When the motorcar was invented at the turn of the 20th century, people didn’t think it would catch on. Within a decade, however, horse-drawn carts had been replaced by cars, and there was no looking back. Now the industry is going through another revolution, as its traditional reliance on fossil fuels is being challenged by fast-moving tech that will enable a more sustainable and efficient future.
In a new report out this week, titled Driving disruption, the environmental disclosure platform CDP analyzes which car companies are best placed to capitalize on the opportunities of the low-carbon economy. The report bases its findings on a $790 bn group of 16 of the world’s largest publicly listed automotive companies, including Toyota, Volkswagen and Ford.
It finds that:
- Profits are shifting to new market players: More than a fifth of automotive company profits are expected to shift to tech suppliers and ride-sharing services such as Uber and Google by 2030
- Players are going green: With a third of new car sales expected to be zero-emission and plug-in hybrid by 2030, this market is expected to soar to $1 tn. The research shows that electric vehicles (EVs) could reach price parity with traditional petrol and diesel cars as soon as 2022, making it easier for car makers to profit from the low-carbon transition. Opportunity beckons in China – the largest vehicle market in the world – which has set very ambitious targets for EVs
- Innovation will drive future sales: Investment in the development of autonomous and shared vehicles has ballooned to more than $80 bn since 2015, climbing at a higher rate than most sectors
- There are new financial risks: Half of these car makers still risk penalties by missing their emissions targets, and costs could be high. The companies analyzed by CDP could be hit by penalties of up to €2 bn ($2.5 bn). In the EU alone, emissions must be reduced by up to a fifth over the next five years, so some companies will need to increase their share of sales from EVs to 20 percent in order to meet the EU’s 2021 targets. Compliance with emissions regulations for traditional car engines is expected to increase threefold by 2025 and reach a cost of more than $2,200 per vehicle
BMW, Daimler and Toyota come out on top on climate
Taking into account all climate-related metrics – including management of all transition risks and opportunities and corporate climate governance frameworks – BMW, Daimler and Toyota are the highest-ranking automakers of the 16 assessed. Subaru, FCA and Suzuki rank lowest, though investors will be most concerned with Kia, Great Wall and Geely (Volvo), which did not disclose their environmental data to CDP.
What IR managers should be looking for
IR managers seeking to learn from car industry leaders on environmental management can take several pointers from CDP’s findings. For example, ambitious targets are part of what help BMW, Daimler and Toyota come out on top of the rankings. Most noteworthy perhaps is Toyota’s ambitious target to reach zero CO2 emissions in the entire vehicle lifecycle by 2050.
Investment in innovation is also a big factor. Companies such as General Motors are preparing for an ‘all-electric future’ and investing heavily in self-driving cars and ride-sharing services while also setting aggressive automation targets. Forays into the ‘sharing economy’ are largely seen as positive for the environment. For example, a Bloomberg report finds that for every vehicle used in a car-sharing fleet, automakers will lose 32 vehicle sales.
Meanwhile, all 16 car manufacturers are found to perform poorly on governance for climate issues. For instance, pay packages for CEOs provide weak to average incentives for climate-related remuneration across the board. This is increasingly important for IR professionals, especially in the wake of the recommendations of the Task Force on Climate-related Financial Disclosures.
Overall, the report shows that car makers that take climate factors most seriously are best set for future growth in an age of massive disruption. Given the car industry’s history as a canary in the coal mine for the wider economy, this is an important warning to IR professionals in all sectors.
Luke Fletcher is senior analyst in the investor research team at CDP