Making Sense of the Transition to Zero Emissions Vehicles with SASB Standards

“The days of the internal combustion engine are numbered.” — Neal E. Boudette and Coral Davenport, The New York Times, 28 January 2021

What precipitated such a dramatic pronouncement? General Motors (GM) had just released its plan to phase out traditional petroleum-fueled automobiles and sell only zero-emissions vehicles (ZEVs) by 2035.

While attention-grabbing, GM’s was not the first move in this direction. In fact, many governments around the world have established targets for the transition to electric vehicles (EVs) or ZEVs. Among them:

• China has a program to phase out conventional autos by 2035.

• The United Kingdom announced a ban on new petroleum-powered cars by 2030.

• The United States does not currently have a federal mandate, but several states have their own targets. California, for example, intends to retire gasoline-powered cars by 2035.

GM’s announcement was quickly followed by similar ones from its competitors: For example, Volvo said it plans to go fully electric by 2030 and Jaguar Land Rover declared the Jaguar brand will be electric-only as soon as 2025.

Such a technological shift driven by environmental initiatives has significant financial implications, both within the auto sector and across the broader global economy and financial markets.

Markets need consistent, comparable, and reliable sustainability information to better understand these developments and the related environmental, social, and governance (ESG) issues. That’s where ESG reporting frameworks and standards, such as those developed by the Sustainability Accounting Standards Board (SASB), come in. Responses to SASB performance metrics can enhance financial analysis as the transition from gas-powered vehicles continues to evolve.

Key Points:

• General Motors (GM) recently announced its plan to sell only zero-emissions vehicles (ZEVs) by 2035, following similar commitments from other automakers and governments around the world.
• The transition to ZEVs has significant financial implications and requires consistent and reliable sustainability information.
• Sustainability reporting frameworks and standards, such as those developed by the Sustainability Accounting Standards Board (SASB), can provide valuable insights for financial analysis.

Fuel Economy and Use-Phase Emission

Among the five disclosure topics in SASB’s Automobiles Industry Standard is Fuel Economy and Use-Phase Emission. This metric focuses on fleet fuel economy, production of ZEVs, and a qualitative discussion around related strategy.

SASB Standard: Fuel Economy and Use-Phase Emissions

Several firms are already reporting to the SASB Automobiles Standard, which can help put the magnitude of their commitments into perspective — for example, by evaluating current sales of low/zero-emissions vehicles against total company sales (an activity metric identified in the SASB Standard). However, it is important to recognize that even within an industry, business models can vary and those considerations should be incorporated when analyzing reported data.

Select Reporting to SASB Fuel Economy and Use-Phase Emissions Metric

Source: Company SASB reports for 2020

Key Points:

• Companies reporting to SASB’s Fuel Economy and Use-Phase Emissions metric can provide valuable data for analyzing their commitment to low/zero-emissions vehicles.
• However, it is important to consider the variations in business models within the industry.

Product Safety

As the auto industry deploys new
technologies, new risks and safety concerns can emerge and reporting to the
SASB Automobiles Standard metrics can yield useful information about their
scale and scope.

One consequence of the shift to electric vehicles are more reports of battery-related fires. In late 2020, Ford delayed the launch of a hybrid plug-in vehicle because a similar model experienced battery fires. BMW and Hyundai also recalled vehicles due to fire risks associated with the battery cells.

SASB Standard: Product Safety

Additionally, it is not entirely clear how these new parts and materials will wear over time. In late 2020, certain older Tesla models were associated with reports of battery fires, which has led to litigation as well as federal investigation.

Key Points:

• Reporting to SASB’s Product Safety metrics can provide insights into the scale and scope of safety concerns associated with new technologies deployed in vehicles.
• Battery-related fires have been a concern for electric vehicles, leading to recalls and investigations.
• Understanding the safety-related defects and the number of vehicles recalled can help identify potential risks and evaluate company responses.

Materials Sourcing

Just as new technologies bring new risks, they also bring new resource demands. EV battery production relies on lithium, cobalt, and nickel, among other materials, and demand for these substances has spiked, creating potential supply chain issues.

SASB Standard: Materials Sourcing

“Nickel is our biggest concern for scaling lithium-ion cell production. That’s why we are shifting standard range cars to an iron cathode. Plenty of iron (and lithium)!” — Elon Musk

Tesla has responded to the resource challenge by switching some of its vehicles to an iron rather than nickel battery. But that decision comes with tradeoffs. Nickel batteries tend to store more energy and are less reliant on cobalt. Tesla has also sought to secure its long-term nickel supply by entering into a technical partnership in a nickel mine in New Caledonia.

Securing lithium is obviously essential to the production of lithium-ion cells and presents similar supply challenges as nickel. To this end, Tesla bought the rights to a 10,000-acre parcel in Nevada where it plans to extract and refine the material.

Key Points:

• Materials sourcing for EV batteries, such as lithium, cobalt, and nickel, is a critical consideration due to the spike in demand.
• Tesla has adapted its battery technology to address the resource challenge, but decisions like switching to iron batteries come with tradeoffs.
• Securing long-term supply of critical materials, such as nickel and lithium, is important for EV production.

Materials Efficiency and Recycling

The shift to ZEVs also has implications for what happens at the end of a vehicle’s useful life. The SASB Automobiles Industry Standard addresses this issue with its Materials Efficiency and Recycling topic, which includes metrics on waste from manufacturing, recovery, and the recyclability of vehicles sold.

SASB Standard: Materials Efficiency and Recycling

The shift to EVs adds new focus on that final metric: recyclability. In particular, the recycling of EV batteries has come under increased scrutiny. This has led to new business activities, such as new ventures that are deploying used car batteries to store energy supporting the power grid.

But the intensifying focus may lead to new regulatory burdens. The EU has proposed requiring recycled lithium, cobalt, and nickel content in EV batteries. An EU commissioner described this rule, which would require disclosure of recycled content in their batteries, as “ambitious but realistic.”

Key Points:

• Recyclability of EV vehicles is an important consideration, and regulators are proposing requirements for recycled content in batteries.
• Recycling of EV batteries has led to new business activities, such as using used car batteries for energy storage.
• New regulatory requirements for recycled content could affect operating costs and compliance.

Labor Practices

The final piece in the SASB Automobiles Standard is Labor Practices. The production processes for the various ZEV technologies have different workforce requirements and it is possible some conventional automobile manufacturing facilities will be shut down.

SASB Standard: Labor Practices

Future plants may not need as many workers. Why? Because electric vehicles have between 30% and 40% fewer moving parts than their gas-fueled peers. At the same time, manufacturing new products may require the construction of new operating facilities, which come with new employment opportunities.

Lordstown Motors repurposed a closed GM factory to produce EVs. The associated labor challenges were instructive. In a recent SEC filing, the company observed:

“Although the area surrounding the Lordstown Complex is home to a highly trained workforce with experience working in the Lordstown Complex and manufacturing vehicles, the workforce does not have experience with electric vehicle manufacturing and many jobs will require significant training. . . . If we are unsuccessful in hiring and training a workforce in a timely and cost effective manner our business, financial condition and results of operations could be adversely affected.”

Transparency into automakers’ workforce management strategies is a growing priority for investors. How will companies train and recruit their employees to run new production processes and manage any potential future restructuring amid the ZEV transition? If companies can’t secure the necessary technical expertise to develop and scale up production, they’ll miss their targets. At the same time, poor labor relations could slow production and lead to strikes or walk-outs. Those firms that develop strong relationships with their employees may improve worker productivity and better position themselves for long-term financial sustainability.

Key Points:

• The shift to ZEVs may result in changes to workforce requirements, with some conventional automobile manufacturing facilities being shut down while new plants are built for EV production.
• Training and recruiting skilled workers for the new production processes is critical for successful transitions.
• Strong labor relations can improve worker productivity and long-term financial sustainability.

Some Broader Impacts

While mandates and commitments to convert from conventional to ZEV will have broad implications for the automobile industry and its suppliers, such a significant transition could have repercussions across a wide range of industries.

Again, the SASB Standards can provide some insights.

1. Oil and Gas Exploration and Production

More automobiles powered by electricity, hydrogen, or other non-traditional fuels could reduce demand for carbon energy, creating potential risks for that industry.

In fact, several prominent companies, including Repsol, incurred large asset write-downs in 2019 that were attributed in part to the transition to a lower-carbon economy. The SASB Standard for Oil and Gas — Exploration and Production includes a disclosure topic covering Reserves Valuation and Capital Expenditures, which can offer some insight into this issue.

Associated metrics ask companies to discuss “how price and demand for hydrocarbons and or/climate change regulation influence the capital expenditure strategy for exploration, acquisition and development of assets.” This has clear implications for reporting companies’ future growth.

2. Electric Utilities

As vehicles are increasingly fueled by electricity rather than petroleum, pressure will likely mount on electric grids, which may require investment in order to meet the increased demand. Moreover, the environmental benefits of EVs depend on the type of power the utility is generating. An EV propelled by wind-generated electricity will have lower emissions than one driven by coal-powered electricity. The SASB Standard for Electric Utilities and Power Generators includes a disclosure topic on Grid Resiliency.

The SASB Engagement Guide notes that investors might want to ask a company’s management about its strategies to test for and ensure the reliability and quality of its service networks. Are significant capital investments needed to improve the long-term reliability and quality of the distribution network? How management responds to such questions could shed light on capacity to meet the transition to EVs.

The SASB Electric Utility Standard also asks companies to disclose total electricity generated as well as the percentage by major energy source and the percentage in regulated markets.

3. Renewable Energy

As utilities respond to rising demand to charge EVs by investing in their capacity, it could further increase demand for renewable energy. Growth in wind and solar capacity could raise issues around materials sourcing, the potential ecological impacts of new projects, and how such projects are integrated into the larger grid. These are all topics covered in the SASB Standards.

Key Points:

• The transition to ZEVs will have broader impact across various industries, including oil and gas exploration and production, electric utilities, and renewable energy.
• Reduced demand for carbon energy may create risks for the oil and gas industry.
• Increased demand for renewable energy will require utilities to invest in grid capacity, and transparency about how they are ensuring grid resiliency is important.

Conclusion

The switch to electric and zero-emissions vehicles presents significant risks and opportunities to automakers and other companies. As automakers gradually retire the internal combustion engine, investors need consistent, comparable, reliable data to assess their exposures, including the associated corollary effects on the larger economy and markets. The SASB Standards, in general, and the SASB Automobiles Industry Standard, in particular, can serve as a helpful dashboard in that effort.

If you liked this post, don’t forget to subscribe to the Enterprising Investor.

All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

Image credit: ©Getty Images / Chesky_W

Professional Learning for CFA Institute Members

CFA Institute members are empowered to self-determine and self-report professional learning (PL) credits earned, including content on Enterprising Investor. Members can record credits easily using their online PL tracker.