On December 12 the jubilation from Le Bourget, France, a
suburb of Paris, was apparent. From a beaming Al Gore to a
euphoric U.N. Secretary General Ban Ki-moon, conference
participants cheered history being made as nearly 200 countries
the Paris Agreement, a pledge limiting greenhouse-gas
emissions in five-year increments.
Many of the signatories have already reported their targets
for 2020, including the U.S. Still, after the champagne corks
flew, just what did they agree to, and what will it mean to
investors in a still-major industry, the auto industry, for the
economy and the environment?
A number of environmentalists, including the
father of climate change, Columbia University
professor James Hansen, dont think the document goes far
enough. After all, U.S. secretary of State John Kerry made sure
the word shall was replaced with should
when the former was inserted, supposedly accidentally during
typing, in a critical part of the pact. The reason: To ensure
that the so-called agreement avoided Congress altogether.
Its also unclear how a nonbinding agreement will
affect industry. Carbon dioxide reductions that call for
keeping emissions low enough to halt the temperature rise at 2
degrees Celsius arent necessarily in many companies
short-term interests. Sure, oil and transportation companies
flocked to the
21st Conference of the Parties meeting (COP21) outside
Paris, but were their hearts truly in it? All you have to do is
drive on a highway to realize that Americans remain almost
pathologically in love with sport utility vehicles.
Brian Irwin, a Dallas-based partner at Chicago consulting
firm A.T. Kearney who leads the firm's automotive practice,
says of about 17.5 million cars sold in the U.S. last year,
only an estimated 3 percent of them were alternative-fuel cars
and light trucks.
When it comes to adopting electric vehicles (EVs) and
hybrids, Irwin is bullish, even though numbers havent
spiked. Back in 2011, we sold roughly the same amount
[percentage-wise of alternative vehicles], he says.
The penetration of alternative powertrain cars was
similar in 2011 as in 2015 as a percentage of total cars
sold in the U.S. In both years that was roughly 3
Tesla Motors, based in Palo Alto, California, sold
approximately 50,580 EVs last year, mostly Model S sedans.
High-profile Tesla buyers, such as
The Late Shows Stephen Colbert, have helped raise the
profile of these EVs.
Harry Briggs, founder of Elkins Park,
Pennsylvaniabased HCB Investment Management and portfolio
manager of its Tactical Energy strategy, says that whereas
Tesla will benefit from tailwinds of Paris, the
companys current market capitalization, at $27.8 billion,
demonstrates broader investor interest in clean and renewable
Teslas valuation, says Briggs, is clearly not
based on the number of its vehicles on the road. Most of
the interest in Tesla, he believes, derives from the potential
of the companys home battery, the Powerwall, charged by
rooftop solar panels.
In the U.S., the adoption of green vehicles has been slow.
France far surpassed the U.S. in diesel-powered light-vehicle
sales last year, 57.5 percent versus 2.5 percent. Diesel, even
petrodiesel as opposed to biodiesel, produces fewer greenhouse
gases. The French edge is much smaller, just a percentage
point, in terms of hybrid adoption (3.2 percent instead of 2.2
percent), according to a survey cosponsored by A.T. Kearney.
Germany has a goal of having one million electric vehicles
operating on its roads by 2020.
Despite Americas slow adoption of alternative
vehicles, 13 car manufacturers signed a CEO leadership statement during COP21
stating that they are serious about working toward the
decarbonization of transportation. David Tulauskas, General
Motors director of sustainability in Detroit, says that
at the World Economic Forum in early December, GM and the other
automakers acknowledge[d] the Paris Agreement and
developments at COP21 as a milestone.
Both Tulauskas and Irwin insist that the auto industry,
which is currently on display at the annual North American
International Car Show in Detroit, is already well on its way
to keeping its carbon footprint small. This is because of
so-called CAFE (corporate average fuel economy) standards,
which mandate that carmakers in the U.S. report overall fuel
economy, including how many miles per gallon their vehicles are
getting, which are matched against regulator-set standards.
Tulauskas argues that for investors, green investments are
no longer the purview of fringe capitalists. If you look
at every major financial firm from Deutsche Bank to
Citigroup to Goldman Sachs theyve all allocated
billions and billions of dollars to investing in clean, green,
low-carbon technologies, he says.
Tulauskas says investors are seeing green because they
can make [a] market at it today. He adds, The risk
of that investment has been mitigated or, in some cases,
eliminated. If renewables are not in your portfolio, you are
missing out on a good return like 4 to 12 to 15 percent
returns that through diversification help lower risk in your
profile. Youve got to have it in your
Irwin points out that by 2025 the CAFE standard will be 54
miles per gallon. The Paris Agreement will be useful as a
common metric, he says, which will help the
worlds automakers understand the best way to deliver a
universally accepted goal. Standards differ around
the world, he says. But whatever the standard is, its
tied specifically to the title of the car. Each year
its based on the footprint of the vehicle, a
measure that includes vehicle size.
National governing bodies generally leave it to the
car companies to come up with their calibrations of fuel
economy. Whereas U.S. fuel economy standards are set by the
Environmental Protection Agency, in Japan they were issued by
the Ministry of the Environment under something called the
Automotive NOx and PM Law, which regulates nitrogen oxide and
particulate matter. In the European Union, nations must follow
the EU directive that includes the most recent tightening of
its emissions standards. By last year, new cars registered in
the EU were not allowed to produce more than 130 grams of
carbon dioxide per kilometer. Most developed countries
have something equivalent [to CAFE], but some countries such as
Canada piggyback on the U.S. for CAFE requirements, says
Standards are fine, but following them is another thing
altogether, as Volkswagen recently demonstrated. The German
automaker installed software so that some Audi and Volkswagen
diesel models could pass emission tests. Because of VWs
subterfuge, its stock price crashed, CEO Martin Winterkorn
resigned, and the company will spend years digging itself out
of the mess. VWs actions hurt the company and investors
in ways the climate accord cannot, at least right away.
Jack Robinson, a portfolio manager with Bostons
Trillium Asset Management, which engages in sustainable and
responsible investing, was invited by JPMorgan Chase & Co.
to speak at the World Business Council for Sustainable
Development, a colloquium in Paris held concurrently with
COP21. One of Robinsons takeaways from the sessions is a
directive initiated by Tesla founder Elon Musk. He, along
with many others, signed a petition [that went] to Volkswagen
requesting that they quit fooling with liquid fuels and switch
to electric right away.
Volkswagen continues to sell gasoline- and diesel-fueled
vehicles. But in the wake of the VW scandal, carmakers
increasingly find it in their interests to meet or beat
emission standards behavior that will dovetail with the
Regulators are calling OEMs [original equipment
manufacturers] to ensure they are in full compliance,