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Climate risk and the auto sector: The impact of changing consumer demand

Leon Saunders Calvert
Leon Saunders Calvert
Head of Research & Portfolio Management

A new Refinitiv report takes a critical look at the carbon-intensive automobile industry. How are changing consumer preferences over the last decade impacting the sector’s decarbonization strategies, and how can analytics help to manage and mitigate climate risk?

  1. Stakeholders in carbon-intensive industries are at the coalface when it comes to the complex task of understanding, analyzing and mitigating climate risks.
  2. Climate change and the decarbonization of the economy has the potential to make or break long-term investments if the implications of climate risk are not quantified and managed.
  3. Climate risk analytics is empowering and informing investors and other stakeholders to make better, more sustainable decisions for the future.

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The far-reaching risks of climate change and its growing impact on both the environment and the global economy are well-documented, but stakeholders in carbon-intensive industries, such as the automobile sector, are at the coalface when it comes to the complex task of understanding, analyzing and mitigating these risks.

The good news is that a new generation of climate risk analytics, based on robust and reliable environmental, social and governance (ESG) data, is empowering and informing investors, asset managers, and other stakeholders, to assess and quantify climate risk and make better, more sustainable decisions for the future.

Our latest report, Sustainability trends and the automotive industry, looks at the trends in vehicle demand and sales between 2010 and 2019, and analyzes the impact of these changes, alongside sustainable objectives, on decarbonization strategies within the sector.

Download Refinitiv’s report, Sustainability trends and the automotive industry

A decade of truckification

Between 2010 and 2019, global vehicle sales increased by a significant 23.1%, alongside a historic shift in consumer preferences.

A chart showing global vehicle sales 2010-2019 by country.
Click the chart to download the ‘Sustainability trends and the automotive industry report’

Demand for sport utility vehicles (SUVs) skyrocketed, with almost all automakers recording significant growth in the mid-to-large SUV class.

This transformation, known as truckification, spelled rising profits for automakers, but simultaneously complicated their decarbonization strategies and introduced a host of consequences for emissions and climate change initiatives within the sector.

The industry has always been a significant contributor to global GHG (greenhouse gas) emissions, but research by the International Energy Agency (IEA) revealed that growth in SUV use was the second largest driver of rising GHG emissions globally between 2010 and 2018, second only to electricity and heat production.

A chart showing global CO2 emissions by source 2010-2018
Click the chart to download the ‘Sustainability trends and the automotive industry report’

A voracious consumer appetite for truckification across the globe, but especially in the U.S. and China, has largely been responsible for this fundamental shift, with our report concluding that the impact on emissions is clear.

Arguably worse, as a result all automakers are now highly dependent on this vehicle class for their future growth and profitability.

As a new decade unfolds, the sector remains tasked with intensifying existing decarbonization strategies, but this is not likely to be a straightforward process given that consumer demand for larger vehicles shows no signs of abating.

Challenges for the automobile sector

Challenges, including sluggish demand for alternative vehicles and regulations that favor larger vehicles, are further slowing progress in the decarbonization arena.

The need for appealing alternatives to conventional internal combustion engines is clear, but although such alternatives – including hybrid vehicles and fully electric vehicles – are already available, they represented under 5% (4.3 million of the total 87.1 million) of vehicle sales at the end of the decade, with a massive 95% of the 2019 sold fleet comprising fossil-fuel powered vehicles.

A chart showing alternative vehicle production 2010-2018 by type
Click the chart to download the ‘Sustainability trends and the automotive industry report’

Further complicating the landscape is the fact that some regulatory provisions favor large vehicles. For example, in the U.S., the marketing of less efficient vehicles is enabled by Environmental Protection Agency (EPA) emissions regulations that calculate emissions allowances based on the wheelbase and weight measurements for each vehicle. This allows more emissions per mile for larger vehicles.

How climate risk analytics can drive change

Against this complex and challenging backdrop, stakeholders in the automobile industry need reliable, trusted tools and analytics to help them fully understand and ultimately mitigate climate risk.

The core of Refinitiv’s purpose is to bring transparency to markets. This is certainly true of our continued investment to enable sustainable finance. Refinitiv offers the most comprehensive ESG dataset in the industry, but also recognizes that accurately understanding corporate intent and effectively measuring the ability of firms to execute their planned decarbonization strategies is not possible using ESG data alone.

Watch: The value of climate analytics in investment processes

Managing climate risk in the automobile sector

We have therefore partnered with Constellation Research, who have developed an innovative method of generating advanced analytics that leverages granular, forward-looking operational and sales data alongside Refinitiv’s ESG data. These analytics focus on climate policy, transparency and reporting, and deliver critical insights into which manufacturers are leading the sector in managing climate risk.

As the automobile sector gears up for what is likely to be another decade of historic transformation, this new generation of climate risk analytics will become part of the essential toolkit needed to accurately inform investors and other stakeholders about the progress and prospects for decarbonization within the sector. In this report, we look at the dynamics between “truckification” and “electrification”, the two variables which have most impact on the industry’s journey to decarbonization.

We forecast the direction for the next few years and – using Refinitiv’s extensive data, such as corporate carbon emissions, policies and targets – identify the likely winners and losers in the transition to a low carbon and prosperous future. For investors it has the potential to make or break long term investments, such as pensions savings, if the implications of climate risk are not quantified and managed. Failure to move capital to the companies most likely to survive and thrive as the economy decarbonizes, is both a risk and a missed opportunity.

Download Refinitiv’s report, Sustainability trends and the automotive industry

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