Features, December 2000/January 2001 Drive yourself greener Judging by their environmental pronouncements, Ford and General Motors are racing to develop the world's greenest car. But green investors continue to favour their European and Japanese competitors. Mark Nicholls reports. US car giants Ford and General Motors may not be the first companies to spring to mind in connection with environmental sustainability. As leading producers of sports utility vehicles (SUVs) - road-going behemoths with appalling fuel efficiency - such companies could well be accused of doing little for the environment. Nonetheless, the two firms are battling for 'environmental leadership' - running advertising campaigns trumpeting their green credentials, trading figures over whose product lines are the most fuel efficient, and investing millions in developing alternative, less-polluting fuel systems. But in comparison with their European and Japanese competitors, Ford and GM still have a way to go. Socially responsible investment (SRI) analysts and fund managers questioned by Environmental Finance placed European and Japanese car makers above their American competitors (see bottom of page). Taken as a whole, the automobile industry now places considerable emphasis on its environmental performance, driven by demand from customers - and governments - for cleaner vehicles. Vehicle manufacturers have entered into a voluntary agreement with the European Union to reduce the CO2 emissions of the average new car by 25% by 2009. And California requires that 10% of new vehicles should be zero-emission (in terms of ozone-causing and particulate emissions) by 2003. Even 'mainstream' financial analysts are showing great interest in companies' plans for a new generation of environmentally friendly vehicles. "Lots of people say that the auto companies are opposed to change," says Greg Merlich, auto analyst at Morgan Stanley Dean Witter (MSDW) in London. "It's not true. They want to sell cars, whether powered by fuel cells, or natural gas, or hydrogen. "If they can produce engines that only emit water [as do fuel cells, which generate electricity from hydrogen and oxygen] at a price customers can afford, then we want them to do it," he continues. All the major car manufacturers are researching such alternative technologies. Germany's DaimlerChrysler and Ford lead an alliance, which includes Volkswagen, Honda, Nissan, and Korean manufacturer Hyundai, to develop fuel cell vehicles. They are working with Canadian fuel cell pioneer Ballard Power Systems. GM and Toyota head a rival alliance, which is working on similar technology. Japan's Honda plans to have fuel cell cars on sale by 2003, beating Ford and GM to the market. The development of low- or zero-emission technology has caught the popular imagination. But mass-market cars powered by fuel cells, electricity, or biofuels (such as ethanol) are probably decades away. There is still considerable work to be done on the technology. Fuel cells, for example, are bulky and expensive. And they need to run on hydrogen if they are to be truly emission free. Herein lies the biggest challenge for fuel cells, which are generally regarded as the great white hope for sustainable transport. While fuel cell cars could run on gasoline (from which hydrogen is extracted on board), hydrogen is the environmental preferred choice. Distributing this hydrogen to consumers will require a whole new infrastructure. Without a network of stations able to provide drivers with hydrogen, few consumers are likely to buy hydrogen-powered cars. And, without demand for hydrogen, there is little incentive to build a distribution infrastructure. The involvement of the oil companies will be crucial in redrawing the fuel distribution landscape, says MSDW's Merlich - and there is some early movement as the more progressive oil majors try and look beyond fossil fuels. Shell has carried out research with a subsidiary of DaimlerChrysler on hydrogen-powered vehicles, and in August BP and Ford announced that they have set up a number of working groups to, inter alia, cooperate on new fuel technologies. But long-term plans to develop fuel cell vehicles don't cut much ice with many SRI analysts. As Merlich concedes, all the major companies have prototypes in some stage of development, leaving little to differentiate between them. And Merlich adds that, within the investible time-frame of three to four years, fuel cells won't have any impact on market share - that is unlikely to happen for at least five years, he says. Claims from motor manufacturers about where they will be in five years time are equally of little interest to many SRI analysts. More important is an analysis of existing product lines, they say. Sustainability Asset Management (SAM), a Zurich-based research company, estimates that 80% of the environmental impact of car companies is in the use of their products over their lifetime - with the production process accounting for the remaining 20%. Similarly, Norway's Storebrand gives 70% weighting to product characteristics against 30% for environmental management when assessing car companies for inclusion in its $150 million Principle Global Fund. And the most important product characteristic is the fuel efficiency of car companies' fleets. But measuring fuel efficiency isn't as simple as it may seem. There are no comparable data of the performance of motor manufacturers on a global basis. Companies themselves are reluctant to provide this information, partly because - aside from the firms' overall environmental impact - these figures obscure as much as they reveal. Overall fuel efficiency is as much a function of markets that companies are active in, and their historical product mix, as the efficiency of individual models. A company that mostly produces super-efficient SUVs could never score as highly as a company that specialises in small, but inefficient cars. Dan Golightly, a Dearborn, Michigan-based spokesman for Ford, believes that criticisms over the current fuel economy of its fleet are unjustified. He says that the given Ford's product mix, comparing the fuel efficiency of its vehicles as a whole with those of Honda or Volkswagen is comparing apples and pears. "The bulk of our market is in the US, where there is significant demand for trucks and SUVs. If you took these out, it would be a close race," he says. "That's why we looked at SUVs [and made a well-publicised commitment in July to improve their fuel efficiency by 25% by 2005]. If we're going to be a responsible company, we've got to make sure these vehicles have the highest fuel efficiency possible." Innovest's Trevet agrees. "We don't compare companies in absolute terms, but with regard to their markets: you can't expect companies to produce cars to the same standards for the US market as for European ones." Figures for the cars sold into the US market are available, and here Honda scores highest, followed by Toyota. Nonetheless, while Ford has announced efficiency targets for SUVs, German manufacturers are adopting broader goals. DaimlerChrysler has delivered a 20% improvement in fuel efficiency since 1990. And Volkswagen plans a 25% reduction in fuel consumption on 1990 levels across its entire fleet by 2005. Robert Niggli, research analyst at UBS Asset Management in Zurich, says that a crucial issue is the speed with which firms are bringing alternative propulsion technologies to market, and how broadly the technology will be applied. "We prefer companies that put efficient motors in large numbers of their cars, rather than super-efficient motors in niche market products," he says. Honda scores highly here, he says. "Honda is attempting to apply its technology to its mass market products. It's Honda Civic [which accounted for 58% of the company's sales of 2.3 million vehicles in 1999] has a low emission motor, for example." And by 2001, 88% of its new products in North America will be certified low emission vehicles, meeting the California Air Resource Board classification. LEV standards call for 70% lower emissions of non-methane organic gases (hydrocarbons) and 50% lower emissions of nitrous oxides than the federal standard. Also, Volkswagen was the first company to introduce a commercial '3 litre car' - that is, one that can travel 100 km on only three litres of petrol. It's Lupo 3L was introduced in spring 1999. And Toyota's introduction of the first mass produced hybrid car gets the thumbs up from SRI analysts. Hybrid cars use a combination of gasoline and electricity (generated when the car is braking, for example) to deliver fuel efficiency some three times greater than conventional engines. Car manufacturing sector leaders Volkswagen Toyota BMW DaimlerChrysler Ford Motor Company The ranking was compiled by asking three research companies and two fund managers to name their top five car companies, placed in order of their commitment to sustainability and/or their environmental and social performance. It should be noted that the results are indicative at best. The participants use different criteria to measure companies' performance, carry out their research at different times, and, indeed, do not all analyse the same companies. The research companies that provided their top five performers are Innovest, based in New York, Munich-based Oekom Research and Sustainability Asset Management in Zurich. Storebrand, a Norwegian asset management company, and UBS Asset Management, part of the Swiss bank, provided the top car company components in their environmentally-orientated 'best-in-class' funds. As always, such a ranking is highly subjective. The different respondents differently weight various factors, and a failure to disclose the required information can heavily penalise otherwise progressive firms. FOR THE FULL STORY EVERY MONTH, SUBSCRIBE TO ENVIRONMENTAL FINANCE, OR CONTACT info@environmental-finance.com FOR OUR BACK ISSUES SERVICE