As ESG investments rise across the world, corporates have been coming under pressure to embrace sustainability. This has led to a plethora of questions being asked about the nature of sustainability, its long-term implications for the organizations and most importantly, if and how shareholders are looking at these sustainability decisions.
Are companies being rewarded for embracing sustainability?
This month the ESG Edge explores whether adoption of sustainability practices is a form of strategic differentiation that can drive superior financial performance, or is it merely a necessity that can ensure corporate survival but not necessarily facilitate outperformance?
Global automobile industry
With the rising evidence of climate change reverberating around the world, the pressure to embrace decarbonization is mounting at an exponential rate. Internal Combustion Engines are being seen as one of the key drivers of global warming, and there is intense pressure on automobile companies to transition to net zero emission Electric Vehicles (EV). In this issue of the ESG Edge, we look at examples of two large automobile companies (both being legacy Internal Combustion Engine based companies) which have articulated highly credible transition strategies towards electric vehicles and how shareholders have reacted to the paradigm shift in strategy.
Let us first look at Volkswagen (VW), which only a few years ago was riled by the Dieselgate scandal and shunned by investors. In March this year, the company unveiled its massively transformative electric vehicle strategy. The automaker, which is the second largest in the world based on sales volume, said it would reduce the cost of producing its batteries by up to 50%, build multiple battery factories around the world, expand its network of charging stations, and eventually transition to solid-state technology that would cut costs and boost efficiency. The ultimate goal was to make electric cars with longer ranges and quicker charging times — two of the biggest barriers to mass EV adoption. It was the first time ever that any conventional automobile company was announcing such a credible transition which went far beyond mere vision statements on what it intended to be.
In our view, what resonated with shareholders was Volkswagen’s vision to “take control of its own battery supply.” The race for huge improvements in battery technology is one of the most expensive and fiercely contested initiative amongst automakers. VW also articulated that it intends to have 18,000 fast-charging public points in operation in Europe by 2025, a fivefold increase over the current state of EV charging in the continent.
Until Volkswagen, no other auto company had highlighted a plan which spelt out in detail the foundation of a credible leadership strategy in Electric Vehicles. Shareholders reacted positively to this news and the company which had been shunned by investors after the Dieselgate scandal, saw a sharp rise in its share price. Since March 2021, when it unveiled this strategy, its stock has risen by 29% relative to Tesla (up 7%), which until then was an undisputed leader in Electric Vehicles.
Another example of a similar announcement came from Daimler– unveiling its electric vehicle strategy which stated that it plans to invest more than 40 billion euros ($47 billion) by 2030 to be ready to take on Tesla (TSLA.O) in an all-electric car market. It would, with partners, build eight battery plants and from 2025, all new vehicle platforms will only make EVs.
"We really want to go for it, and be dominantly, if not all electric, by the end of the decade," Chief Executive of Daimler, Ola Källenius told Reuters, adding that spending on traditional combustion-engine technology would be "close to zero" by 2025. While it is too early to state conclusively how shareholders will react to it, the reaction since the announcement has been positive.
The above examples amply illustrate the point that sustainability decisions, when backed with credible execution plans, are a source of shareholder value creation. We continue to strongly believe that the decarbonization initiatives promise to be the current century’s single biggest investment opportunity.