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21:56

Guest speaker:

David Lubin, Constellation Research and Technology, Inc.
Timothy Nixon, Constellation Research and Technology, Inc.

Sustainability Trends In the Automotive Industry [Climate Risk Analytics]

Episode 43 | Duration: 21 minutes

Find out how the auto industry changed over the last decade and if automotive brands are ready to transform their products to reach the sustainability goals. And, how do changes in the automotive sector affect other industries?

  • Keesa Schreane [00:00:00] Welcome to the Refinitiv Sustainability Perspectives podcast, where our goal is to engage and inform our audience, from investors to asset managers and portfolio managers to sustainability leaders and those involved in ESG and sustainable finance. I'm Keesa Schreane 

    Keesa Schreane [00:00:20] Today, we're talking about sustainability trends in the automotive industry and how the industry is transforming to become more sustainable. We're speaking with David Lubin and Timothy Nixon, both from Constellation Research and Technology and co-contributors with Refinitiv to the report "Sustainability Trends and the Automotive Industry: Truckification and Electrification. You can access the report using the link in the episode description. Now let's dive right in.  

    Keesa Schreane [00:00:52] David, could you please tell us about the top three focus areas of the report?  

    David Lubin [00:00:58] Sure. I'd love to. Refinitiv asked us to take a deep dive, look at the automobile sector as to how important it is in the overall push to decarbonize the economy. When we undertook the report, we decided to first take a look back at the last decade, the last 10 years, and see what had happened in terms of market trends in the auto sector. And that trend can be summarized in one word in our report, truckification the Rise of SUVs, which has significantly complicated the decarbonization effort. So one piece of the report is looking at the whole truckification trend. Who played and what happened to our emissions footprint as a result. And of course, the story is, it went way up. The second aspect of the report was to look at how the major automakers, the twenty-six major automakers in the world, have prepared for the effort to decarbonize in the 2020 to 2030 period. And the third piece of the report, which we'll talk about as well later today, is looking at the auto sector from the investors: which companies are prepared, best prepared to take advantage of the decarbonization opportunities and manage the risks among the twenty-six major automakers. Those are the three pieces.  

    Keesa Schreane [00:02:38] Wow, very good. I like to hear more about the trends that are complicating the decarbonization efforts for automakers. Timothy, could you share with us is there a barrier to profitability involved? And what are some of the other complicating factors that you're taking into account?  

    Timothy Nixon [00:02:54] Sure. Well, there are a few trends that are emerging that certainly will create concerns around profitability for some of the auto manufacturers who are not able to adapt. And these trends are primarily regulatory. So we're seeing increasing numbers of jurisdictions, both national and state and city, impose targets for fossil-free transportation from automobiles. So essentially banning new cars that aren't electric by a certain date. And this list continues to grow for seeing a particular focus in Europe and in South Asia. But I would expect that that to continue and spread as new jurisdictions, potentially, even with the Biden administration, introduce new regulations. So regulation is one driver. Another, of course, is investors. So we're seeing an increasing premium coming from investors and rewarding companies that are able to show either an existing track record of decarbonization in their product or, you know, real concrete Forward-Looking planning on how they're going to decarbonize their fleet going forward. And finally, I would say that you know, alongside the pandemic, we're starting to see the, you know, the power of consumer demand and demand that says, "I want this supply and fund a world that's healthy, healthy for me and healthy for my grandkids". So alongside investors and regulators, consumers are taking a seat at the table, making life quite a bit more complicated for companies that can't figure out how to decarbonize their services and products with enough profitability.  

    Keesa Schreane [00:04:41] And just so we're clear here with the regulatory trends piece, there are actually bans around new non-electric cars. What regions are we seeing this in?  

    Timothy Nixon [00:04:52] Yeah, so primarily you're seeing that now in Europe and in South Asia. Sorry, South and East Asia. So Japan, China, Korea and Europe are leading the charge on this. But again, it's not the kind of thing that that's going to stay isolated. As you know, the increasing interest in decarbonized products takes hold. 

    Keesa Schreane [00:05:24] Could you share who is making progress when it comes to climate impact management and what have they done to manage this before thinking around sustainability and around transition risks? It can be from a country perspective as well as from the industry perspective.  

    David Lubin [00:05:41] Well, if you've looked if you look at the numbers, just picking up on what Tim said a moment ago, if you look at the actual numbers in terms of grams of CO2 per kilometer of the vehicles that were actually sold in the 2010 to 2020 period, the first half of the decade through to 2015, looks like we are on the down the downhill slope, quickly moving towards high efficiency, low emissions automobiles.  

    David Lubin [00:06:16] And then around 2015, the whole picture flattened out. And in fact, the trends in many companies and in many countries began to turn negative. More emissions per kilometer of the fleets that were actually sold. And of course, that was this the rise of the big SUVs. These the mid to large-sized SUVs. And really across the board, while that was while that SUV trend was taking place, some companies were like Toyota. We're still continuing to push their hybrid and high-efficiency vehicles, though they were being overwhelmed by their great success in selling much larger vehicles. If you look at the present moment and try to cast your eye forward, what you see is a kind of interesting picture among the companies that have the most aggressive plans for decarbonization and electrification, like VW. And now, more recently, Hyundai and Kia. Those are companies that have relatively little experience with hybrids and high-efficiency vehicles. Over the past decade and some of the companies with a great deal of experience, the course of the leader being Toyota, half with hybrid vehicles have been least clear about or less much less clear about their plans going forward.  

    David Lubin [00:08:00] So we've got an environment now, when we in the report map out the history file versus the projection for the future based on current statements of plans by the companies. What we see is very aggressive plans by those several of the companies less experienced with alternative vehicle production. And interestingly, less clear and seemingly less aggressive plans from some of those who have been at the forefront of pushing alternate to drive vehicles. So this is the moment in which I guess what I would say, the market is in flux. There is going to be a significant reordering of the leadership, we think, in the marketplace simply based on the comparison of past performance to future projection.  

    Keesa Schreane [00:09:02] So, Timothy, if we do take that into consideration, what sorts of plan items? Bullet point, key ideas should an investor look for? They're looking at what makes a good plan. What makes a successful plan in terms of these hybrids? Are these high-efficiency cars? What should they look from companies?  

    Timothy Nixon [00:09:22] Yeah, I mean, I think the most obvious thing is it does auto manufacturers have a transparent, detailed multi-year or even more by decade plan for how they're going to take their current fleet and introduce deep decarbonization consistent with the assumptions of a 2 degrees world. So the deal here is that this is not just about automakers, automakers competing with each other.  

    Timothy Nixon [00:09:56] It's about automakers operating in line with the plan that, you know, we'll all recognize a decade from now. And that's a moving target. The policy target is because conditions are changing, frankly, worsening all the time, as is the actual competitive situation for these automakers. And on top of that, if you take a company like VW and you say, OK, VW doesn't appear you've been able to produce any electric vehicles that scale, you have no demonstrated capacity to do that. And yet you've got all these plans to produce a decarbonized fleet. And then you ask the question, well, how many workers is it going to take to produce electric cars versus internal combustion engines? And then you start asking questions about the possible economic consequences for the communities in which a giant automaker like VW operates and the impact on employment levels. And you start to realize that, you know, this isn't just a big deal for an auto manufacturer. This isn't just a big deal for the planet in our climate. It's a big deal for whole communities. Tens of thousands of employees and hundreds of thousands of peoples in those communities. So the stakes are higher than they might appear.  

    [00:11:20] So that sounds like it's one type of exposure, perhaps, that that other industry leaders need to look out for. Are there other is that the definition of an exposure? And if so, what are the other exposure elements that other industry leaders need to look out for? David, what do I have to say about that?  

    David Lubin [00:11:37] Well, I was just going to pick up on your original question. What we tried to do in this effort was to turn a lot of these issues into fact-based, rule-driven analytics that we think can help generate some insight and some tools for monitoring the progress of companies in this transition period.  

    David Lubin [00:12:05] So in particular, we tried to create some analytics in which we looked at all of the announced plans of the automakers. Some announced introductions of models, some announced in different time periods, and some announced actual production targets for electric vehicles on a yearly basis. And so we've tried to blend together using a rule they set of algorithms, a, if you will, a score that gives us a way to index the ambition of a company's targets for the future. It allows us to compare on level ground companies that provide more or less information, particularly between now and 2025. 

    Keesa Schreane [00:13:07] This a great concept. Could you name the top three of the top five, what they are?  

    David Lubin [00:13:12] Yeah. So well, we of course, first and foremost believe that people interested, investors and other stakeholders, interested in this topic, need to move beyond thinking about scope one, two and three measures as being the key measures to look at company performance. There are too many assumptions and too much wiggle room in how those numbers are created to make it them particularly meaningful in the auto sector. So for us, the gold standard metric, if you will, is the grams of CO2 per kilometer of the actual sold leak of each of the automakers.  

    David Lubin [00:14:03] So we begin there with what we think is a good comparison of all the major automakers on grams of CO2. The second key thing we did, of course, is to look at the rate of change in that number. So we calculated a long-term average over the past five-plus years of annual change in the grams of CO2 per kilometer of the old fleet. We also thought it was critical to look at the composition of the whole fleet of each of the automakers in terms of the, in effect, the ratio of high-efficiency vehicles to all others in their fleet.  

    David Lubin [00:14:56] So those achieving a high, you know, a high mile per gallon or low gram of CO2 per mile gives us another look at how much of the production comes from these high-efficiency vehicles. And of course, I know there are about a dozen of these. Well, but of course, if they all roll together into a couple of key metrics, one being our sustainable value ratio in which we look at all of the metrics that reflect how well a company is pursuing the opportunity, that the business opportunity that comes from a high-efficiency vehicles alternative drive electric and plugs in hybrid vehicles in comparison to all the risk factors that they're exposed to, which include geographic risk, the regulatory risk that's based on geography and other THT risks that result from more production. And that gives us a new kind of risk to opportunity ratio, it's what we think the new T ratio for sustainable investment.  

    David Lubin [00:16:27] So it takes all these granular, fact-based, production-oriented metrics that are better tied to each of these major companies and then tries to look at both the past and future view of risk, of opportunity versus risk ratio for each of those makers. It tells us an awful lot that we think investors would want to know and gives us the chance each year to see how the how that risk opportunity ratio changes for a company.  

    Keesa Schreane [00:17:06] And so that's great. Timothy, you want I want to bring you in on this, too. We'll give you the last word here. Are there knock-on effects for other industries? So outside of the automotive industry, are there knock-on effects for some of the other industries that you've seen with this?  

    Timothy Nixon [00:17:22] Yeah, well, so it just this might surprise you, but I think I would start with the ESG rating industry because if you look at the way we're analyzing with definitive performance or readiness, risk readiness for this key sector. And what you find at the top of our performance or risk readiness list are companies like Tesla and BYD who do not perform at the top of more conventional ESG rating systems. And that's because this is a look at something different. So look at operational and benchmarking data alongside ESG did it.  

    Timothy Nixon [00:18:27] And the sorts of charging for electric industry and many utilities are also converting themselves into suppliers of clean electricity. So that when, you know, the conscientious test of a buyer goes to plug in her Tesla and you'll know hopefully good about that.  

    Timothy Nixon [00:18:49] You know, it is a good thing because the energy is coming from renewable sources and not from coal-burning power plants. So there's a number of utility oil and gas and other sector knock-on effects which can, when they all come together, actually build on each other and create even more forward momentum for global electrification.  

    Keesa Schreane [00:19:14] Thank you and great conversation. David and Timothy, first of all, looking at the truckification trend, we're looking at 26 major automakers and how they are moving forward with decarbonization. Some of the trends that you spoke about, regulatory banning new non-electric cars. And we see that happening in Europe as well as in Asia. Investors are rewarding companies that show a good decarbonization track record. And finally, of course, consumer demand. Consumers demanding change around decarbonization.  

    Keesa Schreane [00:19:49] And who is doing this well? Well, companies who have sold SUV cars, but also who continue to move forward with their hybrid vehicles and high-efficiency vehicles. The plans that we really consider to be top tier plans for companies who are really doing this right. Auto manufacturers who have transparent, multi-year, or even multi-decade plans toward decarbonization, as well as those companies that are operating in line with the broader defined goals. Finally, some key metrics around how companies are faring and how we get to the conclusions that we've got at the end of the report, grams of CO2 per kilometer of the sold fleet of each automaker. Looking at the rate of change in this number and the composition of the sold fleet, high-efficiency vehicles as compared here to other vehicles. Of course, data being very important, all aspects of the measurement, benchmarking data and ESG data to really give a deeper understanding of climate readiness. Also understanding how the knock-on effect happens, how other industries are being repositioned because of this decarbonization. An example is utilities positioning themselves as suppliers of clean energy. And of course, we look broader to the social area. There is an economic consequence for communities. Employment levels are impacted. David, Timothy, great conversation. Thank you so much for joining.  

    Keesa Schreane [00:21:19] Also again, access the report, Sustainability Trends and the automotive industry using the link and the episode description. Thank you all so much for joining.