable materials close the circle.

Te primary life cycle is initially characterized by the substeps already known from the linear value chain. Strictly speaking, the closed loop does not allow the process steps to be divided into upstream, midstream, and downstream anymore. However, the respective substeps are still refected in the circular economy. Te upstream consists of the extraction and processing of raw materials. Tis is followed in the midstream by the production of the individual cell components and their subsequent completion as fnished cells. Finally, in the downstream, the battery pack is manufactured by the OEM and then installed in the EV. Te completion of vehicle production marks the beginning of the frst utilization phase of the battery in the EV. Te total range of an EV is reported to be between 120,000 km and 240,000 km, with most manufacturers guaranteeing a range of around 160,000 km and a lifetime of 8 years (Hua et al., 2020). As usage increases and capacity losses occur, LIBs can no longer meet performance and energy requirements, such as driving range and acceleration (Hua et al., 2020). Tis is refected in the battery's state of health, which typically reaches end-of-life at a capacity loss of 20–30%. Even during initial use, degraded or defective battery modules can be replaced with end-of-life modules as part of reconditioning and repair to further utilize the capacity of the remaining modules. Due to homogeneous battery aging resulting from more mature technologies and battery management systems, reconditioning will be limited to only 5% of end-of-life batteries in the long term (Zhao et al., 2021). Based on the analysis and the characteristics of the battery, it must be decided whether the battery will be part of the secondary life cycle and thus of the second use or whether it will be directly part of the recycling step.

Te secondary life cycle and its applications focus on the value of repurposing a partially used battery, as opposed to subsequent recycling, which focuses on the value of the battery's metal content (Niese et al., 2020). Te sequence of steps follows battery screening, battery disassembly and reassembly, and the subsequent application of repurposed batteries (Shahjalal et al., 2022). Te technical feasibility of the battery chemistry and the associated economic viability of the second life are fundamental to the secondary life cycle. Tis consideration takes place after the frst life cycle in reverse logistics and analytics as part of a precise suitability test. Methods such as electrochemical impedance spectroscopy, current interruption analysis, and capacity analysis are used (Kehl et al., 2021). Te predominant use of used Li-ion batteries is in energy storage systems (ESSs). In addition, they can be used to refurbish and repair defective frst-life battery modules. Repurposed Li-ion batteries will become increasingly important in sectors such as microgrids, smart grids, renewable energy, and area and frequency regulation. Specifcally, they can be used in stationary grid applications, of-grid stationary applications, and mobile applications (Shahjalal et al., 2022). In particular, the increasing integration of renewable energies into the energy grid will boost the demand for stationary energy storage systems. Tey allow balancing between the irregularity of renewable energy generation with demand deviations and act as a bufer for grid stabilization (Shahjalal et al., 2022). Te requirements for batteries in EVs difer from those in ESS, especially regarding cycling stability, power density, cooling, shock resistance, and safety. Te requirements for ESS are signifcantly lower and easier to meet than those for EVs. Factors such as power density and shock resistance are less relevant than before. Diferences can also be seen in the individual battery chemistries. Low-cost cell chemistries, in particular, seem to be more attractive for the second life, as they are technically more feasible and less interesting for direct recycling due to less expensive cell materials. LFPs, for example, have higher cycle stability, intrinsic safety, and lifetime than high-end technologies. Te end-of-life in the second use occurs when a health state of 40–50% is reached. Subsequently, the materials should be extracted in the fnal recycling step and added to the beginning of the cycle (Gernant et al., 2022).

# **6.6 Outlook and Further Challenges**

Te challenges of the future automotive battery value chain are seen in the overarching issues of the battery industry as well as in further subcategories. With the introduction of autonomous driving, the classic value creation system in the automotive industry is seen in danger and signifcant disruptions are expected, especially in customer–OEM business relationships and ownership models. Nonautomotive players, such as Google, Waymo, Huawei, and Apple, are seen as disruption drivers. In general, (technical) challenges are expected in all areas of the automotive battery value chain. Tese are complemented by the importance of economies of scale, whose infuence will increase sharply in the future. To be economically attractive, any future technology will require a high degree of standardization on the material side and in the cell format (shape and design). In particular, the need for standardization will increase as soon as it is considered from a total cost of ownership model perspective. In addition, the cost of battery technology in general will remain a challenge. Tis is primarily due to manufacturing, production processes, and raw materials. Te need to balance user requirements with the cost of battery technology will be another challenge. To reach the mass market and mainstream electrifcation, many technology points still need to be improved to reduce costs. Apart from the battery, the development of the electrical infrastructure, including charging speed, is also seen as a key challenge for successful implementation.

Several experts see the circular economy of battery technology as a key challenge. Tis starts with the visibility of the batteries. Within the EU, the car manufacturers are legally responsible for the battery once it has reached its end-of-life (EoL) stage. To ensure this, they should always know where their EoL battery is located. Tis overview is signifcantly complicated in today's widespread classic car ownership model and is still an unsolved problem. Te development of a comprehensive data infrastructure with information about the vehicle's current position in the value chain is becoming inevitable, in view of the increasing number of vehicles. To date, the foundations for this are lacking; the frst step in this direction is the introduction of standardized battery passports and a digitally networked value chain that includes all relevant suppliers and partners. Furthermore, a closed material cycle for batteries and the necessary materials is perhaps the most crucial point for establishing the value chain in the long term. Procuring the necessary materials for market ramp-up should not cause any problems currently. However, in the long term, beyond 2050, the system is unlikely to work without an almost 100% closedloop economy. For this, the cycle must be closed, and interfaces must be established. Te question of who will be responsible for the division, one player for the entire cycle or diferent players, still needs to be clarifed and increases the relevance of the intersections. Some experts address the degree of circularity and emphasize its importance in meeting carbon intensity and environmental impact expectations. Many projections for reducing the carbon footprint of battery production are based on the use of recycled materials. To meet the expected levels, experts see strong political action as imperative.

Te material chain describes another challenge. Te supply of resources and raw materials is a weak point and represents a major challenge in Europe, which requires a more sovereign positioning concerning its dependence. As a solution, a more sustainable design of the established supply chains and eforts to enter into partnerships with other countries are discussed. Even if the dependency cannot be resolved, Europe should try to adapt the value chain conditions to its sustainability vision and ideals. It should promote a sustainable value chain design around the extraction and processing of resources and pay attention to working and social conditions. Furthermore, changes in battery technologies are expected to have a signifcant impact on the material chain. Tese will lead to a change in material requirements, for example, with the decreasing demand for cobalt, the increasing demand for manganese, and the trend toward LFP chemistry. Te shift to solid-state technology and metallic anodes will also overturn the current situation.

Expert opinions diverge in the area of capacity-building. While some experts believe that there is no problem in scaling up and meeting battery demand as long as sufcient raw materials are available, others see substantial challenges in building up production capacity and the associated need for materials. Tey also mention the current strategic planning confict on capacity building. Decisions to build battery manufacturing and recycling capacity, in terms of location and battery chemistries, and to cooperate with energy storage system operators, must be made now so that sufcient capacity will be available a decade from now. Tis leads to the problem that many strategic decisions must be made based under uncertainty.

Te production processes represent a further challenge. Te robustness of all raw material and material processing synthesis processes is considered to be sufciently high, as experience from the fast-moving consumer goods sector can be passed on here. Te situation is diferent for innovations in the process steps, where uncertainties arise for the next-generation batteries regarding how raw materials or precursors for syntheses can be produced on a large scale. Te same applies to the production of cell components and cells, for which there are no empirical values from large-scale industrial handling, highlighting the lack of technology and the need for technology development. On the production side, the processing of the solid-state electrolyte and the metallic anodes are seen as major issues. While some subprocesses of the next-generation batteries, such as dry pressing, are already at a medium level of maturity on an industrial scale, many other steps, especially in assembly, still pose signifcant challenges. Moreover, experts see signifcant cost reduction potential in establishing a dry coating process, which is still a complex process with high labor and energy costs. In the future, they see water-based processes with no solvents.

And as if that was not enough, experts see reverse logistics as another challenge. Te difculty of returning the EoL batteries is evident in the entire organization of the logistics chain for second life and recycling. It requires holistic cooperation between established and new players who have not yet worked together to this extent. Te complexity is also refected in the logistics costs. In the EU, batteries are classifed as hazardous goods, requiring many obligations, certifcates, and agreements for their transport. Due to the diferent implementation of regulations in the EU countries, country-specifc adaptation and verifcation of the transport are required. Tis makes the transportation of batteries a slow and an expensive process. Even further challenges are seen in the collection of EoL batteries. Although the visibility of automotive batteries at the end-of-life is higher than for batteries from consumer goods, the diferent possibilities for second-life applications make highly efcient and high-quality recycling of critical materials still challenging. A clear separation of battery chemistries is necessary to ensure high quality and clean recycling. Te problem of classifcation of EoL batteries is still unresolved. Tis requires information from the OEMs, which is currently difcult to obtain.

Te fnal challenge lies in recycling and the revision of current recycling processes. Many difculties and unresolved issues are currently seen here, with a clear gap between recyclers and producers. Te current recycling processes are seen as inefcient and misrepresented. Recyclers often simply shred batteries and dispose of the so-called black mass in landflls, with no recovery and processing of raw materials. However, even companies that do recover raw materials use processes that call for further improvements. Te established recycling processes are not the most efcient because they require a great deal of energy and cost to break everything down. What is needed instead is the development of gentler recycling methods. Te problem currently lies in the small scales and the heterogeneity of cell chemistries. A process can only be properly optimized when the defned cell chemistries with expected materials are available. Another threat lies in the increasing popularity of LFP batteries. Due to the excellent availability of materials and their low cost, these batteries are becoming increasingly popular for nonpremium vehicles. At the end of their service life, in 10 to 15 years, many LFP batteries will be available that no one wants to recycle due to their lack of valuable materials and economic calculations. Companies and governments are not attacking the issue of LFP recycling. It is up to the government to implement regulatory policies to incentivize the recycling of LFPs.

# **6.7 Conclusion**

Te transition to a carbon-free economy is essential to limit global warming, and using renewable energy and electromobility is critical for achieving this. In the automotive industry, however, the transition to EVs shifts carbon footprint considerations upstream. Understanding, managing, and innovating the value chains of the future are therefore key on the Road to Net Zero.

How can sustainable value chains for the future be developed?—We would like to highlight fve takeaways from this chapter that invite further discussion:


5. Te consistent further development of battery storage technologies can make a further decisive contribution to counteracting the prevailing scarcity of resources and will signifcantly infuence the design of future sustainable supply chains.

On the Road to Net Zero, value chains thus play a pivotal role. Despite the importance of the upstream value chain, however, the core activities of industrial OEMs still lie in their own manufacturing processes. Tis is where the various components of complex supply networks are assembled into valuable products. Moreover, manufacturing is where companies have the greatest degree of control and can directly address their environmental footprint. For this reason, the following chapter (Chap. 7) now looks at *Sustainability in Manufacturing*.

# **References**


from https://www.lek.com/insights/ei/charged-demand-brings-challengesbattery-value-chain


**Open Access** Tis chapter is licensed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons license and indicate if changes were made.

Te images or other third party material in this chapter are included in the chapter's Creative Commons license, unless indicated otherwise in a credit line to the material. If material is not included in the chapter's Creative Commons license and your intended use is not permitted by statutory regulation or exceeds the permitted use, you will need to obtain permission directly from the copyright holder.

# **7**

# **Sustainability in Manufacturing Transforming Envisioning the Factory of the Future**

**Nico Hanenkamp and Oliver Zipse**

# **7.1 Introduction**

Sustainable production has been the focus of researchers and practitioners for more than two decades. In the beginning, the research largely addressed aspects such as increasing resource efciency or avoiding hazardous materials in isolation; however, a common understanding exists between academia and industry that sustainability covers a broad range of economic, ecological, and social aspects. Tis approach is also refected in the 12th goal of the sustainable development goals (SDG), which is "responsible production and consumption" (UN General Assembly, 2015). Today, the scarcity of material or human resources and increasing environmental and social regulations mean that manufacturing companies must not only address individual aspects of sustainability, but they must also develop an overall strategy and concept for their implementation. Tis chapter examines how companies can implement this ambition within their own existing manufacturing processes.

As discussed in the previous two chapters, achieving the goal of responsible production requires a new, circular approach to product design (Chap. 5) that has far-reaching implications for sustainable value chains (Chap. 6). Before

O. Zipse BMW AG, Munich, Germany

N. Hanenkamp (\*)

FAU Erlangen-Nürnberg, Fürth, Germany e-mail: nico.hanenkamp@fau.de

the next chapter (Chap. 8) discusses the technological disruptions that can drive the transition to climate-friendly mobility, this chapter looks at *Sustainability in Manufacturing* as a critical step in this transition journey. While the design of products and value networks is vital, it is through the manufacturing process itself that the involved companies can directly modify their material, energy, social, and environmental footprints.

Te purpose of this chapter is to discuss the contributions, tools, and challenges of using sustainable manufacturing to advance the goal of responsible production. Te chapter is divided into three parts. Section 7.2 begins with a brief overview of the origin and defnition of sustainable manufacturing and then launches an explanation of the three dimensions of sustainability and their implications for manufacturing. Te presentation of three use cases illustrates how sustainability is managed at the operational level. Finally, future research perspectives regarding energy use, manufacturing technologies, and circular processes are discussed. Section 7.3 presents the expert conversation between Prof. Oliver Zipse, Chairman of the Board of Management of Bayerische Motoren Werke (BMW) AG, and Prof. Dr.-Ing. Hanenkamp, Institute of Resource and Energy Efcient Production Machines at FAU Erlangen-Nürnberg. Section 7.4 shifts the focus to the sustainable factory of the future, and the chapter concludes in Sect. 7.5 with a short summary and a link to Chap. 8 on *Te Power of Technological Innovation.*

# **7.2 The Three Dimensions of Sustainable Production**

Even after almost three decades of research and practical implementation, no common defnition exists for sustainable manufacturing (Moldavska & Welo, 2017). However, a consensus has been reached that sustainable manufacturing must cover the three dimensions of economic, ecological, and social aspects (Von Hauf & Jörg, 2017). Although the lack of an abstract defnition may seem unimportant at frst glance, researchers claim that its absence creates challenges when attempting to take sustainability concepts from theory to practice in the production environment and on the shop foor. Whether sustainable manufacturing is an environmental initiative, a systematic process, a paradigm, or a balance between the dimensions also remains in question. Since the 1990s, a variety of defnitions have emerged, but these have served to create more confusion than clarifcation. Te U.S. Department of Commerce defned sustainable manufacturing in 2008 as "the creation of manufactured products that use processes that minimize environmental impacts, conserve energy and natural resources, are safe for employees, communities, and consumers, and are economically sound" (cited in Haapala et al., 2013, p. 041013–2). Since then, research and practice have either referred directly to this defnition or adopted similar terms.

Te ecological dimension is directly impacted by manufacturing due to the use of (non)renewable resources and the release of emissions into the environment. While the use of renewable resources must not exceed the rate of regeneration, nonrenewable resources should only be used if the possibility of substituting them exists in the long term. From the point of view of an individual company, the economic dimension means reducing the life cycle costs of equipment and manufacturing costs. Finally, the social dimension addresses the needs of employees and society in the manufacturing environment and supply chain. It covers both the health and safety requirements within the production and targets equality among employees with diverse backgrounds while also addressing social aspects within the supply chain (human rights, working conditions, etc.). In the past, many companies prioritized economic and environmental aspects in their sustainability strategies; however, the upcoming demographic change to an aging population in developed countries, which limits the availability of human labor, is now forcing the manufacturing sector to put more emphasis on social aspects (Yuan et al., 2012). Finally, research has shown that the dimensions of sustainability are strongly interlinked, so the full potential of sustainable manufacturing can only be realized by consistently adopting a three-dimensional (3D) approach (Stark et al., 2014). Upcoming regulations, such as the European Sustainability Reporting Standards (ESRS), with their defned structure of reporting elements and key performance indicators (KPIs), can guide practitioners during implementation (European Financial Reporting Advisory Group, 2022). Te combination of ecological, economic, and social aspects simultaneously increases a company's competitiveness, as refected in improved business performance for companies with a consistent three-dimensional approach to sustainable manufacturing.

Manufacturing companies have always striven to improve their operational performance and have developed appropriate principles and management systems, such as lean management, green manufacturing, or Six Sigma. Tese mature systems already contribute to sustainability in production; however, practices such as lean management alone are insufcient to address all sustainability aspects (Hartini & Ciptomulyonob, 2015). One reason is that the diferent types of waste only partially address sustainability aspects and do not necessarily focus on a life cycle perspective. Terefore, the challenge from an implementation point of view is to integrate diferent concepts and management systems, each with a specifc focus and expertise, to provide overall sustainability to manufacturing.

Te typical research objects tackled with regard to sustainable manufacturing include technologies, the product life cycle from a holistic perspective, value-added networks, and the global manufacturing impact. For each group of research objects, the three dimensions need to be addressed equally.

# **7.2.1 Practical Perspectives on Sustainable Manufacturing**

Te following section illustrates the successful implementation of sustainable manufacturing by comparing *three use cases* from BMW's iFACTORY, each with an equal focus on each of the three dimensions but covering the diferent groups of research objects. With the iFACTORY, BMW addresses the three pillars—LEAN, GREEN, and DIGITAL—thereby setting the direction for the transformation of manufacturing expertise throughout the entire production network (see BMW AG, 2022). Tis means:


Te frst use case shows that incorporating innovative circular materials and systems helps to conserve resources and creates ergonomic benefts for associates. To conserve even more resources, the BMW Group has implemented various projects in packaging logistics. Tese aim to reduce carbon dioxide (CO2) emissions in cooperation with suppliers and to implement the principles of circular economy to the greatest extent possible. European plants are increasingly using recycled materials for packaging. In 2022, new contracts for reusable packaging in logistics specifed almost double the quota of recycled material, increasing from approximately 20% to over 35%. CO2 emissions are also being reduced through the use of alternative sustainable materials, less single-use packaging, lightweight packaging, and reduced transport volumes. Te BMW Group plans and monitors the efects of individual measures via a CO2 calculator for packaging.

A second example of innovative production processes with positive reductions in energy and water consumption is the so-called dry scrubber. In a major step toward greater sustainability, paint shops no longer wash away excess paint particles with wet scrubbing but instead are switching to a system of dry separation. In the spray booth, any overspray that does not land on the car body is now collected using limestone powder rather than water, thereby considerably reducing water consumption. Another major advantage is that, unlike wet scrubbing, dry separation can be carried out in up to 90% recirculated air. Tis means that only 10%, rather than 100%, of the air has to be brought up to the required temperature and humidity, thereby saving vast amounts of energy. Te limestone powder also does not need to be processed and disposed of, unlike contaminated water. Instead, it can be returned to the material cycle—for use in the cement industry, for example.

Te third use case pays in directly to all three dimensions of sustainable production. A 3D human simulation introduces a virtual model of a human into a virtual production environment. It uses a combination of connected planning data to simulate the complete production and assembly process in 3D. Trough this, valuable information can be gathered by simple means, such as planned time analysis, ergonomics assessments, workplace optimization, and validation of planning. Tis enables optimization of process engineering, the conditions for production workers, and process maturity right at the start of production.

#### **7.2.2 Research Perspectives on Sustainable Manufacturing**

Sustainable manufacturing ofers a broad spectrum of research opportunities. Due to the interdisciplinary character of sustainability studies, research on the social, economic, and ecological dimensions requires diferent research competencies. Because of this complexity, this section focuses primarily on the engineering perspectives involving energy, circular processes, and manufacturing technologies and strategies.

With regard to *energy* in the context of sustainable manufacturing, four main research perspectives can be identifed. Improving energy efciency has long been a major focus of research and practice in the past. In addition to energy efciency (i.e., the relationship between the value created and the energy used; DIN, 2011), energy fexibility requires consideration in the future (Popp, 2020). Energy fexibility describes the ability of a factory or a process to adapt to a volatile energy supply with no negative efects on productivity, quality, or delivery service (VDI, 2020). Overall, 16 fexibility measures have been identifed that can be assigned to the factory, production, or process levels. From a research perspective, manufacturing processes, operations management practices, and digitalization technologies all need to evolve to address both energy fexibility and efciency.

Te second perspective involves the substitution of fossil energy sources with renewable energy sources and technologies within a factory. Currently, a strong trend is evident toward the electrifcation of industrial processes (Wei et al., 2019). With the decreasing price level of solar panels and increasing battery storage capacity, the integration of volatile energy sources to operate industrial processes with a continuous demand is becoming both feasible and advantageous. Although industrial processes cover a wide range of temperatures, electric heating systems, high-temperature heat pumps, or solar thermal technologies can easily generate lower temperatures up to 140 °C.

Te third perspective focuses on the systematic change observed across the entire energy supply chain for electricity, from generation to consumption. Decentralized energy generation using photovoltaic systems can now partially replace the traditional external energy supply generated by large power plants and transported over long distances. Tese approaches can help reduce costs and increase energy resilience.

Finally, production systems and factories based on direct current represent a major new area of research. Tese systems allow an easier integration of renewable energy sources, such as photovoltaics, while also eliminating the need for frequency inverters that lead to efciency losses, such as harmonics, and enabling an easier recuperation of electrical energy (Sauer, 2020). Tis broad scope of the entire system of energy supply, transport, and consumption reveals tremendous improvement potential for energy efciency, fexibility, and substitution.

With regard to *circular processes*, the second area of research in sustainable manufacturing places a strong emphasis on material fows and digitalization. Te linear manufacturing approach of "take–make–use–dispose" not only exceeds the waste-carrying capacity of the earth, but has signifcantly increased the rate of resource extraction in the recent past. In the EU-28, the manufacturing sector generated 10.3% of all waste, making it the third largest contributor after construction and mining (Rashid et al., 2020). Decoupling resource consumption and waste generation from economic growth will require the application of circular manufacturing. Te aim of conventional circular or closed-loop systems is to minimize energy and resource inputs, maximize the value generated, and reduce waste and emissions (Nasr & Turston, 2006). Closing the loop between output and (re)input can be achieved through reuse, remanufacturing, or recycling. In many cases, this approach is limited because the present-day processes and products were not intentionally designed for closed-loop systems, and the efort to implement circularity exceeds the potential benefts.

According to Rashid et al. (2020) and in line with the circular economy defnition of the Ellen MacArthur Foundation (2013), a circular manufacturing system is "a system that is designed intentionally for closing the loop of components or products, preferably in their original form, through multiple life cycles" (Rashid et al., 2020, p. 355). Circular manufacturing can operate at the macro-level (e.g., region and smart city), the meso-level (e.g., industrial parks and factory), or the micro-level (e.g., products and processes) (Urbinati et al., 2020). Te micro-level is characterized by the shortest loops and thus has the greatest potential environmental benefts. Based on the original 3R concept (reduce, reuse, and recycle), the 6R framework for implementing circular manufacturing systems, which covers the entire product life cycle (reduce, reuse, recycle, recover, redesign, and remanufacture), represents the state of the art for research and practice (Jawahir & Bradley, 2016).

Te frst R (reduce) refers to the reduction of resource usage in the premanufacturing phase, the reduction of energy and material consumption in the manufacturing phase, and the minimization of emissions in the use phase. Te second R (reuse) refers to the multiple life cycles of the original product or its components after each end of life (EOL). Te third R (recycle) converts material that would normally be considered waste into new material and process input. To gather the product after the use phase, the fourth R (recover) has the task of recovering the products after their EOL. Te ffth R (redesign) incorporates products or components from previous life cycles into the next design concept, while the fnal R (remanufacture) aims to restore used products to their original state. Te 6R system combines traditional methods or tools, such as those for energy efciency, with innovative remanufacturing processes and facilitates stepwise implementation (Brunoe et al., 2019).

Although circular manufacturing ofers tremendous potential for sustainability, its implementation is often hindered by heterogeneous barriers. Because diferent stakeholders are involved, typically including at least suppliers, the manufacturer, users, and remanufacturing experts, the sharing of data and information is a major challenge. Digital twins of material fows can be used to provide and manage complex and heterogeneous data in discrete manufacturing between them (Acerbi et al., 2022). As an alternative to hierarchical data models, blockchain technology has been implemented to share data among diferent stakeholders (Govindan, 2022). In doing so, these data models describe the relationships between processes and material fows, reveal optimization potential for circular manufacturing, and deliver consistent and trustworthy data. Tus, in addition to the 6R methodology, the sharing of data and information is considered a prerequisite for implementing circular manufacturing.

Finally, with regard to sustainability in operations, *manufacturing technologies and strategies* represent a third area of research. On the one hand, innovative processes, such as additive manufacturing (AM) or digitalization technologies, have a strong impact on well-established process chains. On the other hand, further development is required to bring innovative technologies to similar quality levels and process capabilities or to scale them up for manufacturing in batch sizes of single products and high-volume production. On the technological side, additive manufacturing (AM) is a primary area of research. For production scenarios with high complexity and low volumes, AM has already demonstrated competitiveness compared with subtractive or formative technologies (Pereira et al., 2019). Due to the reduction in resource consumption and waste generation, AM has a strong positive impact on sustainability. Te main challenge for future AM processes and machines is their integration into complete supply chains that meet the requirements of high complexity and large volumes. Other technological challenges arise during the production of electric cars, particularly battery production, or the production of components for hydrogen applications. Both of these examples require innovative, isolated process steps, as well as completely new entire production systems and machines; consequently, low quality levels with high fuctuations are a major concern and have a negative impact on overall equipment efectiveness (OEE) (Schnell & Reinhart, 2016). Finally, process chains for innovative applications or AM will not replace traditional technologies. Further potential for improvement lies in the adoption of hybrid manufacturing approaches, such as confguring the most suitable manufacturing technology for a best practice process chain or even combining technologies with the machine tool (Merklein et al., 2016).

Digitalization and the use of artifcial intelligence ofer future research perspectives regarding sustainability. At present, Industry 4.0 approaches have been used primarily to address the environmental dimension, but researchers have already outlined research agendas to address the social and economic dimensions in a holistic approach (Machado et al., 2020; Stock & Seliger, 2016). Digitalization techniques, such as the Internet-of-things (IoT) or cloud manufacturing, represent technological tools that must be adopted to pursue sustainability objectives. Artifcial intelligence (AI) can be used to manage the complexity of sustainability-related data (e.g., with big data analytics approaches). In any case, digitalization and AI require access to reliable data at the process level.

Manufacturing strategies are an additional area of research. Due to the crossdimensional nature of sustainability, its strategy must be strongly linked to functional strategies, such as product or process development. Sustainable manufacturing involves technological aspects as well as methods and tools; therefore, a challenge for future research is to integrate well-established management processes, such as quality and supply chain management, and production systems, such as lean management, with sustainability approaches. Replacing existing processes and tools is not recommended; rather, these should be further developed by considering sustainability aspects (Pampanelli et al., 2014).

In summary, various aspects of future research on energy, circular processes, and manufacturing technologies have been highlighted, without claiming to be exhaustive. An important point to note is that intrinsically motivated employees drive the transformation to sustainable manufacturing. Tey use valid and realtime data in their decision-making to achieve specifc and individual sustainability goals. Terefore, in addition to the technical and organizational challenges described above, a suitable qualifcation concept is of particular importance. To achieve broad acceptance for the implementation of sustainable manufacturing, specifc training content and programs with theoretical and practical content must be developed for all hierarchical levels within a company.

# **7.3 Expert Conversation on Sustainability in Production**

#### **What Is Important in Managing Change Toward Sustainability?**


BMW, we coined a term to describe our desired culture. We call it "Be more BMW." Everyone at BMW knows what BMW should be: entrepreneurial, highly innovative, and building the best cars in the world—the ultimate driving machines. At the same time, however, this term stands for a sustainable and proft-oriented strategy. Tere are diverse requirements, but everyone at BMW knows that this is a solvable equation.

*Hanenkamp:* Sounds like a continuous journey.


After Kaizen and continuous improvement, what do you see in academia as the next step in optimization? Do you see anything that will dominate the next 20 years of production? Specifcally, sustainable manufacturing?

*Hanenkamp:* First, we need to integrate sustainability aspects into our existing processes and culture. Second, we need to open up to sustainability, as well as to digitalization, and improve our ability to create a digital twin of all production processes and steps. But many open questions remain. We have to fgure out how to do this systematically: how to collect data, structure it, make it accessible over time, and maintain it properly. Tis is our task for the future: to integrate the knowledge and experience that we have from several decades since the early days of Kaizen culture and quality management systems and mix it with digital opportunities. We need to address our processes, frst and foremost, without forgetting the corporate culture and mindset of our people.

#### **Is Recuperation a Promising Technology for Sustainable Energy Production Systems?**

*Zipse:* In our factories, we are used to running all our machinery and tools on alternating current (AC). Te iX runs on direct current (DC), which is why we can recuperate. When the car brakes, we recuperate the kinetic energy of the car. If you look at a factory, everything is moving, and, of course, everything needs to be accelerated and decelerated. If we had a direct current plant, we could use all that recuperating energy and put it back into the system. We've identifed this as an important area of research, and we are very close to some applications.

Is this something that could be a next step in a sustainable, energy-efcient production system?


direct current that could come from renewable energy systems, we see that in many manufacturing plants we have more distributed energy generation systems—thermal block-type power plants, renewable energy systems, etc.—which means that our supply varies over time. We also need to integrate storage systems. In the past, we spent a lot of time and efort trying to fnd a single stable operating point for the plant. Today, the challenge is to fnd several of them, because we have to constantly adapt to this fuctuating supply. Tis is a great opportunity for the future.

#### **What Potential Does System Coupling Hold?**


systems at the machine level—a lot of that has already been done. However, the bigger potential is the coupling of the technical building infrastructure with the shop foor.

#### **What Role Does AI Play?**


Before you can talk about AI, you have to talk about digitalization: You have to have data. It is not just the basis of AI applications, but it is needed to make any kind of fact-based decisions. Te challenge that comes with data is that once you invest in data collection and data gathering, you have to do it efciently. It does not make sense just to collect data, put it in a box, and then fgure out what to do with it. You have to allocate it to your specifc use cases and what you want to accomplish with it. Otherwise, you overengineer the data. You simply collect it, and you have to manage and store it for a long time. Tat takes time, money, and energy.

Based on data, we can build AI applications, using data for training. A wide range of AI systems are available—but we need to gain experience regarding which system to use in which application. We have to get over the perception of AI systems as a black-box thing that we do not understand: We throw data in and get data out. We need to have more experience in how to parameterize a neural network system and apply appropriate systems to diferent use cases.


tern recognition. Tis means that all the lighting that was extremely energyintensive could also be spared and energy saved.

Tat is the secondary efect of using AI. We should think not only about the application in a specifc algorithm or a neural network, but also about the secondary efects. AI allows you to be imperfect and much more fexible, which is really exciting potential, especially in the production environment.

### **How Difcult Is It to Get Buy-In for Change? What Role Do Cooperation and Transparency Play in Tis Process?**


a matter of collaboration: Who is willing to share that data? We have started to bring these three things together. We do a lot of contracting, but even better than contracting is cooperation.


### **What Role Do Smart Cities Play?**


ern city is a synergy of industrial and residential life. It is not the industry that is disappearing from the city. On the contrary, we have this factory here in Munich, and it is very much integrated into its community here, providing jobs and how people get here. We spend a lot on people, on public transport, on company bicycles, and so on.

Tis is my idea of a smart city: It must be intelligent in terms of providing the right kind of transportation for people, from bikes to cars to buses and public transport. It is a combination of all of that, and it has to have a government structure that is willing and ready to invest. Tis is because mobility, in particular, depends very much on where the intelligence of the individual mobility lies: Is it in the car, or is it in the city itself? In diferent parts of the world, really smart cities are developing in which all the intelligence is put into the infrastructure of the city. Ten, it does not have to be in the car. Smart cities are about combining individual mobility needs, the intelligence of the city's infrastructure city, and the reality of the people who live there.

# **7.4 The Sustainable Factory of the Future**

Increasing resource efciency and implementing sustainability are key challenges for industry in the future. In 2010, industrial production was responsible for more than 30% of global greenhouse gas emissions, which is only one environmental factor. Companies are therefore called upon to make a signifcant contribution to reducing their environmental impact. Te vision of sustainable production goes beyond the isolated ecological dimension and takes into account social responsibility, competitiveness, and environmental protection. Furthermore, positive interactions between the three dimensions lead to additional benefts for all stakeholders (Stark et al., 2014). Te implementation of sustainable production is currently driven by both economic incentives and regulatory requirements. Successes have already been achieved, such as increased energy efciency and the positive efects of introducing sustainability management systems.

On the one hand, the challenge is that no universal blueprint has been drawn for the transformation to sustainable manufacturing, so the journey must be planned, implemented, and tracked individually. On the other hand, the majority of manufacturing companies rely on experience to manage complex changes, such as the transformation toward a lean company or to implement Industry 4.0 principles and technologies. Despite these challenges, new technologies, such as artifcial intelligence, or accepted standards, such as the life cycle assessment (LCA) methodology, can be applied to improve environmental impacts. In most cases, the transformation must follow a brownfeld approach; that is, the existing equipment and infrastructure have to be upgraded and integrated into the new production system in combination with new production processes, such as additive manufacturing. In summary, this change is a complex transformation, the key principles of which are discussed in this article from an operations point of view. First, sustainable process and factory planning, as well as operations management, will be presented. Second, the contribution of digitalization and artifcial intelligence in an industrial context is considered. Tird, the impact of sustainable manufacturing standards and methods will be highlighted. Finally, the coupling of direct and indirect manufacturing systems and the integration of urban production in smart cities will be discussed.

# **7.4.1 Sustainable Manufacturing Processes along the Life Cycle**

Research and practice agree that sustainability aspects can only be addressed if improvements consider all phases of the product life cycle (i.e., the development phase, the manufacturing phase, the use phase, and the end-of-life phase). Interactions between the phases need to be considered (Liu et al., 2019). In the following section, challenges and opportunities along the design and manufacturing life cycle phases that impact sustainability will be discussed.

Te design of a manufacturing system is critical because changes in later stages can only be implemented with a substantial efort. Moreover, decisions have to be made under uncertainty and undefned boundary conditions. Te dimensioning of a production system, and especially its capacity, is closely related to its sustainability impact and must therefore be derived using a systematic process. For example, if the technological and production capacity after ramp-up signifcantly exceeds the current process demand, this efect leads to inefcient operating points in the manufacturing phase. In addition to sizing, the specifcation of the production equipment in terms of its process steps and manufacturing technology is of great importance. Value-adding steps must be optimized, while non-value-adding steps and process waste must be minimized. If we are to manage the sizing uncertainty and defne optimal processes, we must have reliable process data. However, collecting process data based on physical testing and design of experiments (DoE) is not only time-consuming; it is also often impossible to obtain because the manufacturing equipment is not yet available at this early stage. As digital twins and simulation technologies provide virtual representations of systems along the life cycle, they can also be used to model the dynamic behavior of the production system in terms of sustainability (Negria et al., 2017). Input factors, such as raw materials, consumables, and energy, and output factors, such as productivity or waste streams, can be determined based on varying operating conditions without performing physical tests. To minimize the implementation efort and to achieve high accuracy of digital twin modeling, most practitioners and researchers follow a systems engineering approach (i.e., the production system is broken down into smaller units for which reliable digital twins are developed based on existing data; Computer-Aided Design [CAD], Product Lifecycle Management [PLM], etc.). With increasing maturity and given the physical availability of manufacturing equipment and process design, congruence between digital twins and physical systems must be achieved. Finally, the increasing application of digital twins not only increases the efciency in advanced product quality processes (APQP) within a single company, but they can also be used to model interdependencies related to sustainability at the interorganizational level.

During the ramp-up and in series production, the focus must be on efciency. One key metric is overall equipment efectiveness (OEE), with its three components: loss of availability, loss of performance, and loss of quality (Focke & Steinbeck, 2018). Since losses of availability include all downtime of the manufacturing system, the indicator shows the percentage of a period that the system is in stable operation. Sustainability is negatively impacted because a high level of availability losses requires additional capacity reserves to meet the total demand, with a negative impact on space, and frequent interruptions to operations result in ramp-up losses of energy, personnel, and raw materials. Te second component of OEE is performance loss, which describes whether the production system is at its optimal operating point regarding energy consumption, material input and output, and personnel. Temporary or permanent deviations require additional production capacity. Finally, quality loss is the amount of scrap and rework that occurs in the process chain. Poor quality levels have a direct impact on sustainability because the initial raw material is not processed into fnished goods. Emissions, material consumption, etc. from the raw material generation phase have already been incurred but cannot be used to create products or added value. To incorporate sustainability aspects, a stronger focus is needed on inputs and outputs that have not been considered before, such as emissions and waste streams. Tese extensions to existing key performance indicators will provide reliable and consistent data for efective sustainability decision-making. Practice and research refect that modern shop foor management systems follow this approach and include sustainability metrics. Based on this information, anomalies from the defned operating points can be identifed, and appropriate countermeasures can be initiated on the shop foor (Cerdas et al., 2017).

For the production system design and manufacturing phases, efciency is the central objective. Industrial production processes transform material, energy, and other inputs into fnished goods, delivering added value as well as by-products, such as waste streams and energy losses. To minimize these byproducts, circular production processes must be developed and installed (Gupta et al., 2021). Te concept of the ultra-efcient factory relies on reuse of all types of waste and energy in two main energy and material recycling loops. In the frst loop, wasted energy and materials are fed directly back into the manufacturing phase. In the second loop, the product is returned to the supply chain at the end of its useful life. Tis minimizes downcycling of material (i.e., the use of material for lower performance applications). Tis means that sustainability is based on efcient product generation processes and on efcient recycling and remanufacturing concepts that must be designed into the manufacturing design phase.

### **7.4.2 Digitalization, Artifcial Intelligence, and IoT**

Digitization, Industry 4.0/IoT, and artifcial intelligence have signifcant potential to allow manufacturing companies to implement sustainability (Stock & Seliger, 2016). However, an important point to consider is that digitization is not an end in itself, and its implementation requires a systematic approach. A generic model is the manufacturing analytics approach with four levels: (1) visibility, (2) transparency, (3) forecasting ability, and (4) prescription. Tis approach has been developed for the systematic implementation of digitization technologies (Meister et al., 2019). It ranges from lower levels of digitalization, such as simple data collection, to the modeling of complex system behavior using artifcial intelligence. Although it is not primarily intended for the implementation of sustainability, it represents a systematic approach to the acquisition, handling, and management of data for specifc objectives. When applied to sustainability issues, this analytics approach can be used to better understand correlations, optimize processes, and anticipate and prevent negative impacts on the three dimensions of sustainability.

Te objective of frst-level visibility is to capture data from the shop foor. Accessing shop foor data is a hurdle because it either has to be accessed through a wide variety of diferent protocols (OPC Unifed Architecture [OPC UA], MTConnect, EuroMap77, etc.) or is not accessible at all. Since sustainability data are not always part of existing protocols, retroftting existing machines with Internet-of-things–compatible sensors is often necessary. Te result is that the aggregated data at each time step are stored on a common, often cloud-based platform. Te objective of transparency (2) is to systematically identify the root causes of specifc problems and deviations, such as the increased use of energy or material consumption. Individual and specifc KPIs, for example, for diferent functional units, can be extracted. Te forecasting ability (3) enables us to make projections of trends in the future and to proactively manage deviations. Tis ability can be used, for example, for the demandside management of production equipment and the ramp-down of lower priority processes and machines in the event of energy shortages or price increases. At the prescription level, courses of action are being proposed.

As described above, the analytics approach and the application of artifcial intelligence methods and tools are highly interdependent. AI algorithms require consistent data on a continuous basis, which is provided by the fourstage model (Weber et al., 2019). When this condition is met, AI methods can frst be applied to reduce the complexity of data lakes. For example, principal component analysis can be used to identify the primary drivers of sustainability improvement actions. In addition, black-box AI systems, such as neural networks, can be applied to speed up simulation runs of energy consumption under diferent or uncertain conditions.

#### **7.4.3 Application of Sustainability Standards**

Te development of methods and standards for sustainable production has long been a focus of research and practice. Te goal is to make visible the relationships between production, consumption, and disposal and to assess the impacts of economic activities. Life cycle assessment (LCA) has emerged as the most important and accepted method from a technical perspective (Hagen et al., 2020). It is embedded in the ISO 14000 series of environmental standards that address environmental management issues associated with production processes and services. Common to all sustainability standards is the breaking down of industrial value streams into process modules for which mass fows (raw materials and fuel inputs, products, by-products, and waste), energy inputs, and emissions to water, air, and soil are analyzed. While the data of Scopes 1 and 2 of DIN EN ISO 14064 can be collected internally, cooperation with suppliers is required to collect data for Scope 3 raw and operating material inputs. Scope 3 CO2 emissions are particularly relevant, as they can account for up to 50% of the total footprint (Gross & Hanenkamp, 2021). In practice, suppliers are under increasing pressure from their customers to provide data on CO2 emissions.

Environmental impact categories are assigned to the life cycle inventory analysis, and their quantifcation allows us to focus on prioritized environmental impacts. In practice, the application of sustainability standards with precise data requires a high level of technical efort due to its complexity, as well as extensive methodological knowledge and expertise. As a result, assessments are often conducted on a project-by-project basis and are static in nature, making them unsuitable for the operational optimization of production processes. A dynamization of the LCA (i.e., continuous generation with real-time data) can be used to derive precise measures for the operational optimization of the production processes on the shop foor (Cerdas et al., 2017). Finally, to reduce the burden on all stakeholders in the supply chain, the exchange of sustainability-related data based on trust and using reference data models is required.

# **7.4.4 System Coupling, Urban Production, and Smart Cities**

Te need for more efcient and sustainable operations necessitates that we do not develop and optimize production systems independently, but rather consider them as interconnected entities. In the circular concept, energy, material, and waste streams from one process must be considered for secondary use in other processes. Tis can only be achieved by coupling diferent entities of the manufacturing system. Te concept of system coupling allows the physical fow of materials between subsystems, the recuperation and use of wasted energy, such as electricity or heat, and the exchange of information, such as future demand or the current status. Te peripheral components within production systems, such as cooling devices, are typically operated using simple control strategies with few set points; consequently, energy demand peaks cannot be avoided. Heating, ventilation, and air-conditioning systems (HVAC) rely on more complex control strategies, but their control parameters are not adapted to upcoming heating or ventilation demands. Te prerequisite for system coupling within the factory is the exchange of data between manufacturing systems and technical building equipment. Tis allows for the identifcation of optimal operating points that lead to the adjusted control parameters of the subsystems.

Beyond the internal system coupling within the factory boundaries, the manufacturing site also interacts with the local urban environment. Historically, manufacturing and urban spaces have coexisted, and negative impacts have led to the location of factories on the outskirts of cities. Urbanization, as a megatrend, forces the development of new concepts, such as urban manufacturing or the integration of manufacturing in smart cities (Matt et al., 2020). By defnition, an urban factory is not only a factory that is simply physically located in an urban environment; it is one that strongly interacts with other urban entities regarding information, material, and energy fows and that relies on the local market and suppliers (Ijassi et al., 2022). In this way, urban production can contribute to the sustainable development goals (SDG) of afordable and clean energy (SDG 7), decent work and growth (SDG 8), industry innovation and infrastructure (SDG 9), sustainable cities (SDG 11), and responsible consumption and production (SDG 12) (Juraschek et al., 2018). Tus, negative impacts, such as emissions, arise, but positive contributions, such as the availability of jobs in urban production scenarios, also occur. Given the global trend of urbanization, smart cities will also play a central role in sustainability. Although the concept of a smart city has no common defnition in research and practice, it has a broader scope than manufacturing (Suvarna et al., 2020). It encompasses all entities within the city (including buildings, transportation, energy grids, health care, manufacturing, and commercial services) that need to be connected. Tis also means that material, information, energy, and people fows need to be considered and optimized in the context of the city ecosystem.

#### **7.4.5 Summary and Outlook**

Four diferent principles of the sustainable factory of the future were discussed in this chapter. First, the planning and operation of manufacturing processes with respect to sustainability were shown. While, in the planning phase, the dimensioning and specifcation of the production system are crucial, whereas, in the manufacturing phase, the focus has to be on efciency and abnormality management. In the future, this will require, for example, bringing sustainability aspects to the daily shop foor management level. Second, the availability of real-time process and manufacturing data is critical. Sustainability-related decisions are often highly complex and require a systematic approach to collecting, processing, and proactively applying manufacturing data. Tird, the factory of the future can be assessed for sustainability based on accepted standards. Compared with today's static nature of assessments, the assessments will need to be performed more frequently with minimal efort. Finally, the sustainable factory of the future is characterized by system coupling at multiple levels. Within the factory, production systems, peripheral components, and HVAC systems are physically and digitally connected and operated with global optima in mind. Beyond the physical boundaries of the factory, the exchange of material, information, and energy with the urban space must be considered to have a positive impact on sustainability. Given these directions, research and practice are challenged to develop methods and tools for implementing sustainable factories.

# **7.5 Conclusion**

Sustainability principles are widely accepted, but implementing them in manufacturing is a challenge. Te three dimensions of sustainability—the social, ecological, and economic aspects—must be equally considered, as innovation and research are essential for sustainability in operations. Successful companies have a clear vision of sustainable manufacturing processes, high digitalization, and the use of artifcial intelligence.

So, how can sustainability be integrated into manufacturing?—We would like to highlight fve takeaways from this chapter that invite further discussion:


the process chain. Similarly, circular processes for material fows should play a major role in industrial engineering.

On the Road to Net Zero, sustainable manufacturing provides companies with the most direct lever to drive decarbonization and other sustainability objectives in industrial value creation. Te ability to innovate manufacturing, however, is also crucial for introducing new technologies in the marketplace. In the automotive industry, disruptive technological transformation is needed to replace fossil-fuel combustion engines with drive-train technologies based on renewable energy. For this reason, Chap. 8 now looks at *Te Power of Technological Innovation.*

# **References**


**Open Access** Tis chapter is licensed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons license and indicate if changes were made.

Te images or other third party material in this chapter are included in the chapter's Creative Commons license, unless indicated otherwise in a credit line to the material. If material is not included in the chapter's Creative Commons license and your intended use is not permitted by statutory regulation or exceeds the permitted use, you will need to obtain permission directly from the copyright holder.

# **The Power of Technological Innovation Driving Sustainable Mobility**

**Jörg Franke, Peter Wasserscheid, Thorsten Ihne, Peter Lamp, Jürgen Guldner, and Oliver Zipse**

# **8.1 Introduction**

Te rapid decarbonization needed to meet the 1.5 °C target will require disruptive technological change. In general, there are strong interactions between technological innovation and increased sustainability. So, technological progress can be a key to increased sustainability. In parallel, a stronger focus on sustainability goals requires technological innovation. In this context, technological progress presents both opportunities and risks for many market participants. Emerging technologies are always associated with uncertainties from various sources, which means that their potential, likelihood of occurrence, and the timing are often unclear for a long time (Kapoor & Klueter, 2021). As a result, all relevant stakeholders in business, society, and politics are faced with major challenges.

Tis is especially true for the mobility transition that is currently taking place in almost all relevant markets in the context of climate change and environmental protection. On the Road to Net Zero, this chapter on *Te Power of Technological Innovation* addresses the management of uncertainty associated with emerging technologies in the mobility sector. At the heart

J. Franke (\*) • T. Ihne • P. Wasserscheid

FAU Erlangen-Nürnberg, Erlangen, Germany e-mail: joerg.franke@faps.fau.de

P. Lamp • J. Guldner • O. Zipse BMW AG, Munich, Germany

of this technological transformation is the drive system and its interaction with the associated energy ecosystem. Tis chapter thus complements the previous chapters on *Creating Sustainable Products* (Chap. 5), *Transforming Value Chains for Sustainability* (Chap. 6), and *Sustainability in Manufacturing* (Chap. 7) by broadening the perspective to include external factors such as infrastructure and energy systems. Tese aspects and technology are inextricably linked and can only be evaluated together in terms of carbon emissions and ecological footprint. In parallel, the economic balance must also be considered holistically, as this aspect is critical to the success of the transformation. Forecasts vary widely, ranging from scenarios in which fossil fuels continue to play a signifcant role globally, to scenarios dominated by e-mobility (Zapf et al., 2021).

Te purpose of this chapter is to discuss these corresponding factors in more detail. First, Sect. 8.2 presents the advantages and disadvantages of alternative drive systems. Tis is followed by an explanation of the motivation for the current technological transformation. Section 8.3 presents the expert conversation by Prof. Oliver Zipse, Chairman of the Board of Management of Bayerische Motoren Werke (BMW) AG, Dr. Peter Lamp, General Manager Battery Cell Technology at BMW, and Prof. Dr.-Ing. Jörg Franke, Institute for Factory Automation and Production Systems at FAU Erlangen-Nürnberg, on the future of drive technology from a business perspective. In Sect. 8.4, Prof. Oliver Zipse, Dr. Jürgen Guldner, General Program Manager Hydrogen Technology at BMW, and Prof. Dr. Peter Wasserscheid, Director of the Helmholtz Institute Erlangen-Nürnberg for Renewable Energy and Chair of Chemical Engineering I (Reaction Engineering) at FAU Erlangen-Nürnberg, engage in an expert conversation on the future opportunities of hydrogen as an alternative energy carrier for the automotive industry. Finally, Sect. 8.5 identifes future directions for research and practice to advance the market viability of alternative drivetrains. Te focus is set on the energy ecosystem as an enabler for future drive technologies. Te chapter concludes in Sect. 8.6 with a brief summary and a link to the concluding chapter (Chap. 9), *Te Road to Net Zero and Beyond*.

# **8.2 An Overview on Alternative Drive Systems**

Te European automotive industry is undergoing dynamic change (see Fig. 8.1). In the face of the climate catastrophe, emission limits are becoming increasingly stringent, fuel prices are rising, and individual mobility is being

**Fig. 8.1** Overview of the competitive environment in the automotive industry

hampered by regulations, competing mobility concepts, and conficting customer interests. While Western private passenger car markets tend to shrink, new competitors are emerging, especially from China (Kaul et al., 2019). Most importantly, new technologies are arising that are shaking up the automotive market, which has been fairly stable for decades. Autonomous driving promises completely new business models for passenger and freight mobility, software will increasingly dominate over mechanical functions, and, fnally, the internal combustion engine (ICE) will eventually be replaced by electric drive systems.

Te ICE was the foundation for the triumphant advance of individual mobility in the twentieth century: robust and reliable gasoline and diesel engines powered, at their peak, almost 100 million annually newly produced passenger cars and trucks, as well as tens of millions of motorcycles worldwide (European Environment Agency, 2019; Umweltbundesamt, 2022; Wang, 2021). Te enormously high energy density of fossil fuels allowed enormous ranges of up to 1000 km without stopping for refueling, while the persistently unrivaled low energy cost of oil and its seemingly unlimited availability provided the general public with continent-wide freedom of movement.

Over time, ICE-based drivetrains have evolved into highly complex engineering marvels, improving their energy efciency and signifcantly reducing their impact on air pollution and climate change. However, ICE-based road transport is still responsible for about approximately 20% of carbon dioxide (CO2) emissions, contributes to air pollution especially in large cities, burns the precious natural resource of fossil fuels, and perpetuates dependence on

**Fig. 8.2** Push and pull factors underpinning the success of electromobility (own illustration based on International Energy Agency (2022, 2023) and Reitz et al. (2020))

politically unstable or unreliable countries (see Fig. 8.2) (International Energy Agency, 2022, 2023; Reitz et al., 2020).

In this context, political regulations, such as the tightening of European emission limits (Euro 7) and the goal of climate neutrality by 2050 (European Green Deal), are increasingly weighing on the market environment. As ICEs have approached the asymptotic branch of their S-curve, where further improvements require disproportionate efort, and have little impact, many automotive manufacturers (OEMs) have already announced to stop the development of new ICEs.

Te electric motor is a comparable old propulsion technology. It is completely emission-free, has an unsurpassed efciency (~95%; the ICE is barely above 30% efciency), and therefore causes only about a tenth of the losses of internal combustion engines. It can use renewable energies directly and without great efort, and it does not waste valuable fossil resources. Te unrivaled characteristics of electric motors ofer a much wider speed range with consistently high torque, thereby eliminating the need for complex shifting transmissions (with up to ten gears) and providing a highly dynamic driving experience. Te control dynamics of electric drives, which are an order of magnitude faster, allow the vehicle to be steered longitudinally and laterally over wide ranges without braking, and kinetic energy can also be recuperated in the process (e.g., the BMW iX xDrive50 has a 208 kW maximum recuperation power) (Schwarzer, 2019). In addition, the power density of electric motors is signifcantly higher, their running smoothness is unparalleled due to the rotating drive, and their wear is negligible due to the contactless power transmission (Parizet et al., 2016; Specht, 2020). Based on the technical, ecological, and economic advantages summarized in Fig. 8.2, it is highly likely that at least the majority of land vehicles will be powered by electric drives at some point in the future.

Electric motors are compatible with a wide range of diferent drive confgurations: As a result, electromobility takes many forms, from battery electric vehicles to hybrid concepts and fuel cell applications. Battery electric vehicles (BEV) are increasingly gaining market share. BEVs incorporate a high-voltage battery, enabling electrifcation of auxiliary units, brake energy recuperation, and plug-in recharging at a wall outlet or charging stations. Te major remaining weakness of BEVs is their comparatively short range (currently about 400 to 700 km), as electrochemical batteries allow only about 5% of the gravimetric energy density of gasoline storage systems (0.5 versus 11.4 kWh/kg) (Sartbaeva et al., 2008; van Basshuysen & Schäfer, 2017). From a technical perspective, this disadvantage is exacerbated by the still considerable charging times (around 30 min), since even an electrical charging power of 250 kW corresponds to only about 1% of the power transfer during refueling. With the current state of technology (SoT), these immense diferences can only be partially compensated for by the signifcantly higher efciency of electric vehicles, which is a factor of three to four for a typical driving profle (e.g., for a WLTP1 cycle: the BMW i4 eDrive40 Gran Coupé [250 kW]: 16.8 kWh versus BMW M440d xDrive Coupé [250 kW]: 5.7 lDiesel/100 km, 55.9 kWh/100 km).

Battery technology is currently undergoing continuous development to address the range issue. Lithium-ion batteries are currently the automotive standard due to their robustness, high cycle stability, and a high energy density. Signifcant increases in energy density are currently being achieved, while costs are falling. While the price per kilowatt hour averaged 600 euros/kWh in 2010, it is expected to be approximately 83 euros/kWh in 2025. In addition to specifc energy density and costs, other aspects such as shorter charging times, longer lifetimes, improved temperature performance, and higher reliability are also in focus. Environmental compatibility and the supply of critical raw materials are also important aspects. Battery reuse and recycling are already being implemented, and the corresponding capacities are currently being greatly expanded (Blois, 2022). In parallel, alternative battery technologies are being researched such as solid-state batteries, which allow signifcantly

<sup>1</sup>Worldwide Harmonized Light Vehicles Test Procedure (WLTP): Standardized test cycle determined on test rigs under defned laboratory conditions and based on empirically determined real driving data from Asia, Europe, and the United States. Te WLTP cycle has been valid in the European Union (EU) since September 2017 (Verband der Automobilindustrie e.V. 2018).

higher specifc energy densities. BMW is also involved in the all-solid-statebattery (ASSB) technology.

Because of the range issue, hybrids are still relevant today. Hybrid vehicles have at least two diferent energy converters and two diferent energy storage systems, so they include both an ICE and an electric motor, as well as a fuel tank and a battery. Hybrid powertrains can be classifed according to the degree of hybridization and the energy fow. Development has started on micro-hybrid electric vehicles (MCHEVs), which enable a start–stop strategy, and mild-hybrid electric vehicles (MHEVs), in which an electric machine supports the ICE for load-point shifting. From an environmental and climate protection perspective, these measures are no longer sufcient. To eliminate local emissions and provide at least temporary zero-emission driving, the degree of hybridization must allow for full electric driving. Full-hybrid electric vehicles (FHEVs) allow all-electric driving over shorter distances, while providing good efciencies through load-point shifting and recuperation. However, the electric range and performance are limited. Plug-in hybrid electric vehicles (PHEVs) compensate for the disadvantages by allowing the traction battery to be recharged externally. Figure 8.3 provides an overview of the functionalities of diferent hybridization strategies.

Regardless of the degree of hybridization, the architectures difer. Te serial hybrid uses the ICE as a generator and is driven only by electric motors. Tis means that the ICE is constantly operating at an optimal operating point. Range extenders are a special form of serial hybrids in which a normally

**Fig. 8.3** Functionalities of different hybridization strategies (own illustration based on Doppelbauer (2020) and Tschöke et al. (2019))

switched of ICE charges the battery of otherwise all-electric vehicles when needed. Te parallel hybrid has a switchable mechanical connection between the ICE and the drive axle, so that either drive can be used for propulsion. Tese can be dimensioned smaller, accordingly. Mixed forms of serial and parallel hybrids are also available. Tese power-split hybrids use the power of the ICE for both propulsion and battery charging, resulting in high efciency over the entire load profle. Although hybrids, in general, have the potential to reduce both fuel consumption and emissions, their medium-term future on the European market seems questionable. Te main drawbacks are high system complexity, higher purchase and operating costs, increased vehicle weight, and limited installation space. At the same time, they do not permit completely emission-free operation.

Electric traction drives in automotive engineering exhibit a variety of designs and mounting positions. Regarding the installation position, completely new confgurations are possible, such as wheel hub motors. Allwheel-drive systems and torque vectoring are comparatively easy to implement using multiple motors. Functional integration can also be intensifed. Te spectrum ranges from a partial integration of motor and transmission to fully integrated systems including electric motor, gearbox, and power electronics. Te functional unit can even be supplemented with axle components to form a ready-to-install e-axis. Tis variance in available systems is visualized in Fig. 8.4.

Just as with internal combustion engines, diferent types of electric motors are relevant for automotive applications. Current commercial use focuses on induction motors, permanently excited synchronous motors, and externally excited synchronous motors. Induction motors have a simple design and are easy-to-manufacture. In automotive applications, squirrel-cage rotors are relevant, in which the stator feld induces a magnetic feld in integrated aluminum or copper bars in the rotor. As a result, the rotor follows the rotating

**Fig. 8.4** Overview of various forms of function integration of electric motors (illustration based on Schaeffer Technologies AG (2014, 2023) and ZF Friedrichshafen AG (2017; 2023))

magnetic feld in the stator with a delay. Disadvantages of this motor type are lower efciency and the reduced volumetric and gravimetric power density.

Permanently excited synchronous motors, also called permanent magnet synchronous motors, ofer the best efciency and gravimetric torque density, as well as favorable reliability and packaging characteristics. Te main reason for these characteristics is the absence of excitation windings in the rotor and the associated losses. However, the use of rare earth permanent magnets has signifcant drawbacks in terms of cost, environmental footprint, and supply chain risks. In this context, the establishment of recycling processes for rare earth permanent magnets is an important task for the future. Te permanent excited synchronous motor has been used in the BMW i3, for example.

Externally excited synchronous motors are based on a similar operating principle, but they use copper windings at the rotor instead of magnets for excitation. Tis results in slightly lower efciency and higher packaging requirements, but the fexible adaptation of the rotor magnetic feld allows good operating behavior. According to the current state of the art, the power supply to the rotor is often realized via slip rings, which are subject to wear. As a result, slip rings can have negative efects on lifetime and efciency. In its current ffth-generation drives, BMW uses an optimized system based on slip rings in which harmful dust contamination is retained by improved sealing. An alternative is ofered by inductive transmitters, which are currently gaining interest in the market (Fig. 8.5).

In addition to the types mentioned, the switched reluctance machine and the axial fux motor also show potential for use as traction motors. Te switched reluctance machine is currently the subject of increased research activity as an alternative to the permanently excited synchronous motor. It ofers high efciency without the use of rare earth elements, but the control of the motor is more complex. Axial fow machines are also of research interest because they ofer high power density in combination with a small packaging impact. Although permanent magnets are used, their quantity is reduced. Apart from these new motor types, there are trends toward higher operating voltages (800–1000 V), higher motor speeds, and optimized cooling concepts. Another challenge is the electrifcation of the medium- and heavy-duty segments.

As an alternative to diesel, gasoline, or batteries, hydrogen (H2) has a calorifc value of 33 kWh/kg and can be used as an energy storage medium. Te hydrogen can then be used by fuel cells or even internal combustion engines without producing CO2 emissions. While hydrogen combustion is expected to play a greater role in heavy-duty and of-highway applications, fuel cell electric vehicles (FCEVs) could be a complementary technology for

**Fig. 8.5** Series drivetrains based on different types of electric motors (illustration based on AUDI AG (2019), Dr. Ing. h.c. F. Porsche AG (2021), and BMW AG (2020))

zero-emission long-distance individual mobility. Tese vehicles include conventional electric drives in addition to the fuel cell stacks and storage systems. Range is less of an issue, since hydrogen can be fueled in 3–4 min. Hence, hydrogen vehicles combine "the best of both worlds": Tey ofer all the advantages of electric driving, such as instantaneous acceleration and a smooth, silent, and emission-free ride, combined with the convenience of the fast refueling associated with combustion engine vehicles. Together with its partner Toyota, BMW has many years of experience in the development of FCEVs and has recently launched its second generation of fuel cell systems in the BMW iX5 Hydrogen pilot feet (see Fig. 8.6).

A perceived drawback is the efciency of the hydrogen energy chain because of the conversion steps involved (see Fig. 8.7). First, hydrogen is generated from electricity by electrolysis, made transportable either in compressed form (e.g., for transport in retroftted natural gas pipelines), or cooled down until liquefaction, or in form of a liquid organic hydrogen carrier (LOHC), and fnally converted back to electricity by means of a fuel cell in the vehicle.

However, in addition to pure efciency, overall system aspects must be considered. Te comparison in Fig. 8.7 only takes into account the use phase. When considering the whole life cycle, starting with the mining of raw materials, the production of components and systems, the assembly of vehicles,

**Fig. 8.6** Powertrain of the BMW iX5 Hydrogen with fuel cell stack, electric motor, and two high-pressure hydrogen tanks (BMW AG 2022)

**Fig. 8.7** The effciency of different powertrain options (*BEV* Battery Electric Vehicle, *SoT* State of Technology, *FCEV* Fuel Cell Electric Vehicle) (own illustration based on European Federation for Transport and Environment (2017))

and fnally the recycling after the usage, the diference between BEVs and FCEVs is much smaller. In the case of energy generated entirely from renewable sources, conversion losses have no signifcant efect on the ecological balance.

Also, from an economic and overall energy system point of view, the location and timing of the production of renewable energy must be considered. Self-sufciency regarding emission-free energy will not be possible in many developed countries, so that they will continue to be dependent on energy imports. Here, hydrogen as a regeneratively produced, chemical energy carrier can make a signifcant contribution to decarbonization. For example, ideal regions for the production of solar or wind energy are often far away from main industrial areas, requiring hydrogen as an energy carrier for the transport of energy, as electric powerlines have their limitations, especially for long distances. Since the yield of energy production in these regions can be much higher, the conversion losses are mostly compensated by the lower yield of local production of renewable energy in industrial areas (e.g., in Central Europe). In addition, the production of renewable energy depends on the weather conditions, which leads to times of energy surplus when the energy demand is low. In these surplus situations, instead of turning of the production of solar or wind power, the production of hydrogen results in a higher overall system efciency and also provides additional revenue for the operators of the solar and wind parks.

For the existing feet of combustion vehicles, synthetic fuels based on renewable electricity can be considered another solution. Tese so-called e-fuels are produced by reacting hydrogen from electrolysis with carbon dioxide taken from the atmosphere or emission sources. Combustion of e-fuels in conventional ICEs cannot match the superior technical properties of electric drives, and at the same time, they lose a large amount of energy. Terefore, the cost of providing them is extremely high (see Fig. 8.7). While aviation relies on e-fuels to reduce its carbon footprint, these fuels are not currently expected to be relevant for road vehicles in the long term. Exceptions include niche applications, such as racing or vintage cars. For example, Formula 1 will use e-fuels in its hybrid cars beginning in 2026 (Barretto, 2022).

Te difcult-to-understand technical characteristics and potentials, the complex factors infuencing the performance data, the costs, and, in particular, the environmental compatibility are very difcult to compare objectively among drivetrain choices, even by proven experts (Weigelt, 2022). As a result, despite the clear predominance of electric drivetrains, traditional customers still seem to feel daunted when faced with the necessary change in attitude, and they continue to cling to familiar ICE cars, as refected in the number of registrations and the fact that governments have to set targets for the number of electric vehicle registrations (Association des Constructeurs Européens d'Automobiles, 2022; Bundesministerium für Umwelt, Naturschutz, nukleare Sicherheit und Verbraucherschutz [BMUV] 2021; Bundesministerium für Wirtschaft und Klimaschutz [BMWK] 2023). Terefore, one of the major challenges is to increase customer acceptance by demonstrating technological reliability.

Mobility must always be considered holistically. In addition to the vehicle and its drivetrain, this includes the infrastructure and the established energy ecosystem, which vary greatly from country to country. Tese aspects also have a major impact on the overall efciency and the ecological footprint of the various drive concepts. In the case of electromobility, for example, these are technological disruptions in cell chemistry, the charging infrastructure, and the closing of material cycles for battery raw materials. For hydrogen and synthetic fuels, these include the production and eco-efcient transportation of green hydrogen or synthetic fuels. Unfortunately, this situation challenges incumbent car manufacturers to manage the uncertainties surrounding emerging technologies, while new entrants seize the opportunity to focus on new technologies.

After this brief introduction and comparison of alternative drivetrains, the following two dialogues between experts from research and practice will address the current challenges and opportunities for the future of the drivetrain and the potential of hydrogen in the automotive context.

# **8.3 Expert Conversation on the Future of Mobility**

# **What is the History of Electric Vehicles at BMW and Where Do You Stand Today?**

*Franke:* It is a real honor and a great pleasure for me to talk with you about the future of mobility. Te future of mobility, especially automotive mobility, for me is summed up in the four letters C, A, S, E, which stand for connected, autonomous, shared—I personally would redefne it as sustainable—and, of course, electric driving. Tis was the mantra when BMW decided, 10 years ago, to design and produce a fully electric car, the BMW i3. I drive an i3 as well.

*Zipse:* Do you? I hope you enjoy driving it.

*Franke:* It is still an excellent car, even though it is about 10 years old. It is fully purpose-designed for electric driving, although it started with a small range extender to overcome the range anxiety. Tis range extender has disappeared, and now BMW has changed its strategy a bit. As far as I can see from the outside, BMW's strategy now is to ofer all drivetrain alternatives in every model series. However, fully purpose-designed electric cars would potentially outperform BMW models in terms of better integration, cable harness, compartment design, maybe even efciency and costs. How will BMW overcome these potential disadvantages?

*Zipse:* Tank you very much for that really strategic question. What you call CASE, we call ACES, but it means the same thing: autonomous, connected, electric, and shared. In terms of electric cars, which is what we are talking about here, we have not changed our strategy. We have evolved it into the future. We built the frst electric car in 2008: an all-electric Mini. It was not for public use, but there was an electric Mini in existence. Tere was also an electric 2-Series, you know. We experimented with that, and then, we fnally made the decision, "Let's build an electric car." At the time, we called it the Megacity Vehicle. It later evolved into the i3. We also said, more or less, this can be an experimental feld for car body design, as we had to reduce the weight to increase the range of the car. Te i3 became a carbon car because of the lightweight constraints. It is still the only highvolume carbon car in the world to this very day. Tere is no other manufacturer that has built a car like this.

*Franke:* What has happened since then?

*Zipse:* Back then, we were working with the third generation of our battery technology. Now we are in our ffth generation. Back then, we knew—and in the automotive industry you have to look years ahead—that electromobility was coming. Up until then, there was no mandatory use of electric mobility. Tere was not enough infrastructure, and there was no customer commitment to buy these cars. But because we saw that this was going to happen because of the carbon regulation that was coming, frst in the United States and then in Europe, and then also in China, we made a bold move, a very early move. We changed our strategy at that time, not afterward; that is the misconception. We took the change that was coming very seriously. Ten, we waited a year and a half, until about 2014, to see how the i3 was doing. We saw competitors coming up and making plans. So, we said, "OK, let's get serious now!" Ten, after the i3 experience, we took a very consequent step of electrifying our main architectures. Tese are not conversion products, but are built on fexible architectures. Tis took 4 to 5 years, while the outside world had the impression that we had stopped doing electrifcation, which is not true at all. We prepared for the point in time when electromobility really would take of. Tat time is now: Te iX3 was our frst fully electric car after the i3; the iX is the second car. Tere was a test in Auto Motor Sport the other day, and they tested six fully electric vehicles—purpose-designed vehicles. Other than the iX3, there were vehicles from our German friends, Japanese manufacturers, and so on. Tey were all there. Te iX3, which is built on a fexible architecture, not on a purpose-built architecture, came out on top by a wide margin. First prize!


# **What Is the Strategy for the Electric Drivetrain?**

*Franke:* Let us take a closer look at the electric drivetrain. As a production engineer, I am impressed by how BMW designs and builds not only combustion engines, but also electric motors. But as a production engineer who focuses on the production of electric motors, I also know that the drivetrain is made up of not only electric motors, but also batteries and power electronics, and of course, it is integrated in a charging network. How will BMW diferentiate itself in the future in the other modules of the drivetrain?


example. What modules will BMW produce in the future to claim this as a core competence and diferentiate itself from its competitors?


Te second thing is the speed of development. You increase your development speed when you have more than one supplier. In 2019, we built our own research and development (R&D) center here, where we developed our own competencies. Tere are more than 2000 parameters in the cell. Te right combination determines the performance of the cell. Now comes the interesting part. What happens with a lithium-ion cell? First, you try to optimize the cathode by increasing its performance. You increase the nickel (Ni) content, you increase the manganese content, and you increase all the ingredients of the cathode. But what happens if you increase the energy density on the cathode? You have to change the anode as well. You go away from graphite to silicon–graphite or something like that. Once you have that, the third step is the performance of your electrolyte, and then, the fourth step, which we may do in this decade, is to go from a liquid electrolyte to a solid electrolyte.


diferent technology. Tere is a big diference between a fuid electrolyte and a solid electrolyte.

Why are we investing? Because there are many competitors out there, and they are extremely competent. We can build up partnerships, as for our business model. It is much better to use the market than to invest in developing specifc technologies ourselves. We invest wherever we have an integration task, where all the technologies come together in the car. We refer to this as HEAT, which stands for the German acronym "Hochintegrierte Elektrische AntriebsTechnik" (meaning Highly Integrated Electric Drivetrain), a combination of the electric drivetrain and the clutch end zone.


Te assumption that in-house production gives you a higher competence is simply wrong. Our experience is very diferent. You build up your own competence when you operate in a monopoly situation. Take press shops, for example. Building those up is very difcult, a super high investment: One costs 100 million euros. Tere are not many market players out there who build press shops. It is not high-tech, but you have a very clear oligopoly situation—and you are completely dependent on press shops. It is a simple technology, and it makes sense to invest in ourselves.

Tat is the situation we have. Of course, in our purchasing department, we always look at the market situation. If we cannot increase our speed and we do not have a shortage of supplies out there, we rather tend to buy.


# **What Does the Future of Mobility Look Like?**


*Franke:* So you are not afraid of Google or Apple?

*Zipse:* Te companies you mentioned are not building cars. Tey build technology. Inside the automotive sector, they are not making any money. So the question is: When do you, as a car producer, make specifc investments without looking at the contribution margin? It is quite simple: When we bring a car to the market, the cost has to be lower than the price needed to make a positive contribution margin. None of these companies think about contribution margins. What will happen, at least for the next 10 years? We will be at the forefront of assisted driving that goes to a Level 2+ with driver supervision in Germany—which is hands-free, by the way.

People think that only Level 3 is hands-free, but this is not true. You, as the driver, are monitored to see if you are still looking forward, and if you are not, the car will ask you to take over control. Level 3 is completely hands-free, but that is highly restricted around the world. To ofer Level 3, you need radar, lidar, and optical sensors like a camera—we are absolutely sure of that. You cannot do Level 3 with cameras alone. But a lidar sensor in a car is very expensive.


#### **What Is the Role of Connectivity?**

*Franke:* I have to touch on at least one last question. We talked about electromobility and autonomous driving, but I think connectivity toward the customer and toward infrastructure is also very important. Modern cars are already connected to the Internet through mobile communications technology, telephone, web conferencing, updated maps with up-to-the-minute congestion information, music, video, entertainment services, and Netfix—you name it. Everything is available in the car.

Equally important is the constant connection of electric cars to the smart energy grid. Dynamic inductive power transfer technology, which means recharging the car while driving it and promises infnite range. Connectivity supports autonomous and convoy driving, stabilizes the electricity grid, and ofers new services for individual mobility, such as tolls without pay stations, navigation, fast Internet communication, and so on and so forth. Tis technology is never discussed. We all talk about batteries and hydrogen, but no one talks about inductive power transfer while the car is moving. How can BMW take advantage of this promising technology?


we will prepare the infrastructure with IPT, inductive power transfer. Could this be a new business model for BMW?


# **8.4 Expert Conversation on H2 as Fuel of the Future**

#### **What Is the Importance of the Hydrogen Strategy?**

*Wasserscheid:* I am really excited to be here and to discuss with you the topic of hydrogen as a future fuel. It seems to me that hydrogen is a very dynamic feld at the moment. A lot of scientists, companies, and even politicians have recognized that this fully defossilized energy system that we want to have in 2045 can only work if we have storable energy carriers. Te time has come: People are developing hydrogen strategies everywhere. Tere is a Bavarian hydrogen strategy, there is a German hydrogen strategy, there is a European hydrogen strategy, and my frst question is: What about a BMW hydrogen strategy?


point is: If you have hydrogen as a transport vector to Germany, the efciency discussion is completely diferent, because it makes no sense to convert the hydrogen into electricity to charge the battery in your car. It is better to use this hydrogen immediately and directly in mobility, of course frst in sectors where batteries have problems (e.g., trucks).

Would you say that we have enough electricity in Germany? Because this is not about Germany, is it? Climate change is global. Tere are places where it is much easier and more economical to generate renewable energy than here in Germany.

*Zipse:* Right. We have a global perspective on hydrogen. Tis is important because only about 8% of our worldwide revenue is generated in Germany. So, we have to look beyond the German hydrogen discourse. And if you take a global perspective, you see many use cases where access to electromobility is lacking. From our point of view, the only emission-free possibility for private passenger cars, apart from battery electric vehicles (BEVs), is fuel cell electric vehicles (FCEVs) that run on hydrogen. Tere will be plenty of cases where people will not have access to charging infrastructure/ electricity. So, hydrogen is a perfect complement to our overall strategy. It obviously does not mean that we are undecided. On the contrary, we are determined because we are not in a shrinking scenario. We do not see hydrogen as a shrinking scenario. Because we produce almost 3 million cars per year, we can aford to have three or four diferent drivetrains, especially because our whole mindset is about architectures and not around platforms. Tat is the perfect strategy for us. Tat is the way forward.

#### **What Will a Hydrogen Car Look Like and What Is Its Advantage?**

*Wasserscheid:* It is a disruptive technological change to move from fossil to renewable technologies. If you are going to build your frst BMW hydrogen car, what kind of car and what kind of customer are you targeting? *Guldner:* We just have completed the development of our second generation of fuel cell technology and integrated it into the X5, one of our bestselling models. A small pilot feet of BMW iX5 hydrogen vehicles is currently used worldwide for testing and demonstration purposes—very successfully. Ten, we will move on to the next development steps, and customer cars will be ready when the markets are ready for them. Diferent countries move at a diferent speeds, and we will see when the right point of time comes, probably before the end of this decade.

*Wasserscheid:* I drive a hydrogen car myself, as a private car, a Hyundai NEXO, and I am really waiting for the BMW. Do not forget me! I am your frst customer!

*Guldner:* We will call you, and you can come for a test-drive soon (laughs).

*Wasserscheid:* Perfect! And the experience is that this is a nice way of driving, especially for long distances, because even though the network of fueling stations is still quite thin, it is basically enough if you drive long distances. You pass a flling station every 50 km. Tat is more than enough.

Let us go into the future, into the year 2045, when Germany is supposed to have zero emissions, according to the new climate laws.

What will be the ratio between battery electric and hydrogen electric then? Because my feeling is that batteries are moving fast today because you already have the scale and the mass production efect. In the hydrogen business, the situation is still diferent. To give an example, if you want to get a cheap fuel cell today, then the best thing is to buy a NEXO or a Mirai, take the fuel cell out, and throw the rest away. Te reason is that fuel cell production has yet to be scaled up. What is your outlook for 2045? Let us just assume that, by then, technology development is in the mass market for all technologies, and it is really an established market for both technologies.

*Zipse:* Te question is, which parameter, which vector do you believe in? Do you think that the people are afraid of too long charging times in electromobility—even in the very best case, it will be longer than at a gas station. People might not want to stand in the dark and wait 10 min. Tey want to refuel quickly and then go. We do not know that. I think the main driver for hydrogen will come from settings in which you have to drive emissionfree and you do not have a charging station. Tat is the main driver. It is not range or anything like that. It is not even the cost. For example, if we say that we want €5 per kilogram of hydrogen, and that would be the point at which it becomes competitive. It is also when countries, through legislation, no longer allow greenhouse gas emissions from cars—and there will be many in 2040. Not all, but a lot. What happens if you cannot charge all these electric cars?—Te issue is not the availability of battery electric cars, but the availability of charging stations.

*Wasserscheid:* What kind of example do you have in mind?

*Zipse:* What will you do in rural areas? In densely populated areas, like most of Germany, you can provide enough charging interfaces. When you build new houses, you build in charging facilities. You can do that in cities or in the countryside. But in a very scenic, unspoiled environment, where nature is dominant, you cannot tear up all the roads and build a massive amount of charging infrastructure. You will get a massive political problem. What do you do there? But remember, by 2040, we want to drive emission-free. So, either you stop driving cars to those places, which is one option. Or you have a hydrogen car.


#### **What Is the Technology Strategy Behind Hydrogen?**

*Wasserscheid:* Let me dive a little deeper into the technology strategy. Hydrogen is a brand-new technology; it is disruptive. What is the value chain? And who will be involved with what kind of service and with what kind of product? I guess that this is also a strategic decision for BMW. When and where do we form alliances with other OEMs for fuel cells—I know about your collaboration with Toyota—or do we source in from classical suppliers like Bosch, Schaefer, and so on, who fortunately are also quite active in the hydrogen business? I think it is very encouraging that German companies are recognizing that this kind of business fts very well with what they know, maybe diferent from making batteries. What is the strategic decision for BMW to have a Unique selling proposition in the hydrogen race, but also to have its own product portfolio within this powertrain of the future?

*Zipse:* We already touched on this point before with the batteries. I think that in-house competence in all areas is overrated. System integration competence is the most important thing you need to have. Ten, you have to have a very strong ability to cooperate. If you have strong partners out there and we do have partners who have been cooperating with us for many years—then you do not need to have all competencies in-house unless you have an extremely unique technology, which is not the case here. I am sure that with all these hydrogen drivers, there will be a thriving supplier market. Tere will not be just one fuel cell supplier. Te important thing to remember is that the integration possibilities—because we already have an electric drivetrain—are quite simple. At the end of the day, a hydrogen car is more or less an electric car. Our car architectures are designed so that BEVs and FCEVs have a high degree of synergy. Tis is crucial for our electric strategy.

We have a long-standing relationship with Toyota that we are very happy with. Once we decide on a series model, we have to look at who is the best supplier or the best partner. Regarding a make-or-buy decision, it is not always true that the in-house made decision is the optimal choice. It can be right, but most of the time it is not, because you lose a lot of fexibility.

*Wasserscheid:* Tis discussion goes even deeper if you think about the whole hydrogen value chain, with green hydrogen production, hydrogen logistics, fuel cells as one way of hydrogen utilization, and the aspect of industrialization and scaling. People sometimes ask me, "Oh, hydrogen has been around for 100 years! Why is it not there yet?" Te main problem is this relatively complex value chain: You have to fnd suppliers and partners—and that is not easy at the beginning. For example, there are diferent technologies for on-board storage: compressed, cryo-compressed, liquid, and all of that. It is important that the frst movers—Toyota and Hyundai are excellent examples—are able and willing to cover parts of that value chain themselves. Otherwise, the technology will not begin to move.

*Zipse:* Do you see that change happening yet?

*Wasserscheid:* I am convinced that we will now build this value chain. We see this in the Bavarian Hydrogen Centre. Tere are companies that do electrolysis, like Siemens Energy; companies that do diferent kinds of hydrogen logistics, like Hydrogenious LOHC Technologies; and companies that do fuel cells or fuel cell components, like Bosch and Schaefer. When all these elements come together, the chain will work. What about your willingness as BMW to contribute your part to building these value chains? Is it just to say, "I have to buy this, this, and that, and then I will prepare a car"? Or is it, "I believe in this technology, so I want to be this kind of enabler like Hyundai or Toyota"? We've seen the Toyota cars at the Olympics—they really have a mission on hydrogen. Is the same true for BMW?


#### **What Is the Impact of Hydrogen Technology on Climate Goals?**

*Wasserscheid:* When we talk about defossilization, green products, and a low carbon footprint, we also have to consider the production process for cars. In Spartanburg, I think you were the frst company to show that hydrogen mobility can be very helpful in reducing the carbon footprint of your production by using hydrogen-powered forklifts. To what level can you extend that experience? And to what level do you think that competitors and other companies that move goods from Point A to Point B would adopt this kind of technology?


But, to give some examples, we see that diesel is not dead—far from it. In Europe alone, one in fve customers still buys a diesel car. It is a thriving market. Te petrol engine is still there, also the hybrid: We are the world's largest producer of hybrids among all OEMs. Tis is a fourishing segment for us, despite all the public discussion. Pure electric cars have also grown steadily in recent years. So all four drivetrains are very proftable. Te question is: Will hydrogen be the ffth drivetrain, or will it be another technology? It does not matter—as long as you have thought about the possibility and put it into architectures. Tat is what we have done and what we are doing. So far, that strategy has been absolutely right, because in terms of the overarching strategy, we know that if a company of this size does not grow, it will run into problems. So we have to grow, and the lever is technology openness.

#### **What Are the Limiting Resources of the Hydrogen Business?**


when does scarcity become an economic argument for survival? Tat is why we have defned the principle of "secondary material frst" as one of the main pillars, at least for the next 10 years. Because humanity is extracting about 100 trillion tons of ores and resources from the planet. Ten you ask people, "How long will that continue?" One thing is for sure. Most resources are fnite. You can still use them, but they will become more expensive. Palladium, rhodium,… even steel are getting more expensive. So, it makes economic sense to put secondary materials frst, at least as a cornerstone of your strategy. I think that is a wise decision.

*Wasserscheid:* Yes, it helps that platinum is so valuable and people have already developed processes to refne and recycle it. Plus, the quantities that are used in fuel cells and hydrogen release units are small.

Tat brings me to my last question: Tere is one resource that may also be limited. And that is brains. Right? (All laugh and nod.) For all that we have discussed, you need people. People with a diferent mindset. If you are trained as a person with gasoline in your blood, you are quite likely to fail in this electric world. Or maybe not? So the question is: How do you manage the talent pipeline or attract experts in technologies like batteries, hydrogen, and all these electrifed mobility technologies? And how does that change the way a company like BMW is going to operate in the future?

*Zipse:* You hit the nail on the head, because of course brains are a limited resource. But much more important than the limited brain is the mindset. We fnd a strong source of power in trying to get the right mindset. We did not fnd such a big diference between the diferent drivetrains. An electric car is not that diferent from an internal combustion car. All of the electrics—apart from the battery—are very "mechanical." We move people who work in the internal combustion engine plant to the Dingolfng plant. It is almost the same skill set. And it is not that diferent. What stays the same is the continuous progress in every technology. Take digitalization, which in principle is not new to us, but every year something new comes along. Putting the right digital solutions into a car and making a proftable business model out of it, that is the most important question. At the end of the day, your product has to be unique, proftable, and attractive. Tat is not just a question of qualifcation or whether we have enough digitalization. It is a question of mindset. Tis is what we are trying to get the whole company to do, that everyone is part of a larger system that pays into a business model. If you have that mindset, you will get enough brains that want to contribute.

*Wasserscheid:* I think one important way to achieve this is close cooperation and interaction between universities and BMW, as in our very exciting discussion today. Many thanks for that!

# **8.5 Beyond Technical Functionality: The Energy Ecosystem around Eco-Effcient Drivetrain Solutions**

As shown in the previous sections, diferent technologies compete in the area of individual mobility for diferent target groups and markets. While some technologies compete directly with each other, others complement each other for diferent applications and sectors. In this context, technology openness is a key to achieving climate neutrality. In Europe, e-mobility is expected to dominate the mass consumer market in the future. In other areas, such as heavy-duty transportation, it is not yet clear which drive solution will prevail in the long term. All solutions require massive research eforts in various felds to advance the respective technological maturity level.

Te associated technological change requires close cooperation between industry (OEMs and suppliers), research, and politics (international and national). At the same time, consumer acceptance must be promoted. Te application potential and user acceptance of alternative drivetrains depend to a large extent on the infrastructure and the energy ecosystem. Future practice and research avenues must therefore focus on these two aspects.

In the feld of energy ecosystems, three potential future paths for eco-efcient mobile and stationary energy storage are discussed below. Due to the close interaction of new drive technologies with the associated infrastructure, disruptive energy distribution systems in the automotive context are also presented.

#### **8.5.1 Eco-Effcient Storage of Electric Energy on Board an Automobile**

Te present status and success of battery electric vehicles is closely linked to a specifc battery technology—the Li-ion technology. Te reason is the outstanding energy and power density of the Li-ion technology compared with other material combinations (see Fig. 8.8).

Several inventions have been necessary to make Li-ion cells work. In 2019, the pioneering work of John B. Goodenough, M. Stanley Whittingham, and Akira Yoshino conducted in the second half of the last century has been

**Fig. 8.8** Ragone diagram showing specifc energy and power densities of different battery technologies (Note: Status as of 2013 on cell level—today Li-ion expand further to the right; "Ragone plot of various battery technologies with specifcation at cell level for automotive applications without lithium–sulphur and metal–air batteries." originally published in Budde-Meiwes et al. (2013). Proceedings of the Institution of Mechanical Engineers, Part D: Journal of Automobile Engineering, 227(5), 761–776. https://doi. org/10.1177/0954407013485567; all rights reserved.) (Budde-Meiwes et al., 2013)

honored by the Nobel prize. And it was the need for higher battery capacity for the new consumer electronic devices, like the camcorder, which motivated Sony in the late 1980s to industrialize the Li-ion technology.

Te working principle and the subsequent steps to build a Li-ion cell from the incoming materials (powders, solvents, conducting foils, separator, electrolyte, and cell housing) to the fnal cell is shown in Fig. 8.9. Te key materials are the active anode and cathode materials being able to store Li-ions in its inner structure. While graphite is the predominant material for the anode for all applications, the choice of the cathode material (typically a lithium metal oxide) strongly depends on the application and the requirements.

For example, the key performance indicators (KPIs) for automotive applications difer substantially from those of the consumer electronics leading to diferent solutions. While the lithium–cobalt oxide (LCO) cathode material is used in consumer electronics, LCO is not suitable for automotive

**Fig. 8.9** Overview of the working principle of a Li-ion battery cell, the typical set of materials and the typical realization from materials to electrodes and fnally to cells (pouch, cylindrical, or prismatic hard case)

applications due to cost and safety reasons. Te predominant cathode material in battery cells for electric vehicles today is the lithium–nickel–manganese–cobalt oxide (NMC) chemistry (a layered oxide structure).

Ten years ago, the material composition was the so-called NMC111 (i.e., equal amounts of nickel, cobalt, and manganese [33% of each]). In the future development, the nickel content was continuously increased to 80% in today's so-called NMC811 material (80% Ni, 10% manganese, and 10% cobalt). Te beneft is a substantial increase of the specifc capacity of the material from about 150 mAh/g (NMC111) to about 210 mAh/g (NMC811). Te drawback is that those high-performance materials are thermally less stable, leading to challenges for lifetime and/or safety.

As shown in Fig. 8.9, the active layers of a cell (multiple electrode and separator layers arranged in a stack or jelly roll) can be integrated in diferent mechanical cell housings. Tose are pouch cells, cylindrical cells, and prismatic hard case cells. Each of those has individual weaknesses and strengths, and those are all used in automotive applications.

**Pouch cells:** Te housing consists of a thin composite foil (polymer with an alumina layer in between). Te sealing is done by a lamination process. Te advantage is its lightweight and high degree of freedom in realizing different form factors (only cell thickness is limited). Te disadvantage is the possible difusion through the laminate seal and the low mechanical robustness.

**Cylindrical cell:** Te housing is mainly steel but could also be alumina. Te integration of a cylindrically wound jelly roll gives the best volumetric energy density. Sealing is done by crimping (risk of difusion but lower than for a pouch) or laser seal. Te advantages are the mechanical robustness and constant shape even when pressure builds up inside the cell. Te disadvantage is the limitation of the cell size (production process, thermal management, etc.).

**Prismatic hard case cell:** Te housing is a prismatic alumina can. Sealing is done by laser welding. Te advantages are the mechanical robustness and long lifetime, and it can be easily used in highly automated production process to manufacture modules and packs.

Te battery cell (i.e., the chemistry used) and the mechanical cell concept is responsible for the electric vehicle's core properties of range, driving performance, and charging time. BMW has focused on the prismatic hard case cell as the building block for its battery architecture. Te reasons are the mechanical rigidness, the longevity, and the suitability for high-volume and high-quality production of modules and battery packs. BMW has optimized this type of battery over fve generations, and it now successfully powers our present feet of battery electric vehicles (see Fig. 8.10).

In the sixth generation of BMW eDrive technology utilized in the NEUE KLASSE, signifcant advancements have been made in the cell format and chemistry. Te introduction of the new BMW round cell, purpose-built for the electric architecture of NEUE KLASSE models, allows for a remarkable increase in the range of the highest range model, up to 30% (according to WLTP) (BMW Group, 2022; see Fig. 8.11).

Deviating from the ffth-generation prismatic cells, the sixth-generation BMW round cells difer in an increased nickel content on the cathode side. Tis allows the cobalt content to be reduced. In addition, a notable increase in the silicon content on the anode side contributes to a signifcant increase in the volumetric energy density of the cell of more than 20% (BMW Group, 2022).

**Fig. 8.10** BMW's Gen5 battery cell, module, and pack architecture

**Fig. 8.11** BMW's Gen6 battery cell and pack architecture and the resulting improvements of some relevant KPIs (the reference is the present Gen5 battery pack architecture)

In the NEUE KLASSE, the battery system is critical because, depending on the model, it ofers fexible integration into the installation space to save space through a "pack to open body" approach that eliminates the cell module level (BMW Group, 2022; see Fig. 8.11).

Moreover, the NEUE KLASSE's battery, drivetrain, and charging technology will operate at a higher voltage of 800 V. Tis enhancement optimizes energy supply from direct current high-power charging stations, enabling a much higher charging capacity of up to 500 A. As a result, it will take up to 30% less time to charge the battery from 10% to 80% (BMW Group, 2022; see Fig. 8.11).

Te BMW Group places strong emphasis on reducing the carbon footprint and resource consumption throughout the production process, starting from the supply chain. To achieve this, cell manufacturers will use lithium, nickel, and cobalt, incorporating proportions of secondary material, that is, raw materials that already exist in the material loop and are not newly mined. In addition, the BMW Group is committed to using only green electricity from renewable sources for battery cell production. Both of these advances are expected to reduce the carbon footprint associated with producing battery cells by up to 60% compared with the current generation (BMW Group, 2022).

Emphasizing the importance of a circular economy in e-mobility, the BMW Group aims to reuse raw materials. Circular loops signifcantly diminish the demand for new raw materials, reduce the risk of environmental and social standard violations in the supply chain, and lead to substantially lower CO2 emissions. Te BMW Group's active involvement in all stages of a circular battery economy (see Fig. 8.12) underscores their commitment to this approach. Ultimately, the long-term objective is to adopt fully recyclable battery cells (BMW Group, 2022).

For the new generation of BMW battery cells, the raw materials cobalt and lithium will be sourced from certifed mines, ensuring transparency over extraction methods and promoting responsible mining practices. Te

**Fig. 8.12** BMW's circular battery value chain

sourcing is carried out either directly through the BMW Group or via the battery cell manufacturer (BMW Group, 2022).

For numerous years, the BMW Group has actively participated in initiatives aimed at establishing standards for responsible raw material extraction and advocating compliance with environmental and social norms through mine certifcation. Tis approach not only exemplifes the company's commitment to sustainable business practices but also reduces its dependence on certain resources and suppliers from a technological, geographical, and geopolitical perspective.

For an OEM, the continuous further development of battery systems is mandatory. In the past, the main driver for battery cell development was to increase energy density and hence range of the battery electric vehicle. With the NEUE KLASSE, driving ranges of up to 900 km, depending on the specifc vehicle, will be reached. In principle, ranges above 1000 km are technically possible but are, in most cases, neither economical nor ecologically reasonable. It is more important to develop and deliver a product optimized along all relevant KPIs and the needs of the customer. Hence, future battery cell development will diversify and be directed to diferent areas of the car portfolio (see Fig. 8.13). Tis will be: a) still the optimization of energy density ("range-optimized"), but equally important, b) the best ft between energy density and cost ("cost-optimized"), and c) the low cost sector for entry models ("low-cost").

**Fig. 8.13** Future diversifed development directions for battery cell technology

Since 2008, the BMW Group has been progressively cultivating its expertise in battery cell technology. Tis expertise has been consolidated at the BMW Group's Battery Cell Competence Centre (BCCC) in Munich since 2019. Encompassing the entire value chain, from R&D to battery cell design and manufacturability, the BCCC serves as a hub for translating cutting-edge battery cell innovations into practical applications swiftly and efectively. To this end, the BMW Group collaborates with a diverse network of approximately 300 partners, including established companies, start-ups, and research institutions. Te insights acquired through these collaborations undergo validation at the Cell Manufacturing Competence Centre (CMCC) located near Munich in Parsdorf (BMW Group, 2022).

Tis competence and continuous efort are needed to ensure that the best possible and most eco-efcient battery technology is ofered to the customer.

### **8.5.2 Eco-Effcient Hydrogen Storage and On-Demand Electrifcation**

Energy from renewable sources enables a climate-friendly supply of electricity, heat, and alternative fuels. However, due to the volatile nature of renewable energy sources, technologies are urgently needed to make renewable energy storable, transportable, and globally tradable to link privileged production sites with centers of consumption. One solution is energy storage in the form of hydrogen, which can be produced by electrolysis of water with renewable energy. If the energy stored this way is needed again, the hydrogen can be used to generate electric energy in a fuel cell, with water vapor as the only additional product. In this way, a CO2-free energy system can be established.

In the future of defossilized and fully emission-free energy systems, hydrogen technologies will play a very important role. Tey will provide solutions for applications where battery technologies cannot be used for reasons of cost and practicality. Tis applies, in particular, to the following areas:


One challenge, however, is that elemental hydrogen (H2) has only a very low energy density at ambient conditions. For storage and transport, hydrogen is therefore stored as a gas under high pressures of up to 700 bar or liquefed at temperatures below minus 250 °C (Preuster et al., 2017). Concerning the transportation of hydrogen, leveraging established fossil fuel infrastructure—specifcally, natural gas pipelines—ofers noticeable advantages. Utilizing existing infrastructure proves to be more cost-efective and resourceefcient (U.S. Department of Energy, 2023). However, while blending hydrogen into natural gas to transport a gas mixture is comparatively feasible for modest of proportions of hydrogen, converting the gas grid to distribute only hydrogen presents more complex technical, legal, and policy-based challenges (Jayanti, 2022). Furthermore, on an international scale, hydrogen transportation approaches that rely on molecular hydrogen demand the construction of new, considerably expensive infrastructure. Given this context, researchers are exploring alternative methods for hydrogen transportation that extend beyond merely repurposing existing pipelines. Current research and development work at FAU is therefore aimed at establishing innovative hydrogen storage and logistics approaches that are highly compatible with the existing infrastructure for the currently utilized fuels. Tis infrastructure compatibility ofers the chance for a much faster introduction of hydrogen-based clean energy technologies on a system-relevant and global scale.

To realize this compatibility with existing energy infrastructures, the elemental gaseous hydrogen is bound to a carrier molecule in a heat-producing hydrogenation reaction. Tis creates a hydrogen-rich form of the storage system, the loaded storage compound, which can be easily stored and transported in a liquid or liquefed form. On demand, elemental hydrogen can be released from the charged storage compound in a reverse, heat-consuming dehydrogenation reaction. In this process, the discharged storage material is formed again and can be used for another hydrogen storage cycle. Reaction accelerators, the so-called catalysts, play a decisive role in the described storage and release reactions. Tey accelerate the rates of reaction and ensure that the desired hydrogenation and dehydrogenation reactions take place with the highest possible selectivity.

A technically very promising example of this approach is the so-called liquid organic hydrogen carrier (LOHC) technology, in which molecular hydrogen is reversibly bound to an aromatic liquid compound (Preuster et al., 2017). Research contributions of the FAU in the last decade have shown that the aromatic compound benzyltoluene is particularly suitable as hydrogenlean storage compound (Jorschick et al., 2017; Rüde et al., 2022). Benzyltoluene is a readily available industrial product and has been applied since the 1960s as heat transfer oil. Many properties of the compound are known and very well suitable for its application in hydrogen storage, such as its high thermal stability and the high intrinsic safety of the compound. Based on this LOHC system, FAU researchers have developed a hydrogen storage and transport technology that has been commercialized in the meantime by the FAU spin-of Hydrogenious LOHC Technologies GmbH (www.hydrogenious.net). Since its foundation in 2013, Hydrogenious has developed into a global technology leader for hydrogen storage using LOHC technologies and today has 200 employees.

Interesting alternatives in the feld of chemical hydrogen storage include the reversible chemical binding of hydrogen to the gases CO2 or N2, which also leads to liquid (methanol and diesel) (Artz et al., 2018) or liquefable (ammonia and dimethyl ether) (Schüth et al., 2012) hydrogen-rich storage compounds. Tese compounds can be split on demand to produce hydrogen or used directly as chemicals or as climate-neutral combustion fuels (see Fig. 8.14).

An important diference between these CO2/N2 concepts and the LOHC technology is that LOHC-released hydrogen is of sufcient quality for reelectrifcation in a fuel cell after condensation of the liquid carrier. By contrast, splitting ammonia, methanol, or dimethyl ether for hydrogen production

**Fig. 8.14** Illustration of the working principle of chemical hydrogen storage

leads to gas mixtures of hydrogen and nitrogen or carbon dioxide, respectively. Tese mixtures have to be separated to obtain pure hydrogen for fuel cell operation. While the LOHC carrier compounds are transported in the hydrogen-rich state from the energy-rich location to the energy consumer and in the hydrogen-lean state back for recharging, the equivalent storage cycle is typically closed for CO2- or N2-based hydrogen storage technologies via the atmosphere. At the energy-rich location, CO2 or N2 is extracted from the atmosphere, and the same compounds are released to the atmosphere after hydrogen splitting and separation at the energy consumption site.

Overall, the technologies for chemical energy storage, and for the LOHC technology in particular, ofer clear advantages over batteries and physical storage of elemental hydrogen if the stationary energy storage of large amounts of energy, global energy transport, and emission-free heavy-duty mobility are the focus. Chemical hydrogen storage can be realized at ambient temperature and ambient or low pressure to provide very high energy densities. Since the loaded storage material can be easily handled like today's fuel, the existing infrastructure for liquid energy carriers (tankers, tank wagons, and tank farms), which is accepted by the population and has proven itself over many decades, can be further used. Tere is no need to build expensive new supply infrastructure, nor does the hydrogen require complex cooling or compression. Most interestingly, these chemical hydrogen storage technologies are exportable and can also be used in countries whose gas and electricity distribution infrastructure has so far been poorly developed (Hank et al., 2020).

#### **8.5.3 Eco-Effcient Electricity Distribution via an Electrifed Road Infrastructure**

Te glaring disadvantage of the limited storage capacity and charging capacity of batteries cannot be overcome in the short term. Another major challenge at present is the expansion of the charging infrastructure. According to statistics from the German Federal Network Agency, there were 63,806 normal charging points and 12,755 fast charging points in Germany as of December 01, 2022 (Bundesnetzagentur, 2023). Te German government plans to increase this number to 1 million publicly accessible charging points by 2030 (Bundesministerium für Digitales und Verkehr [BMDV], 2022). Te European Union plans to install one charging station every 60 km along major trafc routes (European Parliament, 2022). Te deployment of bidirectional charging and smart grids will create further synergies.

Other technologies can complement this strategy. For example, instead of storing energy in massive batteries and carrying them in the car, electric energy can be transferred directly from electrifed roads to parked and even moving electric cars. Inductive power transfer (IPT) automatically starts the charging process when the vehicle is parked over a charging coil. By installing this technology on long-distance roads, the energy needed to drive can be provided continuously, the concentrated grid load caused by ultra-fast charging is reduced, and the size of the batteries can be signifcantly reduced. As a result, electric cars can become lighter and less expensive, and even heavy trucks can be driven electrically, efciently, and with zero emissions for an unlimited driving range without additional recharging. Conversely, by eliminating the need to recharge at rest stops, the investment requirement for the immensely expensive fast-charging columns is decreased, the space required for charging cars is reduced, and travelers no longer waste time recharging their batteries on long-distance trips.

Again, after BMW introduced the i3 as the frst purpose-designed electric car in Germany, with the plug-in-hybrid 530e, BMW was the frst car company to bring wireless power transfer to the market in series production.

Te primary coils (see Fig. 8.15), consisting of concentrically wound copper strands, are installed under the road surface in parking lots or on roads at intervals of about 1 m. A magnetic feld pulsed at 85 kHz excites an electric voltage in the secondary coils, which are mounted on the underbody of the vehicles. More than 20 kW of power can be transmitted per coil, which is sufcient even at high speeds and under normal conditions for propulsion and simultaneous battery charging. Higher power requirements, such as for

**Fig. 8.15** Inductive charging is based on resonant magnetic fux coupling (own illustration based on Loisel et al. (2014)) trucks and buses, can be met by installing multiple secondary coils. With a precisely tuned oscillating circuit and excellent primary and secondary coil qualities, energy transfer efciencies of over 90% can be achieved, even surpassing the efciency of previous high-performance conductive energy transfers, since the additional electrochemical energy conversions in and out of the battery can be eliminated.

Since the magnetic felds of the primary coils are basically harmless to living beings and are only activated when a secondary coil system is coupled, the road trafc infrastructure can be electrifed without hesitation. However, it will be necessary to educate the public in order to dispel any reservations they may have. Te automatic identifcation of vehicles in the energy system, comparable to the registration of a cell phone in the mobile network, makes the payment process more convenient. Te permanent connection of electric vehicles to the smart grid while parking and driving enables the use of vehicle batteries for an efective stabilization of the energy grid (vehicle-to-grid). Even if only half of all German cars were to be converted to electric drives, about one terawatt-hour (TWh) of storage capacity would be available (Loisel et al., 2014). (Tis is equivalent to about 25 times the capacity of all of Germany's hydroelectric storage power plants.) Te introduction of this technology will, of course, require signifcant investment to retroft existing infrastructure and expand the electrifed road network. Te additional infrastructure costs for electrifed roads are estimated to be about €1 million per road kilometer (KTH and QiE, 2019).

Compared with other technologies, large-scale inductive charging is still a relatively nascent feld. It brings to the fore fascinating research questions pertaining to its potential applications and development. Given the need for technology openness to accommodate various use scenarios, exploring these research avenues can help assess both the technological viability and economic feasibility of this charging method and whether it could complement other charging technologies in the future.

# **8.6 Conclusion**

Te mobility sector is currently in a state of uncertainty. Many market players are facing challenges due to technological change, increasing regulation, changing customer behavior, and the emergence of new competitors. Established technologies that have dominated for many years are losing importance and are being replaced by alternative technologies. Te most obvious change in the powertrain is the ongoing replacement of the internal combustion engine and the substitution of fossil fuels. Tis major technological change is necessary to enable a completely emission-free future in the context of climate change, but is also motivated by environmental and health protection. Accordingly, there are strong interactions with the megatrends of decarbonization and sustainability.

Te evolution is sequential. Bridging technologies such as hybridization facilitate the transition, while other technologies compete directly with each other as long-term solutions. At the same time, complements are possible for diferent applications and sectors, such as battery electric mobility and hydrogen as the fuel of the future. It can be assumed that battery electric vehicles will form the backbone of emission-free individual transportation in the future. Regeneratively produced hydrogen, which can be used in fuel cells and internal combustion engines, can provide a complementary solution. Potential applications include long-distance, heavy-duty, or of-highway transportation. In any case, there is a close interaction between the drive technology and the associated energy ecosystem. Renewably generated electricity and hydrogen must be available in sufcient quantities and at attractive economic conditions. In addition, distribution and convenience for the end user must be ensured. Tis requires a charging and refueling infrastructure that is as capable as the current one for fossil fuels. Te European Union's targets of charging points every 60 km and hydrogen refueling stations at least every 200 km along major transport routes and in every city are a step in the right direction. Te technology of inductive charging while driving might be another attractive option. In any case, massive investment in infrastructure is essential.

Other automotive megatrends include connectivity, autonomous driving, and mobility as a service (Gall & Sieper, 2021). Tese developments, which can be summarized under the term ACES, are mostly not directly related to the drive technology used, but beneft from the increasing electrifcation and digitization of vehicles. As a result, there is the potential to increase safety and comfort while reducing the environmental footprint. At the same time, the technological advances are having a major impact on the OEMs' and suppliers' businesses. Companies that are unable to respond to these developments and uncertainties will face major problems. However, this challenge can also be seen as an opportunity. New markets, products, and business areas are emerging. At the same time, the general public benefts signifcantly from sustainability, zero emissions, and increased safety.

So how can technologies for future contribute to sustainability?—We would like to highlight fve takeaways from this chapter that invite further discussion:


Technologies for the future are needed to disrupt the fossil-fuel-based status quo and to develop the products and value chains for zero-emission mobility. Tis chapter has thus concluded our discussion of the diferent individual steps on the Road to Net Zero. At the same time, it has shown that technology is related to strategy, products, value chains, and much more. Emphasizing this interplay between the diferent contributions of this book, the following and fnal chapter (Chap. 9) *Te Road To Net Zero and Beyond* weaves together important threads of our previous discussions and concludes this book with a look into the future of collaborations that can drive the sustainability transformation.

# **References**


bmdv.bund.de/SharedDocs/DE/Anlage/G/masterplan-ladeinfrastruktur-2. pdf?\_\_blob=publicationFile


engine. *International Journal of Engine Research, 21*(1), 3–10. https://doi. org/10.1177/1468087419877990


**Open Access** Tis chapter is licensed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons license and indicate if changes were made.

Te images or other third party material in this chapter are included in the chapter's Creative Commons license, unless indicated otherwise in a credit line to the material. If material is not included in the chapter's Creative Commons license and your intended use is not permitted by statutory regulation or exceeds the permitted use, you will need to obtain permission directly from the copyright holder.

# **9**

# **The Road to Net Zero and Beyond Looking Back, Taking Stock, and Moving Forward**

**Markus Beckmann and Irene Feige**

# **9.1 Refecting on Collaborative Learning**

What are the strategic pathways for sustainability-driven business transformation? With this question in mind, Bayerische Motoren Werke AG (BMW) and FAU came together in a series of expert dialogues to discuss critical topics on the Road to Net Zero. Tis book not only documents these dialogues but also uses them as the core for seven chapters. Each chapter explores some of the many complexities and intriguing issues involved in transforming our economy toward sustainability. Supplemented by a brief introduction to the topic and selected future research avenues, the idea was to allow readers to dive directly into the facets of the "Road to Net Zero" that interest them.

Each chapter therefore stands on its own. However, no chapter stands in isolation. On the contrary, the various steps on the Road to Net Zero all interact, are highly interdependent, and require an integrated perspective. Te purpose of this concluding chapter is to refect on this bigger picture. We will do this in four steps. First, we look back by briefy reviewing the lines of argument developed in each chapter and how they relate to each other. Second, we take stock by identifying recurring themes, critical insights, and lessons (to

I. Feige BMW AG, Munich, Germany

M. Beckmann (\*)

FAU Erlangen-Nürnberg, Nuremberg, Germany e-mail: markus.beckmann@fau.de

be) learned that we have identifed across individual chapters. Tird, focusing on journeying forward, we look beyond the Road to Net Zero outlined in this book and identify future questions for sustainability-driven business transformation. Finally, we refect on the nature of these challenges and discuss the role of industry–university partnerships in addressing them.

# **9.2 A Summary of this Book's Storyline**

Te title of this book, "Te Road to Net Zero," signifes an ambitious objective—achieving net-zero emissions to curb global warming. Tis bold ambition has profound implications. We cannot reach carbon neutrality merely by making incremental improvements within the existing fossil fuel–based economy. Instead, it necessitates a complete transformation in our business practices, with wide-ranging consequences and contributions required across diferent domains, as discussed in each chapter of this book.

# **9.2.1 Chapter 2: Setting the Course for Net Zero**

Chap. 2 initiated the discussion by dissecting the scientifc and political aspects of the net zero concept. It elaborated on why the Paris Agreement was a pivotal moment in global climate policy. Not only was it the frst global pact supported by all major carbon emitters, including the United States, China, and India, but it also established absolute global warming temperature targets. Based on climate science, these politically agreed-upon targets translate into a defned limit to the remaining carbon budget that humanity can aford, contrasting with the relative reduction approach of the Kyoto Protocol. Consequently, the Road to Net Zero demands a radical transformation of our systems, rather than continuous enhancements to existing fossil fuel technologies and business models.

Te chapter delved further into how governments can catalyze this transformative change. Te expert conversation within it explored the role of government policy in promoting conditions conducive to decarbonizing the economy. Tis includes strategies such as pricing carbon via emission certifcates and carbon taxes, enforcing suitable market regulations, and promoting infrastructure development necessary for the introduction and scaling of alternative technologies. Chapter 2 also elucidated how corporations can align their business objectives with the global Road to Net Zero. It introduces the idea of setting Science-Based Targets, which ofers a tangible and scientifcally substantiated framework for businesses to align their operations with global climate change mitigation eforts.

### **9.2.2 Chapter 3: Crafting Corporate Sustainability Strategy**

Chapter 3 shifted the focus from external, science-based discussions and political decisions, such as the Paris Agreement, to the internal strategic decision-making process within companies. It explored how these external parameters infuence business operations. In the past, companies often set sustainability goals that were separate from their core business strategies, typically under the umbrella of corporate social responsibility. However, the escalating urgency of climate change necessitates a fundamental change in approach. Mature strategies no longer regard sustainability as an isolated component, but integrate it holistically.

On the Road to Net Zero, true life cycle decarbonization requires that sustainability be woven into the fabric of a company's value creation process to encompass the entire value chain rather than just the company's direct operations. Chapter 3 delved into how this integrated approach revolutionizes the entire strategic process. Building upon Chap. 2, it started with strategy formulation as the phase to set reliable, Science-Based Targets. It then moved on to strategy implementation, which necessitates a unifed management approach, and concluded with strategy evaluation, which demands innovative methods of measurement and reporting, thus smoothly transitioning into Chap. 4.

#### **9.2.3 Chapter 4: The Future of Corporate Disclosure**

As the focus on a company's sustainability strategy and performance intensifes, the traditional approach of reporting solely on fnancial indicators falls short of meeting the diverse interests of all stakeholders. Traditional reporting, primarily designed for investors, emphasizes the company's fnancial performance. However, in today's context, specifcally on the Road to Net Zero, there is a growing need to encompass nonfnancial, sustainability-related aspects to address the information requirements of a wider array of stakeholders, including employees, governments, and society at large.

Te shift toward nonfnancial or sustainability reporting has seen a signifcant evolution, moving from voluntary standards with limited comparability to stringent regulatory requirements advocating for enhanced transparency. Chapter 4 delved into this transition and its relation to integrated reporting. It refected upon recent legislative changes, explored the challenges associated with measuring and selecting both fnancial and nonfnancial key performance indicators (KPIs), and discussed the delicate task of balancing the diverse interests of diferent stakeholders.

# **9.2.4 Chapter 5: Creating Sustainable Products**

In the automotive industry, one reason why the Road to Net Zero depends on trustworthy information and comprehensive reporting is that the advent of electric vehicles has shifted the majority of life cycle emissions from the usage phase to the production phase. As a result, circular value chains and their various elements have become paramount in the operational transformation to net zero. With this in mind, Chap. 5 shifted the focus to the importance of product design. Because decisions made in product design have diverse impacts on material sourcing, manufacturing, a product's use phase, and the options for closing material fows at the end of its life, the transition to a circular economy necessitates a reimagined approach to product development. Chapter 5 therefore explored design for recycling, the substitution of scarce resources with secondary materials, and the introduction of natural materials, with a particular focus on interior design. Implementing circular design also requires a shift in service design. Services that facilitate circularity, such as product take-back programs, become essential. Alternatively, a transition in ownership from manufacturers to service providers, emphasizing access and performance-based business models, can help execute circular strategies. Consequently, product design and service design must evolve in tandem.

# **9.2.5 Chapter 6: Transforming Value Chains for Sustainability**

Te conversation about sustainability in product development inevitably leads to the issue of procuring scarce and valuable resources. On the Road to Net Zero, the substitution of primary materials with secondary materials ofers a crucial lever for reducing carbon emissions over the entire life cycle. Chapter 6, therefore, deepened the material fow analysis by zooming into this potential, as well as the challenges of sourcing scarce and valuable resources for electric mobility. Manufacturing batteries and electric drivetrains, in particular, requires energy-intensive materials that are not only limited in quantity, but are also concentrated in a handful of countries worldwide. In addition to its relevance to greenhouse gas (GHG) emissions, this constraint underscores the call for closed-loop supply chains that incorporate secondary materials into production.

However, realizing the vast potential of these material fow loops to achieve carbon reduction and environmental impact goals is not without hurdles. Substantial technological, organizational, and regulatory obstacles exist at each stage of the circular value chain. Because circularity requires robust data, further digital advances, such as the digital battery passport and appropriate data-sharing methods, are essential. In addition, as later noted in Chap. 8 and its discussion of the role of technology, Chap. 6 provided important background on why continued innovation in battery storage technologies can signifcantly contribute to ofsetting existing resource scarcity and will strongly shape the blueprint of future sustainable supply chains.

#### **9.2.6 Chapter 7: Sustainability in Manufacturing**

Before Chap. 8 delved into this role of technology, Chap. 7 focused on the transformation of traditional factories into green, sustainable ones as a pivotal element in the operational transition to net zero. Over the last two decades, production optimization has been a focal point for researchers and practitioners. While the previous shift toward operational excellence was primarily internal, an integrated strategy now necessitates a broader, system-wide consideration, which ties back to Chaps. 3, 5, and 6. To illustrate this shift, Chap. 7 used the BMW iFACTORY as an example, which combines lean systems, digital technologies, and circular production to address sustainability comprehensively. Chapter 7 thus highlighted that the responsibility for implementing decarbonization and circularity begins, but does not end, within a company's own operations. It also emphasized that sustainable production is not a one-of project, but a continuous process that builds on a company's expertise in quality or lean management. Tis type of continuous learning requires access to multiple sources of data, from production machines to manual processes, again underscoring the relevance of data and transparency.

# **9.2.7 Chapter 8: The Power of Technological Innovation**

Te disruptive transformation required for the Road to Net Zero is not possible based (solely) on the basis of incremental efciency improvement in our current fossil fuel–based technologies. Tis is particularly true in the mobility sector. Chapter 8 examined technology alternatives that can replace the internal combustion engine (ICE) as the dominant drivetrain technology. Te chapter conducted a systematic analysis of future drivetrains, from electric drivetrains to synfuel internal combustion engines (ICEs) and fuel cells, discussing the eco-efciency as well as the challenges and opportunities of each technology and outlining potential future technological developments.

A key fnding of the chapter was that there is no technological silver bullet. Instead, each technology will be part of the decarbonization roadmap dictated by specifc use cases and contexts. Battery electric vehicles are likely to dominate personal transport, while hydrogen could complement in areas such as long-distance and heavy-duty transport or in sparsely populated contexts. Regardless of the underlying green technology, future vehicles will be Autonomous, Connected, Electric, and Shared (ACES), with each aspect contributing to sustainability when efectively integrated. However, zeroemission technologies need an enabling energy ecosystem with sufcient renewable energy and innovative charging infrastructure. Tis is a task to be addressed not only by private companies but also by public policies that promote market regulation, incentives, and investments for this enabling environment. Chapter 8 thus closed the loop by linking back to the frst expert conversation and the public policy discussion in Chap. 2.

#### **9.2.8 Looking Back on the Road to Net Zero**

Upon refecting on the summary presented above, we would like to share two crucial observations. First, the expert discussions documented in this book and the seven resulting chapters do not purport to ofer a comprehensive view of all the challenges and questions surrounding the Road to Net Zero. Rather, while addressing many vital topics, some important perspectives are absent. For instance, the role of consumers is touched upon (e.g., in Chap. 3 as a sustainability driver or in Chap. 5 when discussing service design to promote circular consumer behavior) but not explored in depth, and the interaction between automotive mobility and broader mobility systems is mentioned (e.g., in Chap. 7 on smart cities) but not analyzed thoroughly. We anticipate future discussions to tackle these and other underexplored aspects.

Second, the summary outlines the book's chapters in a linear fashion, implying a sequential progression. However, the real-world transition to net zero is far from linear, as all elements must occur simultaneously, with numerous interconnections and feedback loops arising between the various topics. Tus, the following section identifes and discusses recurring themes that link the diferent chapters and emerging insights as potential lessons to be learned across chapters.

# **9.3 Insights and Themes across Chapters**

As editors, we had the rewarding experience of reviewing all the chapters multiple times, often oscillating between diferent sections. Tis iterative process illuminated recurring themes and insights that echo throughout the various chapters and, at times, across the entire book. We present some of these observations in this section. It is important to note that not all these insights are novel or counterintuitive. To those of us deeply immersed in sustainability management, some fndings may seem evident and familiar. However, their recurrence does not diminish their importance but underlines their signifcance. We also share these insights with readers in mind who may be new to the discourse on sustainability management. Regardless of whether these insights seem novel to you, resonate with your experiences, or provoke critical thought, our aim is to stimulate a thoughtful discourse.

# **9.3.1 Sustainability Demands Both Integrative Thinking and Integrative Management**

Sustainability is widely recognized to necessitate integrative thinking due to the multifaceted nature of sustainability challenges. Tese challenges cut across various disciplines, sectors, and stakeholder interests, requiring an understanding that goes beyond the siloed knowledge of individual disciplines. Integrative thinking enables the synthesis of diverse perspectives and the ability to see interconnections and interdependencies. Tis is critical for devising holistic, efective strategies for sustainability that consider the environmental, social, and economic dimensions in tandem rather than in isolation.

In this book, experts from diferent disciplines exemplify this integrative thinking with a focus on integrative strategy (Chap. 3), integrative reporting (Chap. 4), the integration of sustainability in product development (Chap. 5), value chains (Chap. 6), or the factory of the future (Chap. 7). Tese contributions highlight that integrative thinking is more than the simultaneous consideration of ecological, social, and economic factors. It also requires a holistic view when embracing a life cycle perspective, integrating sustainability aspects from raw material extraction to a product's end of life.

However, integrative thinking does not come naturally. While functional diferentiation and specialization across disciplines are essential for gaining the detailed understanding required to address specifc challenges on the Road to Net Zero, they also create fragmentation that requires reintegration. Tis leads to a strong call for an integrative management approach, both within and between organizations.

Integrative management emphasizes collaboration and coordination across various units within an organization and among diverse external stakeholders. In the context of sustainability, this might mean aligning diverse internal functions—some of them represented in this book—on sustainability goals. It could also involve collaboration with external stakeholders, such as suppliers, customers, governments, nongovernmental organizations (NGOs), and communities, to cocreate sustainable value.

So what is the takeaway? Te integrative thinking required for sustainability must be complemented by appropriate forms of integrated management. Tis does not only mean incorporating sustainability into individual corporate functions; it also includes creating organizational structures that promote cross-functional collaboration and knowledge sharing. Furthermore, it is essential to align incentives that bind individual roles and responsibilities with the bigger sustainability picture.

# **9.3.2 Sustainability Is a Moving Target**

Tat "sustainability is a moving target" is not only a well-known adage in our feld, it is also a practical reality that we experienced while working on this book. From the expert discussions in 2021 to the completion of this book, we noted a myriad of changes in our conversations. Some details that were current during our initial discussions may appear outdated now. Without changing their substance, we have carefully adjusted these sections where appropriate. We have also encapsulated the expert dialogues within comprehensive chapters that focus on the emerging longer-term picture, with the goal of providing enduring value to our readers.

Sustainability is a moving target primarily because it operates within a complex, dynamic system characterized by a continual change. Social, economic, environmental, and technological factors are all in a constant state of fux, and each of these infuences our understanding of sustainability, as well as the drivers and means for addressing it. For instance, as scientifc knowledge about climate change deepens, our goals for carbon reduction may become more aggressive (Chap. 2). Similarly, as market demands and regulations change, so do the drivers for sustainability strategy (Chap. 3). Since the start of this book project, changing regulatory requirements have also massively reshaped the feld of sustainability reporting (Chap. 4). Likewise, geopolitical disruptions have changed the discourse on sustainable and resilient value chains between the initial expert conversations (2021) and this book's publication (2023) (Chap. 6). Finally, rapid technological change, including accelerated advances in artifcial intelligence, ofers new opportunities to promote circularity (Chap. 5), sustainable manufacturing (Chap. 7), and, of course, the race for green drivetrains (Chap. 8).

So what is the takeaway? On the Road to Net Zero, we must continually refresh our understanding of our destination and the path to reach it. Te multifaceted nature of sustainability means that advancements in one area could trigger new challenges and opportunities in others. Terefore, sustainability is not a fxed target, but an ongoing, evolving journey that demands constant reassessment and adjustment of our strategies and goals. Tis journey requires iterative learning and, crucially, unlearning. We must reevaluate and may need to discard yesterday's answers and practices and develop new ones tomorrow. It necessitates questioning established responsibilities, business models, technologies, and the notion of going it alone. Unlearning is challenging, especially in isolation. Hence, collaboration and exposure to alternative perspectives are vital for learning and prospering, which leads us to our next insight.

#### **9.3.3 Sustainability Is a Race You Cannot Win Alone**

Sustainability challenges, such as climate change, are systemic problems that require systemic solutions. Te Road to Net Zero is, therefore, about systemic change. However, as nearly every expert conversation highlighted, no company or organization can single-handedly achieve the systemic changes needed to transition to a sustainable future. Instead, collaboration is needed to secure and pool resources, share knowledge, and align eforts around common goals.

Collaboration with diverse stakeholders is nothing new for companies. In fact, cocreating value with customers, suppliers, investors, employees, and communities is at the core of what defnes a well-managed frm and sustainable growth. However, the Road to Net Zero calls for deeper and more nuanced forms of partnerships and collaboration. With this book's focus on the automotive industry in mind, we would like to highlight three of them.

First, public–private collaboration is essential for setting the stage for sustainable mobility solutions. Tis includes not just relevant energy market regulation and carbon pricing, but also the establishment of necessary infrastructure for electric or hydrogen mobility, from renewable energy generation to distribution, storage, and charging infrastructure (Chaps. 2 and 8). Second, on the Road to Net Zero, companies are being held accountable for the life cycle impact of their products. Tis is especially pertinent for the automotive industry, where vehicle electrifcation shifts emissions from usage to the upstream value chain (Chap. 6). To truly take responsibility for their full life cycle impact, companies must forge more profound collaborations along their value chains. Tis involves exchanging sustainability-related data, codeveloping and integrating greener technologies, and establishing circular material fows (Chap. 5). For instance, automotive OEMs can signifcantly reduce their carbon footprints by replacing primary materials with secondary ones. However, these solutions demand more sophisticated collaboration along the value chain, as Chap. 6 demonstrated for electric batteries. Tird, decarbonizing entire industries and sectors requires competitors to collaborate to establish robust industry standards and an equitable playing feld for sustainability (Chap. 3). Tis is already happening in the automotive industry with initiatives like Drive Sustainability, a partnership of leading OEMs improving supply chain sustainability, and the emerging data ecosystem Catena-X (Chaps. 5 and 6).

So what is the takeaway? Collaboration is undoubtedly a buzzword, and it is hard to argue against it. However, while it sounds simple, in reality, it can be a complicated dance. Coordinating diferent partners amplifes the complexity and necessitates the reconciliation of divergent, often conficting, interests. While the Road to Net Zero is grounded in a shared commitment to a sustainable future, the perspectives and motivations of companies, regulators, and civil society actors often diverge. Even among themselves, OEMs and suppliers vie for value, and competitors seek to outdo each other. Even within industries, companies compete for a slice of the pie. Competition and diverging interests do not disappear in the pursuit of sustainability; instead, it is about forming partnerships that respect these diferences and align them toward a common goal. Hence, companies must hone their partnership skills, including the ability to compete within a set framework while jointly crafting a better one.

#### **9.3.4 It Is All About Data: Measurable Indicators, Targets, Transparency, and Digitalization**

Data, along with measurable indicators, targets, transparency, and digitalization, are at the heart of the Road to Net Zero. Te book's opening chapter set the tone with the principle, "what gets measured, gets done," emphasizing that the journey toward sustainability must be grounded in reliable data and evidence, especially when it comes to the decarbonization of industry. Without them, eforts lack direction and tangibility.

Defning the right indicators is a crucial frst step. For climate change, this seems straightforward. Here, carbon dioxide (CO2) and the other greenhouse gases identifed in the Kyoto Protocol and translated into CO2 equivalents form the basis for the global climate policy discourse (Chap. 2). Tese indicators, in turn, enable efective target setting, both for the global Road to Net Zero (Chap. 2) and for corporate strategy (Chap. 3). At the global level, the 2 °C and 1.5 °C global warming goals and the implied remaining carbon budget present benchmarks against which global climate action can be measured, revealing our current dramatic shortcomings. Building on the CO2 indicator to translate global targets to the corporate level, companies can leverage frameworks like Science-Based Targets to align their decarbonization eforts with the decarbonization paths needed at the planetary level (Chap. 2).

Along with the indicators and targets, the right measurement scope is equally important. While at a planetary level, this is straightforward (all of humanity's emissions are included), the picture is more complex at the corporate level. Here, some emissions are caused by a company's own operations, while others occur upstream or downstream in the value chain (Chaps. 3, 5, 6, and 7). A life cycle approach to measuring emissions, therefore, accounts for CO2 emissions from all stages of a product's life—from the extraction of raw materials to the disposal of the product. Tis comprehensive view reveals hidden emissions and enables better decision-making. At the same time, it adds complexity, as Scope 3 emissions (occurring in the value chain) are much more difcult to infuence and measure.

However, having the right indicators, targets, and scope is pointless without access to high-quality data. Particularly when it comes to driving decarbonization in a complex system like a value chain, having precise, timely, and comprehensive data is paramount. Tis type of data allows businesses to identify hotspots for improvement, implement changes, and track their success. However, generating high-quality data is easier said than done. Currently, the majority of Scope 3 emissions are estimated using databases. Actual, real-time data are scarce. In addition, suppliers are reluctant to share data. Overcoming these challenges requires collaboration and technological innovation, with digital platforms like Catena-X demonstrating how digital solutions can facilitate data sharing on the Road to Net Zero.

Te role of digital solutions in accelerating progress on the Road to Net Zero cannot be overstated. Digitization has the potential to signifcantly enhance the transparency of carbon emissions in value chains (Chap. 6). Technologies such as blockchains, artifcial intelligence (AI), and the Internet of things (IoT) can provide unprecedented visibility into the environmental footprint of products and services throughout their life cycles (Chap. 5). For example, IoT devices can capture real-time emissions data at every stage of production (Chap. 7) and distribution, from raw material extraction to enduser consumption. AI can subsequently process this enormous amount of data to generate actionable insights, identify emissions hotspots, and propose efective mitigation strategies. Blockchain technology enables securing this data, ensuring its integrity, and making it tamper-proof. Tis shared, decentralized ledger allows every participant in the value chain to access and verify the same emissions data, fostering a culture of accountability and collaboration. Tus, by harnessing the power of these digital technologies, we can create a data-driven, transparent, and trustworthy system for tracking and reducing carbon emissions across value chains.

Finally, data are important for internal decision-making. Reporting this type of data, with all its complexities and nuances, is crucial to ensuring transparency and building trust among stakeholders (Chap. 4). Transparency promotes accountability, while also fostering an environment in which best practices are shared and replicated and accelerate the industry-wide transition to sustainability.

So, what is the takeaway? Progress on the Road to Net Zero depends on the quality of the data that guides us. Tis means that companies should take a science-based approach to defning reliable metrics and setting targets that are aligned with societal sustainability goals. To consider holistic life cycle impacts, collaboration across the value chain requires the fow of data and information along it. Digitalization provides the game-changing innovations needed to generate, exchange, process, and disclose data at this new level of complexity.

#### **9.3.5 Not Everything That Matters Can Be Measured (Accurately)**

While data, metrics, and measurement are crucial on the Road to Net Zero, many chapters emphasized that factors such as vision, leadership, and culture are equally essential to a successful transition to sustainability (Chaps. 1, 3, 5, 6, and 7).

Metrics are undeniably important for tracking progress and facilitating decision-making, but they are always selective and therefore have their limitations. One of the key challenges lies in the multidimensionality of sustainability. Sustainability encompasses a wide array of elements, from environmental protection to social equity and economic viability. While some of these aspects can be quantifed and measured, others are qualitative and intangible, making it hard to aggregate them into a single, comprehensive sustainability index.

Moreover, the sustainability transition discussed in this book is taking place in a 'VUCA' world (Chap. 3) characterized by volatility, uncertainty, complexity, and ambiguity. Predicting future scenarios or outcomes involves a multitude of variables and assumptions, many of which are subject to change due to unpredictable factors. Terefore, while metrics can guide our actions and decisions, they cannot perfectly predict the future or fully capture the complexity of sustainability.

Tis is where the importance of vision, leadership, culture, and long-term commitment comes into play (Chaps. 5, 6, and 7). Te role of leadership is not just to understand and use metrics but to provide a vision of the future that transcends these measurements. Leaders need to inspire and motivate and to foster a culture of sustainability that is rooted in values and beliefs as much as in data and evidence. Tis culture, in turn, can shape behaviors and decisions in ways that cannot be precisely measured but are nonetheless critical to achieving sustainability goals.

A good illustration of this is the 1.5 °C global warming target that underpins the Road to Net Zero. While this target is informed by scientifc data on the potential impacts of climate change, the decision to set this particular target was ultimately a political one (Chap. 2). It represents a collective vision of a future in which we limit global warming to a level that, according to scientifc consensus, could prevent the most catastrophic efects of climate change. Tis vision and the leadership required to pursue it are essential complements to the metrics that guide our path toward sustainability.

So what is the takeaway? Te transition to sustainability requires a balanced approach, combining both technological advancements and evidence-based decision-making with shared values and a clear vision. Metrics alone, without a guiding vision, can lack direction and may not lead to meaningful change. Conversely, a vision without factual evidence might result in superfcial or inefective solutions. Achieving sustainability demands the thoughtful integration of both elements, creating a comprehensive strategy that is frmly rooted in scientifc facts and guided by shared values and aspirations.

# **9.4 Beyond the Road to Net Zero**

Tis book has brought together selected perspectives that have their role to play on the Road to Net Zero. In doing so, the primary focus was on the urgent issue of climate change. However, as we underscored earlier, sustainability is a moving target that is constantly evolving in response to our growing understanding of our relationship with the planet and the realization of our collective responsibilities. Terefore, reaching net zero is just a milestone, not the fnal destination. In this section, we highlight a few exemplary topics that merit further exploration but are beyond the scope of this book. Although these topics have been touched upon within this book, they invite a more comprehensive exploration in our ongoing quest for sustainability. Te list is far from complete but sufces to show the potential for further collaboration between universities and industry.

# **9.4.1 Beyond Decarbonization**

Tis book has primarily focused on the Road to Net Zero, acknowledging the urgent need to reduce CO2 emissions in light of the ongoing climate crisis. Tis is a signifcant step forward in addressing the sustainability challenge. However, we must understand that it is not the only pressing environmental issue we face today.

Beyond carbon emissions, other pressing ecological challenges exist, such as the signifcant footprint of our material resource consumption. Tis footprint afects not only carbon emissions but also biodiversity, our water resources, and social issues, including human health. Te Global Resources Outlook by the United Nations Environment Programme (UNEP) in 2019 revealed that resource extraction has tripled since 1970, even though the population has only doubled during the same period. Extractive industries contribute to half of the world's carbon emissions and account for more than 80% of biodiversity loss.

Tese consumption patterns, with the world utilizing over 92 billion tons of materials annually and growing at a rate of 3.2% per year, are not sustainable. Agricultural land-use changes account for over 80% of biodiversity loss and 85% of water stress, with the extraction and initial processing of metals and minerals accounting for a signifcant proportion of health impacts from air pollution and global carbon emissions.

To address these issues, we need to decouple economic growth from material consumption. Tis can be achieved through a circular economy, which not only reduces CO2 emissions but also reduces the strain on our planet's fnite resources. Te importance of slowing down, narrowing, and closing material fows for this purpose has been described in detail in Chap. 5 of this book. Tere is already a broad knowledge base in sustainability management for implementing circularity through various strategies. However, compared with the climate-related Road to Net Zero, there is still a critical path ahead.

In fact, the signifcance of the Road to Net Zero goes beyond its climate change implications. It symbolizes humanity's frst attempt to translate critical planetary boundaries into policy frameworks and science-based corporate targets. Te "Road to Net Zero" recognizes that human prosperity and economic growth must be aligned with the ecological carrying capacity of our planet, with the climate system being one such planetary boundary. Te Paris Agreement and its related frameworks provide an accepted benchmark for climate change. However, for other planetary boundaries, such as biodiversity, the development of adequate indicators, global targets, development pathways to meet them, company-specifc targets, and standards for measuring and comparing performance is much more in its infancy.

In this book, we have focused on the Road to Net Zero greenhouse gas emissions. However, humanity must also bend the curve regarding the loss of biodiversity, soil, or freshwater reserves. With the Global Biodiversity Framework agreed upon in December 2022 at the United Nations' Biodiversity Conference COP15 in Montreal, a New Road to Net Zero could emerge regarding biodiversity loss. A business-related initiative linked with this discourse is the Science-Based Targets for Nature (SBTN), which extends the successful Science-Based Targets Initiative (SBTI) for climate to other aspects of nature. SBTN seeks to develop quantifable, scientifcally backed objectives to mitigate the impacts of environmental degradation and biodiversity loss. Te initiative's success remains to be seen, but its potential to infuence corporate activities is encouraging.

Alongside ecological challenges, businesses are also grappling with their broader social impact, including their duty to respect and uphold human rights. As industries transition toward electrifcation, green energy, and circularity, this afects the complexity of global supply chains, presenting new risks of indirect involvement in human rights abuses. Corporations are also tasked with ensuring fair labor practices, not only within their own organizations but also within their supply chains, which span multiple jurisdictions with varying labor standards. Te rapid advancement of technology, such as automation and artifcial intelligence, has introduced new challenges in preserving privacy and preventing discrimination.

As on the Road to Net Zero, businesses must foster more efective collaborations with governments, NGOs, and communities to successfully address these issues. In addition, they must establish robust grievance mechanisms and remediation processes to respond efectively when things go awry. Te importance of transparency and accountability cannot be overstated in these matters. However, just as discussed for environmental challenges, the development of comprehensive indicators and standards for measuring, comparing, and reporting human rights performance remains an ongoing process, again refecting the nature of sustainability as a moving target.

Finally, grasping the interconnectedness and intersectionality of various sustainability challenges is crucial. For instance, while the electrifcation of mobility presents a promising path toward lowering CO2 emissions, the increasing demand for certain minerals can inadvertently exacerbate biodiversity loss and result in human rights challenges. Similarly, the shift toward a circular economy is not devoid of complexity. Tis might necessitate managing trade-ofs between reducing GHG emissions, moderating water usage, minimizing biodiversity impacts, optimizing required land mass, and limiting hazardous emissions. In this context, businesses transitioning to circularity must develop a nuanced understanding of these trade-ofs and establish rigorous criteria for evaluating and comparing them when making pivotal decisions. As we continue our journey toward a sustainable future, it is essential that our approach is comprehensive, balanced, and cognizant of these interwoven facets of sustainability.

# **9.4.2 Beyond Reducing Negative Impacts**

As our discussion of the Road to Net Zero focused on how to sharply diminish carbon emissions, the spotlight has invariably rested on curtailing a company's adverse impact on its environment. Unarguably, mitigating harm carries immense signifcance—a truth we expounded in our preceding discourse. However, an overemphasis on the reduction of harm can cast a shadow on another equally important aspect—the positive impacts that society expects companies to create. Traditionally, these positive contributions encompass a wide range of factors, from the utility of their products and services in addressing various human needs and the fnancial and personal development opportunities ofered to employees to the fnancial returns disbursed to investors and society via taxes.

As we traverse the Road to Net Zero, acknowledging the positive roles of corporations becomes crucial to ensure that well-meaning attempts to pare down negative efects, such as decreasing carbon emissions, do not inadvertently cause unproportionally harm elsewhere by undermining the value companies bring to their stakeholders.

Understanding how companies can create positive impacts is also crucial to achieving net zero goals, as discussed in this book. Te term "net zero" itself suggests a balance—it does not denote the absolute absence of emissions; rather, it suggests the idea that remaining emissions added to the atmosphere can be ofset by emissions eliminated or sequestered elsewhere.

In the Paris Agreement, the net zero goal mandates that, by 2050, global emissions must be as close to zero as feasible, with any lingering emissions reabsorbed from the atmosphere by oceans and forests, for instance. Tis emphasizes the need for carbon removal, hence shifting the focus toward measures with a positive impact. Similarly, the SBTI Net-Zero Standard states that companies wishing to adhere to this ambitious standard must not only establish robust reduction targets (at least 90% emission reduction by 2050) but also neutralize any remaining emissions through permanent carbon removal and storage.

Tis focus on activities with a positive impact extends beyond just net zero carbon emissions to include net zero targets for biodiversity and water. Here, for any biodiversity loss that cannot be avoided, businesses need to neutralize these remaining negative efects with positive impact measures. Positive impact activities are therefore pivotal in achieving any net zero goal. However, even upon reaching the net zero landmark, net zero emissions or biodiversity losses only signal a cessation of future harm to our climate and natural environment. Te existing damages and depleted ecosystems remain unaddressed, which is where regenerative business practices come into play.

Regenerative business practices are an emerging paradigm that aims to restore, renew, and revitalize their own sources of energy and materials. Tis concept takes sustainability a step further, moving beyond merely reducing harm to actively repairing and enhancing the environments and communities in which a business operates. Tese practices embody the essence of regeneration—they are, by defnition, net positive. 1 Tey enable companies to design systems that not only sustain but also enhance the capacity of the environment and communities to fourish. Companies can apply such regenerative practices in their own operations, encourage their suppliers to do so, or collaborate with third partners (e.g., when restoring natural ecosystems or removing carbon from the atmosphere).

Tese capabilities to generate positive impacts, individually or in collaboration with others, open up thrilling prospects beyond the net zero milestone. Hence, once we have traversed the Road to Net Zero, the next stage of ambition could be to embark on the Road to Net Positive.

# **9.4.3 Beyond Single Trajectories That Ignore the Role of Space**

Tackling climate change via the Road to Net Zero is a worldwide efort, but it is crucial to recognize that solutions and contributions are context-specifc. Tis book has touched lightly upon this geographical aspect, but it needs more in-depth exploration in future research and cross-sector dialogue.

Place matters enormously when it comes to transformation pathways toward sustainability. From a business viewpoint, various factors, such as the enabling environment, strategic drivers, potential alternatives, practical constraints, and benefts of sustainability engagement, are all infuenced by where the company operates. Here, companies often encounter fragmented and sometimes contradictory environmental contexts that pose the challenge of forming a unifed, consistent strategy.

To start with, in Chaps. 2 and 8, and beyond, this book highlights the role of public policy in shaping corporate sustainability strategies, ranging from energy market and carbon pricing regulations to those concerning products and technologies (such as feet emissions or the ban of internal combustion engines) and infrastructure development (such as charging infrastructure). However, public policies are far from uniform globally. For example, emerging regulations for recycling electric batteries vary signifcantly between China and the European Union, meaning that the requirements for companies' sustainability strategy difer depending on the regulatory context.

In the automotive industry, providing mobility has, by defnition, a spatial perspective. It makes a diference whether mobility is provided in an urban

<sup>1</sup>Note that "positive" here refers to the desirable, positive impact, not to remaining undesirable efects that have not been reduced to zero.

context in the Netherlands or in a rural context in Brazil. Te spatial context will infuence customer needs, the availability of charging infrastructure, and the suitability of diferent technologies to meet those needs.

Furthermore, when assessing the sustainability of value chains, it is critical to consider spatial factors afecting the life cycle impacts of technologies and usages. Factors such as the availability of green energy, water scarcity, biodiversity impacts, and emissions from transport and logistics are all location-dependent. Hence, the most sustainable alternative in one location might not be the same in another. External drivers like societal expectations and customer and employee needs play a key role in shaping a company's sustainability strategy (Chap. 3). Tese societal drivers vary greatly between regions. Terefore, global companies must balance meeting diverse expectations while maintaining their internal consistency. Considering these spatial contexts, the journey to net zero will follow diferent trajectories in diferent regions.

Tis book evolved from a discussion among experts from the same spatial neighborhood. Te FAU and BMW headquarters are both located in Bavaria, Germany. However, for a more comprehensive understanding, we need to foster dialogue with stakeholders from other global regions like China, the United States, and others. Future exchanges should focus more on understanding these difering contexts, their infuencing factors, their impact on sustainability, and how companies, regulators, and other stakeholders can align multiple transition pathways on our shared planet.

# **9.5 The Future of Industry–University Partnerships**

Te journey toward sustainability requires innovative technologies and robust policy frameworks, as well as dynamic collaborations that transcend traditional boundaries. Tis book stands as a testament to this type of collaborative spirit by documenting and expanding on the dialogues of experts from BMW and FAU, who came together to discuss critical landmarks on this journey.

Tese dialogues underscore the potential of university–industry partnerships in addressing sustainability challenges. Tese challenges are complex and multifaceted, demanding an array of perspectives and interdisciplinary dialogues. Universities, particularly full-spectrum universities like FAU, are uniquely equipped to facilitate such dialogues. Tey encompass a wide spectrum of disciplines and maintain a crucial outside position, providing a healthy distance and independence from business, political actors, and civil society. Tis independence allows them to critically assess the status quo and propose innovative solutions grounded in rigorous research.

However, the dialogues in this book, while insightful, have largely represented rather homogenous views. Tis points to the need for a greater diversity of viewpoints in our discussions around sustainability. Controversies about sustainability should not be viewed as a hindrance, but rather as a source of innovation and learning. If orchestrated constructively, they can spark creative solutions and drive progress. In these dialogues, it is important to respect the difering identities, needs, and integrities of various actors, recognizing that each contributes a unique perspective to the overall discussion.

While this book has focused on the collaboration of two strong partners in Bavaria, BMW and FAU, future collaboration must transcend regional and institutional boundaries. Universities, with their inherently international nature and rich tapestry of research collaborations, are well suited to facilitate such partnerships. Tey can serve as a platform where perspectives from different regions, disciplines, and sectors can coalesce, fostering a rich discourse that can fuel sustainability transformation.

Furthermore, universities serve as a natural bridge and forum for discussion between generations. Tey are places where enthusiastic and sustainabilitydriven youth interact with experienced professionals and academics. Tis intergenerational dialogue can stimulate fresh thinking and drive momentum toward sustainability goals.

In conclusion, the power of university–industry partnerships in driving the transition to sustainability cannot be overstated. Tese partnerships ofer an invaluable platform for interdisciplinary dialogues, viewpoint diversity, and international collaborations. More than that, they provide a space where respect for difering identities and needs, and the passion of diferent generations for sustainability, can come together to catalyze transformative action on the Road to Net Zero and beyond.

**Open Access** Tis chapter is licensed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons. org/licenses/by/4.0/), which permits use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons license and indicate if changes were made.

Te images or other third party material in this chapter are included in the chapter's Creative Commons license, unless indicated otherwise in a credit line to the material. If material is not included in the chapter's Creative Commons license and your intended use is not permitted by statutory regulation or exceeds the permitted use, you will need to obtain permission directly from the copyright holder.