Despite a turbulent few years, the auto sector remains important to global investors. That is not just because of the size and scale of the sector itself supporting more than 7 million jobs in the U.S. alone but also because, for many investors, the auto industry retains its role as a bellwether of the global economy. Thus, recent findings that environmental factors are increasingly shaping the future prospects for many automakers will have profound implications for investors.
The new research, carried out by environmental finance nonprofit CDP in its Emission Impossible report, released this past month, has found that in a world of tightening regulations, some car companies are ahead of the game, thanks to investments in greener, advanced vehicles and manufacturing efficiency, whereas others are driving into trouble.
Volkswagen may not be the only automaker on the hook for emissions compliance failings, according to CDPs investor research. Although there is no suggestion of fraud elsewhere, as was the case for VW, it is clear that other manufacturers are finding it increasingly difficult to find technical solutions to ever-tighter regulations and are coping only by taking advantage of the existing credit system to offset their shortfalls. If this credit system comes to an end, then the research identifies seven other automakers at risk of potential fines of up to $4.8 billion (from the European Union and U.S. combined) for noncompliance on their fleet emissions.
General Motors Co. is among the automakers at the greatest risk from noncompliance, facing as much as $1.8 billion in emissions penalties 114 percent of earnings before interest and taxes. Ford Motor Co. fares little better, exposed to as much as $1.2 billion in penalties, or 27 percent of earnings before interest and taxes. Whereas these amounts are estimates based on an assumption that credits will not always be available to manufacturers, there is good reason to think that such outcomes are becoming ever more likely. Most countries passenger vehicle fleet emission targets are not yet stringent enough to align with the goal signed at the Paris Agreement: to keep global warming to 2 degrees Celsius or less. We can thus expect regulation to become even tighter, quicker, and to make the challenge even harder for many car manufacturers.
According to CDPs research, four companies BMW, Daimler, Ford and Volkswagen were given an A grade for their management of manufacturing emissions. BMW is a good example of industry-leading practice. For example, between 2006 and 2010, waste disposal per vehicle produced fell 37.6 percent, and on average BMW now produces only 10.09 kilograms of disposable waste per vehicle.
The tightening regulatory climate is also creating an enormous opportunity for investors by growing the market for advanced vehicles such as hybrids and plug-ins. In 2015 global sales of advanced vehicles increased by 60 percent.
Of the 15 manufacturers covered by CDPs report, three manufacturers received an A grade from CDP for their efforts in the advanced vehicle market: Nissan Motor Co., Groupe Renault and Volkswagen. Nissan, which was ranked as the overall leading company across CDPs environmental metrics, is benefiting from worldwide market leadership in battery electric vehicles in particular, the success of its 100 percent electric LEAF model. That leaves the automaker well positioned to capitalize on stringent vehicle emissions targets in China that are estimated to result in 5 million electric vehicles there by 2020.
Overall, the report shows that those car manufacturers that take climate factors the most seriously are the best set for future growth. Given the car industrys history as a canary in the coal mine for the wider economy, this is an important warning to investors that policy responses to climate change are driving technological disruption that will have serious investment implications across many sectors.
James Hulse is head of investor initiatives at CDP (formerly the Carbon Disclosure Project) in Oxford, U.K.
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