[Editor's note].ESG reporting has always been considered a new topic in the investment world, but many investors don't understand it. At present, more than 30% of listed companies will regularly publish ESG annual reports, and by the end of 2022, more than 1,700 A-share listings in China have issued ESG reports. What's the problem?
Automobile manufacturers, in addition to selling cars, can also make money by "selling carbon".
Tesla's (NASDAQ:TSLA) earnings report hides a "secret fund" to obtain funds by crediting carbon emissions to competitors. As early as 2019, Bloomberg reported that since 2010, Tesla has earned a total of nearly $2 billion in revenue by giving US federal greenhouse gas emission credits to automakers such as General Motors, Fiat, and Chrysler. This figure grew to 1.6 billion a year in 2020, and even helped the company's performance turn around that year.
Billions of dollars are "earned" every year, and this kind of business is afraid to be the envy of other car-making peers. What's even more envious is that it's not easy to replicate such a business model. The reason why Tesla can "sell carbon" to make money is because many states in the United States have a "zero emission vehicle (ZEV) credit system", which requires car companies to earn points by manufacturing and selling electric vehicles every year, and all car companies need to earn a minimum point threshold, and violators may face lawsuits and fines. In addition, any excess points can be stored and deferred, or sold to other car companies.
In China, in order to continue the gradual decline of the new energy vehicle subsidy policy, the government has issued the "Parallel Management Measures for the Average Fuel Consumption of Passenger Car Enterprises and New Energy Vehicle Credits", also known as the "double credit" method, in recent years. The industry expects that the constantly revised "double credits" are expected to be upgraded to "carbon credits" in the future, and work with the world to promote low emissions.
Such cases also directly reflect the importance of ESG (Environmental, Social and Governance), especially environmental protection and carbon emissions, for the automotive sector. In the future, automotive manufacturers that ignore ESG will face even higher manufacturing and operating costs.
Focusing on China, BT Financial Data Exchange found that although there is a well-known green business card of "new energy vehicles" among A-share listed companies, there is still room for improvement in ESG disclosure in the automotive industry. Flush data shows that in 2022, the ESG disclosure rate of the automotive sector divided by Shenwan industry is only 2879%, ranking 5th from the bottom out of 31 industries.
Many companies have just disclosed ESG reports, such as the veteran car company Dongfeng - on December 13, 2023, Dongfeng Motor (600006SH) released its 2022 Environmental, Social and Governance ESG Report. This is the company's first ESG report, which will be released annually in line with the fiscal year in the future.
What should investors focus on for Dongfeng Motor's ESG report?The third party gave Dongfeng Motor a not high "BBB" ESG rating, what is the gap between it and the better performers?
As mentioned above, the A-share automotive industry has not done a good job in ESG disclosure. According to Flush ESG rating data, Yutong Automobile, Great Wall Motor, Jiangling Motors, Changan Automobile and SAIC Motor are relatively good ESG disclosures in the automotive industry, all of which have received "AA" ratings.
Dongfeng Motor, which recently disclosed its ESG report for the first time, has received a rating of "BBB". This rating is not the best in the automotive industry, but it is still better than the "BB" rating of most companies.
From the perspective of dismantling the three aspects of ESG, Dongfeng Motor's environmental management has achieved good results, ranking 21st among 265 companies in the industry (Shenwan first-level classification).Social management is also excellent, ranking 26th in the industry;Corporate governance management ranks low, at 197, and has a low score in "management governance", which may be related to the "abstaining from voting before leaving office" incident reported by the first centralized report before.
In the "ESG Research Report on the Domestic Automotive Industry (2023)" compiled by the Sustainability Standards Research Center of the University of Finance and Economics, another ESG rating system, Dongfeng Motor's rating has also shown a downward trend. The report found that in terms of "key governance issues", Dongfeng Motor and many other car companies have performed poorly in corporate governance, which is in line with the above-mentioned straight flush ratings.
The report also pointed out that under the MSCI rating system, Dongfeng Motor and other companies are at the level of "BBB" or below, which is lower than the domestic rating, which urges Chinese automakers to have a lot of room to improve in terms of ESG.
Domestic car companies are still facing huge challenges in the field of carbon peaking and carbon neutrality, and they need to have deeper considerations ...... the purpose, impact, and implementation of the 'carbon neutrality' strategyThere is a need to continue to raise the profile of key social issues, such as employing employees," the report said.
In recent years, the environmental impact of the manufacturing industry, including car manufacturing, has attracted widespread attention, especially the stamping, welding, and painting processes in the production process will bring high energy consumption and pollutant emissions
BT Financial Data Channel flipped through the announcement and found that before 2022, although Dongfeng Motor did not disclose ESG reports, it has disclosed social responsibility reports for many years. In the 2021 social responsibility report, there was no mention of carbon emissions-related work;In the 2022 report, Dongfeng Motor disclosed that in July of that year, the company released a plan for carbon peak and carbon neutrality at the manufacturing end, and formulated 67 carbon reduction paths.
Specific energy savings and emission reductions are described in Dongfeng Motor's first ESG report recently released. In the chapter of "The original intention does not change the green mountains and green waters", the company said that it will carry out a number of energy-saving improvement projects in 2022, and most of the projects have achieved better energy-saving effects under the premise of zero capital investment. For example, the carbon reduction of "topcoat JPH improvement" reached 11116 tons of carbon dioxide equivalent, "two-coated VOC transformer optimization and capacity reduction" energy saving reached 1975 tons of standard coal.
In this section, the company also mentions that it has obtained environmental management system certification, carried out environmental training, etc. BT Financial Data Exchange found that if Dongfeng Motor can disclose indicators with a longer time span and better comparability, it will be able to make the market clearer and better understand its green transformation process.
One object that can be compared horizontally is BYD (002594sz ）。In BYD's social responsibility report (right in the figure below), the company has disclosed the company in the past three years under various general calibers (such as scope.
1. Scope 2) carbon emissions and greenhouse gas emission intensity. In Dongfeng Motor's ESG report (left in the figure below), although specific data has been released, it does not give investors an intuitive effect.
Not only Dongfeng Motor, but also domestic car companies are generally vague in the disclosure of greenhouse gas emissions, which has become a "common problem in the industry". The Zhongxin Jingwei article once wrote that only a few companies such as BYD and Geely have disclosed the scope.
1. Scope 2 GHG emissions, and Scope 3 emissions are still missing. Most of the remaining automakers only estimate and describe the total amount of emissions in their social responsibility reports or ESG reports. Such a "common problem in the industry" reflects the need for domestic automakers to improve the disclosure of greenhouse gas emissions.
Tianyancha data shows that Dongfeng Motor Co., Ltd. is a veteran car company founded in 1999, located in Xiangyang City, Hubei Province, mainly engaged in automobile manufacturing, Dongfeng Motor Group is its controlling shareholder, and foreign investment enterprises include Dongfeng Light Engine, Changzhou Dongfeng Motor, etc.
It needs to be analyzed that Dongfeng Motor has two listed entities, one of which is Dongfeng Motor, which is listed on the A-share market, and its business focuses on commercial vehicles such as light trucksThe second is Dongfeng Group Co., Ltd. (00489.), which is listed in Hong Kong, Chinahk ）。The latter, as the parent company of the group, has a large market capitalization and business scope, and this article focuses on the former listed on the A-share market.
According to the latest production and sales data released by Dongfeng Motor, in the first 11 months of 2023, Dongfeng Motor's cumulative sales volume was 14150,000 units, a year-on-year increase of 1743%。The year-on-year growth rate of production in the same period was even higher, at 3023% - the growth rate of production is higher than the growth rate of sales, or reflects the replenishment of inventory by terminal sales such as dealers.
The penetration rate of new energy vehicles needs to be improved, which is also a problem faced by Dongfeng Motor. At present, Dongfeng Motor's new energy penetration rate of commercial vehicles is about 18%, which is higher than the overall level of the national commercial vehicle market, that is, about 15% or less, but there is still a big gap between the new energy penetration rate of passenger cars and the level of close to 40%.
The low penetration rate of new energy and the stagnation of the penetration rate of commercial vehicles are the problems faced by the whole industry. The National New Energy Commercial Vehicle Market Information Association has revealed data that in October 2023, the penetration rate of new energy commercial vehicles will be 144%, the same as the same period last year, while the new energy penetration rate of passenger cars in the same period was as high as 36%.
Problems such as a larger gap between the operational efficiency of new energy commercial vehicles and fuel vehicles, and a longer R&D cost and R&D cycle have caused the above-mentioned common problems in the industry. However, industry insiders are already optimistic about new energy commercial vehicles to the fast lane, "China Business Network" has quoted industry insiders to look forward to the prospect that by 2030, the penetration rate of medium and heavy truck new energy vehicles will exceed 35, the penetration rate of light trucks will exceed 33, and the annual carbon reduction will be 80 million tons.
How can Dongfeng Motor seize such a green opportunity?In its ESG report, Dongfeng introduced its strategic layout, pointing out that Dongfeng will "focus on the research and development of vans, small vans and light trucks (containing hydrogen fuel), and in terms of technology, specialize in energy-saving technology, hybrid technology, fuel cell truck technology and other research". These strategic layouts still need to be translated into more solid sales figures.
In terms of the "G" of ESG, that is, corporate governance, Dongfeng Motor has had controversial incidents.
According to the "Surging News" on November 22, 2023, in November, at the general election of Dongfeng Motor, a senior independent director who has served for 3 years abstained from voting, and even said that he "does not know the company", causing an uproar in the market and attracting regulatory attention.
On November 20, the Shanghai Stock Exchange issued a regulatory work letter to Dongfeng Motor, requiring the company to explain matters related to the abstention of the board of directors. The next day, Dongfeng Motor issued an announcement explaining the ins and outs of the matter, saying that on November 20, the board of directors meeting deliberated on the proposal of the general election and the convening of an extraordinary general meeting of shareholders, and Qin Zhihua, as an independent director, abstained from voting on the proposal.
According to BT financial data, most of the cases of such abstention by INEDs occur in some ST shares or companies with large business disputes (for example, some real estate giants have invested billions of yuan in cross-border new energy, which has been opposed by INEDs). The occurrence of such an incident in Dongfeng Motor, which has a stable operation, surprised some market participants.
According to the "Paper" and many other ** reports, Dongfeng Motor's announcement also revealed details, saying that Qin Zhihua's reasons for abstention were that the work of the sixth board of directors was not summarized, the recommendations were not implemented effectively, and the communication with the board secretary and senior executives was not smooth, and even "I don't know enough about the company", and he also proposed to resign as an independent director.
However, Dongfeng Motor refuted the above reasons one by one, saying that the company's various re-election work was legal and compliant, the internal communication mechanism was complete and effective, and Qin Zhihua still needed to continue to perform his duties as an independent director before his formal resignation.
With the improvement of capital market rules, the number of cases in which directors and independent directors of listed companies disagree or express independent opinions is bound to increase, which is a good thing. However, how to make benign suggestions and suggestions speak rationally, get positive responses from the company, and effectively implement them will be a "ESG exam" question that must be answered in front of Dongfeng Motor and all listed companies.
According to the latest financial report data, in the first three quarters of 2023, Dongfeng Motor's revenue will be 916.7 billion yuan, a slight increase of 048%；Net profit 3730470,000 yuan, a year-on-year decrease of 6195% - there is a situation of increasing income but not increasing profits. Even rarer, the deduction of non-net loss 10.6 billion yuan, the first time in recent years.
In addition to the decline in performance, Dongfeng Motor's cash flow problem has also attracted market attention. In recent years, the company's "net cash flow from operating activities" indicator has often recorded negative values. The "cash flow ratio" reflects the company's ability to obtain sufficient cash through operations to repay debts and meet commitments, and this indicator was recorded by Dongfeng Motor in the first three quarters of 2023. 002 and -0045, which directly reflects its cash flow pressure.
Dongfeng Motor once said in its financial report that the decline in cash flow indicators was mainly due to the decline in product sales and the decrease in the proportion of cash collection.
In this regard, Bai Yiyang, vice president of the research department of CMB International, once analyzed in an article in "China-Singapore Jingwei" that although Dongfeng Motor has fluctuations in payment collection, it will not affect the company's operation. From Dongfeng Motor to Dongfeng Group are vigorously developing new energy, the scale of fuel vehicle sales is the historical burden of its transformation, and the problem of "difficult to turn around" will accompany the painful period of transformation.
But fortunately, there is an opportunity in the crisis, and exports are also opportunities that Dongfeng Motor needs to grasp. At present, new energy vehicles have become one of the "new three types of export foreign trade" in 2023, and Dongfeng Motor also revealed in its 2022 financial report that overseas export sales of 8,000 vehicles that year, an increase of 59% year-on-year4%。
Whether it is export or new energy, the premise of good business is the company's perfect ESG system and information disclosure. The old Dongfeng Motor not only wants to step on the "green accelerator", but also to drive steadily and go far, so as to have the opportunity to become a more dazzling leader in the highly competitive future.
[ESG Investment Analyst Comments].
1.Framework and highlights: Dongfeng Motor's 2022 Environmental, Social and Governance ESG Report adopts the most widely used GRI framework in the world and CAS-ESG 5., which is widely followed by domestic enterprises0 framework combined with the disclosure framework for reporting preparation. The report is materialistic, taking into account not only the impact of climate change on business, but also the environmental and social impact of corporate activities. The report is applicable to a wide range of stakeholders, including investors, and provides information on enterprise valuation and related decision-making for a wide range of stakeholders, including investors.
2.Analyst's tip: In addition to the basic information of the enterprise, the main topic of the report discloses the content that the enterprise focuses on. Among them in Cass-ESG 5Governance responsibility, social risk management and value creation are disclosed under the 0 framework, but environmental risk management is not disclosed. Environment-related issues and social-related issues such as energy, water and sewage, emissions, employment, occupational health and safety, training and education, and local communities are disclosed under the GRI framework, but economic-related issues are not disclosed.
ESG investment analyst Zhang Qian, double MBA from Beijing Jiaotong University and Missouri State University, CFA certified ESG analyst of the American Institute of Certified Public Accountants
Author | han