ESG: Financiers lean into sustainability

Electric vehicles are prompting a wave of eco-conscious finance companies to break into — or expand into — auto, heightening the industry’s focus on environmental, social and governance-based business models. Environmental, social and governance (ESG) investing was first introduced in 2005 to encourage corporations to conduct business in a way that supports environmental sustainability and social equity, according to ESG.org , a global professional association. As the automotive industry pushes electric vehicles (EVs) into the market, new finance companies entering the market are modeling their business with environmental sustainability and EV adoption at the forefront of operations. “There are new finance organizations that are designed specifically around putting EVs on the road,” John Possumato , founder and chief executive of mobility platform DriveItAway Holdings , told Auto Finance News . Some of the new entrants have created alternative ways for consumers to buy or lease EVs. DriveItAway Holdings, founded in 2017, uses a rent-to-own subscription model that allows consumers to “test drive” an EV by making monthly payments that build toward a down payment, if the consumer chooses to buy the vehicle. If the consumer does not want to purchase the vehicle, they can return it at any time with no penalty. These alternative financing models are picking up steam. Working with Ontario-based lease-here, pay-here dealership Legacy Auto Credit , DriveItAway expanded its subscription model to Canada late last year following successful launches around the United States. EV subscription service, Autonomy , founded in 2020, also has a model where consumers pay monthly to drive an EV and can end their subscription at any time. As of December 2022, Autonomy had grown to 15 to 20 subscriptions per day with a goal of 20,000 subscribers by the end of 2023, founder and CEO Scott Painter previously told AFN . Incentives are also at the core of increasing EV adoption in the U.S. For example, companies such as EV Life , founded in 2019, and Tenet , founded in 2021, provide consumers the ability to drive EVs at a lower cost by applying EV tax credits to the upfront purchase price of the vehicle in order to lower the monthly payment of the loan. “What we’re all seeing is that traditional auto lending is looking at EVs, and they’re thinking they should be financed just like gas cars. For electric vehicles, startups that are coming to the market see EVs as unique assets that are different than gas vehicles.” Peter Glenn, co-CEO and head of marketing at EV Life Financiers lean into sustainability Sustainability goals are bringing financiers to the auto segment, boosted by EV programs. Over the last few years, the industry has seen a growth in investments in sustainable financing and companies that are built to increase consumer adoption of EVs, Driveitaway’s Possumato said, noting that once the market becomes less volatile, investment in sustainability-focused companies should accelerate. “This is a major transition point that I think a lot of finance people and investors in general will want to get ahead of, because there’s no question EVs are here to stay,” he said. EV share climbed to a record high of 7.2% of new-vehicle sales in the first quarter, with EV sales in the U.S. totaling 258,882 units — up 44.9% YoY, according to Kelley Blue Book . Tenet, for one, partners with financial institutions that share its goal to grow EV adoption. The lender holds a $10 million revolving credit facility with NY Green Bank — which specializes in transactions that contribute toward progression of clean energy financing — that has an accordion option of up to $25 million. “We work with capital markets, and specifically financial institutions in the private and public sectors that want to specifically fund sustainable, renewable-energy products and accelerate the adoption,” Alex Liegl , founder and CEO of EV Life, said during an April 27 panel at New York Fintech Week. “We’re here to align incentives.” Gaining access to incentives is one of the largest barriers to sustainable projects, and Tenet assists consumers to utilize tax credits available, Burr Tweedy , vice president on NY Green Bank’s investment and portfolio management team, said during the panel. “NY Green bank supports all types of sustainable infrastructure projects, we’ve historically done mostly solar and wind projects, and efficiently accessing these tax credits is a huge barrier for a lot of projects,” Tweedy said. “This is a financing problem across all sustainable initiatives.” Legacy companies commit to sustainability While sustainability is bringing new entrants into auto finance, legacy OEMs and auto lenders also encourage environmental sustainability through their own governance initiatives. “The environmental and sustainability aspects of ESG have grown dramatically [in auto]. All the manufacturers have pitched a lot of money on moving EVs successfully. There’ll be an ever-growing, sustained push to get the mainstream buyer in an EV that will change the reflection of the whole retail business.” John Possumato, founder and chief executive of DriveItAway Holdings Bank of America , for one, recently launched an EV resource center to educate consumers about them as part of the bank’s commitment to deploy $1 trillion of sustainable capital by 2030. The resource center provides consumers with educational, interactive content on EV types, tax incentives, battery range and maintenance costs, according to the bank. Bank of America in February also debuted EV charger financing at its more than 10,000 dealers and EV manufacturing partners across the U.S., and has a private label deal with Lucid Motors to provide financing for Lucid vehicles. Chase Auto , too, has a similar consumer resource center to educate consumers on EVs and has inked two private label deals with Rivian Automotive and Fisker . Toyota Financial Services , meanwhile, issues green bonds on the asset-backed securities market, the proceeds of which go toward the financing of hybrid EVs market. Toyota has issued five green bonds as of Dec. 31, 2021, totaling $7.6 billion, according to the company. Proceeds from bonds in 2021 were used to finance more than 46,000 new retail installment contracts and operating leases. Meanwhile, traditional OEMs are racing to stand up battery plants in a push to meet EV production goals and build vehicles that qualify for federal tax incentives under the guidelines of the Inflation Reduction Act. Only 10 vehicle models qualify for federal tax incentives after stricter battery sourcing requirements took effect last month. General Motors and Samsung SDI on April 25 announced that the companies plan to invest more than $3 billion to construct a battery cell manufacturing plant in the U.S., which is targeted to start operations in 2026. Ford Motors , too, is in the process of building battery plants in Kentucky and Tennessee in a joint venture with South Korean battery maker SK Innovation . The companies are investing $11.4 billion in the new plants. Yet, changes to corporate governance are not cheap. Both General Motors and Ford Motor Co. have committed billions to accelerate EV and battery manufacturing operations, and those investments are pushing down profit margins. GM’s net profit margin dipped 26.6% year over year to just under 6%, and Ford’s net profit margin fell 91% YoY to 2.9%, according to the companies’ separate earnings reports. Still, the competitive landscape and the overall cost to scale EV initiatives should bode well for OEMs’ operations, according to a May 1 Morgan Stanley research note. “We believe recent significant changes in the economic and competitive environment of the electric vehicle market have encouraged General Motors and its peers to apply an even greater level of discipline to the economic and investment outlook through mid-decade and beyond,” the note stated. Investors weigh social impact Along with environmental efforts, investors use social criteria to determine where to invest, considering, for example, how a company manages its relationship with customers and the communities where it resides. Subprime lender Tricolor Auto Acceptance , in fact, has built its business model around the social aspect of ESG. Tricolor aims to make a “positive social impact” through providing underserved and credit invisible Hispanic consumers access to credit and an opportunity for upward mobility, Daniel Chu , founder and CEO of Tricolor, told AFN . “We built this business on the belief that if we can improve the quality of our customers’ lives, then we will be economically successful as well. People deserve access to credit to the extent they're willing to work and repay their loan and meet their obligation.” Daniel Chu, founder and CEO of Tricolor Several auto lenders have entered the market within the last decade whose focus is on lending to underserved consumers. Artificial intelligence-based auto lender Lendbuzz , founded in 2015, uses AI and machine learning to provide credit to foreign-born borrowers who do not have a FICO score. Thin-credit fintech Nova Credit similarly pulls data from overseas credit bureaus to provide a credit history for consumers. Westlake Financial tapped Nova’s data and technology in 2021 to finance vehicles for thin-file borrowers. Subprime lender Credito Real USA ’s Hispanic auto loan business line makes up about 20% of its $160 million portfolio, CEO Scot Seagrave told Auto Finance News . Subprime lending by nature leans toward predatory lending due to high interest rates, Tricolor’s Chu said. “We think the best measure in subprime lending of whether a company is doing good [for the consumer], is asking if the customer is better off as a result of the loan that’s been originated to them.” If the consumer fails on their loan, they’re in a worse-off position than when they originated the loan and it puts them “deeper down the food chain,” Tricolor’s Chu said. “If you make the loan affordable and you give [the consumer] a quality product that’s going to perform, that gives them a chance of upward mobility as opposed to just spiraling down.” Social impact, as measured by investors, is outlined in social bond issuance parameters. For an ABS issuance to be classified as a social bond, the capital must be used for financing socially sound and sustainable projects that achieve greater social benefit, according to the International Capital Market Association . Tricolor’s initial social bond was the first one ever in the auto ABS market, a $212 million issuance in May 2022. The lender issued a second $224 million social bond in February 2023. “The purpose of issuing a social bond is to allow the managers of capital who either have a mandate or a desire to really close that gap in terms of access to credit. That, to me, is the upside of ESG and auto finance,” Chu said. Most activity in capital markets has related to the environmental side of ESG in the past, he said. “Today, the social aspect is a small piece in capital markets,” Chu said. “There have been a lot of issuances related to EVs. If you look at the social part of ESG, it's very limited, but it’s a start, and it brings awareness to the investor community that they can direct their capital and achieve a real purpose through a rated product or bond.” ESG is becoming a larger part of the industry as finance companies and OEMs make commitments to putting EVs into the foreground of operations, so it is becoming a way companies must do business, DriveitAway’s Possumato said. “There will be more focus on ESG, and unlike in the past when it was a corporate profile thing, it will be a reality for operations of the business,” he said. Businesses “have to do sustainability, because the world is going that way.” Auto Finance Summit East, Auto Finance News’ new spring event, is set for May 10-12 at the JW Marriott Nashville featuring a fireside chat with Peter Muriungi, CEO of Chase Auto. Visit autofinance.live.

ESG: Financiers lean into sustainability

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