A few months ago, as spring was still losing the fight against the last efforts of winter, I attended a financial conference close to Zurich. That’s one of those events where asset managers meet up with investors to tell them why they are the best option to invest with, in whatever theme they feel is of most interest at the time. Not too long ago, these events still had some diversity to them, as you had the opportunity to speak to a great variety of managers on different strategies. Those days are gone. Today, everything, and I really mean everything, is around ESG (Environmental, Social & Governance) and impact. In a way that’s great – I’m absolutely convinced of companies needing to behave like good citizens, both towards their employees and the environment (which is what ESG is about), and if they can report some concrete metrics on that good behaviour (which impact is about), then all the better. What I don’t like is when the discussion gets stupid, because when it does, it also gets counter-productive. In this case, as you probably guessed already, it was about EV’s.
One of the sessions I chose to attend was with a portfolio manager (PM) who started by presenting his team with their name, role and how they commuted to work. The options were bike, public transport or EV, and when someone asked about conventional cars, she was told that wasn’t allowed on the team. The PM thereafter spent whatever was left of his 20 minutes to talk in extremely broad, non-committing terms about how we were all going to die very soon unless we all invested through him in cool companies such as Tesla and solar panel manufacturers, rather than the terrible old dinosaur industrial companies, to which he gladly also counted traditional car manufacturers who now build EV’s – go figure. To conclude, he then looked at his client relations guy standing next to him and explained how he had convinced him to buy a Tesla, and how happy he was by now. Apparently the colleague wasn’t trusted with saying this himself.
In the context of what was supposed to be a serious, institutional investor conference, this was all a bit too much for me so I put up my hand, congratulated the client relations guy on his new car and said I hope firstly he didn’t have a car before, since replacing it with an EV in most cases and for a very long time will be detrimental to the environment and not positive from a total emission perspective, and secondly that I hope he drives a lot, since he’ll need around 100.000 km’s for his Model S to be “net positive” in total CO2 emissions compared to a conventional car. I added that I’d be interested in knowing where the solar panels of the mentioned company were produced. All this made the PM quite excited, and in a rather arrogant way (how dare you question the wisdom of EV’s??) told me that the 100.000 km number was absolutely not correct and based on “biased research by the petroleum industry”. He never gave a number himself. With regards to solar panels, he had to admit that a large part were still produced in China, but “not in the problematic parts”. Stupid me – I wasn’t aware there were parts in China which are not a Communist dictatorship…
It’s been a year and a half since I published one of my most read posts on EV’s and how they won’t save the climate (catch it here if you missed it). One of the main points in that post was on the “CO2 deficit” of EV’s, i.e. the very large amounts of CO2-emitting energy that goes into their battery production. This fact was validated by a study I learnt of recently, commissioned by VW in 2019 and done by the Austrian Joanneum Research Institute together with the German automobile club ADAC and the excellent German Economics Professor Hans-Werner Sinn.
With apologies for the bad quality (coming from the fact that I took a picture of the screen during a presentation by Prof. Sinn), it’s pretty easy to see why VW didn’t want a lot of publicity around the study’s results and instead chose to bury it in a basement somewhere before it was leaked to the public. You see, the results go against the complete electrification VW and all other car makers in the world are currently embarked on. The diagram is based on the total CO2 emissions of a car, so for an EV including the production of batteries, and the two lines depict on one hand an electric Golf and on the other the same car with a diesel engine. As the graph makes painfully clear, for a country with an electricity mix comparable to Germany and Austria (and there’s quite a few of those), the 100.000 km number the PM claimed was exaggerated is actually quite the opposite when compared to an economical diesel engine. If you go by the yellow vertical line that shows the average lifetime of a car in Germany, the EV simply never catches up.
Russia’s war in Ukraine has laid bare especially Europe’s dependency on Russian energy and is now talked about as something that will accelerate the transition to renewables, which on a global basis still make up less than 2% of the energy mix. This reasoning is often accompanied by statements of how solar panels and wind mills will continue to get cheaper according to a version of Moore’s law (which refers to how the number of transistors doubles every two years whilst prices of computers are cut in half). This is quite simply wrong.
Firstly, the material cost of notably metals that go into the production of all renewables has a worth that will always prevent the cost from going below a certain level. Most of those metals have price-wise been at a historical bottom during the last ten years or so, until very recently. If you combine that with a cost of financing that with interest rates at zero has been as low as it can get but is now moving up, everything points to renewables getting more expensive going forward, not the other way around. To which should then be added further issues such as notably the extraction of required metals from great countries like Russia, China and the Congo, the many tons of cement needed for the basements of wind mills and so on. That’s not good news for anyone, especially since the ESG-movement has been very good at preventing any form of investment in oil, gas, and even nuclear, a non-polluting and non-weather dependent form of energy. That’s obviously where it gets stupid.
Some countries have a better energy mix than Germany and Austria and with cleaner energy sources, the EV equation improves. There are also initiatives to recycle battery metals and even replace especially cobalt, and there’s obviously research into steady-state batteries and so on. That’s all great, but it won’t be here tomorrow or even in a few years, and the issue of scale is still huge. Quite simply, we are very far away from having the battery or other storage capacity required for an energy system based on renewables, and such a system would also by definition assume massive over-investment, such as to produce enough energy to store when the wind blows and the sun shines. I don’t know about you, but the more I look at wind and solar power, the more I’m convinced that this is not what our future will be built on. I am however as convinced that we will manage to solve the energy equation such as to reduce emissions, quite simply because human creativity is unbeatable at solving challenges, and emissions is a challenge we need to respond to. But we need to be smart about it.
We all suffer at the pump these days and as previously said, things won’t get better anytime soon (rather the contrary if you consider that China has basically been in lock down, i.e. not consuming a lot of anything, in the last months, but is now opening up). I fully understand if you choose to buy an EV, especially if you can produce your own energy through solar panels (preferrably not from China) or otherwise, but please don’t tell your friends how you are helping save the environment by doing so, because in most aspects, you’re not. For those without their own electricity production, unfortunately it can be expected that electricity prices move up as well. It seems the market is starting to realize that as well, as illustrated by the stock price performance of EV’s this year, as illustrated above. I haven’t checked on the recent performance of the funds managed by the PM I met at that conference but looking at the table, I think I have a pretty good idea!