Leading investors reveal the drivers behind investing in sustainable transport.
This article originally appeared in Blue & Green Tomorrow’s Guide to Sustainable Transport 2014.
There was something different about last year’s Frankfurt Auto Show. As the world’s largest motoring event, it is a chance for car manufacturers to show off their new models to industry experts. While in the past gas-guzzling supercars have hogged the limelight, the 2013 edition saw electric and hybrid vehicles take centre stage.
For the first time, every single one of the major manufacturers unveiled at least one hybrid or electric model. BMW pulled the curtain on its i3 and i8, Volkswagen showcased the E-up! and the E-Golf, Mercedes brought along the S 500 plug-in and Audi impressed with its hybrid Sport Quattro. Meanwhile, Japanese manufacturer Toyota – whose Prius model is often held up as the poster child for hybrid technology – devoted its entire stand in Frankfurt to its hybrid range.
Manufacturers are launching electric and hybrid models at a rate of knots – and not just for the fun of it. They’re reacting to consumer demand and tougher standards – particularly in the US. Most notably, in 2012 the Obama administration introduced a policy that requires the fuel economy of 90% of vehicles sold in the country by 2050 to be 54.5 miles per gallon (mpg). This one measure is said to dramatically reduce oil consumption and lower carbon dioxide emissions by around 5%.
As well as the models unveiled in Frankfurt last year, Tesla has fast become one of the leading players in the market. Spearheaded by charismatic entrepreneur Elon Musk, co-founder of PayPal, its fully electric luxury saloon car the Model S has been handed numerous awards by the mainstream car world. Asked in 2012 about his motivation for developing electric cars, Musk said, “We need to figure out how to have the things we love, and not destroy the world.”
For sustainable investors, the potential electric car revolution is just one of a number of attractive areas around sustainable transport. Tesla, initially quite a volatile stock, posted quarterly profits for the first time in Q1 2013. Meanwhile last month, it surged to its record value. Hyewon Kong – a senior analyst at London-based asset management firm WHEB – says consumer demand is the major driving force behind their success. That said, there are some issues that need ironing out on electric vehicles specifically.
“Electric vehicles won’t appear in the mass market yet because of constraints they have. Until we have a real breakthrough in battery technology, I don’t think it’s going to be a dramatic journey”, she says.
WHEB is a specialist in sustainability investing. Its Listed Equity team only invest in companies that are providing solutions to key challenges like climate change, resource shortages and water scarcity. Sustainable transport forms one of the FP WHEB Sustainability fund’s nine investment themes.
Because of the rigour with which the WHEB team applies these, it can’t invest in original equipment manufacturers – or OEMs – for whom electric or hybrid vehicles only represent a small portion of their overall turnover. But it does look at firms developing batteries (like one of its stocks, Johnson Controls) or others that are going to benefit from the shift towards electric vehicles, such as Umicore, which makes cathodes for batteries for electric cars.
Electric vehicles are not the only area within sustainable transport investment. Kong says there is a “paradigm shift” around improving the fuel efficiency of conventional gasoline engines that WHEB is also keeping a keen eye on.
She adds, “About two or three years ago, we did a review on fuel efficiency. What was surprising for me was how much energy is lost. Only 15% of energy from fuel is used to move the car. The rest is getting lost because of the engine. Running idle also plays a role, as does weight.”
In an effort to cut down wasted energy, a lot of work is going into making engines lighter and more efficient. There are companies working on Start-Stop technology which shuts engines off when at a standstill and restarts when the driver’s foot is removed from the brake. One such bit of equipment, developed by Johnson Controls, is said to improve fuel efficiency by 3-8%.
Jon Forster, associate director in the listed equities team at another sustainable investor, Impax Asset Management, agrees that transport energy efficiency is a rapidly growing sector.
“Tightening global emissions standards mean that vehicle manufacturers are aiming to produce lighter and more fuel efficient vehicles”, he says.
“Ford announced at the recent Detroit Motor Show that its new F-Series pickup truck, the best-selling vehicle in the US for the past three decades, will weigh 700 pounds less than its previous model.”
Impax specialises in resource efficiency. Its flagship investment trust, Impax Environmental Markets, returned 32.2% for the last calendar year, compared to its benchmark, the MSCI All Countries World Index, which returned 20.5%. Forster says one of its holdings, Borg Warner, is focused on technologies that improve fuel economy, emissions and performance. He adds, “Their expertise includes engine timing systems, boosting systems and ignition systems, and they are innovators in transmission and all-wheel drive technology – all of which can help improve fuel efficiency.”
Elsewhere, car sharing is a big trend. Membership schemes like Zip Car (which merged with UK rival Streetcar in 2010 and was acquired by car rental firm Avis in 2013) – that allow people in urban environments to hire cars as and when they need them – are also viewed as attractive. The recently launched easyCar Club, owned by the people behind easyJet, is another popular choice.
The number of people signed up to such schemes increased by 10% in 2013 to 160,000 in the UK. Some commentators have attributed the increased interest in such schemes to the reason why car sales, post-financial crisis, have been slow to pick up.
Away from cars, bikes and public services like buses are also viewed as important in the sustainable future of transport. The Department for Transport in the UK estimates that over 540,000 journeys are now made by bicycle every day in Greater London alone. This figure doubled between 2000 and 2012.
As the most environmentally-friendly mode of transport (other than walking), manufacturing companies like Shimano (held in the FP WHEB Sustainability Fund) and Giant are sure to benefit from this increased consumer demand in cycling.
But it’s not just domestic transport that is being revolutionised. Intermodal transport – where goods are transported using multiple modes of transport – is another trend that sustainable investors are watching.
For reasons both economic and practical, a lot of this kind of work is done by trucks. Rail, historically, wasn’t very punctual – whereas trucks were. But with technology now available to improve both the safety and reliability of rail, there could be a sea change on the horizon.
To benefit from such a shift, the FP WHEB Sustainability Fund holds Wabtec, which works to produce safety technology for trains. Kong says even a 1% shift from truck to rail could have a significant positive impact on society.
As for his outlook for the future, Impax’s Forster sees a couple of key trends that will shape investment decisions in sustainable transport over the coming years: “Increased focus on fuel efficiency favours existing technologies such as turbocharging, injection control and light weighting, over electric vehicles and hybrid electric vehicles. We expect emissions regulations to continue to tighten, such as the requirement for 54.5mpg by 2025 in the US and an expected limit of 95 grams of CO2 per kilometre by 2024 in the EU.”
There are a range of fund managers that see sustainable transport as a key driver in their investment decisions. Other considerations include road safety and the tightening of emissions targets, with a number of companies profiting from technologies that improve safety and make vehicles more environmentally-friendly.
Given transport’s contribution to global greenhouse gas emissions, and the range of innovative solutions on hand that need investment to grow to scale, it is not a sector that investors can afford to overlook.
Will Self-Driving Cars Be Better for the Environment?
Technologists, engineers, lawmakers, and the general public have been excitedly debating about the merits of self-driving cars for the past several years, as companies like Waymo and Uber race to get the first fully autonomous vehicles on the market. Largely, the concerns have been about safety and ethics; is a self-driving car really capable of eliminating the human errors responsible for the majority of vehicular accidents? And if so, who’s responsible for programming life-or-death decisions, and who’s held liable in the event of an accident?
But while these questions continue being debated, protecting people on an individual level, it’s worth posing a different question: how will self-driving cars impact the environment?
The Big Picture
The Department of Energy attempted to answer this question in clear terms, using scientific research and existing data sets to project the short-term and long-term environmental impact that self-driving vehicles could have. Its findings? The emergence of self-driving vehicles could essentially go either way; it could reduce energy consumption in transportation by as much as 90 percent, or increase it by more than 200 percent.
That’s a margin of error so wide it might as well be a total guess, but there are too many unknown variables to form a solid conclusion. There are many ways autonomous vehicles could influence our energy consumption and environmental impact, and they could go well or poorly, depending on how they’re adopted.
One of the big selling points of autonomous vehicles is their capacity to reduce the total number of vehicles—and human drivers—on the road. If you’re able to carpool to work in a self-driving vehicle, or rely on autonomous public transportation, you’ll spend far less time, money, and energy on your own car. The convenience and efficiency of autonomous vehicles would therefore reduce the total miles driven, and significantly reduce carbon emissions.
There’s a flip side to this argument, however. If autonomous vehicles are far more convenient and less expensive than previous means of travel, it could be an incentive for people to travel more frequently, or drive to more destinations they’d otherwise avoid. In this case, the total miles driven could actually increase with the rise of self-driving cars.
As an added consideration, the increase or decrease in drivers on the road could result in more or fewer vehicle collisions, respectively—especially in the early days of autonomous vehicle adoption, when so many human drivers are still on the road. Car accident injury cases, therefore, would become far more complicated, and the roads could be temporarily less safe.
Deadheading is a term used in trucking and ridesharing to refer to miles driven with an empty load. Assume for a moment that there’s a fleet of self-driving vehicles available to pick people up and carry them to their destinations. It’s a convenient service, but by necessity, these vehicles will spend at least some of their time driving without passengers, whether it’s spent waiting to pick someone up or en route to their location. The increase in miles from deadheading could nullify the potential benefits of people driving fewer total miles, or add to the damage done by their increased mileage.
Make and Model of Car
Much will also depend on the types of cars equipped to be self-driving. For example, Waymo recently launched a wave of self-driving hybrid minivans, capable of getting far better mileage than a gas-only vehicle. If the majority of self-driving cars are electric or hybrids, the environmental impact will be much lower than if they’re converted from existing vehicles. Good emissions ratings are also important here.
On the other hand, the increased demand for autonomous vehicles could put more pressure on factory production, and make older cars obsolete. In that case, the gas mileage savings could be counteracted by the increased environmental impact of factory production.
The Bottom Line
Right now, there are too many unanswered questions to make a confident determination whether self-driving vehicles will help or harm the environment. Will we start driving more, or less? How will they handle dead time? What kind of models are going to be on the road?
Engineers and the general public are in complete control of how this develops in the near future. Hopefully, we’ll be able to see all the safety benefits of having autonomous vehicles on the road, but without any of the extra environmental impact to deal with.
New Zealand to Switch to Fully Renewable Energy by 2035
New Zealand’s prime minister-elect Jacinda Ardern is already taking steps towards reducing the country’s carbon footprint. She signed a coalition deal with NZ First in October, aiming to generate 100% of the country’s energy from renewable sources by 2035.
New Zealand is already one of the greenest countries in the world, sourcing over 80% of its energy for its 4.7 million people from renewable resources like hydroelectric, geothermal and wind. The majority of its electricity comes from hydro-power, which generated 60% of the country’s energy in 2016. Last winter, renewable generation peaked at 93%.
Now, Ardern is taking on the challenge of eliminating New Zealand’s remaining use of fossil fuels. One of the biggest obstacles will be filling in the gap left by hydropower sources during dry conditions. When lake levels drop, the country relies on gas and coal to provide energy. Eliminating fossil fuels will require finding an alternative source to avoid spikes in energy costs during droughts.
Business NZ’s executive director John Carnegie told Bloomberg he believes Ardern needs to balance her goals with affordability, stating, “It’s completely appropriate to have a focus on reducing carbon emissions, but there needs to be an open and transparent public conversation about the policies and how they are delivered.”
The coalition deal outlined a few steps towards achieving this, including investing more in solar, which currently only provides 0.1% of the country’s energy. Ardern’s plans also include switching the electricity grid to renewable energy, investing more funds into rail transport, and switching all government vehicles to green fuel within a decade.
Zero net emissions by 2050
Beyond powering the country’s electricity grid with 100% green energy, Ardern also wants to reach zero net emissions by 2050. This ambitious goal is very much in line with her focus on climate change throughout the course of her campaign. Environmental issues were one of her top priorities from the start, which increased her appeal with young voters and helped her become one of the youngest world leaders at only 37.
Reaching zero net emissions would require overcoming challenging issues like eliminating fossil fuels in vehicles. Ardern hasn’t outlined a plan for reaching this goal, but has suggested creating an independent commission to aid in the transition to a lower carbon economy.
She also set a goal of doubling the number of trees the country plants per year to 100 million, a goal she says is “absolutely achievable” using land that is marginal for farming animals.
Greenpeace New Zealand climate and energy campaigner Amanda Larsson believes that phasing out fossil fuels should be a priority for the new prime minister. She says that in order to reach zero net emissions, Ardern “must prioritize closing down coal, putting a moratorium on new fossil fuel plants, building more wind infrastructure, and opening the playing field for household and community solar.”
A worldwide shift to renewable energy
Addressing climate change is becoming more of a priority around the world and many governments are assessing how they can reduce their reliance on fossil fuels and switch to environmentally-friendly energy sources. Sustainable energy is becoming an increasingly profitable industry, giving companies more of an incentive to invest.
Ardern isn’t alone in her climate concerns, as other prominent world leaders like Justin Trudeau and Emmanuel Macron have made renewable energy a focus of their campaigns. She isn’t the first to set ambitious goals, either. Sweden and Norway share New Zealand’s goal of net zero emissions by 2045 and 2030, respectively.
Scotland already sources more than half of its electricity from renewable sources and aims to fully transition by 2020, while France announced plans in September to stop fossil fuel production by 2040. This would make it the first country to do so, and the first to end the sale of gasoline and diesel vehicles.
Many parts of the world still rely heavily on coal, but if these countries are successful in phasing out fossil fuels and transitioning to renewable resources, it could serve as a turning point. As other world leaders see that switching to sustainable energy is possible – and profitable – it could be the start of a worldwide shift towards environmentally-friendly energy.
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