Driving change at carmakers

Driving change at carmakers

09-11-2020 | Insight
A multi-decade transformational change has begun at carmakers that will identify the winners and losers for investors.
  • Carola van Lamoen
    van Lamoen
    Head of Sustainable Investing
  • Cristina Cedillo Torres
    Cedillo Torres
    Engagement Specialist

Speed read

  • Robeco concludes three-year engagement with nine carmakers
  • Some success in transitioning from fossil fuel-powered vehicles
  • Issues remain with safety recalls and commitments to decarbonizing

The world’s largest auto manufacturers are now starting to actively transition to electric cars and place more emphasis on shared transport systems, says Robeco engagement specialist Cristina Cedillo Torres.

This was considered unthinkable a few years ago, partly due to the immense cost of retooling factories. However, some resistance to change persists, making it imperative for investors to keep up the pressure in the race to cut carbon emissions, she says.

Robeco is concluding a three-year engagement program with nine carmakers, six of whom have made enough progress to allow the dialog with them to be successfully closed. Three others still have some work to do regarding the transition from the internal combustion engine, and on safety recalls, she says.

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Acknowledging the ambition

“When we launched our engagement in 2017, the idea of achieving zero-emission transport was not being seriously considered by any major car manufacturer,” says Cedillo Torres. “Yet, three years later, there is broad industry acknowledgement of this long-term ambition.”

“Policies setting ambitious fleet emissions targets, particularly in the EU and China, have been a critical driving force of change in the industry. More recently, the rise of successful battery electric vehicles by new industry entrants is challenging the status quo, while gaps in technological innovation among incumbents is starting to become visible.”

“Carmakers have had to answer fundamental questions related to their future product offerings. This specifically relates to how quickly they are able to shift from the internal combustion engine to alternative powertrains such as electric vehicles, as climate concerns call for zero-emission fleets.”

Meeting the Paris goals

The engagement program is part of a wider effort by Robeco’s Active Ownership team to encourage investee companies to meet the goals of the Paris Agreement. This seeks to limit global warming to a maximum of 2 degrees Celsius above pre-industrial levels by the end of this century, and ideally restrict it to 1.5 degrees. To achieve this, the world will need to be carbon-neutral by 2050.

Robeco engaged with the nine carmakers both individually and collectively under the Climate Action 100+ initiative – a collaboration of international investors launched in 2017. It targets the world’s 161 highest carbon emitters, led by the energy, mining, utility and auto industries.

Robeco also played a proactive role in developing engagement priorities as the automotive industry sector coordinator for the Institutional Investor Group on Climate Change (IIGCC).

Long-term commitments

“Throughout our dialogue, we have seen automakers begin to respond with significant long-term commitments that aim to achieve net-zero emissions by 2050,” says Cedillo Torres. “All companies under our engagement have set targets around emission reduction or electrification of their fleets.”

“Examples include two companies in the peer group that have set ambitious commitments, one of which has been validated as being aligned with a 1.5 degrees scenario by the Science Based Target Initiative (SBTI).”

“A third company has also set a mid-term (2030) emissions reduction target that has been validated by SBTI. Moreover, it was considering setting a long-term target by the time we ended our engagement. Finally, a fourth company is in the process of merging with another car manufacturer to become better positioned to weather the industry’s transition to automated, connected, electric mobility.”

“So, we are encouraged by the industry’s acknowledgment of the need to decarbonize its products. However, we are also aware that this is a multi-decade transition, and what we are witnessing now is only the start of a long and uncertain road to zero-emission mobility.”

Challenging safety records

Aside from decarbonizing by phasing out fossil fuel-powered petrol and diesel engines, the car industry has had a poor safety record in recent years, with a number of recalls due to defective components.

“Rising recall costs following multiple safety failings over the past decade, raise questions about the industry’s efforts in ensuring the highest product quality,” says Cedillo Torres. “Even though each company has its own approach to product quality management, through our engagement we identified some features that were relevant in our assessment.”

“These were governance and board oversights of product quality performance, linking product quality metrics into incentive schemes of management and staff, and supplier engagement. Moreover, recall data shows a growing trend of recall campaigns being caused by a failure of electrical components due to physical defects, operating software failure, software integration failure and software remedy failure.”

“As vehicles become increasingly automated and connected, there is a need for the industry to adopt more sophisticated product quality management for these components. Based on our discussions and the disclosures available, we found five companies to have appropriate quality management practices in place. Still, a lot of unknowns remain due to a lack of transparency. We see significant room for improvement in companies’ disclosures on this issue.”

The winners and losers

In all, for investors it will boil down to who successfully emerges with viable products in a multi-decade transition, Cedillo Torres says. Those companies not preparing now to shift towards a low-carbon fleet face higher risks related to the energy transition.

“We are now at the very early stages of what will be a long transition to zero-emissions transport,” she says. “Many uncertainties lie ahead for the industry.”

“But what is clear is that there will be new winners and losers, and we may be witnessing the end of the automotive industry as we know it. Carmakers now clearly recognize the need to progressively transform their product offerings into zero-emission vehicles.”

“Meeting regulatory emissions requirements and maintaining product quality will remain important in the years to come. In order to retain investor confidence, carmakers will need to make timely strategic decisions and provide transparency on their planned course of action.”

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