Michele Leung, Green Finance Advisor of Friends of the Earth (HK)
According to the statistics, automobile manufacturers contributed approximately 13%* of total global carbon emissions. Vehicle tailpipe emissions represented nearly 80% of this carbon footprint, which presents the industry’s biggest challenge in decarbonization.
Due to its large carbon footprint, more regulators who focus on climate change are shifting their attention to auto industry. In the recent COP 26, declarations were made by government to work towards all sales of new cars and vans being zero emission by 2040 or earlier. Similarly, in China, the ’14th Five-Year’ New Energy Automobile Industry Development Plan is a critical period for the transformation and upgrading of China’s auto industry. It is targeted to reach 20% share of passenger new electric vehicles sales by 2025. The ambition is to reach 100% of passenger vehicles electrified in 2035.
The growth of electric vehicles market is exponential. According to International Energy Agency (IEA), based on current trends and policies, it projects the number of electric cars, vans, heavy trucks and buses on the road worldwide to reach 145 million by 2030, which represents nearly 14 times the number observed in 2020. China, in particular, is leading the market with its new electric vehicle penetration rate rose to 13% in 2021.
However, one should note that while electric vehicles do not generate tailpipe emissions, the batteries used to power them are charged via electricity grids which may not be emission free. National grid emissions depend on a range of energy source mix, including coal and renewables. The fact is, this reallocation of emission from tailpipe to grid is still considered and categorized as Scope 3 Category 11 under the Greenhouse Gas Protocol, migrating from indirect use-phase to direct use-phrase emission. According to an industry research paper^, it is found that if all vehicles were replaced with electric equivalents, that industry average Scope 3 Category 11 emissions would have been reduced by 31%, though it is a significant reduction, it is still far from the ideal “zero-emission”.
Nevertheless, accelerating the proliferation and adoption of zero emission vehicles is an important step for automobile manufacturers to decarbonize their carbon footprint and the world to achieve Net Zero. In parallel, investors are getting more interested in corporates’ electric vehicles strategies. When evaluating the auto industry, in addition to carbon footprint, investors should also be aware of the ESG risks stemming from social aspects. Investors should pay attention to the product recalls and impacts of Over The Air (OTA) updates under product safety. Investors should also consider how the companies manage their supply chain impacts (especially along the Original Equipment Manufacturer (OEM) model and upstream), as well as the restructuring and talent requirement practices under labour management.
*In 2019 alone, automobile manufacturers constituents of the MSCI ACWI Index as of May 2021 were responsible for nearly 4.7 gtCO2e, approximately 13%2 of total global CO2 emissions.
^ MSCI ESG Research “Electric Vehicles and the Elusive Road to “Zero Emissions”’ by Yu Ishihara, June 2021
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