Total time: 12:12

00:02

Sara Rodriguez: Hi everyone, and welcome back to another episode of The Hitchhiker's Guide to ESG Investing. My name is Sara Rodriguez and I'm a research analyst here at Sage Advisory. Here with me today is my colleague Andy Poreda, research analyst and the author of a recently published research paper titled “Net Zero Heroes.” 2021 has brought us a new administration, and with that, the United States has re-entered into the Paris Climate Agreement, and renewed the pledge to aggressively cut down our greenhouse gas emissions in an effort to limit the global temperature increase to 1.5 degrees above preindustrial levels. The Paris Agreement focuses on reaching worldwide carbon neutrality, or “net zero.” One industry that will be paramount in the shift to net zero will be the auto industry, as transportation is responsible for a large amount of greenhouse gas emissions worldwide – constituting about 15% globally and about 30% of emissions in the United States. Andy, can you tell us a bit about why the auto industry is such an important focus when it comes to reaching net zero?

1:11

Andy Poreda: Absolutely, Sara. As you mentioned, the transportation sector in general, which obviously includes the auto industry, is a huge component of all our greenhouse gas emissions, especially in America. So, if we're looking at a way to really put a dent in our pathway towards net zero and getting there, I think this is a great place to look. One of the big things that's been discussed here in this net zero challenge is the discussion on electric vehicles, also known as ‘EVs’ for short. I think this is a great place to look at where we can really start seeing the discussion of how choices that are made by these industries and consumers can really put a dent in our pathway. So, one way to think about it is, you have to compare, and see the benefit of whether or not electric vehicles are going to really have an impact. I think you have to start to break down the auto industry and think about how greenhouse gas emissions occur from a company. So, the first part, that's the production phase, and in the production phase we're usually including the Scope 1 and Scope 2 emissions. The big thing here is that this production process is energy intensive to make a car, right, not just the putting it together. Think of this for an EV, the battery technology that's required for it, that requires a huge amount of energy. Think about things like steel and other materials that come from a car, it's a very energy intensive process. However, in actuality, what ultimately happens in a traditional car is the usage of the car from the consumer, which is known as that Scope 3 emissions, that is really where the majority of our energy ends up happening is actually from the usage phase, when you go to the gas pump, or you recharge your electric vehicle, that's what's going to really, over a long period of time, have the most impact negatively on the environment. So, the good part about electric vehicles is though they are more energy intensive on the front end in the production phase, the more that we drive them over time, you eventually reach a point where that electric vehicle has less of environmental impact than its traditional counterpart. There are also some other assumptions, I think that are very important. That’s the fact that we need to consider in this situation, we have a set power mix like we have in the U.S. right now, a mix of wind, solar, nuclear, natural gas, and coal. That assumption and that discussion also plays into it, because as we go towards a more green power structure, then the benefits of those electric vehicles become even greater. So, that's why this is a really interesting discussion to be had, because it can have a huge impact. But it's a complicated one, and I think it's really good for all stakeholders to start having that discussion and pushing for, how viable this is as an option moving forward.

3:52

Sara Rodriguez: Absolutely, and I think it's something that has really been in the news more lately, especially this year, we've already seen announcements from both the federal government and major automakers regarding their shift to net zero. Andy, can you elaborate a little bit on these announcements?

4:10

Andy Poreda: Yeah. So, I think it's no surprise that the Biden administration is going to be utilizing EVs in this pathway towards net zero. We haven't seen anything yet officially from them on a net zero pledge, but we know it's in the works. I think, based on what we talked about, the fact that the transportation sector uses so much energy, this is going to be a key focus. So, President Biden made a big announcement in the fact that, one of the things that the United States government has is a large fleet of vehicles, cars, trucks, you name it, they have a ton of vehicles that are on the roads right now, and they drive a decent number of miles. And so, he made an announcement that he wanted the U.S. government fleet to be all electric, and also all American, which is also another interesting point, but we can talk about that some other day. One of the things that they pushed out is, we saw then after that announcement, we saw GM make a huge pledge to go to only electric models by 2035, and that's really quick. I mean, that's 14 years from now. So, you see that it basically became a race from other companies to match that challenge, and we saw Ford make a carbon neutral pledge by 2050, and as you saw in your Holdings and Highlights that you did on Toyota, even Toyota who has been a leader in the environmental space, from a hybrid perspective, they also now are debuting three electric vehicle models for the U.S. market. So, I think you can see that they're all trying to get on board with President Biden, and this is just the tip of the iceberg and we can expect to see some more news from all of these companies moving forward.

05:43

Sara Rodriguez: Yeah, it's interesting to me that we've seen this wave of announcements by these major automakers, especially with Toyota's announcement of their three new electric vehicles. We know that Toyota has had their Prius model out in the United States for about two decades now. But they had yet to release any fully electric cars until their announcement this year. Why do you think there has been such slow adoption in the electric vehicle space in the United States?

06:15

Andy Poreda: That’s a great question Sara, and I think there's a lot of moving parts here. I think one of the big things in the United States is, if we look at how our demand for vehicles has shifted over time, we are seeing a ton of interest in SUVs and crossovers. A 2020 figure I saw showed that they represent about 50% of new car sales, and then you start adding trucks that are 20% of new car sales. If you think about that, there's not that much room left for the automobile, the traditional car sedan market. And if you then compare that to some of the vehicles that are being offered from companies like Tesla and others, the American public wants these larger vehicles and there's not necessarily an appetite for these smaller vehicles yet. That being said, there’s a lot going on in the market to try to enhance that, but I would say that to try and take SUVs away from Americans seems like a risky move for any automobile company, and they need some impetus to really make that happen. I think consumers are also wary from a lot of other perspectives. Say you live in an apartment complex, Sara, if you bought an EV, how are you going to charge it? Is your apartment complex setup for that vehicle to be able to charge? Maybe there's one or two, but it may not be viable for you to charge it overnight. Or if you have to go on a road trip, possibly three hours away, you’ll need a place to charge on the way. There are some, and it's getting better, but I think most Americans probably don't want to be early adopters and they want some of the infrastructure to be there to support this EV market. I think there's some other issues as well, like the upfront costs in a time where Americans are cash strapped as it is – to try to spend a lot of money up front, there's a premium to be paid initially on that, even with subsidies, and I think that's the other part that we're seeing. A lot of people can't buy new cars or they’re going to wait until maybe the market is a little better, overall, for EVs. So, I think those are some of the things that we need to think about. There’s obviously great potential, but I think Americans are willing to buy an EV there, it's just not right for them in their mind, unless there's something really pushing them to do so.

8:21

Sara Rodriguez: Yeah, Andy, you bring up an interesting point about infrastructure. And as we both know, just a couple of weeks ago, Texas was hit by a massive winter storm that left the state covered in a blanket of snow and ice and left millions of people without power and water for days on end, after failures in our electricity grid. The switch from gasoline powered cars to electric vehicles will certainly increase the strain on our grid systems, which makes me wonder, will our infrastructure be ready? Can you speak on some of the challenges that will come with the shift from traditional vehicles to electric vehicles?

8:59

Andy Poreda: Sara, that's a great point, too. I noted that as well. And I saw that Austin had their electric bus fleet, I think there was 20 of them, all were rendered useless during this recent outage. And that's, that's unfortunate. And I think that type of issue is a one-off that shouldn't cause people to be concerned too much about the reliability of using EVs. But I do honestly think that there is a bigger discussion to be had, as we talked about if a third of your energy is in the transportation sector, and now you're putting it all onto the grid that's already strained, and that’s what we saw as well in Texas, we had a system basically running at capacity. If we start thinking about adding 30% of that energy or something similar to that number onto the grid, we will have to think to plan for that. If we also want to shift to a more renewable model it's going to be exacerbated. We're talking about charging, maybe after hours, where you may not have that output from a solar photovoltaic power station. So, we have to think about these complexities. A study that we saw said we needed from a gigawatt electric capacity, it (the grid) needs to basically double the power to 186 million EVs by 2050. So, that's a huge amount of power and I think it's worth the conversation to be had as to how we get there and it's more complex than I think we all want to realize. It’s not a slam dunk in how easy it is to do.

10:19

Sara Rodriguez: Right, it's not going to be just as easy as these big automakers announcing that they're going to have all electric models only in 15 years, seems like there's going to be a lot more that's going to have to go into that to make it happen. So, that’ll be something to keep an eye on. In addition to that, we know that there are going to be other alternatives to gasoline-powered vehicles, like vehicles that run on natural gas, hydrogen fuel cell vehicles, and also just your average plug-in hybrid that runs on both gasoline and electricity. Andy thank you for talking with us today. To learn more about Sage and to read Andy’s paper titled “Net Zero Heroes” please visit us at sageadvisory.com. You can also find us on our Sage Advisory LinkedIn page and our Sage Advisory Instagram. Thanks for listening and have a good day.

11:12

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