Hertz-Tesla deal is not the ESG gear shift the auto ABS market is looking for
Skeptics point out limited scale of EV purchase, and rightfully so
The recent supply deal struck by car rental company Hertz and electric vehicle manufacturer Tesla is not the ESG game changer the securitization industry has been waiting for, though it is a small step forwards.
At first glance, the news is a huge win in the battle to reduce carbon emissions. How can it be considered otherwise? It not only allows Hertz to reduce its own greenhouse gas emissions by adding non-fossil fuel vehicles to its fleet, but has also immediately forced competitors like Avis to step up their game in contributing to the national goal of making EV vehicles 50% of all cars sold by 2030.
Avis responded with its own tentative plan to take on EVs at scale. The company says it is working out the logistics with original equipment manufacturers (OEMs) and infrastructure partners, and there are whispers in the ABS market that Avis' next securitization could include EVs as collateral.
But ESG investors should not hold their breath.
Behind the fanfare, the announcements could end up being nothing more than words in a convenient ESG narrative, at least for now.
For one thing, the scale of the Hertz deal is still much too small to have a material impact.
Without a doubt, the EV sector has been growing rapidly, with EV vehicle registration in the US reaching 1.8m in 2020, three times the figure in 2016, according to the Pew Research Center. Considering the potential, getting a head start in the sector is a great idea for a lessor.
But EVs are still only a tiny portion of the overall auto market, with market penetration lingering at 2.5%-3%, according to a study by McKinsey.
“Skeptical may not be the right word for how I feel, but maybe it is,” said one esoteric ABS portfolio manager. "There is a growing portion of EVs in the sector, but big change isn’t going to happen overnight."
What’s more, the addition of EVs to fleets only touches on one pillar of ESG, the ‘E’ for environment, and even within that area it is far from a complete plan.
There is still a lot of other work that Hertz and its competitors need to do before striking up ESG friendly deals. Thought needs to be given, for instance, to the sustainable disposal of EV batteries.
Governance and social standards are another story entirely. Issuers looking to make true progress on ESG must pay attention to diversity, from corporate leadership down, and the way they treat their employees.