Tesla share price surge highlights electric vehicle investors’ jitters

Today we have a packed newsletter, starting off with news from Tesla this week. The beleaguered car company defied stock market sceptics as its shares rallied after earnings on Tuesday.

Simon has updates on legislation from the European parliament with important implications for sustainable business, and Kaori and Lee share a global perspective on sustainability bonds. For all the politicisation of sustainability these days, the fixed-income space continues to be a key source of financing for green, blue and other climate initiatives.

Thanks for reading — Patrick Temple-West

Electric vehicles

Tesla navigates slowing EV demand and a crowded field with an ‘affordable’ model

Tesla’s share price jump this week highlighted how jumpy electric vehicle investors have become, amid rising competition in the sector and waning consumer enthusiasm.

Elon Musk this week said that the company had decided to accelerate the development of its “affordable” electric car model, expected to cost $25,000, with production likely to start in the first half of 2025. Tesla’s stock surged on the news, jumping 17 per cent following its earnings announcement on Tuesday. But the company’s shares are still down 31 per cent since the start of the year.

Tesla remains the world’s most valuable car manufacturer, with a 41 price-to-earnings ratio. Rivals Ford, BMW and Volkswagen do not come close to that eye-watering multiple.

But a major challenge for Tesla — and a key factor behind its share price decline — is that its cars are no longer the only quality EVs on the road.

In China, Tesla is losing out to rivals that make smaller, cheaper EVs. These include market leader BYD, whose Seagull car sells for less than $10,000.

Since 2022, Tesla has dropped the price for its Model Y sport utility vehicle by about $20,000. Battery prices in the US dropped by only about $3,000 over that time, the International Energy Agency said in a report this week. The price pressure has been weighing on Tesla’s profits. Its operating margin dropped to 9.2 per cent in 2023, down from 17 in 2022.

The fierce competition and smaller profits are also affecting companies in the EV supply chain — notably battery makers. Last month, CATL, the world’s biggest EV battery manufacturer, suffered its first fall in quarterly profits in almost two years amid slowing growth and stronger competition.

Consumers have also grown wary of EVs. In the first three months of 2024, EV sales growth slowed and the percentage of EV cars on the road dropped, according to JD Power. EV charging problems were weighing on car companies, JD Power said in a report last month.

“EVs are still a clear part of the product road map. That hasn’t changed. But clearly there is some pivot as it relates to timing and investment and the approach to achieving that,” Dan Levy, an analyst at Barclays told me.

But an affordable Tesla that costed about $25,000 “will drive greater EV adoption” overall, Morningstar analyst Seth Goldstein said.

He’s not known for thinking small, but for Musk to propel Tesla’s next era of growth he will have to. (Patrick Temple-West)

REGULATION

European parliament passes landmark green measures 

This week’s European parliament plenary in Strasbourg marked the final such session of a five-year term in which green issues moved to the centre of the European agenda. Lawmakers used the opportunity to pass a raft of legislation that might struggle to progress after June’s European elections, when pollsters expect a rightward lurch.

One notable new set of measures centred on packaging. These items included a ban on some single-use plastic packaging (including for unprocessed fruit and vegetables) from 2030, and a requirement that all plastic packaging must be recyclable.

Lawmakers also passed a regulation banning products made with forced labour, and giving member states and the European Commission new powers to investigate goods and supply chains.

The most important legislation passed this week was the Corporate Sustainability Due Diligence Directive, which requires companies to monitor and report on social and environmental risks, and to act on problems they uncover. 

After pushback — notably from top German officials — the directive was revised to reduce the number of companies that will be subject to it, and its implementation will be phased in over several years. But the CSDDD still looks like a landmark piece of legislation that will force big companies operating in the EU — including a large number of non-European ones — to scrutinise their own supply chains more closely. (Simon Mundy) 

Green bonds

The new bond issuers on the block

An influx of new players is entering the sustainable bond issuance space. Last month, Iceland issued its first sovereign green bond, raising €750mn in a 10-year euro-denominated benchmark offering.

While the country’s energy sector is already remarkably green — producing more than 99 per cent of its energy from renewables such as hydroelectric and geothermal — it still relies on fossil fuels for transportation, among other sectors.

“Even though we don’t use coal, we don’t use gas, we still import oil from our friends in Norway,” former finance minister Thórdís Kolbrún Reykfjörd Gylfadóttir told Moral Money. Iceland plans to put the new funding towards decarbonising sectors of its economy which still rely on fossil fuels, including transportation and the chemicals sector.

Issuances of green, social, sustainability, and sustainability-linked bonds, also known as GSSSB, are expected to reach more than $1tn in 2024, according to S&P Global. This category of bonds has slowly but surely accounted for a growing share of total bond issuances, rising from a 5 per cent share in 2019 to 13 per cent in 2023. S&P expects that share to reach 14 per cent this year. 

There are several factors supporting this rise. First, sovereign issuances appear to be growing. In 2023, sovereign GSSSB issuances rose 52 per cent, reaching $160bn, S&P Global figures show. 

European issuers account for the lion’s share of GSSSBs, but new players are crowding in. The composition of GSSSBs is changing too. Green bonds eclipse all other categories, but social bonds are starting to command a growing share of the pie. This evolution could be another factor contributing to stronger bond issuance.

Mongolia provides one example — in 2023, it issued its first green bond as well as gender specific bonds for the first time.

“There is definitely demand in this area,” Mongolia’s minister of labour and social protection, Khurelbaatar Bulgantuya told me.

However, lack of regulation had hindered bond issuances on the Mongolian stock exchange, Bulgantuya noted. The gender specific bond issued last year with the Swiss impact investing platform Symbiotics Group, for example, was listed on the Luxembourg stock exchange.

“First we have to expand the domestic stock exchange to be able to cater to the bond issuances of both small and large businesses,” she said, adding that the Ministry of Finance was working on a new law that would help make bond issuances more attractive to investors.

Examples exist in Tanzania, where the country has been creating an environment more conducive to sustainable bond issuances.

“Here, a retail investor can put in money as little as $200, and this has created huge momentum from the informal sector,” said Peter Malika, a technical adviser and head of the UN Capital Development Fund in Tanzania. This had helped make the Dar es Salaam stock exchange vibrant, he added.

Next month, Tanga Urban Water Supply and Sanitation Authority, a local Tanzanian water utility, will issue east Africa’s first subnational green bond. The utility partnered with the UNCDF to issue the bond, which will target water infrastructure projects, such as expanding distribution and treatment capacity.

For this upcoming bond, issuers aim to accommodate as many retail investors as possible. “Mostly it will be subscribed by institutional investors but we are expecting around 5 per cent” to come from retail investors, said Stella Lyatuu, an investment officer at the UNCDF.

If the bond issuance can show it can be a successful supplement to development financing, Malika expects other countries in Africa to follow suit. Because of the continent’s young population, “we are looking for solutions for unemployment, urbanisation . . . this is where these types of bonds will play a major role,” he said. (Kaori Yoshida, Nikkei and Lee Harris)

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