ICE car companies are significantly underestimating the lifetime emissions of their vehicle and investments in car makers can be more carbon intensive than investments in oil companies
A damning new report has found legacy car companies* are significantly underestimating the lifetime emissions of their ICE (internal combustion engine) vehicles, and that investments in car makers are – on average – more carbon intensive than investments in oil companies.
The joint report, released by global think tanks Nomisma and Carbon Tracker, also found ESG (environmental, social and governance) ratings 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 CO2 emissions from Toyota, Volkswagen and Stellantis combined are higher than the sum total emissions of the UK, France and Italy.
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 manufacture. Source: Nomisma and Carbon Tracker
Investments in ICE car manufacturers were on average 18% more emissions intensive than investments in oil companies
The study also analyzed and compared the carbon intensity of investments in ICE vehicle manufacturers compared to oil companies with shocking results.
Greenhouse gas emissions per car manufacture. Source: Nomisma and Carbon Tracker
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.
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 kilometer.
ESG ratings are disputable with opaque methodologies
The authors of the report point out that legacy auto ESG ratings are disputable with 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 indicate 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,” the report says.
A lack of global standards on car model segments means reported vehicle efficiencies differ significantly from real-world efficiencies
Linda Romanovska, who was involved in drafting EU Taxonomy sustainable criteria says the results are not surprising.
“ESG ratings tend to make broad generalizations of what counts as sustainable, frequently use estimates and indirect data, and each have a different underlying methodology,” she says.
“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.”
New EU ESG reporting regulations, including the Corporate Sustainability Reporting Directive (CSRD), entered into force in January 2023, with EU Member States required to implement provisions into national law and regulation by July 2024. These laws require companies to report three sustainability alignment KPIs, each with a percentage alignment to EU Taxonomy of net turnover, capital expenditure 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 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,” she said. “The EU Taxonomy focuses on real actions and investments companies have made, rather than future commitments.”
While these ESP reporting laws apply only to EU member countries, they are quickly being recognised as a leap ahead of most other country reporting regimes and, for companies operating and/or selling in the EU, they are quickly being taken up as a default global standard.
EU finds 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.
When calculating lifecycle emissions, car makers are using lifetime mileage figures that are lower than the vehicle’s actual average lifetime.
“Consequently, ESG ratings do not serve their purpose and do not sufficiently enable users, investors and rated companies to take 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 $40 trillion globally.
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% – come 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.
Automotive industry grossly underreporting emissions
The researchers collected the automakers 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,” according to the report.
Accounting for discrepancies in vehicle lifetime mileage and real-world vehicle efficiency, the researchers found emissions per vehicle are on average 27% higher than car makers report.
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 the world’s most damaging companies.
As the world’s third largest car market after China and the U.S., 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.
*Legacy car companies are those who have been operating for decades such as Ford Motor Company, Toyota and VW as opposed to new companies such as Tesla and BYD.
Featured photo: Honda East Liberty Auto Plant in Ohio
