Will the Fed put a floor under your Tesla stock?
By: James Poletti
Tags: Environment, Federal Reserve, Automotive, Tesla, Branding

A couple of years back I worked on a project to develop an electric vehicle brand for one of the big car companies, whose intention was for this to ultimately retire their master brand. That seemed ambitious at the time but we may be fast approaching an environment in which the master brands of the big volume car companies rapidly take on a toxic whiff.

In the summer, the news was that Tesla’s valuation made them worth more than Toyota, Volkswagen and Hyundai combined. Tesla did 145,000 units in its last quarter. Yet Toyota alone manage 2.2M in that same timeframe. So the gap is surely going to take some closing. But the arc of the Universe, which has been visible in the skies over Washington for the last couple of weeks, might be bending in Tesla’s direction.

Last week the Federal Reserve made a historic statement acknowledging the financial risks of climate change. Governor Lael Brainard said: “Acute hazards, such as storms, floods, or wildfires, may cause investors to update their perceptions of the value of real or financial assets suddenly…” In other words, big swings in pricing could be felt by businesses whose viability might either be materially impacted by climate effects or suddenly appear much less sustainable to a world forced to wake up to climate crisis by adverse events on their doorstep.

No doubt many investors’ Volkswagen stocks have been converted to Tesla ones this year. Brainard’s warning raises the spector of far greater swings in sentiment to come.

While Biden faces a titanic political struggle to shift America away from its economic and employment dependency on carbon, messages like this from the Fed suggest the private sector could be forced to regulate itself. The pivot to a green economy may gather pace from monetary policy before the fiscal policy arguments die down around a ‘Green New Deal’.

What points beyond simple market sentiment is the possibility of restrictions being placed on carbon-dependent businesses’ ability to issue debt in the markets on favourable terms. That is, the idea of carbon negative, carbon neutral or carbon positive bonds, put in place to manage the effective subsidy of risks associated with environmentally harmful business. Any such kind of rating of debt would impact its pricing and availability.

Earlier this year, environmental campaigners called for the ECB to determine both ‘green’ and ‘brown’ bond issues, the latter for carbon intensive companies would be judged accordingly. Both the ECB and Bank of England have been assertive about their will to use monetary policy to promote the green shift. Last week ECB President Christine Lagarde rattled the cage again, saying that “climate risks are not adequately priced.” But until now the Fed has remained tight-lipped.

Plenty of people will be upset by the notion of banks making what they see as fiscal decisions, that are considered the domain of elected government. But as Jana Randow points out in a piece on Bloomberg, the banks are deeply embedded in markets because of the massive monetary injections seen around the world this year:

“[The ECB’s] purchases of corporate bonds now total more than 260 billion euros. That makes it increasingly vulnerable to any selloff, for example if the European Union’s drive for a green recovery from the pandemic causes write-offs of carbon-intensive assets such as coal-fired power stations.”

If governments won’t act, perhaps central banks will have to. Does that put a floor under your Tesla stock?

It remains to be seen. What’s certain is, it should put some urgency behind the traditional car manufacturers’ electric brand reinventions.

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