Episode Transcript
Speaker 0 00:00:00 Welcome to the re 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 E S G and sustainable finance. I'm Kea Shreen. 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 the Refinitiv to the report sustainability trends and the automotive industry truck electrification and electrification. You can access the full report using the link in the episode description. Now, let's dive right in. David, could you please tell us about the top three focus areas of the report?
Speaker 1 00:00:58 Sure. Uh, I'd love to, uh, Refinitiv asked us to take a deep dive look at the automobile sector cause of how important it's, uh, in the overall push to decarbonize, uh, the economy. When we, uh, undertook the report, we decided to first take a look back at the last decade, the last 10 years, uh, and see what had happened in terms of, uh, market, uh, trends, uh, in the auto sector. Uh, and that, uh, trend can be summarized in, in, in one word in our report, reification the rise of SUVs, uh, which has, uh, significantly complicated the decarbonization effort. So, one, one, uh, piece of the report is looking at, uh, the whole stratification trend, uh, who played, uh, and what happened, uh, to our emissions footprint as a result. Uh, and, and of course the story is it went way up. Uh, the second, uh, aspect of the report was to look at how the major automakers, the 26 major automakers in the world, uh, have prepared for, uh, the effort to decarbonize, uh, in the 2020 to 2030 period. And the third piece of the report, which we'll talk about, uh, as well, uh, later today, uh, is looking at, uh, the auto sector from the investor's view, who, which companies are prepared, uh, best prepared to take advantage of the decarbonization opportunities, uh, and, uh, manage the risks among the 26 major automakers. Those are the three pieces.
Speaker 0 00:02:38 Wow. Very good. And I'd 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?
Speaker 2 00:02:54 Sure. Well, there are a few, a few trends which are emerging that certainly will, um, create concerns around profitability for some of the auto manufacturers who are not able to adapt. And these trends, um, are primarily regulatory. So we're seeing increasing numbers of jurisdictions, both national and state, and city impose targets for, you know, fossil free, uh, uh, transportation from automobile. So essentially banning, uh, new cars that aren't electric by a certain date. And this, this list continues to grow. We're seeing a particular focus in, in Europe and, and in South Asia, but I would expect that, uh, 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, is investors. So we're, we're seeing an increasing premium coming from investors and rewarding companies that are able to show, uh, either a an existing track record of decarbonization in their product, um, or, you know, real, uh, concrete forward looking planning on how they're gonna decarbonize their fleet going forward. And finally, I would say that, you know, alongside the, the pandemic, um, we're starting to see the, you know, the power of consumer demand, uh, a demand that says I want to, uh, supply, uh, and, and fund a world that's healthy, healthy for me and healthy for my grandkids. So alongside cons alongside investors and regulators, cons, 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, uh, with enough profitability.
Speaker 0 00:04:41 And just so we're clear here with the regulatory trends piece, there are actually bands around new non-electric cars. What, what regions are we seeing this in?
Speaker 2 00:04:51 Yeah, so pri primarily you're seeing this now in, in Europe, um, and in, and, and in South Asia. So, so, uh, Japan, sorry, south and, and, and East Asia. So Japan, China, Korea, and Europe are leading the charge on this. But again, it's, it's not the kind of thing that that's gonna stay isolated as, you know, the increasing interest in, in decarbonized product takes hold.
Speaker 0 00:05:18 Okay. And that's a great segue into who is doing this well. So, and I'd love to hear from both of you here. Could you share who is making progress when it comes to climate impact management, and what have they done to manage this to be forward thinking around sustainability and around transition risks? It can be from a country perspective as well as from, um, the, the industry perspective.
Speaker 1 00:05:41 Sure. Well, if you look, if you look at the numbers, just picking up on what Tim said a moment ago, if you, if you look at the actual numbers, uh, uh, in terms of, uh, grams of CO2 per kilometer of the vehicles that were actually sold, uh, in the 2010 to 2020 period, the first half of the decade through to 2015, looked like, uh, we were on the, down the downhill slope, um, quickly moving towards a, uh, uh, high efficiency, uh, low emissions automobiles. And then around 2015, the whole picture flattened out. Uh, and in fact, uh, the trends in, in many, uh, uh, con 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, uh, the, the rise of, uh, the big SUVs, uh, the mid to large size SUVs, really across the board.
Speaker 1 00:06:42 While that was, while that s u v trend, uh, was taking place, some companies, uh, were, uh, like Toyota, uh, were still continuing to push their, um, hybrid, uh, and, uh, uh, and high efficiency vehicles, though they were being overwhelmed by their great success in selling much larger vehicles. If you look, uh, at the present moment, uh, and try to, uh, cast your eye forward, what you see, uh, is, uh, a kind of interesting picture, uh, among the companies that, uh, have the most aggressive plans, uh, for, uh, decarbonization and electrification, uh, like, uh, VW and, and even, uh, Dahmer, uh, and now more recently, Hyundai and Kia. Those are companies that, uh, have relatively little experience, uh, with hybrids and high efficiency vehicles over the past decade. And some of the companies with, uh, a great deal of experience, the, the course, the leader being Toyota, uh, ha with, uh, hybrid vehicles have been least clear, uh, about or or less, much less clear about their plans going forward.
Speaker 1 00:08:00 So we've got a, uh, an environment now when we in the report map out, uh, the history file versus the projection, uh, for the future based on current, uh, uh, statements, uh, of, uh, plans by the companies. What we see is, uh, very, uh, aggressive plans by those, by several of the companies less, uh, experienced with alternative vehicle production. And, uh, and interestingly, uh, less clear and seemingly less aggressive plans from some of those who have been, uh, at the forefront of, uh, pushing alternative to drive vehicles. So, uh, this is a moment in which I guess I would say the market is in flux. Uh, there is going to be a significant reordering, uh, of the leadership, uh, we think in the marketplace simply based on, uh, on the comparison of past performance to future projection.
Speaker 0 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 if they're looking at what makes a good plan, what makes, um, a successful plan in terms of these hybrids or these high efficiency cars? What should they look for in plans from companies?
Speaker 2 00:09:22 Yeah, I mean, I, I think the most obvious thing is it does, uh, an auto manufacturer have a trans transparent, uh, detailed, um, multi-year or even multi-decade plan for how they're going to take their current fleet, um, in introduced, you know, de decarbonization, um, consistent with, uh, the, the assumptions of a two degree world. So, um, the, the, the deal here is that this is not just, um, about automators automakers competing with each other. It's about, um, automakers operating, um, in line with, uh, a planet that, uh, you know, will all recognize, uh, a decade from now. Um, and that's a, that's a moving target. The, the policy target is because conditions are changing, frankly, worsening all the time, as is the, the actual competitive situation for these automakers. And, and, uh, and on top of that, if you take a company, um, like vw then you say, okay, VW doesn't appear.
Speaker 2 00:10:27 You've been able to produce any electric vehicles at 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 gonna take to produce electric cars versus internal combustion engines? Um, and then you start asking questions around the, the, 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, you know, the stakes are, are higher than they might appear.
Speaker 0 00:11:20 So that sounds like it's, um, one type of exposure perhaps that, that auto 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 auto industry leaders need to look out for? David, what do you have to say about that? Well,
Speaker 1 00:11:38 I, I was just gonna pick up on, on on your original question. What we tried to do in this, uh, effort was to turn a lot of these issues into, uh, fact-based, uh, rule driven analytics that, uh, we think can help generate some, uh, insight and some tools for monitoring, uh, progress of companies in this transition period. Uh, 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 announce, uh, you know, in different time periods and some announce actual, uh, production targets, uh, for electric vehicles, uh, on a yearly basis. And so we've tried to, uh, blend, uh, together using a rule-based set of algorithms, a, uh, if you will, a, uh, a, a score that gives us, uh, a way to index the ambition of a company's, uh, targets for the future. Uh, it, it, uh, allows us to compare on a, a level ground, uh, companies that provide, uh, more or less information, uh, particularly between now and 2025. So
Speaker 0 00:13:02 Share with us some of those, some of those specific risk measurement tools. That's just a, a great concept. Could you name the top three or the top five of what they are?
Speaker 1 00:13:11 Uh, yeah. So, well, we, we did this. We, we, of course, first <laugh> and foremost, uh, believe that, uh, people interested, investors and other stakeholders interested in this topic need to move beyond thinking about scope one, two, and three, uh, measures as being, uh, the key measures, uh, to look at company performance. There's too much, too many assumptions and too many, too much wiggle room in how those numbers are created, uh, to make it them particularly meaningful in the auto sector. So for us, the, the, the gold standard metric, if you will, uh, is the, um, grams of co2, uh, per kilometer of the actual sold fleet of each of the automakers. So we begin there with a, with a, uh, what we think is a good comparison of all the major automakers on, uh, on, on grams of co2, uh, of the sold fleet.
Speaker 1 00:14:14 We, the, the second key thing, of course, is to look at the rate of change, uh, in that number. So we, uh, we com we calculated a, uh, long-term, uh, average over the past, uh, five plus years of annual change, uh, in the grams of CO2 per kilometer of the whole plea. We, we also thought it was critical to, uh, look at the, uh, the composition of the sold fleet of each of the automakers in terms of, uh, the, uh, in effect the ratio of high efficiency vehicles to, uh, all others in their fleet. So those achieving a high, um, you know, a high, uh, mile per gallon or, uh, or low gram of CO2 per uh, mile gives us another, uh, look at how much of the, uh, of the production comes from, uh, these high efficiency vehicles. Uh, and of course, uh, I, you know, there are about a dozen of these.
Speaker 1 00:15:21 Well, but of course, it, it, they all roll together, uh, into a couple of key metrics. One being our sustainable value ratio in which we look at all of the metrics that, uh, reflect how well a company is pursuing the opportunity that the business opportunity that comes from a high efficiency, uh, vehicles alternative drive electric and plug-in hybrid vehicles, uh, in comparison to all the risk, uh, that, uh, factors that they're, uh, exposed to, which include geographic risk, uh, regulatory risk that's based on geography, uh, and, uh, uh, and, and, uh, uh, other, uh, uh, g h G risks, uh, that result, uh, from their production mm-hmm. <affirmative> now. And that gives us a interesting kinda risk to opportunity ratio. It's a, it's what we think new key ratio for, uh, sustainable investors. So it, it takes all these granular, fact-based production-oriented metrics that are, uh, uh, that are tied to each of these major companies and, and then tries to look at both, uh, the past and, uh, future view of risk of opportunity, uh, versus risk ratio for each of those makers and tells us, uh, an awful lot, uh, that we think, uh, investors would wanna know and gives us a chance each year, uh, to see how the, how that risk, uh, opportunity ratio changes for a company.
Speaker 0 00:17:04 That's great. And Timothy, I wanna wanna bring you in on, on this too. Yeah. 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?
Speaker 2 00:17:19 Yeah. Well, so just, this might surprise you, but I, I think I would start with the, the ESG rating industry, because if, if you look at the way we're, we're analyzing, uh, with Refinitiv, uh, the performance or readiness, risk readiness for, for this key sector, I mean, what you find at the top of our performance or risk readiness, uh, list are, are companies like Tesla and B y D and Bake who do not perform at the top of more conventional E S G rating systems. Um, and that's because this is a look at something different. It's a look at operational and benchmarking data alongside ESG data. So I, I would argue that this, this work by Refinitiv and Constellation is the first step in a new direction towards a deeper understanding of, you know, ESG performance, climate impact readiness. And then of course, to answer your more question, your question more directly, I mean, there are many companies that are positioning in sectors that are positioning themselves for this, uh, huge opportunity coming from electrification of transportation.
Speaker 2 00:18:22 I mean, BP, for example, is positioning itself as a source of, of charging stations, uh, for electric industry. And, and, and many utilities are also converting themselves into suppliers of clean electricity so that when, you know, the conscientious Tesla buyer goes to plug in for Tesla and feels, you know, hopefully good about that, you know, it, it, it is a good thing because the energy is coming from renewable sources, um, and not from, say, coal burning, uh, power plants. So there's, there's a number of, of, you know, utility, oil and gas and other sector knock on effects, which can, when they all come together, actually build on each other and, and create even more forward momentum for global electrification.
Speaker 0 00:19:11 Thank you and great conversation, David and Timothy. First of all, looking at the stratification 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. And who is doing this well? Well, companies who have sold SUVs, 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 broader defined goals. Finally, some key metrics around how companies are faring and how we get to the conclusions that we got to in the report.
Speaker 0 00:20:26 Grams of CO2 per kilometer of 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 to other vehicles. Of course, data being very important in all aspects of the measurement, benchmarking data and E S G 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's an economic consequence for communities, employment levels are impacted. David Timothy, great conversation. Thank you so much for joining. Thank
Speaker 2 00:21:14 You. Great to be with you.
Speaker 0 00:21:17 Also, again, access the report sustainability trends and the automotive industry, stratification and electrification using the link in the episode description. Thank you all so much for joining. We invite you to subscribe to the Definitive Sustainability Perspectives podcast on iTunes, Spotify, or wherever you stream your content. What did you think about the podcast? Leave us a review on iTunes or follow us on LinkedIn and Twitter for updates on our show. Thank you for joining. See you next time.
