Slow greening will cost carmakers billions in European fines

23 October 2017 Consultancy.uk

Large car-manufacturers such as BMW, Volkswagen, Fiat, Chrysler and Peugeot Citroën risk major fines, to the tune of hundreds of millions, if they don’t radically improve their CO2 footprint. In total, seven out of eleven large carmakers are on course to miss the new European targets, according to a new report – while the UK lags behind in the development of electric vehicles, as it struggles to make its 2040 deadline for banning the sale of combustion engine-powered vehicles. 

Europe is making collective efforts to improve the sustainability of the car industry – with the European Commission setting key goal to reduce CO2 emissions. Now, the EU has introduced a new regulation that by 2021 forces carmakers to reach more stringent CO2 emissions criteria. Under the new targets, carmakers must reduce the average emissions of the cars they sell to below 95g of CO2 per km.

These new guidelines have sent the automotive industry into panic however, following an analysis which has shown that only four out of eleven large car manufacturers will meet the European CO2 emission targets by 2021. The remaining seven are potentially facing huge fines, amounting to €95 per gram of CO2 above the emission limit, multiplied by the number of cars that the manufacturer sells in 2020.

How carmakers rank on Co2 emissions

At the current rate, Volkswagen, which owns the Audi and Porsche brands, is expected to face the biggest fine, facing a €1.7 billion fine according to the researches. Volkswagen, which is still facing the consequences of its diesel emissions scandal, is aware of the challenge, and has therefore launched ‘Together’, its strategy to 2025 which it bills as the biggest change in its history. The new strategy focuses on automation, battery development and the production of electric vehicle to improve its CO2 footprint. The change will, however say PA, only have a real impact after 2020, meaning that the fines over CO2 targets is a realistic facing. 

In PA’s analysis, which each company has its own individual target, as the EU target takes into account the types of vehicles sold, meaning that a company with smaller average vehicles will face more stringent targets than a group focused mainly on large cars. Under the system, carmakers also receive "super-credits" for every fully electric car they sell, allowing them to offset the impact of more polluting vehicles.

BMW and Fiat Chrysler

Not surprisingly, German rival BMW also are facing a potentially hefty fine, estimated at €600 million, on the back of its slow progress to electrification – sales number of green vehicles are not picking up fast enough to offset the demand for its popular premium and larger petrol and diesel vehicles). The group are forecast to miss their 2021 target by 4g CO2 per km. 

The second largest fine would meanwhile sting Fiat Chrysler for €1.2 million. The popularity of Jeep, coupled with heavy weights and high emission rates, and the lack of an alternative drivetrain strategy or options means FCA has increased their average CO2 emissions three times in the last five years (with only a very small reduction in 2016). As a result, they are likely to miss their targets by the highest margin of all the carmakers. They are still only taking small steps towards electrification meanwhile, despite a number of European economies including the UK planning to outlaw the sale of fossil fuelled cars by 2040 

The biggest fall from grace, according to the consultants, who advise many of the manufacturers in the car industry, is Peugeot Citroen, which was set to meet EU emissions targets but now is facing different fortunes. Following the merger with Opel and Vauxhall this year, last year’s top performer is fifth and forecast to miss their 2021 target by 3g CO2 per km. This reflects the relatively polluting footprint Opel and Vauxhall vehicles have, with the aim that from 2023 85% of PSA’s portfolio will be electric driven or hybrids coming too late to meet the 2021 target. 

Co2 Emissions from cars in selected countries in the EU

Volvo is the best performer, jumping to first position from seventh last year. This dramatic change is largely a response to the fact that Volvo rocked the automotive industry by stating that it wants to only produce electric and hybrid vehicles by 2019. This significant step toward the electrification of their fleet also features a plan to introduce at least four plug-in hybrid vehicles by that year, gradually increasing its share of purely electric vehicles after.

Toyota remains second, having also significantly improved its CO2 performance for 2021. Other notable companies include Renault-Nissan and Jaguar Land Rover, which for the first time in PA's benchmark are no longer orange, but green. 

Commenting on the findings of the report, Thomas Göttle, Head of Automotive solutions at PA Consulting Group, said, “Carmakers across Europe need to make radical changes in order to meet the EU CO2 emissions targets for 2021. Many of them need to focus now on developing new models that will appeal to the consumer and help them meet their targets. There is nothing less than a revolution facing the car industry and those manufacturers who fail to keep up face potential fines in the billions."

Frank Witter, Chief Finance Officer at Volkswagen, has previously said to the Financial Times that the costs of complying with the CO2 targets are the biggest pressure on the group's R&D budget, calling it the "overarching issue" for the company. He added, "The other items, investing and developing new technologies, autonomous driving, connectivity, electrification, are certainly important, but the most critical one is CO2 compliance."

Real driving Co2 emisions are higher then measured in the NEDC tests

Progress by country

Examining the situation from a national perspective, Norway performs best, with the country’s manufacturers exhibiting the lowest CO2 emissions (94.2g CO2 / km) and the largest share of newly sold plug-in hybrid and electric cars (29.1%). Norway is also well on-course to ban the combustion engine from 2025. The Netherlands sits in second place in the EU. The emission level seen in the Netherlands was 2017g CO₂ / km in 2016 while 5.9% of all new cars sold were electric.

The United Kingdom will need to up efforts to realise the ambitions to eradicate the combustion engine by 2040, however. While the time-frame still seems lengthy, the automotive industry is still heavily dependent on conventional engines, and in the meantime, the UK is heading to the bottom of the list of European countries. The development of alternatives in the UK also lags behind other countries. The United Kingdom currently produces 2.5 million internal combustion engines, 15% of the European total, making it difficult for them to switch to electrical options rapidly without upsetting the market.

Tracking the improvements? 

For the European Union and the regulators, the race of the industry towards greener footprint poses challenge how they track the advancements. CO2 emissions performance was derived from a test cycle known as the New European Driving Cycle – a standardised procedure designed to compare different vehicles under similar conditions. It has now been replaced in the EU by Worldwide Harmonised Light Vehicles Test Procedure, which is designed to provide a more accurate representation of real conditions; longer duration, higher speed and including more acceleration and deceleration.

With the tests in mind, carmakers are continuously looking at performing as best as they can in the tests, however that might not reflect performance on the road. Analysis also shows that the gap between CO2 emissions and NEDC tests has more than doubled over the past decades: the gap is currently 35% and continues to increase. In the majority of cases car producers are seemingly getting their footing right, however because of this notable gap between tests and results, there remains a large worry that manufacturers may be cheating the tests, as with the recent diesel emissions scandal, bringing the industry’s reputation into disrepute, while making the EC seem notably weakened as it attempts to set an example to developing economies when dealing with climate change.

Related: Brexit likely to hit UK automotive manufacturers hard.

×

Private equity firms ramp up sustainability focus

19 April 2019 Consultancy.uk

In line with business leaders across the industrial gamut, private equity firms are increasingly on board with sustainability projects. According to a new study, the investment arms for major funds are implementing a number of strategies aimed at supporting sustainable economic development in line with global goals.

While the business world has finally begun to acknowledge the danger of climate change, effective action plans remain difficult to achieve. The Paris Agreement has stipulated a clear target for the decades leading up to 2100, although massively reducing emissions while not crashing the economy could be a tall order.

Businesses that are able to acquire capital can use it to boost productivity and output, thereby creating a virtuous cycle of development. However, some businesses are better able to utilise resources than others, both in terms of their relative productivity, as well as the value of the respective outcomes relative to costs (including environmental harms). Financing can therefore provide an avenue to select businesses that are aligned with various global sustainability goals, while shunning those that drive little or unsustainable social value creation.

Top moves made by investment arms towards responsible investment

Profit has for the longest time been the central criterion for investment decisions. Yet profit at any cost is increasingly seen as creating considerable social harms, while often delivering only marginal value. As a result, the private equity sector, which was initially sluggish to change its ways with regards to sustainability, has started to see the topic as an opportunity as much as a challenge.

A new study from PwC has explored how far sustainability goals have become part of the wider investment strategy for private equity (PE) firms. The report is based on analysis of a survey of 162 firms and includes responses from 145 general partners and 38 limited partners.

Maturing sustainability

Top-line results show that responsible investment has become an issue for 91% of respondents. For 81% of respondents, ESG (environmental, social, and corporate governance) was a board matter at least once a year, while 60% said that they already have implemented measures to address human rights issues. Two-thirds have identified and prioritised Sustainable Development goals that are relevant to their investment segments.

Change in concern and action on climate-related topics over time

While there is increasing concern around key issues, from human rights protections to environmental and biodiversity protection, the study finds there are mismatches between concern and action. For instance, concern among investment vehicles around climate change has increased since 2016.

In terms of risks to the PE firm itself, concern has increased from 46% of respondents in 2016 to 58% in the latest survey. However, the number who have taken action remains far below those concerned, at 9% in 2016 and 20% in 2019. Given the relatively broader scope of investment opportunities, portfolio companies face higher risks – and more concern – from PE professionals, at 83% in the latest survey. However, action is less than half of those concerned, at 31%.

Changing climate

In terms of the climate footprint of the portfolio companies, 77% of respondents state concern in the latest survey. 28% of respondents are taking action through the implementation of measures to mitigate their concerns.

Concern and action taken on ESG issues

In terms of the more pressing issues for emerging responsible investment or ESG issues, governance concern of portfolio companies comes in at number one (92% of respondents), while 60% have taken action on it. Firms have focused on improving awareness – setting up policies and a range of training modules for their professionals around responsible investment decision making. Cybersecurity takes the number two spot, with 89% concerned and 41% implementing strategies to mitigate risks.

Climate risks take the number three spot in terms of concern for portfolio companies (83%), but falls behind in terms of action (31%). Health and safety track records are a key concern at 80% of businesses, with 49% implementing action. Gender imbalance within PE firms themselves ranks at 78%, which is being dealt with by 31%. A recent survey from Oliver Wyman showed that there is gender balance at 13% of GP teams in developed countries.

Biodiversity is also an increasingly pertinent topic, with risks from pollution and chemical use increasingly driving wider systematic risks around environmental outcomes. It featured at number eight on the ranking of most likely global risks for the coming decade, with its impact at number six. As it stands, biodiversity is noted as an issue at 57% of firms, with 15% implementing action.