Green Transportation: the Banking Opportunity
Through ratifying the Paris Agreement, 189 countries agreed to work together to invest in a low-carbon future, lowering greenhouse gas (GHG) emissions enough to limit the average global temperature increase in this century to 2 ̊ C or less.
One area where there is significant opportunity to decrease GHG emissions is the transportation sector.
Transportation accounts for 23 percent of global energy-related greenhouse gas (GHG) emissions. Replacing vehicles powered by internal combustion engines with electric vehicles (EVs) will lower GHG emissions and reduce air pollution in urban areas. EVs have become competitive alternatives throughout the transportation sector, providing solutions ranging from e-bikes to passenger cars and delivery trucks.
IFC’s Green Banking Academy (GBAC) is an online banking knowledge initiative designed to help financial institutions and the private sector in Europe and Central Asia (ECA) learn about green banking and build green portfolios. GBAC advisory services are available to help financial institutions invest in the green transportation sector. IFC offers the tools and supports financial institutes need to invest in these new opportunities, to measure the impact of these green investments on GHG levels, and to report on green investments held in their portfolios.
“Not only does the electrification of transport represent a significant market opportunity but it’s also a way to combat choking urban smog.”
Kartik Gopal, Senior Industry Specialist, IFC
According to the International Energy Agency’s most recent annual report, global sales of electric cars reached 4.6 percent of all car sales in 2020. This is a significant increase from 2019, when the global share of EVs was 2.7 percent. In total, including both battery-powered and hybrid vehicles, global sales of electric cars reached 3 million in 2020, up from 2.1 million in 2019. Including previously sold cars, IFC estimates the total global stock of electric cars at 10 million.
Financial institutions have an opportunity to develop and market specialized loan products for consumers purchasing new or used electric cars. These loans would increase the green component of a financial institution’s portfolio. While EVs may have higher up-front costs than traditional vehicles, operating costs are expected to be lower, allowing consumers to repay vehicle loans using the savings achieved from replacing gasoline with electricity.
Electric vehicles must be charged regularly. Consumer access to charging stations at home, at work, and in public places will be necessary. Financial institutions have opportunities to work with existing service stations to add new charging facilities, and to work with new businesses developing charging infrastructure. A wide range of business structures could be used to build charging facilities. These could include privately owned single spaces in public areas, co-operatives offering charging facilities to residents of an apartment building, or large-scale investments in chains of branded charging stations in multiple locations.
Potential EV buyers can be deterred by a perceived lack of access to charging infrastructure. Digital solutions are helping to overcome this fear, as new mobile apps alert drivers to nearby charging stations. Some apps allow consumers to compare charging prices or pay for electricity using digital platforms. As charging infrastructure evolves, digital technology developers will seek financing to launch new consumer products.
By 2040, IFC estimates that over half of all passenger vehicles will be electric.
Although mass transit ridership fell during the Covid-19 crisis, demand is expected to return and eventually exceed previous levels. Electric buses are the fastest-growing segment of the EV market.
Global sales of buses have varied in recent years, from a peak of more than 125,000 in 2016 to 82,000 in 2020. But while sales of electric buses have varied, the share of total bus sales comprised of electric buses has increased steadily, from 0.8 percent of total sales in 2015 to 4.6 percent in 2020. Electric buses’ share of new bus purchases is expected to increase as cities take steps to decrease pollution.
There are opportunities for financial institutions to lend funds for the purchase of new electric buses or bus fleets. E-buses typically require higher up-front expenditures, with savings achieved through lower operating costs. These higher up-front costs have led to innovative financing and business models in this segment, including leasing models, and unbundling models where the business of bus ownership is separated from fleet operation.
As with personal EVs, the need to charge bus batteries creates lending opportunities. There are two primary methods of charging electric buses: overnight charging at bus terminals, usually using less expensive slow charging infrastructure; or fast-charging equipment known as pantograph infrastructure that allows buses to charge quickly during regular route stops. Both of these charging types require investment in new infrastructure.
“A cocktail of technology, investment, and scale in electric buses and other high-use intra-city electric vehicles will soon reach a point where reliability and cost advantages create the death spiral for internal combustion engines.”
John Graham, Principal Industry Specialist, Global Transport, IFC
Smaller Electric Vehicles
There are electric solutions for all types of transportation. For personal, intra-city transportation there are electric bikes, small electric scooters, electric motorcycles, and electric two- and three-wheeled vehicles. These smaller vehicles have become especially important in low-income areas where personal cars are unaffordable for many consumers.
Because these smaller EVs have a relatively low purchase price, it will be difficult for financial institutions to profit from specialized lending products for individual consumer loans. However, there are opportunities to provide financing for companies purchasing fleets of EVs. Rental services offer fleets of e-scooters or e-bikes for short-term use. Delivery services, particularly in the food industry, are buying fleets of small EVs for intracity delivery. As these uses become more common, owners will need financing to expand and upgrade their existing fleets. Developing and offering loans for fleet purchases can increase a financial institution’s green portfolio.
Electric two and three wheelers make up the biggest share of electric vehicles globally, with a total fleet of 190 million vehicles
Light Commercial Vehicles and Trucks
Last-mile deliveries are going green. “Last-mile deliveries” describes moving goods from the closest distribution hub to their final destination. As retail companies face stakeholder pressure to use green transportation, more light commercial vehicles and trucks will be needed for intracity transport. For example, in April 2021, IKEA announced plans to ensure that, by 2025, 100 percent of its deliveries will be made by electric vehicles (EVs) or other zero-emissions solutions in the 30 countries where IKEA operates.
The conversion of these delivery fleets benefits corporations and the environment, and also results in a need for financing. There are opportunities for financial institutions to finance single vehicle purchases or entire fleets.
“If we don’t fundamentally change how we move people and goods, the world is on its way to 2 billion cars by 2050 and a 60 percent increase in transport emissions, which is simply unsustainable.”
Aniruddha Dasgupta and Riccardo Puliti, World Bank Blog
Opportunities Throughout the EV Value Chain
There will be opportunities to finance facilities and supply chains to produce all types of EVs, from e-bikes to e-buses. Many EVs will be produced by existing corporations using retrofitted facilities, but new facilities may be developed by new corporations, particularly in countries and areas with relatively low production costs. Banks developing expertise in green transportation may become preferred lenders.
Battery technology for EVs is changing rapidly as research results in new developments. Currently, most EVs are powered by lithium-ion batteries. Compared to other options, lithium-ion batteries have high energy density, offering high voltage and charge storage per unit size. Cheaper options in development will reduce costs and increase battery lifespan. In addition to lithium, other inputs for battery production include cobalt, nickel, and manganese. As demand for these minerals grows, companies may seek financing to develop or expand mining operations.
Ideally, some of the increased demand for battery materials will be offset by recycling used batteries, creating a circular economy. Most EVs in use are still operating with their original batteries, but in time, these batteries must be replaced. Recycling technology is still evolving, and there are not yet adequate facilities in place to handle future demand for this service. Several business models are possible, and it is inevitable that new entrants to this market will seek financing and advice from financial institutions.
Batteries make up between one-quarter and one-third of the cost of EVs. Producing fast-charging low-cost batteries will be key to full-scale EV adoption. Currently, the majority of the world’s EV batteries are made in China. As new EV manufacturers look to secure new supply chains, there is potential to produce EV batteries in Europe and Central Asia. With battery prices falling rapidly and technology evolving quickly, battery producers must continually evaluate and revise production processes to remain competitive. This ongoing process will require regular involvement with financial institutions.
“If you look at the Paris Agreement, the internal combustion engine is incompatible with the future we are obliged to create.”
Monica Araya, Transport Lead, Climate Works Foundation/Global Drive Electric Campaign
Start Your Green Journey
For more information about the IFC ECA Green Banking Academy or to schedule an assessment of your climate capabilities, please email firstname.lastname@example.org to contact a member of our team. We are looking forward to working with you. Stay green!