The electric revolution is here, and many industries and cities are looking at ways to switch their energy consumption away from fossil fuels to electric alternatives. The automotive sector, for example, is transforming its outlook for the future. With national gas prices averaging over $4 in April 2022, and more environmental regulation on vehicle emissions coming into play, increased demand for alternatives is leading the global market toward carbon-neutral vehicle production.
With transportation accounting for 30% of greenhouse gas emissions in the U.S., the automotive industry holds a significant role in improving our environmental position. Leaders in the industry have pledged to transition to electric vehicles (EV) by 2030 and 2050, however progress has been slow.
When it comes to investing in the sector, ESG ratings have been a good starting point to assess the risks of companies, however, they typically do not capture the bigger picture. Our recent paper on ESG due diligence explores the subject in more detail, but let’s take Tesla and General Motors, for instance.
- Tesla is known globally for its role in transitioning consumers away from fossil fuels by vastly reducing emissions associated with its vehicles. The average internal combustion engine (ICE) car will emit 69 tons of CO2 over its lifetime. While CO2 emissions from driving a Tesla will vary based on the carbon intensity of the electric grid in a particular region, Tesla has determined that the average greenhouse gas emissions from charging one New York-based Tesla vehicle equates to the emissions from an ICE vehicle with a fuel economy of 135 MPG. Even in Michigan, where approximately 60% of the energy comes from natural gas and coal, driving a Tesla would equate to a car with 59 real world MPG. Tesla estimates that its customers avoided 5.0 million metric tons of CO2 emissions in 2020.
- By contrast, GM’s fleetwide fuel economy in 2020 was 23 MPG, the same as it was in 2018. According to the EPA, GM’s real world fuel economy improved from 22.2 to 23 from 2015-2020. This ranked them 11th out of 13 companies studied. From 2015-2020, the EPA noted that GM was the third best auto company at reducing tailpipe emissions, after Toyota and Kia. On the other hand, Tesla had no reduction because its cars have no tailpipe CO2 emissions.
Despite its impact on emissions goals, Tesla’s S&P Environmental score comes up short (28 out of 100) when compared to a more traditional automotive leader that aspires to be fully electric by 2030, General Motors, which earned above-average scores (78 out of 100).
With the SEC’s latest climate-related disclosure rule that would require public companies to be transparent about their carbon emissions and their impact on the environment, maybe some of this will change. But it won’t happen overnight.
Making a commitment to proper interpretation of ESG ratings is the key to sustainable investing at Reynders, McVeigh. ESG ratings are a good starting point, however by considering ESG scores in the context of broader due diligence, investors can better uncover investments that advance ESG issues while remaining positioned for growth.
If you have any questions about how we integrate ESG into our investment process, we encourage you to reach out.
This material is propriety and represents the current, good-faith views of Reynders, McVeigh Capital Management, LLC (“RMCM”) at the time of publication. It is for informational purposes only and should not be transmitted or reproduced to any 3rd party without RMCM’s permission. ESG (environment, social and governance) metrics are based only on social impact, not financial performance. They may not provide a complete picture of social impact as they are only as reliable as the amount of data available. The metrics discussed above were compiled on February 11, 2022 by independent third parties (see sources). RMCM has no direct or indirect affiliation to these third parties. While this material includes a selection of current RMCM recommendations, it is not a complete list of the companies that RMCM recommends to its advisory clients and it includes companies that RMCM does not recommend to clients. References to specific companies are for illustrative purposes only and should not be relied upon as investment advice or as a solicitation to transact in a particular security or in a particular manner. There is no guarantee that any particular investment will be profitable. Past performance not indicative of future results. All investments involve risk. Please consult your investment advisor before making any investment decisions. All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed, and RMCM disclaims any duty to update any of the information and data contained herein. Certain statements may be deemed forward-looking, but any such statements are not guarantees of any future performance, and actual results or developments may differ materially from those discussed.