AN ESG PERSPECTIVE ON THE 
AUTOMOTIVE INDUSTRY
February 2020
On the Web:  wam.gt/2RVDGty
 
TOPIC OF FOCUS: INVESTING  
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medium without express written permission.
Bonnie M. Wongtrakool, 
Global Head of ESG Investments
The evolution of the automotive industry is accelerating as the popularity of electric vehicles spreads—fueled 
by the desire to cut emissions—and as the promise of self-driving cars moves closer to becoming a reality. In this 
paper, we examine the implications of these disruptive changes and their potential impact on the automotive 
workforce and society, and discuss the corporate governance and strategy required to navigate them. We also 
highlight the related ESG factors that shape our investment outlook and positioning in the automotive sector.
Michael Borowske,
Research Analyst with a 
specialty in US automotive, 
gaming and industrials
Florent Vallespir, Research 
Analyst with a specialty in Euro-
pean automotive and high-yield
KEY TAKEAWAYS


The automotive industry is changing as the result of innovation in the areas of 
electrification, autonomous driving and shared mobility.


With transportation estimated to account for between 15% and 25% of global carbon 
emissions, and road vehicles responsible for almost three-quarters of that share, the 
environmental motivation is clear.


The shift to more electric-based and autonomous vehicles will disrupt the traditional 
automotive workforce, as well as the automakers.


Capable automotive leadership with diverse backgrounds, industry expertise and strategic 
partnerships to address knowledge gaps will be essential to traverse the obstacles ahead.


While the automotive industry adapts to these trends, Western Asset remains committed 
to its ESG investment approach and will continue to engage with issuers to promote best 
practices.

Western Asset	
	
	
	
February 2020
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AN ESG PERSPECTIVE ON THE AUTOMOTIVE 
INDUSTRY
By Bonnie M. Wongtrakool, Michael Borowske and Florent Vallespir
Once the Disruptor, Now the Disrupted
Commercialization of the automobile in the early 1900s transformed livelihoods and living standards across the 
industrialized world. As the automobile industry developed, millions of manufacturing and assembly jobs were 
created, petroleum and steel companies grew significantly, and train usage fell sharply. When passenger cars 
became commonplace, larger homes were built in the suburbs, tourism activity increased, and the movie drive-in 
and fast food drive-thru industries were born.
Though cars remain well entrenched in modern lifestyles, in more recent years the automotive industry has been 
the subject, rather than catalyst, of change. In early 2007, Original Equipment Manufacturers (OEMs) and Tier I/
II suppliers were challenged by leveraged balance sheets, expensive cost structures and large pension liabilities. 
Given the highly cyclical nature of demand for automotive products, the Great Financial Crisis dealt a particularly 
damaging blow to the industry, so much that executives from the Detroit Three and United Auto Workers (UAW) 
leadership were forced to seek emergency funding from the US government to avoid bankruptcy. 
Between 2009 and 2017, the industry benefited from very low unemployment levels, favorable financing terms 
and solid residual values. Global sales and production volumes rebounded, resulting in improved margins, record 
profitability and healthier balance sheets. Since then, however, a new set of challenges has emerged, including 
several major environmentally and socially driven shifts in demand. These secular trends, which will play out over 
multiple years, include electrification, autonomous driving and shared mobility. 
In this piece, we will take an in-depth look at these disruptive changes. We will explore their implications on the 
automotive workforce and on society, and the governance and strategy required to navigate them. To conclude, 
we will review how these environmental, social and governance (ESG) factors have shaped our investment outlook 
and positioning in the automotive sector.
Electrification: Between a Rock and a Hard Place
Transportation is estimated to account for 15% to 25% of global carbon emissions, with road vehicles responsi-
ble for almost three-quarters of that share.1 Given that almost 200 countries have committed to reducing their 
emissions under the Paris Agreement, there is no doubt that the usage of electric vehicles (EVs) must increase 
around the world. 
The path to achieving this, however, is clouded by supply and demand-related concerns. Electric batteries, which 
are currently priced between $150 and $200 per kilowatt hour, are still too expensive to incentivize a complete 
shift to EVs. To even the playing field between EVs and internal combustion engine vehicles (ICEVs), battery 
costs must fall to $75 per kilowatt hour. This is projected to occur sometime between 2025 and 2030, driven by 
technological advances and economies of scale.2
At present, EV-inclined consumers have limited purchase options, with offerings that are either expensive relative 
to mass market ($35,000 or below) ICEVs or limited to luxury (above $75,000) buyers. In addition, consumers remain 
hesitant due to “range anxiety” around the sparseness of public charging infrastructure (Exhibit 1). Increasing 
“Though cars 
remain well 
entrenched in 
modern lifestyles, in 
more recent years 
the automotive 
industry has been 
the subject, rather 
than catalyst, of 
change.”

Western Asset	
	
	
	
February 2020
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AN ESG PERSPECTIVE ON THE AUTOMOTIVE INDUSTRY
the density of charging networks within the US, China and Europe to a more operable level by 2030 could cost 
upwards of $3 billion per year,3 with some portion of that burden likely to fall on the automakers.
The EV growth that has occurred to date has been driven largely by regulatory support. China, where EVs have the 
highest adoption rate in the world at 7%, has been most proactive. It began a national direct subsidy program 
for EVs in 2015 and places limits on the registration and usage of ICEVs. It also requires charging infrastructure to 
accompany new residential construction, public parking lots and large public buildings. These policies are selec-
tively enforced at the provincial level.
Outside of China, 13 countries and 30 cities and states have set deadlines to eliminate ICEVs, with the most ambitious 
targets set by Bristol in the UK (2021) and Norway (2025).4 More broadly, the European Commission has mandated 
average new car emissions to decrease from the current level of 120.4 g CO2/km to 95 g CO2/km by 2021, with a 
15% reduction from that level by 2025 and a 37.5% reduction 
by 2030. Auto manufacturers that fail to meet these levels 
will pay a penalty of €95 for each excess g/km.5 Conversely, 
manufacturers will receive extra credit in their emissions 
calculations for new vehicles emitting less than 50 g CO2/km, 
i.e., EVs and fuel cell vehicles. At the present time, most OEMs 
claim that they will not be subject to any EU emission-related 
fines regarding the 2021 deadline. This outcome is predicated 
on a material increase in plug-in hybrid electric vehicle (PHEV) 
production and sales in 2020, some new EV launches, as well 
as more “mild-hybrids” (ICEV with EV functionality to switch 
off engine when braking/stopping and then restart quickly), 
which benefit from a more lenient treatment by the EU. 
In the US, federal tax credits for EVs are being phased out, 
and the Environmental Protection Agency (EPA) and National 
Highway Traffic Safety Administration (NHTSA) are working 
to weaken fuel economy standards across the country. In 
addition, American car buyers remain loyal to sport utilities 
“China, where EVs 
have the highest 
adoption rate in 
the world at 7%, 
has been most 
proactive.”
Exhibit 1: Public Charging Outlets Installed Globally 
Source: BloombergNEF. As of 15 May 19
0
100
200
300
400
500
600
700
2012
2013
2014
2015
2016
2017
2018
Outlets (Thousands)
Japan
Rest of World
China
U.S.
Europe
Financing the Transition
Despite the magnitude of climate-related risks facing 
the automotive sector, there are few opportunities to 
support carbon transition through green bond invest-
ments. Even in the euro-denominated market, where 
green bond issuance is currently active, the majority 
of automotive issuers are absent. Although we have 
engaged with companies to explore green financing 
options, most remain insufficiently proactive in this 
area of the credit markets. Issuer reluctance may par-
tially be due to the pricing of green versus non-green 
bonds, which is perceived to be modest, as well as the 
currently limited amount of projects and/or low-emis-
sion fleets that could be used to secure new offerings. 
Whether or not green automotive issuance ultimately 
expands, Western Asset remains committed to its ESG 
investment approach and will continue to engage 
with issuers to promote best practices within their 
respective operations and supply chains.

Western Asset	
	
	
	
February 2020
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AN ESG PERSPECTIVE ON THE AUTOMOTIVE INDUSTRY
vehicles (SUVs), which consume about 25% more energy than medium-sized cars. SUVs accounted for nearly half 
of all US car sales last year and have been the second largest contributor to global carbon emissions since 2010.6 
The popularity of SUVs is a feature of other markets as well, including Europe.
Overall, while growth has slowed, transportation-related emissions are still rising across the globe, suggesting that 
regulators must become more stringent in order to meet climate goals. We expect that outside the US, regulations 
will continue to tighten, further accelerating consumer EV demand (Exhibit 2). Managing products across regions, 
already a highly complex task, will become more costly, further compressing automotive profits. For example, 
Daimler recently estimated that electrification will reduce its margins by 1% per year through 2022.7 
Autonomous Driving and Automotive IoT: The New World
Like EVs, autonomous vehicles (AVs) face a cost disadvantage relative to ICEV, but by a far more daunting margin. 
This is due to the costs associated with the features and automotive connectivity related to the IoT or “internet of 
things.” The cost of a research AV car is around $400,000, including LiDAR (light detection and ranging), advanced 
GPS, data storage and graphics processing components.8 Yet OEMs must prepare for the advent of AV, or risk ex-
tinction if consumers fully migrate to hands-off driving. As with EVs, AVs will require automakers to make significant 
investments today in order to position properly for the future.
Companies that invest prudently now will eventually be in a position to monetize these investments by offering 
upgrades, applications and ancillary services such as infotainment and predictive maintenance. Estimates of the 
market opportunities created by autonomous driving vary widely, ranging from hundreds of billions to trillions.9 
But the market will be competitive and crowded as many technology companies, both large and small, are already 
pursuing these new revenue streams.
Shared Mobility: Not a Game Changer … Yet
Despite the seeming ubiquity of Uber and Lyft, ridesharing has not yet significantly impacted the auto industry. 
Assuming annual road travel of 10 to 15 thousand miles, car ownership at 60 to 75 cents per mile is more attractive 
than ridesharing at $1.50 to 2.50 per mile,10 helping to maintain global car sales at 75 to 80 million units per year 
(Exhibit 3). Traditional consumer preference also remains entrenched—63% of US survey respondents would 
rather own their own vehicles than rideshare, even if the latter were free.11 
However, as large cities—which occupy just 2% of the world’s land mass but produce 70% of the world’s carbon 
“Companies that 
invest prudently 
now will eventually 
be in a position 
to monetize these 
investments by 
offering upgrades, 
applications 
and ancillary 
services such as 
infotainment 
and predictive 
maintenance.”
Exhibit 2: Global Short-Term Passenger EV Adoption by Region
Source: BloombergNEF. As of 15 May 19
EV Share of Sales
Rest of World
India
US
Europe
China
0
5
10
15
Percent
2015
2017
2019
2021
2023
2022
2020
2018
2016

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February 2020
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AN ESG PERSPECTIVE ON THE AUTOMOTIVE INDUSTRY
emissions12—come under pressure to address climate issues, urban policymakers and planners will need to critically 
examine shared mobility practices. Ridesharing has actually increased mileage and exacerbated traffic in large US 
metropolitan areas; 60% of rideshare users would otherwise have used more carbon-efficient public transportation, 
and rideshare drivers drive a staggering 43% of their miles without a passenger.13
In addition, consolidating passengers through autonomous ridesharing services would not only reduce carbon 
emissions, but also accelerate the commercial viability of AVs by decreasing the operating cost per mile. This would 
increase the attractiveness of ridesharing relative to car ownership—and could negatively impact demand from 
the traditional car-buyer base. 
Societal and Secondary Impacts
Because EVs take about a third less time to make than ICEVs, and EVs require fewer parts,14 fewer workers will 
be required to support the automotive manufacturing process. Furthermore, auto jobs will revolve less around 
assembly and servicing, and more around engineering and technology functions that support and advance energy 
efficiency, autonomous driving and ridesharing capabilities. Further down the value chain, the distribution model 
will also change because of lower maintenance needs, growth in digital channels, and new customer segments. 
Workers will need to build new skill sets to meet the industry’s evolving needs, and automotive companies will 
need to develop channels to capture and retain new talent.
The energy and power sectors will also be affected, as demand for electricity (and subsequent infrastructure) will 
rise along with EV penetration (Exhibit 4), eventually displacing oil demand by 13 million barrels a day, according 
to International Energy Agency projections.15 Demand for copper, lithium, cobalt and nickel is expected to increase 
correspondingly (Exhibit 5). This should provide a boost to parts of the metals & mining sector, one that we have 
favored within our portfolios in part due to this structural demand. Companies within this sector may need to 
adjust their production efforts to meet the demand for these elements; sources are subject to geology, and new 
mines are increasingly located in geographies outside of developed countries. ESG considerations are critical for 
mining companies that have to address not only the inherent safety risks of their activities, but also environmental 
impacts and social responsibilities. For example, mining companies must manage heavy water and power needs in 
the production process, safely dispose tailings, manage relationships with host country regulators and officials, and 
safeguard local communities against exploitation. Effective governance is essential to manage these risks, not just 
for mining companies within their own businesses, but also for automotive companies within their supply chains. 
“Workers will 
need to build new 
skill sets to meet 
the industry’s 
evolving needs, 
and automotive 
companies will 
need to develop 
channels to capture 
and retain new 
talent.”
Exhibit 3: Global Passenger Car Sales by Region
Source: BAML, Western Asset. As of 16 Jan 20
North America
Europe
Rest of World
China
Asia  ex China
Sales (Millions)
0
10
20
30
40
50
60
70
80
90
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019E
2020E
2021E
2022E

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AN ESG PERSPECTIVE ON THE AUTOMOTIVE INDUSTRY
Autonomous mobility will also have a wide-ranging impact. In its fully developed form, autonomous driving will 
enhance the quality of life of suburban commuters who would otherwise spend hours behind the wheel, as well 
as the elderly and physically disabled who would otherwise have limited geographic mobility. New services will 
be needed to accommodate the changing needs of these customer segments. 
At the same time, AVs may enable roads to accommodate additional vehicles due to their ability to adjust speed 
more quickly and precisely. Combined with population growth, this potential for increased vehicle density could 
actually result in higher numbers of cars on the road, adding to the list of challenges for city planners. In addition, 
legal and regulatory frameworks must be well designed to address and contain the risk of injuries and casualties 
due to technical malfunction, user error and cyber-terrorism.
The Role of Corporate Strategy and Governance
Though the exact timing of all these trends is far from certain, key inflection milestones are expected to occur in 
the latter half of the 2020s, leaving automakers a short runway to prepare. Meanwhile, high uncertainty remains 
around which emergent technologies will become industry standards, how uptake will vary across regions, how 
externalities to society will be distributed and how regulations will shape the market. 
“Though the 
exact timing of 
all these trends is 
far from certain, 
key inflection 
milestones are 
expected to occur 
in the latter half of 
the 2020s, leaving 
automakers a short 
runway to prepare.”
Exhibit 5: Annual Lithium-Ion Battery Demand 
Source: BloombergNEF. As of 31 Dec 19
0
500
1,000
1,500
2,000
2016
2018
2020
2022
2024
2026
2028
2030
2029
2027
2025
2023
2021
2019
2017
Consumer Electronics
E-buses
Passenger EVs
Stationary Storage
Commercial EVs
Gigawatt -Hour (GWh)
Exhibit 4: Yearly Electricity Consumption From Passenger EVs, Commercial EVs and E-buses
Source: BloombergNEF. As of 31 Dec 19
0.0
0.5
1.0
1.5
2.0
2.5
2015
2020
2025
2030
2035
2040
Terawatt-Hour (Thousands)
E-buses
Passenger EVs
Commercial EVs

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February 2020
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AN ESG PERSPECTIVE ON THE AUTOMOTIVE INDUSTRY
Corporate vision and leadership are key in navigating this uncharted territory. As the traditional business model 
is being upended, the auto industry needs to consider innovative approaches and make hard choices. Senior 
management cannot conduct business as usual, but rather must be open-minded to different viewpoints, 
and fluidly incorporate regional and technical perspectives. Diversity in management and board composition 
will help companies to address these challenges. One leader in this area is General Motors, where 25% of the 
board has technology experience, senior leadership includes a female CEO and CFO, and half of the workforce 
are women. 
Some automakers will need to build the agility to pivot aggressively as trends take shape. We note that Volk-
swagen (VW), which was convicted for misstating its auto emissions in 2015, recently announced a $66 billion 
commitment to investments over the next five years in EV and AV. These plans include an addition of 75 new EV 
models by 2029 and a target to sell 26 million EVs over the next 10 years.16
Exhibit 6: How OEMs, Ride-Sharing Companies and Suppliers Are Connecting to Develop Autonomous Cars
Source: Reproduced from “How automotive OEMs, ride-sharing companies and suppliers are collaborating to develop autonomous cars” by Tom Phillips.17 As of 31 Dec 19
The race to develop production-ready highly automated cars has led to unprecedented levels of cooperation between key rivals. 
Here are just some of the new links that have been forged:
OEM
Tech Firm / Tier Suppliers
Ride Share
Search Engine
Partnership
Investment
Data Share
Mapping
Others
Over 130 partners 
including most 
major OEMs in China
$750M
Investment
in Cruise
$500M
Investment
Non-Exclusive
Development
Agreement
Partnership
$1B
Investment
$1.7B
Investment
Strategic
Partnership
Data
Sharing
Autonomous 
Technology 
Partnership
$560M
Investment
$300M/
24,000 Cars
L4 Autonomous
BEV Platform
Data
Sharing
$ 200M
Investment
Taxi
Partnership
Test Cars
in China
Partnership and 
Seat on 
Management Board  
AI
Partnership
20,000 Cars/
Partnership
62,000 Cars/
Strategic
Partnership
Mapping
Engineering
and Tech 
Resources
Partnership
Strategic
Partnership
Planned
Partnership
Software + 
Hardware Partnership
Engineering
and Tech 
Resources
AI
Partnership
AI
Partnership
AI
Partnership
Mapping
Long-Term
Partnership
Partnership
Navigation Team
Autonomous
Vehicle
Development 
Real-Time
Mapping
HD
Mapping
“Corporate vision 
and leadership are 
key in navigating 
this uncharted 
territory. As the 
traditional business 
model is being 
upended, the auto 
industry needs to 
consider innovative 
approaches and 
make hard choices.”

Western Asset	
	
	
	
February 2020
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AN ESG PERSPECTIVE ON THE AUTOMOTIVE INDUSTRY
Given the requirements for expertise outside of automakers’ core competencies, partnerships and joint ventures 
to fill in the gaps are crucial. In addition, cross-industry cooperation has several benefits, including mutualiza-
tion of research and development costs that would otherwise have to be fully absorbed by the automaker, and 
standardization of operating technologies that on their own are not commercially differentiating factors for the 
end-use customer. 
OEMs, shared mobility companies and technology players have already formed numerous relationships (Exhibit 
6). These arrangements vary widely in scope and complexity. Within the automotive industry, partnerships range 
from targeted joint ventures such as BMW and Jaguar Land Rover’s collaboration to develop electric drive units, 
to more ambitious alliances such as VW and Ford’s partnership on both EVs and AVs, to full-blown mergers such 
as the recently announced Fiat Chrysler-PSA transaction. More broadly, we would highlight connections with two 
of the leading AV development companies: Waymo, which tests its technology on vehicles supplied by Jaguar 
Land Rover and Fiat Chrysler Automobiles, and Cruise Automation, which was acquired by GM in 2016 but sold 
a 20% equity stake to Softbank in 2018.
Investment Outlook and Positioning
In addition to the ESG risks explored in this piece, the automotive industry must contend with ongoing uncertainty 
around trade negotiations between the US, Mexico, China, and Europe (Brexit), managing costly and complex 
global re-structuring programs in the midst of a more challenging production environment, and maintaining 
healthy balance sheets and liquidity buffers ahead of an inevitable turn in the cycle.
Given the plethora of headwinds against automakers, Western Asset maintained a negative outlook and under-
weight positioning versus our respective benchmarks throughout 2017 to mid-2019. With industry sales at or near 
peak levels and comparatively tight trading levels, Western Asset’s global automotive research team found few 
positive catalysts to drive relative outperformance and a lengthy list of potential cyclical, secular and technical 
concerns. These include deteriorating industry fundamentals, particularly outside the US, heightened trade/tariff 
uncertainties, fears of a rating downgrade for a large US-based OEM to below-investment-grade, volatile raw 
material input costs and persistent new issuance from OEMs to help fund their captive finance businesses. All 
of these events resulted in wider spreads, higher yields and decreased investor sentiment in the space. Even in 
the midst of this challenging fundamental backdrop, Western Asset was able to identify credits with a positive 
outlook, including several that met the “rising star” theme which has been a key focus of our credit research 
team over the last several years. 
Today, we are cognizant that the current risk/reward opportunity set is more balanced, specifically in the in-
vestment-grade automotive subsector, as several headwinds have abated and spreads more fully reflect the 
fundamental difficulties and structural risks the industry faces. With this in mind, Western Asset has adopted a 
slightly more favorable view of the sector, primarily based on our assessment of relative value, and as such we 
remain comfortable investing in the short/intermediate part of the yield curve for select OEMs and suppliers. 
Looking ahead, Western Asset believes the industry will remain under pressure from the aforementioned cyclical 
and secular forces, resulting in additional negative rating agency actions in the US and Europe this year and in 
2021. Separately, we believe there is an increasing likelihood of further industry consolidation at both the OEM 
and supplier levels over the course of the next three to five years, as the benefits of increased, size, scale and 
diversification may provide some insulation against margin pressure and rising research and development costs. 
As we move forward, our preference is to invest in companies with strong balance sheets, large liquidity buffers, 
disciplined capital allocation policies, flexible cost structures and solid free cash flow generation capabilities to 
help manage through a more challenging operating environment.
“As we move 
forward, our 
preference is to 
invest in companies 
with strong 
balance sheets, 
large liquidity 
buffers, disciplined 
capital allocation 
policies, flexible 
cost structures 
and solid free cash 
flow generation 
capabilities to help 
manage through a 
more challenging 
operating 
environment.”

Western Asset	
	
	
	
February 2020
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AN ESG PERSPECTIVE ON THE AUTOMOTIVE INDUSTRY
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ENDNOTES: 
1 	 “The Climate Opportunity of Auto 2.0: How Big Tech Drives Faster EV Adoption,” Morgan Stanley, 9/5/2019.
2	 BloombergNEF, Morgan Stanley, Credit Suisse.
3	 “The Challenge of the Two Clocks,” “The Challenge of the ‘Far’: EVs,” Credit Suisse, 6/27/2019.
4	 National ICE Phase-Out Announcements, BloombergNEF, 9/5/19.
5	 “Reducing CO2 emissions from passenger cars,” European Commission website.
6	 “Growing preferences for SUVs challenges emissions reductions in passenger car market,” International Energy Agency, 10/15/2018.
7	 Daimler Capital Market Day, 11/14/19.
8	 “The Challenge of the Two Clocks,” Credit Suisse, 6/27/2019.
9	 “The Challenge of the Two Clocks,” Credit Suisse, 6/27/2019.
10	“The Climate Opportunity of Auto 2.0: How Big Tech Drives Faster EV Adoption,” Morgan Stanley, 9/5/2019; “The Challenge of the Two Clocks,” 
Credit Suisse, 6/27/2019.
11	“How shared mobility will change the automotive industry,” McKinsey & Company website, April 2017.
12	“Cars & Climate:  Tech’s Opportunity to Tackle CO2,” Morgan Stanley, September 2019; c40.org. 
13	“The New Automobility Report: Lyft, Uber and the Future of American Cities,” Schaller Consulting, 7/25/2018; “Estimated TNC Share of VMT in 
Six US Metropolitan Regions,” Fehr & Peers, 8/6/2019.
14	An ICE drivetrain contains over 2,000 parts, whereas an EV drivetrain contains around 20. “Seven Reasons Why The Internal Combustion 
Engine is a Dead Man Walking,” Forbes Magazine/Website, 9/6/2018.  
15	“Global Oil Demand to Hit a Plateau Around 2030, IEA Predicts,” Bloomberg.com, 11/12/2019.
16	“VW Challenges Rivals With $66 Billion for Electric Car,” Bloomberg, 11/15/2019.
17	“Infographic: Self-Driving Car Connections,” Automotive iQ, 6/4/2019.