Carmakers need to introduce sustainable finance in company ratings to succeed – think tank

Achieving a climate-friendly transition in the automotive sector will require better information disclosure by carmakers to make the sector fit for investments from financial actors that adhere to sustainable finance principles, think tank Agora Verkehrswende has said. Car manufacturers need to be subjected to an “integrated, transparent and future-oriented” company rating based on mandatory criteria, the think tank said. Rating agencies have to develop corresponding rating principles, while policymakers should ensure that clear rules for agencies are established. “Only those car companies whose business model and strategy are compatible with the Paris Climate Agreement’s targets offer investors and funders protection from climate-related risks,” think tank head Christian Hochfeld said. Financial markets would have to make available enormous sums for the car sector’s transformation, Hochfeld said, arguing that investments will be made into those companies that offer the most compelling climate strategy. “That’s why it’s in the economic interest of manufacturers and suppliers as well as of investors and banks to make sure that policymakers establish standards for integrated company reporting. Rating agencies can then build on that,” Hochfeld added.

The think tank had commissioned sustainable finance research institute NKI to analyse the car industry’s future investment prospects. It found that the current standard practice for many companies of producing separate financial and sustainability reports is no longer viable. “Company ratings of the future have to be integrated and comprehensively and systematically illustrate the climate and sustainability risks a company is facing and the eventual financial consequences,” NKI head Rolf Häßler said. Company reports so far focused on performance indicators resulting from actions in the past, whereas risks related to global warming and regulatory responses in the future are not factored in. “A consequence is that carmakers and suppliers have no incentive to consistently orient their activities towards climate action requirements,” Agora Verkehrswende argued. 

Sustainable finance principles based on environmental, social and governance (ESG) factors are increasingly viewed as necessary to introduce changes to investment decisions that enhance emissions reduction efforts across the economy rather than undermining them. Germany’s famed car industry is under intense pressure to fund its shift to electric mobility, as manufacturers from other countries are catching up or are more advanced in terms of electric vehicle sales and innovation.