Fires burning in the Western US and catastrophic floods in Europe this past week have kept a sense of climate crisis front of mind. These alarming changes in our shared climate are fueling a global scramble to modify our infrastructure and to innovate new forms of energy production and consumption that can be more sustainable. As we have previously discussed, the key to real change in a profit-driven corporate structure is collective engagement. Investor pressure, regulatory changes, and innovative technology are all needed to create sustainable transformation.

Renewing the Promise of Electric

One of the most entrenched elements of fossil fuel consumption has been the use of gasoline in cars. In 2020, gasoline consumption equaled 44% of total US petroleum consumption.1 The idea — and the reality — of electric superiority to gasoline to power cars began in the late 19th century, but mass production of the Ford Model T paired with the discovery of cheap oil in Texas squashed the technology. Over the last 50 years, the combination of higher oil prices and new environmental concerns have renewed efforts to make a broad shift toward electric vehicles. The two crucial turning points to success — via profitability — were the release of the Toyota Prius in 2000, and the 2006 announcement by Silicon Valley start-up Tesla Motors that it would produce a long-range all electric car.

Tesla’s efforts and their continuing string of technical successes spurred other large automakers to accelerate their own innovations in electric vehicles. Improvements in battery technology helped bring the industry to the point today where just about every brand boasts an electric option. From luxury brands such as Jaguar, BMW or Porsche, to brands such as Honda and Chevrolet, every carmaker is racing to transform their production from the internal combustion engine to the cleaner electric options. GM announced early this year that they plan to produce only electric vehicles by 2035, and last week Daimler Benz did them one better by declaring that the Mercedes-Benz lineup would be all-electric by 2030.

The Race for Profitability

This week Tesla reported their earnings, and brought into the spotlight the volatility and uncertainty of financial success for a new technology, even as industry-wide change and consumer acceptance finally seems within reach. Their second-quarter revenues increased 74% over 2020, and their earnings jumped dramatically as well: they have invested for years in growth, and they are finally providing profitability for their investors.

Does that make Tesla a good investment? Tesla’s stock price has increased in anticipation of future production and profitability, peaking at $900 in late January, and then retreating to $691 today. The company is growing quickly, but investors are pricing the stock as though Tesla will be the sole winner in the shift to electric vehicles, dismissing the broad success that is spreading in the industry. True success requires there to be a whole host of winners in this race, for every company to become all-electric, and the initial technical innovator won’t necessarily be the long-term winner.

Are They Really Cleaner?

Success in electric vehicle production in recent years has prompted concern beyond simply emissions from use. First, there is the question of whether vehicle production is any cleaner, and second, the concern that the sources of electricity generation aren’t changing quickly enough to make electric vehicles a material improvement over internal combustion engines.

There is a wide range of analysis about the “cradle-to-grave” environmental impact of electric vehicles, and the comparison with fossil fuel-powered vehicles. One representative study illustrates the salient issues. In sum, lithium-ion powered vehicles emit on average fewer greenhouse gases, significantly fewer volatile organic compounds, dramatically less carbon monoxide, and less black carbon than conventionally powered vehicles. Nothing is really black and white, though: lithium-ion battery production emits more particulate matter and sulfur oxides, and uses 50% more water resources during component mining.2

Electricity generation matters, too, in determining how much greener it can be to operate an electric car. Increasingly, growth in demand for electricity is expected to be provided by renewable and nuclear sources, but existing production depends heavily on coal. Globally, coal remains the leading source of electricity production, followed by natural gas.3 Development of solar, wind and other renewable sources such as hydropower is accelerating and is supported in many countries by national policy. Still, overall electricity use is increasing, and we are using more and more coal and natural gas despite the rapid increase in renewables. This sets the stage for a new phase of creativity in regard to how we use energy, not just how we generate it.

Shared Urgency for Change

The transformation from internal combustion to electric is not the only arena in which we are seeing collaborative engagement among investors and innovators on climate issues. Many industries are creating new standards for researching their environmental impact, developing metrics, and reporting to shareholders and to the public as a whole. An urgency for change also stretches in other directions, with investors asking companies to measure progress towards equity in the workplace for women and workers of color, as well as other stakeholder issues.

Investors and consumers both play a critical role in helping social and technical progress grow from ideas into reality. Consumers help prove the demand exists for cleaner technologies by being early adopters, often at higher price points than traditional options. Investors provide capital to early stage companies and use their ownership to push incumbent companies to continue innovating toward greater sustainability. While we know that change is complex and gradual, the chorus of voices can accelerate the process for all stakeholders in the global ecosystem.

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References

1 “Oil and petroleum products explained,” US Energy Information Administration, May 10, 2021.

2 “Environmental Effects of Battery Electric and Internal Combustion Engine Vehicles,” Congressional Research Service, June 16, 2020. “This specific study finds that the life cycle of selected lithium-ion BEVs emits, on average, an estimated 33% less GHGs, 61% less volatile organic compounds, 93% less carbon monoxide, 28% less nitrogen oxides, and 32% less black carbon than the life cycle of ICEVs in the United States. However, the life cycle of the selected lithium-ion BEVs emits, on average, an estimated 15% more fine particulate matter and 273% more sulfur oxides, largely due to battery production and the electricity generation source used to charge the vehicle batteries. Further, the life cycle of the selected lithium-ion BEVs consumes, on average, an estimated 29% less total energy resources and 37% less fossil fuel resources, but 56% more water resources. These results are global effects, based on the system boundaries and input assumptions of the study.”

3 “Electricity Mix,” Our World in Data.

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This commentary on this website reflects the personal opinions, viewpoints, and analyses of the North Berkeley Wealth Management (“North Berkeley”) employees providing such comments, and should not be regarded as a description of advisory services provided by North Berkeley or performance returns of any North Berkeley client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data, or any recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. North Berkeley manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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