Fleets Giving EVs New Lease of Life

As auto manufacturers’ strategies evolve, other roads are opening up for investors looking to accelerate the transition to electric vehicles.

Electric vehicle (EV) sales across the world are trending upward, not only driving decarbonisation but reshaping an entire industry and its supply chain.

“Road transport electrification is reshuffling cards in global markets, as carmakers compete fiercely to capture their share of a growing pie,” the International Energy Agency says.

BloombergNEF recently predicted global EV sales will exceed 30 million in 2027, rising to 74 million annually by 2040. With road transport accounting for 27% of global emissions, policymakers now realise they need to turn this forecast into reality.

But there are sharp differences between countries, with EV sales falling behind the curve in several developed markets.

Battery electric (BEV), plug-in hybrid (PHEV) and hybrid electric vehicles collectively made up 36% of the UK ‘s 1.9 million car sales in 2023. This might seem an acceptable rate ahead of the country’s deadline to phase out internal combustion engines (ICE) by 2035. But it also represents a plateauing of demand that leaves fossil energy fuelling more than 92% of the cars on British roads.

In July, the UK’s Climate Change Committee (CCC) said stagnating BEV sales were below its recommended pathway for the first time. To meet binding commitments, substantial reductions to UK surface transport emissions are needed, requiring the rate of EV uptake “to accelerate quickly”.

The CCC called for the reinstatement of the previous 2030 ICE ban – noting the uncertainty sown in the minds of consumers and investors – as well as the removal of planning barriers to EV charge points, installation of which must treble by the end of the decade.

Relief is available in the wholesale market, which encompassed over half (57%) of new UK car registrations last year across fleet and business sales. According to the UK’s Society of Motor Manufacturers and Traders (SMMT), 77.1% of BEVs registered last year went to fleets and businesses, compared with 22.9% to private buyers. Attributing many sales to advantageous government-backed salary sacrifice schemes, campaign group Transport and Environment has argued for their extension beyond scheduled expiry in 2027-28.

Wholesale purchasers have significant potential influence on the pace of the EV transition. The rental, leasing and fleet finance sectors can place significant orders with manufacturers, helping to ramp up market share, but can also help to stimulate demand through services that encourage end-customer interest.

Firms that purchase and run large fleets of cars and vans can reduce their overall emissions profile significantly by making the switch to EVs. This goes beyond those with major road transport distribution networks – retail giants such as Amazon – to companies large and small that run fleets as part of remuneration packages.

To date, investor activity has been limited both from an engagement and capital allocation perspective, even where fleet emissions are material, including the many service providers owned by global banking groups. But this is beginning to change as climate-focused investors look for more ways to support EV adoption.

“While global EV sales are still rising, there has been something of a deceleration in Europe,” says Sacha El Khoury, Head of Impact Equities at Artemis Investment Management. “As such, we are increasingly looking beyond EV manufacturers and infrastructure providers for opportunities to use our influence with investee firms that have large fleets, specifically where these represent a material part of their transition to net zero.”

Bumpy ride

From an investor perspective, the wholesale market has a mixed record in aligning investor returns with net zero impact, partly reflecting the performance of policy frameworks in incentivising demand.

Well-established challenges in the retail market have compromised rental firms’ EV ambitions, while the ability of the fleet sector to offset these for their end-users has helped them to attract investors.

According to the British Vehicle Rental and Leasing Association (BVRLA), around 10% of the UK car rental fleet are BEVs or PHEVs. While this is roughly double their share of the overall market, electrification has been a bumpy ride for individual firms to date.

Europcar set ambitious emissions reduction key performance indicators for the five-year sustainability-linked bond (SLB) it issued in 2021, but the firm is likely to breach at least one – if not all.

The first requires the company to sharply reduce the average emissions intensity of both cars and vans in its fleet, while the second commits it to having 20% of its fleet classified as ‘green’ – defined as emitting less than 50 CO2/Km – by the end of 2024.

Analysis from the Anthropocene Fixed Income Institute (AFII) suggests the latter is rising, and the former falling, too slowly to reach the SLB’s sustainability performance targets (SPTs) – incurring a 12.5 basis point penalty paid out to investors – despite recent efforts to stimulate demand. The AFII also observes that an increase in EVs as a proportion of Europcar’s fleet would probably be insufficient on its own to help achieve its first SPT.

Europcar grew the proportion of EVs to 12% of its total fleet in 2023, with customers driving them for 3.5 million miles across 50,000 more days than in 2022. The firm has also added to its range of EV models available to rent and sought to reduce customer anxiety by only requiring returning vehicles to be 20% charged.

However, with rivals also experiencing challenges – Hertz disposed of a third of its EV fleet in January, while Sixt reported weak consumer demand – Europcar’s efforts to reach targets well beyond the industry average and consumer demand look set to fail, at least in the short term.

“The ambitious metrics used by Europcar are welcome because they increase transparency to investors,” says Jo Richardson, Head of Research at the AFII. “If they are missed, the SLB still serves to highlight the challenges in the rental sector around consumer demand.”

EV ecosystem

In July, UK bank NatWest offered institutional investors an opportunity to buy into the EV transition of the leasing sector with a bond issued under its Green, Social and Sustainability Financing Framework. The seven-year bond, which was 4.67 times oversubscribed, will provide £750 million (US$983 million) to finance or refinance leases used to purchase EVs.

It will enable NatWest’s asset finance arm, Lombard, to cost-effectively grow the number of EVs it can offer to corporate customers as part of its decarbonisation strategy. The bank will report on its allocation of proceeds, including an estimate of tailpipe CO2 emissions avoided, within 12 months.

Compared to the rental sector, Lombard has developed a more comprehensive approach to supporting the EV transition, devising multiple initiatives to reduce user cost and risk.

“The funding models of the leasing industry are evolving rapidly, from direct, vanilla funding to the provision of an aggregated service proposition – covering procurement, maintenance, infrastructure, vehicle management and disposal of the electric car or van,” says Stuart Clark, Lombard’s Head of Climate Transition, observing that fleet finance firms are becoming ecosystem providers.

As well as launching a salary sacrifice scheme that reduces the cost of EV leases by 43% on average for higher-rate taxpayers, Lombard has partnered with contract hire firm Ayvens to enable vehicle access and mitigate residual price risk, with Octopus Energy to provide workplace and home-charging capabilities, and with Diode Energy to develop migration plans for businesses interested in switching to EVs.

In terms of further stimulating demand, many are focused on the promised reinstatement of the 2030 ICE ban. But there is a plethora of other regulatory and policy tools at hand – including technology subsidies, scrappage schemes, direct infrastructure investment or charging cost reduction, and low or zero-emission zones.

According to BVRLA figures, the UK has recently seen a 47% increase in EVs adopted via salary sacrifice schemes, which offer tax-based incentives to support access to EVs – with some firms bundling insurance, maintenance and charging infrastructure into the package. The SMMT does not isolate salary sacrifice from overall EV fleet sales volumes, but anecdotally industry experts estimate this tax-efficient option accounts for up to half.

Further, because demand for the schemes – which make EVs at least cost-competitive with ICE equivalents – is often employee-led, some argue that their popularity undercuts claims of weak consumer demand. Labour’s plans for the scheme are not yet known.

“Salary sacrifice allows firms to offer a great employee benefit, while also reducing their Scope 3 carbon emissions,” says Michael Evans, Chief Financial Officer at Octopus Electric Vehicles, which leases EVs to businesses and individuals. “But they’re not available to the whole working population. So it would be good to see other government incentives to facilitate further EV take-up.”

Diverse needs

Lombard’s Clark says a range of policy actions and service innovations are needed to support the EV transition to meet diverse needs across retail and wholesale markets.

Large firms with ‘grey’ fleets – whereby employees own cars are used for business purposes – were attracted to salary sacrifice schemes not only to reduce emissions but also to measure them, he notes. Meanwhile, SMEs are more focused on reducing total cost of vehicle ownership, looking for funding solutions that match their cashflow profiles and mitigate their risks.

Many major fleets operators became early movers to meet their net zero commitments, including many that signed up to the global EV100 initiative, launched in 2017. But mass adoption depends on companies being able to address multiple challenges, with technologies such as real-time data-driven risk management seen as integral.

“Institutional investors can support this transition by engaging with portfolio companies, advocating for EV integration, and allocating capital to sustainable investments – such as funds focused on EV technology,” says Dan Saunders, CEO and Founder at Zeti, which works with UK corporates to electrify their fleets. “By doing so, they can help overcome these barriers, enabling broader adoption while advancing sustainability goals.”

In some respects, the shift to EVs is only one part of a wider change to the road transport landscape driven both by convenience and other sustainability factors – such as the resource-intensive nature of prevailing vehicle production models.

“Providers should be looking to take away the complexity of ownership,” says Clark. “Added-service subscription models help to support multimodal travel, offering services where different types of transport are provided in a unique bundle.”

While EV-related investment opportunities open up, Artemis’s El Khoury expects engagement by investors on emissions from the wholesale market to be a targeted affair for now, based on contribution to the overall carbon intensity of individual firms.

“For firms with big fleets, their transition can be material for driving demand,” she says. “But the EV transition of fleet used by the executives of a carbon-intensive manufacturing firm is less likely to be a focus for engagement, as it’s not going to move the dial on its net zero strategy.”

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