As we begin 2022, it is worth reflecting on one of the big Climate Transition success stories of the twenty twenties: the growth of the Electric Vehicles (EV) market.
At the end of 2021, the UN-convened Net-Zero Banking Alliance brought together banks worldwide, representing over 40% of global banking assets. They are committed to aligning their lending and investment portfolios with net-zero emissions by 2050. As of the end of 2021, major banks have pledged a trillion dollars of lending towards climate change.
Let’s not get obsessed with existing green sectors
In the journey towards Net-Zero, we see significant commitments towards green investments. However, paving new green roads and paths will not get us there. To reach the desired Net-Zero goals, it is crucial to re-construct the non-green sectors such as utility, energy, and discretionary consumer goods.
The banks’ mantra (in driving the economy and businesses towards sustainability) has been the holy trinity of investing, divesting, and engaging. However, these decisions need primary measurement metrics.
Popular measurement metrics today on the carbon front utilize bottom-up carbon footprint data (Scope-1, 2 & 3 emissions), which is aggregated and reported by the companies themselves. Using this data is not enough as carbon-focused exclusionary strategies often drive most investments towards clean sectors such as information technology. Carbon-focused exclusionary strategies mean taking firms with larger current carbon footprints out of the investment portfolio. This strategy negatively penalizes high carbon-intensive sectors such as utilities and energy and regions such as the Mediterranean.
At Entelligent, we used this data on screening out S&P 500 companies with a high carbon footprint and noticed a 20% portfolio tilt towards the technology sector.
Source: Carbon data from ISS. Portfolio used S&P 500. We screened in 25% of the companies in the S&P 500 with the lowest carbon footprint.
To add more power to climate change we need more attention on the sectors and companies that are changing their traditional pathways and paving a more sustainable future. Re-constructing old roads can be harder than building new ones. There is always a need for additional traffic management and temporary breakdowns during re-construction.
A great example: the Consumer Discretionary sector
One sector that is overcoming all the re-construction barriers is the Consumer Discretionary sector. Entelligent’s T-Risk (Climate Paris Aligned Scores) is designed to capture these measurable and material climate transitions. When we screen the same S&P 500 portfolio using Entelligent T-Risk to choose 25% of the companies that are leading these climate transitions we see a big portfolio tilt towards this sector. Real Estate and HealthCare also get higher climate transition scores.
Source: T-Risk from Entelligent, Portfolio used S&P 500. We screened in 25% of the companies in the S&P 500 with the best T-Risk scores.
One reason the Consumer Discretionary sector is doing so well is the inclusion of Electric Vehicles (EV). According to the International Council on Clean Transportation (ICCT), vehicle manufacturers have announced over $150 billion in investments to achieve collective production targets of more than 13 million EVs annually by 2025 (though much more could be in the pipeline).
The best part of this commitment is it is not a distant 2030 or a 2050 commitment, but a near-future 2025 commitment. We can experience this commitment together and it sets a great example for other industry groups to follow.
It’s not all about Tesla
According to the Entelligent T-Risk analysis, this sector has players that are less obvious but who are making great strides towards measurable and substantial sustainability. These players include The BMW Group and DAIMLER AG. BMW is the latest global carmaker to commit to setting a science-based target. It is also committed to procuring 100% of its electricity from renewable sources for its operations by 2050, as part of its commitment to be 100% Renewable (RE100) led by the Climate Group (see https://www.there100.org/ ). Ford is following this trend by innovating and integrating projects like the Ford Bronco Sport which uses 100% recycled ocean plastics for parts. Another example, higher in the automotive supply chain is the Swedish steelmaker SSAB which is now 5 years into a program to develop a fossil-free steel process called Hybrit. The results of these efforts are reflected in the financial returns and the balance sheet indicators of these companies.
The importance of Finance in fueling EV growth
It is good to see how banks are supporting this journey in these sectors by fueling the speed towards NetZero with large amounts of capital.
The banks’ total auto loans rose to $530.20 billion in the third quarter, up from $518.11 billion in the second quarter and $489.16 billion in the same period 12 months ago.
The top of the funders is Capital One Financial Corporation. Of the top 25 lenders, ranked by auto loans in the third quarter, Capital One remained in the No.1 spot as the top auto loan lender for the fourth consecutive quarter. With a loan book of $74.72 billion in total auto loans, the bank posted a 4.2% quarter-on-quarter and a 14.3% year-over-year rise in auto loans.
Indeed, the banks are still financing fossil fuels while also signing up to net-zero pledges. However, it is also comforting to see that they aggressively invest in sectors with the most potential for rapid carbon reduction.
Sources and additional reading:
- ESG and me. It’s ok to be different. - September 23, 2022
- Why insurance holds the key to ESG adoption - March 22, 2022
- EV: the crucial role of Finance in driving Electric Vehicles growth - January 18, 2022