Road transportation remains a major contributor to CO2 emissions in the European Union (EU). It contributed nearly 21% of the EU’s total CO2 emissions in 2016, with cars alone producing around 12%. The EU has set ambitious targets for car emission cuts.
Meeting these targets will require billions of euros of investment in new technologies and production facilities to help car manufacturers transform themselves. NN Investment Partners (NN IP) believes green bonds could play a crucial role in financing this transition.
The EU has set a target for fleet-wide average emissions of new passenger cars at 95g CO2/km by 2021, with further 15% and 37.5% reductions by 2025 and 2030, respectively. Car manufacturers that do not comply with these emission targets will face substantial fines.
With the advent of more stringent regulations determining what projects can benefit from green bond financing, only zero- and low-emission cars (less than 50g CO2/km) will be eligible. Since many car manufacturers are launching numerous EV models, green bonds look like an ideal tool to finance sales of these vehicles.
Green bonds could also be used for financing the building of dedicated production platforms for new electric vehicles (EVs) and the installation of new re-charging points across Europe. In order to maintain a reasonable ratio of charging stations versus EVs, Bloomberg expects that between 2 million and 5 million charging outlets might be needed globally in the future – up from 632,000 at end-2018.
Finally, green bonds could help car manufacturers finance production and recycling of battery packs. Currently, many car manufacturers outsource the production of battery cells to suppliers but develop the technologies and production capacities for battery packs in-house.
Despite the role that green bonds could play in financing the transformation of car production, only one euro-denominated green bond has been issued by a car manufacturer: a EUR 600 million bond issued by Toyota in 2017. The proceeds were used to finance the sales of Toyota and Lexus models that meet certain emissions criteria in the US market.
Bram Bos, lead portfolio manager Green Bonds at NN Investment Partners, comments: “If we are to achieve the climate targets set by the Paris Agreement, we will have to change the way we travel. Given that transport is the second-largest contributor to global greenhouse gas emissions, the market expects car manufacturers to do their part for climate-mitigation efforts by shifting their business models to low-carbon transportation."
“As auto manufacturers hold a vast pool of eligible green assets, there is strong potential to finance this transition with green bonds. This would greatly enlarge and diversify the green bond space. Sustainability-focused investors would also stand to benefit, as this would lower investment barriers within the green bond universe. In addition, green bonds represent a great investment opportunity, as we’ve found that investors face no additional costs when investing in green bonds. In fact, by investing in green bonds, investors can reduce the carbon footprint of their portfolios without sacrificing liquidity or returns.”
NN Investment Partners is committed to engaging with potential green bond issuers, particularly within emerging sectors. It regularly engages in dialogues with car manufacturers regarding their green investments and has a deep-seated conviction in the power of two-sided dialogue to determine issuers' intentions and advise them on the best market practices.
NN IP also seeks to educate potential issuers about how green bond proceeds might be used and which green assets would be eligible, in order to ensure that the bonds would be truly green. With these engagement efforts, NN IP seeks to expand the green bond market and increase the diversity and greenness of available green bonds.