Capital for the Transformation of the Automotive Industry

Investors invest where they see profitable business models with the lowest possible risks. Climate protection is gaining importance as an evaluation criterion. This applies not least to the automotive industry, whose products have so far contributed greatly to global warming. Large amounts of private capital are necessary for the transformation of the automotive industry. Therefore, capital providers who want to hedge their investments against climate risks can exert a great influence and accelerate the transformation of the automotive sector.

The Paris Climate Agreement is increasing the pressure on politicians and financial market regulators to move markets in the direction of climate protection. One important instrument is the reporting requirements for companies. In the future, the reports will show whether a company‘s business model and strategy meet the requirements of the Paris Climate Agreement. Beyond the reporting obligation, policymakers are developing climate-oriented framework conditions to create long-term planning and investment security for all relevant actors.

Climate policy requirements for automotive companies are increasing worldwide – but not at the same pace everywhere. In order to protect themselves from these regulatory risks and to remain competitive in the long term, automotive companies are aligning themselves early with the Paris Climate Agreement. They prepare their strategies and measures transparently. They combine sustainability-related and financial factors in their risk analyses. Based on this information, the capital markets can direct their investments specifically towards climate-friendly business models. Access to capital is only possible for automotive companies with transparent climate reporting.

So far, climate-related risks have often been underestimated in credit assessment and credit ratings and excluded as „non-financial.“ In addition, company reports and ratings concentrate on the current financial year and at best compare them with previous ones. Only with an integrated assessment of the financial and sustainability factors can agencies give the capital markets a realistic picture of the potential investment risks. This also includes information on how companies will align themselves with the Paris Climate Agreement in the future.

Currently, business valuations primarily cover large companies. Unlike large companies, small and medium-sized automotive companies often do not have the processes and structures needed for positive valuations. They also have less capacity to respond to extensive and often diverse information and reporting requirements. However, as part of the transformation, they will also have to invest a lot in climate-impacting innovations and new business models. Therefore, simplified assessment procedures are needed for small and medium-sized enterprises in the automotive sector.