#Automotive Finance

Sustainable & green financing: the new normal

Jan 27, 2023 - 6 min read
Also Available in : Français
Bettina Vaccaro Carbone, Head of Research for SFP at Sopra Banking Software
  • The UK is banning the sale of new diesel and petrol cars from 2030 onwards, and hybrids from 2035.
  • In the EU, all new cars must be zero-emission by 2035.
  • ESG investments are set to exceed $53 trillion by 2025, representing a third of worldwide assets under management.

During the Sopra Banking Summit 2022, our expert speakers explored sustainability and the auto finance industry. Below, we build on that hot topic.

Green financing and the automotive sector may seem unlikely bedfellows, but as sustainability takes an ever-more important role in our day-to-day lives, they’re increasingly linked. Regulatory change, the need for vehicle manufacturers to reduce carbon dioxide emissions, and the rise of tools like green bonds are some of the elements driving progress, cementing the relationship.

As a result, interest in green automotive financing – the funding of low- and zero-emission vehicles, including hybrid and electric – is growing. Alongside that, institutional investors are integrating environmental, social and governance (ESG) in their financial decisions more than ever before. Lenders are also playing a greater role in the sustainability agenda by offering favorable green loans and educating the market.

Indeed, when it comes to creating a greener future there are opportunities for all the key players, from carmakers and captives to dealers and consumers.

Regulations are driving change

European Union (EU) and UK regulations are spurring car manufacturers to go green. For instance, the EU’s Sustainable Finance Action Plan called for a common classification system for sustainable economic activities – an EU taxonomy that will allow for a common vocabulary.

The rules outline the following four overarching conditions an economic activity must meet to qualify as environmentally sustainable:

  1. Contribute substantially to one or more climate and environmental objectives
  2. Shouldn’t significantly harm any other goals
  3. Carried out according to minimum social safeguards, defined in the regulation
  4. Comply with technical screening criteria laid out by the Climate Delegated Act.

The taxonomy also requires asset managers and owners to publicly disclose ESG metrics. 

Going further to help reach the 2050 climate neutrality goal, here under a few examples of more concrete directives: 

  • Newly built European vehicles can’t emit more than 95 grams of carbon dioxide per kilometer
  • The UK is banning the sale of new diesel and petrol cars from 2030 onwards, and hybrids from 2035
  • In the EU, all new cars must be zero-emission by 2035.

These factors have galvanized auto manufacturers into action. For example, Volvo is the founding member of the Accelerating to Zero Coalition and aims to reach net-zero emissions by 2040, General Motors announced it will increase electric and autonomous vehicles investment to $35 billion by 2025, and Mercedes is striving to make new passenger cars carbon-neutral by 2039.

General Motors announced it will increase electric and autonomous vehicles investment to $35 billion by 2025

However, necessity isn’t the only driving force. More than ever, businesses and consumers recognize the importance of sustainability.

On top of that, the market is changing, facilitating progress. Advancements in the electric vehicle (EV) arena – such as bidirectional charging, improved battery technology, and more efficient mass production – are helping carmakers align their strategies with the 2015 Paris Agreement.

Carmaker ratings based on compulsory criteria

It’s possible to further accelerate the greenification of the automotive industry via clearer and stricter rules around information disclosure.

According to think tank Agora Verkehrswende, for vehicle manufacturers to transition to a climate-friendly model and attract finance from sustainability-focused investors, they must be assessed according to an “integrated, transparent and future-oriented” company rating based on mandatory criteria.

If investors and lenders are to reliably evaluate the strategies of carmakers, financial indicators and ESG-related data must “comprehensively and systematically show which climate and other sustainability-related risks a business is exposed to and their financial consequences,” says Rolf Häßler, Head of sustainable finance research institute NKI.

The rise of green auto bonds

To further future-proof their operations, vehicle manufacturers are launching “sustainable finance frameworks” and using eco-friendly tools like green bonds. These demonstrate their commitment to ESG initiatives and help finance their zero-emissions goals.  For instance, Ford issued the largest green bond by a US corporation in 2021, with net proceeds used exclusively for clean transportation projects like developing their battery EV portfolio.

As manufacturers adapt, interest in this type of green bond is gathering momentum, particularly following the release of the European Green Bond Standard, improving the “effectiveness, transparency, comparability and credibility of the market”.

Investor appetite is evident, too: Daimler’s 2020 10-year green bond issuance was more than four times oversubscribed. Indeed, according to Bloomberg Intelligence, ESG investments are set to exceed $53 trillion by 2025, representing a third of worldwide assets under management. There are several reasons for this, from portfolio diversification and meaningful long-term returns to society being more eco-aware.

ESG investments are set to exceed $53 trillion by 2025.

The role of lenders in helping consumers go green

As demand for green financing continues to grow, auto lenders and captives can join the revolution by offering green auto loans. These loans incentivize consumers to consider zero- or low-emission vehicles through interest rate discounts and extended repayment terms, making environmentally friendly cars more affordable for borrowers. In Spain, Santander offers ECO mobility loans for hybrids and EVs or the installation of electric recharging points.

Sustainability-linked loans (SLL) also come into play, with terms that hinge on meeting ESG targets. Indeed, Volkswagen’s €1.8 billion agreement depends on them achieving their European carbon dioxide emission targets.

On top of that, banks can book run green bonds, such as Société Générale’s management of ALD Automotive’s highly oversubscribed green bond.

Furthermore, lenders can work with forward-thinking technology partners like Sopra Banking Software to sustainably digitalize via integrated, flexible, and cloud-based financing solutions like SFP Wholesale. As a result, companies such as Vero Technologies have streamlined and automated their operations, enabling teams to focus on improving the customer experience and providing more productive outcomes for their dealer clients.

Case study: Tandem Bank

Car dealerships on board the green train can capitalize on the situation by partnering with eco-forward lenders. For example, Tandem is a “greener digital bank” offering a Motor Finance product to dealers.

With broad lending criteria, transparent terms and a fast digital application, they aim to support consumers as they transition to ever-greener cars. In conjunction with that, Tandem’s committed to helping dealers increase their green credentials.

“We plan on playing an influential role,” says David Briggs, Managing Director of Tandem’s Car Finance division. “We’re here to inform and educate, and are looking to develop a green advice service, to assess dealer premises and how they run their business. Our entire model has sustainability principles and ESG imperatives at its absolute core.”

Greening the auto industry

The green auto financing market will continue to evolve as regulations come into effect, consumer expectations evolve, car manufacturers increasingly pursue clean transportation initiatives, and lender and investor appetite grows.

Concern for the environment is only going one way, meaning the auto industry has no choice but to adapt. In turn, that inspires other key players to take action, further advancing the greening process.

Sopra Banking Software is committed to fighting climate change; environmental causes are at the heart of our strategy. 

Indeed, we aim to be net carbon neutral by 2028, in line with the Climate Pact agreed at the UN Climate Change Conference of the Parties (COP26). To achieve that, we’re reducing all direct and indirect emissions and compensating for remaining emissions by investing in certified carbon capture projects.