A damning new report has found car manufacturers are significantly underestimating the lifetime emissions of their combustion engine vehicles, and that investments in car makers are, on average, more carbon intensive than investments in oil companies. Daniel Bleakley with the story.
The joint report, released by global think tanks Nomisma and Carbon Tracker, also found ESG ratings (Environmental, Social and Governance) used by financial institutions fail to capture the true impact of the automotive companies, and that the EU’s sustainable finance taxonomy offers a much more accurate representation of companies’ impact on climate and the environment.
The report finds that when scope 3 emissions are included, some automotive companies generate more emissions than entire G7 economies.
The CO2 emissions from Toyota, Volkswagen and Stellantis combined are higher than the sum total emissions of the UK, France and Italy.
Greenhouse gas emissions per car manufacturer. Source: oil companies in disguise Nomisma and Carbon Tracker.
More carbon intensive than oil companies
The study also analysed and compared the carbon intensity of investments in ICE (internal combustion engine) vehicle manufacturers compared to oil companies with shocking results.
The researchers calculated investment carbon intensity by dividing companies’ total estimated emissions by market capitalisation. Using this metric, they found investments in legacy ICE car manufacturers were, on average, 18% more emissions-intensive than investments in oil companies, with Ford and Stellantis more than three times more carbon intensive than Exxon Mobil and BP.
Car maker carbon intensity investment (tonnes of CO2 equivalent per enterprise value including cash). Source: Oil companies in disguise* Nomisma and Carbon Tracker
ESG ratings disputable and opaque
The authors of the report point out that legacy auto ESG ratings are disputable, with a very low correlation between raters. For example, VW scored ESG ratings of 88/100 with S&P and 21/100 with MSCI.
“From a qualitative viewpoint, it remains unclear what they actually measure: a comparison with impact-based EU Taxonomy alignment scores indicates that emissions are still a very marginal factor in ESG ratings and, therefore, they do not serve the purpose of improving the decarbonisation of portfolios.” says the report.
The researchers compared the average legacy auto ESG ratings of various financial institutions to the automaker’s score against the EU Taxonomy of sustainable economic activities (shown below in green).
The EU Taxonomy regulation, which sets criteria to determine if an economic activity can be considered environmentally sustainable, was recently made mandatory for large companies operating in the EU.
Legacy car maker average ESG ratings. Source: Oil companies in disguise* Nomisma and Carbon Tracker
Linda Romanovska, who was involved in drafting EU Taxonomy sustainable criteria, says the results are not surprising, saying:
ESG ratings tend to make broad generalisations of what counts as sustainable, frequently use estimates and indirect data, and each has a different underlying methodology.
“Whereas the EU Taxonomy is a razor-sharp assessment tool, based on a set of precisely defined custom-made criteria to determine a certain economic activity, for example, ‘manufacture of low carbon technologies for transport’ as taxonomy-aligned sustainable.”
The new EU regulation requires companies to report 3 sustainability alignment KPIs. These KPIs are each a percentage alignment to EU Taxonomy of net turnover, capital expenditure and operational expenditure.
“The taxonomy alignment indicators are in essence, an aggregation of the sustainability levels of the individual activities of a company, which paints a detailed picture of how much of company’s turnover is generated by doing something objectively sustainable.
“In other words, by activities that are significantly contributing to the six sustainability objectives addressed by EU Taxonomy. Similar assessment is done for a company’s capital and operational expenditure.
“An ESG rating may rate a car company high because it has a company-wide “net zero by 2050” commitment. However, the EU Taxonomy will recognise only the portion of the company’s turnover that was generated by producing “zero emissions vehicles” as sustainable, regardless of company-wide policies and commitments on climate.
“If a company has a transition plan, only the capital expenditure that is already being invested in the transition, which leads the company to achieve or increase taxonomy alignment in the future will be recognised as sustainable. Therefore the EU Taxonomy focuses on real actions and investments companies have made, rather than future commitments.”
ESG ratings lack transparency
In June 2023 the European Commission carried out an investigation into the ESG ratings market and found a lack of transparency in methodologies and objectives of ESG ratings.
“Consequently, ESG ratings do not serve their purpose and do not sufficiently enable users, investors and rated companies to make informed decisions on ESG-related risks, impacts and opportunities.” states the Commission in its proposal for ESG regulation.
The Commission says that estimates put ESG/sustainable investing at $US40 trillion globally.
“Since decisions by investors and businesses are crucial for the transition to a climate-neutral and more sustainable economy, this ultimately hinders the market’s potential to contribute to the European Green Deal and achievement of UN Sustainable Development Goals.” says the Commission.
VW only 9.4% EU taxonomy aligned
In its first annual sustainability report since EU Taxonomy reporting became mandatory, VW reported that its turnover is only 9.4% aligned with the EU Taxonomy criteria, the bulk of which (7%) coming from VW’s EV manufacturing. As the report shows, this is in stark contrast to S&P’s 88/100 and MSCI’s 21/100 ESG ratings.
2022 VW EU sustainable economic activity taxonomy alignment of turnover. Source: VW
Grossly underreporting emissions
The researchers collected the automaker’s global sales data as well as their stated Scope 1, 2 and 3 emissions and then calculated resulting emissions per vehicle using average lifetime values. The researchers found that when calculating lifecycle emissions, car makers are using lifetime mileage figures that are lower than the vehicle’s actual average lifetime.
“Reported values are generally low compared to the models’ actual average lifetime. This is despite OEMs having large financing and dealership networks which can provide extensive data and knowledge on how vehicles are used and what their lifetime mileage is.” notes the report.
The researchers say that a lack of global standards on car model segments means reported vehicle efficiencies differ significantly from real-world efficiencies. Based on their methodology, the researchers found that ICE vehicles were, on average, producing 14% more emissions per km than reported by companies and that plug-in hybrids were producing 3.42 times more emissions per km.
Accounting for discrepancies in vehicle lifetime mileage and real-world vehicle efficiency, the researchers found
emissions per vehicle are actually, on average, 27% higher than car makers report.
Automaker declared emissions per vehicle versus our best estimate (wltp rw + epa + ev correction).
As jurisdictions continue to tighten regulations around ESG and with the EU Taxonomy becoming the new global benchmark in sustainable finance reporting, legacy automakers are being exposed as some of world’s most damaging companies.
As the world’s third largest car market after China and the US, Europe’s move toward stronger sustainable finance legislation could significantly accelerate the flow of investment away from highly polluting companies into clean technology.
In 2024 we’ll see if legacy auto is capable of shifting as fast as EU regulators.
* Oil companies in disguise 2024 edition.
Republished by permission from thedriven.io. Original here.
Daniel is a qualified mechanical engineer, climate activist and former Anne Kantor Research Fellow at The Australia Institute working in the Climate and Energy program. His areas of interest include climate policy, electrification, renewable energy and fossil fuel taxation.