There is still has a long way to go before the internal combustion engine, which has powered economies since the steam age, gives way to vehicles powered by electricity or hydrogen, but the sea-change has begun. The car industry, which has long been a capital intensive, cyclical and low margin business, is beginning to show signs of undergoing a transition.
Although it’s not yet profitable for car companies to make electric vehicles (EVs), nor are the vehicles at a mass-market price point, the regulatory environment is positive and capital is being invested. All car companies are committed to being carbon neutral by 2050 and the European Deal has set the blueprint for transformational change. By 2030, there should be a 55% reduction in emissions from cars and 50% from vans, compared to 1990 levels. From 2026, road transport will be covered by emissions trading, putting a price on pollution, stimulating cleaner fuel and re-investing in clean technologies.
Changing vehicles from fossil fuel use to electric and hydrogen is not a magic bullet that will turn the industry green. The automobile sector was responsible for 13% of global CO2 emissions, with vehicle tailpipe emissions representing nearly 80% of this footprint. With electric vehicles, the emissions question still remains, it just moves from tailpipe to energy source. As responsible investors, we also want to highlight other crucially important considerations for sustainability, including – how will the industry source all the raw materials required for electric vehicles as responsibly as possible? How will the industry’s workforce be prepared for the EV transition, which may result in a significant reduction in headcount?
When we examine car companies on their environmental, social and governance (ESG) credentials, these are factors that we now must take into account. Our recent in-depth analysis of the car industry led us to conclude that car companies are doing more for the sustainable and responsible future of their industry than they may get credit for.
When we are assessing how well a car manufacturer is reacting to the move to electric vehicles, it makes sense to scrutinise its governance closely. Does the board have the skills to oversee the transition to EVs and is it linking remuneration to overall reduction in emissions? We also want to see diverse and independent boards, which will look after the interests of all stakeholders, and with diversity reflected in the workforce.
We are also carefully considering how the car company is managing the shift to producing electric vehicles. These vehicles involve industrial materials such as cobalt, tin and aluminium that must be sourced with due care and attention to the full supply chain. So far, all of the companies we spoke to could give details on their significant reduction in the use of raw materials, but they had little-to-no detail on the upstream impacts from sourcing materials. So, this is an area that needs much greater focus.
The recycling of batteries also needs better initiatives. Currently, because of the hazardous materials involved, only 5% of batteries are recycled. Longer term, there is sure to be a push for greater rates of recycling, so there is opportunity for car companies to partner, or create their own recycling methods, driving circular economy initiatives.
Making electric vehicles will involve a smaller workforce, so we want to be sure car companies are taking care of their workforces now and in the future. There need to be plans for re-training, early retirement pathways and full engagement with unions in order to avoid strike action and poor relations with employees. Auto companies also need to consider the workers involved in the wider supply chains. Are the raw materials being sourced without any violation of human rights? We were reassured to find that manufacturers did have growing awareness of these risks.
Following our wide-ranging engagement with seven major car companies, we’re increasing the risk rating around human rights in the supply chain, in order to further highlight it to the industry. We also want to include data protection and security as a risk across the sector, as cars are become far more high-tech and able to data collect. Currently, most car companies have a low ESG score, but we want to suggest an overall raising of scores for the industry, because awareness by car companies of the ESG risks faced is greater than investors may credit.