Search this website. You can use fund codes to locate specific funds

Blowing smoke and fogging mirrors: why the European auto sector is a long way from Paris

In an in-depth report, our Responsibility Office and EOS at Federated Hermes examines European auto firms’ progress in transforming their businesses to Paris-Alignment.

In 2020, the European Union (EU) put its foot down on climate change with tough new CO2 emission standards for the regional auto industry.

Under the EU rules, auto manufacturers must keep their average new vehicle emissions at a maximum of 95g CO2/km in 2020 or risk substantial fines. At first glance, the auto industry standards appear to take Europe further down the road to making its rendezvous with the Paris Agreement on Climate Change goals.

Preliminary data alongside auto company announcements suggests the top ten largest companies operating in the EU – with the exception of VW – will avoid fines once the 2020 emissions results are finally in.

The U-turn among European auto manufacturers to comply with the new emission standards is nothing short of miraculous considering most EU-made models sold in 2019 were in the range of 100-150g CO2/km.

But on closer inspection, the European vehicle miracle one-year carbon reduction effort reveals itself as a smoke-and-mirrors trick. Rather than engineering a massive shift in business operations, the EU auto industry has largely hit the 2020 CO2 KPIs by relying on short-term relief measures in the regulations that include:

  • generous intra- and inter-business electric vehicle offset schemes; and,
  • a concession that allows manufacturers to exclude the 5% most-polluting vehicles from their carbon calculations.

Excluding such ‘regulatory enablers’, data shows that vehicles sold in 2019 leave a significant ‘pollution legacy’ – a trend that  foreshadows a similar lack of progress against real-world emission reductions in the 2020 period.

Stalling for time to avoid fines in 2020, however, will leave most auto firms at risk of missing next year’s CO2 requirements when many of the regulatory quick fixes won’t be available. More importantly, the industry has wasted a chance to move ahead on producing and selling the Paris Agreement-aligned fleet of vehicles that will be essential in meeting climate change targets in coming years.

Study finds industry stuck in fossil first

In our just-released in-depth market analysis, we found EU auto manufacturers remain well off the pace in achieving the emissions standards demanded by climate science.

The study, based on 2019 sales figures, matches the current state of EU auto production against the UK Committee on Climate Change scientific analysis that sets a deadline of 2035 – ideally, 2030 – to phase out all fossil fuel-powered automobiles (including hybrids) in favour of pure battery electric vehicles (BEVs).

By that gauge, the European industry needs to step on it – and quick. According to our analysis, EU vehicle sales in 2019 looked like this:

While the 2019 data shows government policies have driven some positive movement with diesel sales falling from 36% in the previous year, the industry faces a momentous task in converting 98% of production to pure battery electric vehicles (BEVs) in just nine years if it is to meet the UK Committee on Climate Change’s preferred 2030 target.

At current conversion rates the EU auto industry would not even make much of a dent in emissions with sales of hybrids – including the plug-in hybrid electric vehicles (PHEVs) often cited as a viable bridging technology to a pure BEV future.

However, while PHEVs theoretically appear to offer a reasonable stop-gap solution, their real-world performance in cutting emissions is poor.

In fact, PHEVs are likely worsening the climate problem, as manufacturers have negated any potential CO2 reduction power the hybrids may offer by substantially increasing average vehicle weights. Also, many drivers of the now-oversized PHEVs rarely charge their vehicles, relying primarily on the high-emission internal combustion engine (ICE) technology to get around.

Our modeling shows that manufacturers will have to lift their pure electric vehicle output enormously over the next decade to have any hope of achieving the UK Committee on Climate Change ambitious 2030 targets.

The required EU auto manufacturing split between diesel, petrol, PHEV and BEV vehicles by 2030 to meet two CO2-reduction scenarios is detailed below:

Even at the lower end of the target range, BEVs should represent about half of all EU-built vehicles by 2030 to meet the required emission levels.

The finding seriously questions the current European auto manufacturer strategy of boosting PHEV production in particular: this approach may not provide the optimal return on capital for shareholders.

R&D gears need engaging to spark electric transition

If the industry is to achieve electric supremacy in double-quick time, though, it will have to invest considerably in research and development (R&D).

Our analysis found some evidence of EU auto sector increase in electric vehicle R&D activity based on a recent uptick in patent applications.

Despite the encouraging BEV patent data, given the significant structural changes required in the auto industry to ensure it helps the transition to a Paris Agreement-aligned 1.5°C world, EU manufacturers will have to outlay significantly more investment into R&D.

At the international business of Federated Hermes, we have put R&D investment high on the list of talking points for our planned engagement with European auto companies over the coming years.

As the research indicates, auto manufacturers need to move much faster in shifting their operations and sales to line up with the Paris Agreement agenda.

The EU auto sector is part of a global trend in the industry that has seen ongoing consolidation and innovative technology partnerships, creating a powerful nexus capable of delivering sustainable vehicle options to consumers.

Along with other investors, we will urge the industry, through positive engagement, to use that power to keep the world on track to limiting global warming to no more than 1.5°C.

The EU auto sector will have to cooperate with policymakers to ensure effective regulations are put in place for an orderly transition to a net zero future, rather than treating them as a set of rules to be gamed.

Based on the evidence to date, the European industry has some distance to travel in meeting those CO2 emission standards; but Paris is not that far away.

For more information, please download our in-depth report here.

More Insights

Five Federated Hermes funds awarded Austrian EcoLabel
Five of the firm's funds have been awarded the Austrian Ecolabel
Spectrum Q2 2022: Investing into the aluminium paradox
In this latest edition of our quarterly Spectrum report, experts from Federated Hermes consider the question of aluminium. The lightweight metal will play a crucial role in the energy transition but will need to address its own carbon footprint first.
Climate Change High Yield Credit strategy, interim report 2022
In this inaugural report, we delve into what makes the Federated Hermes Climate Change High Yield Credit strategy unique. As well as introducing our process and team, the report provides an overview of our proprietary Climate Change Impact (CCI) score, complete with portfolio examples to illustrate the scoring system in practice.
Federated Hermes Stewardship Report 2021
At Federated Hermes we believe the investment industry can be a powerful force for good, building a fairer, more equitable world for all – and that active ownership and engagement is the best way to achieve this. In this, our second annual Stewardship Report, we provide an update on our efforts towards effective and outcomes-driven stewardship.
The chimps are coming
The public art exhibition Chimps are Family, unveiling on Endangered Species Day (Friday the 20th of May) at Tower Bridge, sets to create awareness around the plight of the endangered apes.
Market snapshot: Slowdown fears send equities spinning
Stagflation concerns continue to mount, with investors piling into cash positions as the global growth outlook plunges.