As stock markets gyrated and companies scrambled for capital at the start of the coronavirus outbreak, it was noticeable that the greener a company seemed, the easier it was for it to attract funds. Investors showed a preference for makers of electric cars and corporate debt with green credentials.
For auto companies looking for capital, the message was clear: if you haven't been ambitious enough to get into so-called ‘green bonds' yet, then now is the time to do so.
Green bonds are not new. These innovative securities designed specifically to help organisations finance their transition to a low-carbon future have already been issued by governments and more recently by private companies. Banks, retailers and utility companies have all issued ‘certificated' green bonds, which have the stamp of approval from an independent ratings agency such as the Climate Bonds Initiative. Almost $100 billion of such green bonds have so far been issued in 2020.
Yet only a handful of car companies have issued green bonds and most issues to date have been in Asia and linked to auto financing rather than manufacturing. In 2017, Volvo was the first European carmaker to issue such a bond, but no major European or US manufacturers have issued green debt despite the huge investments needed to meet the carbon-reduction targets many have already agreed. For example, Volkswagen has undertaken to reduce the total carbon footprint of its passenger vehicles by 30 per cent by 2025 and to become fully carbon neutral by 2050. Achieving this is going to be expensive.
One reason why carmakers have been slow to embrace green bonds is that the company has to show that the capital raised really will be used for low-carbon purposes. For large companies with complex operations that can be challenging. Green bonds also make ongoing reporting requirements more onerous and expensive.
Another factor is reputational risk. There is always the possibility that the green bond fails to be accepted for listing by a recognised ‘green index' such as that run by financial data company Bloomberg. The Spanish oil and gas company Repsol ran into trouble in 2017 by issuing a green bond that major indices did not agree was actually green.
Building the future
Now is the time for the world's big carmakers to put these concerns aside and embrace new forms of finance to bolster their visions of a healthier planet – and there is already evidence they are moving in that direction. Toyota and Hyundai have issued several auto-financing green bonds and earlier this year VW published a Green Finance Framework that lays the groundwork for future green bond issues to fund manufacturing. Daimler, the parent company of Mercedes, has published a similar framework and industry insiders suggest it will start raising green finance soon, probably later this year.
These companies appear to have decided that the costs and reporting burden of green financing are outweighed by the advantages, which include readier access to capital and an opportunity to market themselves to the more environmentally-conscious customers of the future. As the global auto industry confronts the costs of decarbonisation, other companies will no doubt follow the early green bond pioneers.
And that will be a win-win situation for us all.