The upheaval in the automotive industry is obvious and is affecting more and more companies. The challenges are enormous: the switch to electric cars alone requires massive investment in research and development and requires a transformation of the entire value chain - in addition to the development of a new infrastructure, for example in the form of charging stations. The industry will not be able to manage this change without external capital. As financiers, banks can play an important role in this transformation. But what does this mean for banks' sustainability strategies? How can they bring their loan books in line with climate targets and at the same time support the industry in its transformation towards greater sustainability?
The Net Zero Banking Alliance (NZBA) is addressing this question. In a recent report, NZBA members, led by ING and Barclays, have developed a comprehensive guide for banks seeking to align their automotive financing practices with net zero emissions targets. The sector-specific analysis outlines the decisions and considerations banks need to make when setting climate-related targets and provides insights into practices, prevailing trends and common challenges in setting emissions targets for automotive financing. The overall aim is to assist banks in reviewing their current practices and formulating or adjusting their targets. The report focuses on decarbonization on the one hand and on car manufacturers on the other, as the vehicle design decisions they make have a significant impact on a vehicle's life cycle emissions.
Various approaches to target definition
The report shows that banks take several different approaches to setting emissions targets in the automotive sector. This is also because they often struggle with data problems: For example, there are significant discrepancies in the way vehicle manufacturers report their emissions, particularly in relation to Scope 1, 2 and 3 emissions, which banks must take into account in their analysis. Eliminating these inconsistencies is a prerequisite for defining meaningful targets. More standardized reporting practices in the future will facilitate this step.
This is particularly important as the objectives of the various financial institutions have so far differed significantly. The analysis shows that banks use a wide range of individual approaches and criteria that reflect the diversity of net zero targets. For example, while some institutions use data to measure emissions based on end customers, others focus on the downstream value chain. This diversity also highlights the importance of considering regional differences, data limitations and emerging approaches to target setting in the automotive sector.
For example, they must decide on the right financial product, such as corporate loans, fleet loans or direct vehicle loans, take into account different vehicle types and areas of the value chain, integrate stakeholders and include the availability of data or greenhouse gas emissions and other ecological criteria in their decisions.
Transformation means collaboration
Ultimately, banks are also dependent on external support, according to the authors of the report. For example, the automotive industry and legislators must ensure better availability of data.
Efforts in the automotive sector have a significant impact on global greenhouse gas emissions. The transformation of the industry is therefore essential. However, this requires a coordinated approach by all players in the automotive industry value chain as well as the financial sector and political decision-makers.
Please click here to read the full report.
Society is transitioning to a low-carbon economy. So are our clients, and so is ING. We finance a lot of sustainable activities, but we still finance more that’s not. See how we’re progressing on ing.com/climate.