Ford Motor Company (F) Earnings Call Transcript & Summary

Good morning, and welcome to the Ford ESG Investing Fireside Chat, hosted by Wolfe's Managing Director covering autos, Rod Lache. [Operator Instructions] And now I hand the call over to Rod.

Thanks, Tatiana, and thanks, everybody, for joining us on this week's call to talk about ESG Investing and Ford Sustainability Report. The catalyst for this webinar was actually to discuss the Ford Sustainability Report, but ultimately, we thought we could make this a little bit broader, and Ford has agreed to give us a look into how they manage ESG issues, how they set targets and talk a bit about why a growing population of investors are focused on this theme. For those of you who have participated in these webinars in the past, you know that these calls are always better when we get great participation through Q&A. And we'd love to have you ask questions. Those questions, particularly the ones that help us tease out incremental takeaways for investors, make these webinars much more valuable for everybody. And you can do that by entering your questions on the lower right-hand corner of your screen. Now as you type those in and you hit enter, just note that those questions only appear on my screen and no one else's. I ask those anonymously. So none of the other people that are listening and the Ford team doesn't see that, so they wouldn't be able to respond right away. But I will ask those questions anonymously, and hopefully, we get some interesting dialogue. So with that, I'd like to introduce our guests today, joining us from Ford. We're very pleased to welcome Bob Holycross, Bob is Vice President and Chief Sustainability, Environmental and Safety Officer; Cynthia Williams is a Global Director of Sustainability, Homologation and Compliance; Lynn Tyson; Jim Gawron from Investor Relations, I think most of you already know. Jim, I think you wanted to open this up maybe with just a few introductory comments about the sustainability report. So why don't you take it away?

Perfect. Thanks, Rod, and hello, everyone. Really appreciate you joining us today. So I want to open the discussion today by highlighting the importance and interconnectedness of environmental, social and governance factors, otherwise known as ESG. The nonfinancial metrics and intangible assets associated with ESG are increasingly driving investment decisions not just because it is the socially responsible thing to do, but because ESG performance is often closely correlated with financial performance and shareholder value. This is evidenced in the fact that the UN Principles for Responsible Investment now have over 3,000 investor signatories, representing nearly $90 trillion in assets under management, growing over 13x since 2006. Now emerging and emerged megatrends, such as climate change, socioeconomic inclusion, racial justice and the COVID-19 pandemic have put a special emphasis on the need to integrate ESG into corporate governance, strategy and risk management. That is why we believe the release of our 21st Annual Sustainability Report has come at a very important time. This report underscores our commitment to providing reliable, comparable and decision-useful disclosures for our key stakeholders. It also includes reporting consistent with the SASB and TCFD frameworks and contains the second iteration of our climate change scenario report. Now importantly, the disclosure showcases our sustainability leadership and performance across environmental and social dimensions and includes the announcement of our new commitment to achieve carbon neutrality globally by 2050. We are so proud of the fact that Ford is the only full-line U.S. automaker committed to doing its part to reduce CO2 emissions in line with the Paris Climate Agreement and working with California for stronger vehicle and greenhouse gas standards. ESG is not an add-on at Ford, it permeates all that we do. So with that, I'm delighted to have Bob, Cynthia and Lynn with me today to further impact all of these topics. So Rod, back over to you.

Great. Thanks, Jim.

Look, I was hoping to maybe just kick off the discussion with a bit of a broader question. Maybe this should go to Bob, but any of you chime in. Just I was hoping -- it's such a broad topic, ESG. I was hoping maybe you can just talk a little bit about how you prioritize which issues are the most material to the company. How do you set those targets? And what are you prioritizing at this point?

Sure. I can start with that. First of all, thanks, Rod, for having us and hosting us. It's a real honor to be here with you and with all of the guests that are online today. So I mean, you are right, ESG has become such a broad topic. And for us, we've been on this journey really much throughout our 117-year history. But when you really look at the last 20 years when we started digging in and reporting, it has really changed over those last 20 years. And so what we've been doing in terms of how do we assess, how to scope this, what are the key issues for us, we do engage with a number of different third parties in this space to see what's on people's mind, all our different stakeholders. We do what we call a materiality assessment usually every couple of years where we look at all the different key factors that we know have a big impact on our business in this space, but then also kind of surveying stakeholders on what's on their minds and what are the things that are key for them as we address these broader issues. And when we do that materiality analysis, you can almost think of it as a matrix, what's of high importance to Ford, what's of high importance to stakeholders, and it almost kind of plots like that. And obviously, for us, when it comes to the E in ESG, it's going to center around our vehicle fleet and the emissions from vehicles and when they are used in operations because that's the largest part, obviously, of our portfolio in this space. So when it comes to things like the vehicle -- the fuel efficiency of our fleet, the conversion to lower-carbon technologies like electrification and what have you, those, obviously, will rise to the surface. But also now, even more importantly, stakeholders want to know, and it's important for us to understand the longer view on what is our resilience to climate change. So what's kind of the risk assessment in terms of where our operations are and some of the different scenarios that may come out depending on how things can change. And as you mentioned, COVID-19 has certainly put a new spotlight on how we do those assessments and the urgency we do them with. And then it comes to things like our supply chain and the greater operational aspects of all the pieces of our business and how we prioritize those. So the supply chain is a big impact for us and something that we concentrate on as well. And then even in focus most recently, when you look at the social side of it, obviously, from a human capital, human rights perspective, that -- those become very material issues for us in how we integrate everything together. So it is something that's a moving target. It's something we have to assess on a regular basis, but those are some of the major aspects of it for us.

Thanks, Bob. So clearly, the resilience of the company over the long term, this is the critical part of it. And I'm curious about just -- there are many reasons to focus on this. But as far as your interactions with investors, how big a role do you think this is taking as far as their criteria for investing? And do you sense that this is becoming a bigger topic for them in their discussions with you?

Yes, Rod, I can take that one. In our discussions with our investors, we have found that it's becoming increasingly important criteria for investment decisions. Since investors recognize ESG, performance can both reduce downside risk. There's also opportunity to increase upside value. So just to give a few Ford-specific examples on reducing downside risk, we have our reducing policy risk by working with California on the voluntary program for greenhouse gas emission standards. And then in addition to just being the right thing to do and consistent with our culture and our truth, our people's first responses to the COVID-19 pandemic and the movement for racial justice helps to reduce the reputation risk and market risk. And finally, as it relates to climate change and climate-related physical risk, we've done some detailed scenario analyses, trying to look at our operations and develop robust strategies there for the future. So turning to the other side of the equation, the -- regarding upside value from ESG, investors really see opportunities for growth in new markets and new products as well as the potential for higher returns on capital from operational efficiency, such as with energy efficiency. Also, there's workforce efficiency and reducing turnover and the need for recruitment. So our conversations with both our passive and active investors have increasingly focused on these areas, especially just within the last 12 months, has really been a hockey stick there. So these -- and investors have provided more clarity around their ESG expectations, in particular, and have -- we've seen them exercise their proxy votes, consistent with their ESG guidelines that they've provided to us and to the market. So -- and I believe these trends are being felt in the broader industry as well, not just at Ford and in our interactions. So just a quick stat. Now if you follow the money, you can see that one of the fastest-growing investment approach is known as ESG integration. That's now at $17.5 trillion in assets under management where investors incorporate ESG factors into investment and strategic decision-making. So based on all of these trends, ESG is certainly a part of Ford's investment thesis, as you mentioned. And it really has been for 20 years now under the strong leadership and sustainability from Bill Ford, and it's definitely something we plan to continue in terms of the momentum going forward.

Great. Thanks, Jim. And I do want to return to some of the points that I wrote down that you just brought up about the upside -- potential for upside value and cost in a minute. But I was hoping maybe, first, this document that you publish yearly, the sustainability report, it's a huge report. I'm hoping you can maybe just give us a framework for the process of pulling it together, but really specifically, how should investors be reading this? What should we be looking for in that document? Are we able to objectively compare your performance kind of maybe at a high level against other competitors? And where does Ford stand relative to your peers on that?

Sure, Rod. I'll take that question. In terms of the sustainability, sustainability is one of the industry's top priorities and one of the issues I think -- the biggest issues that the industry faces as a whole. Over the years, sustainability has been a top priority for Ford. I would say, for more than 20 years. I know back in 1999, the year my daughter was born, we actually issued our first sustainability report. Great year. But -- and that one was titled Connecting with the Society. For Ford, I think what we try to put into the sustainability report, we look at highlighting what's our leadership role in sustainability and so how do we lead the industry. So we try to highlight things like that. We also look at how do we share and show that we have actually made a positive impact on the planet, how do we reduce our carbon emissions, how do we improve CO2 from our facilities and things of that sort. So those are some of the things that we've tried to highlight within the report. And in terms of competitiveness and how investors could actually take a look at the report, what we do is we have the report details, sustainability performance of our operations and also vehicle data. We also -- we align with performance metrics of us reporting frameworks. And so with that respect, we have several that we actually detail out our report. We meet with these folks. We engage with them to make sure that they are aware of what's in the report. We talk about some of the things that we feel that we're ahead of competitors on. But some of those frameworks that we look at, we look at GRI, SASB, TCFD, some of these that Jim mentioned earlier. But we also have United Nations Compact Communication on Progress index. We have the UN Guiding Principles. We also have the Bloomberg Gender-Equity Index and also the UN Sustainable Development Goals. So those are some of the framework -- reporting frameworks that we utilize, and we -- and those are good key indicators that stakeholders could use to actually compare us to our competitors.

So maybe just kind of following on that. Can you give us a few details on when you look at those somewhat objective frameworks, where are you stronger and weaker against competitors? Are there specific targets that we should be aware of, aspirational goals that you have to improve in certain areas that maybe you can talk about?

Sure. I can talk a little bit about that, Rod. It's somewhat of a cottage industry in terms of all these different ratings that are out there, and there's even rating the raters and trying to see where people are coalescing around what are the ratings that are kind of most applicable from a broader industry perspective or even across industries, right, so investors can compare companies to one another. So it's a real challenge. For us, again, having now been doing detailed reporting for 20 years, we've had some experience at it. When we look at some of the key metrics that we report on, obviously, tying it back to that materiality assessment idea, when you look at from a vehicle perspective for us in the auto industry and the performance of our vehicles in this space, we see ourselves positioning for leadership based on how we're going after electrification relative to our biggest franchises within our fleet. So rather than a couple of niche products or what have you that might be directed more at compliance or what have you, our strategy is really building out around our what we call our franchises. So when you think about the Mustang Mach-E, all-electric vehicles coming out later this year, the announcements we've made regarding the F-150, not only having a hybrid coming out at the end of this year but also a full-battery electric vehicle. And then also our commercial vehicle franchise where we've talked about our transit vehicles that are going to have all-electric capability as well. So really emphasizing the key products for us and where they can make a difference most for society as a whole. That's where we see ourselves relative to our competition and our carbon strategy around the E, if you will, being in a leadership role. The second aspect that I would point to, and this is really key, is are you also, as a company, advocating for policies that are supportive of where we need to go overall as a society, as an industry and as a company. A lot of these commitments and goals and things can be nice headlines or taglines, but to really put your advocacy where your strategy is, we think is a key differentiator for us as well and something that investors are going to be paying more and more attention to as well as consumers. So as Jim and Cynthia mentioned earlier on, in the U.S., for example, the work that we've been doing with California advocating for stronger greenhouse gas emissions, trying to take a longer play, right, for more sustainable pathways that aren't as dependent upon the current election cycles or what have you. So that's how we kind of look at how we differentiate ourselves. Obviously, year-over-year improvements and a lot of the array of metrics are key for us, which we report on and measure ourselves relative to competition. But beyond that, your other question on what are some of the broader goals, we have set aspirational goals beyond the carbon neutrality pledge of 2050 that we did in more detail last year. So it's things around air, water, waste, energy, materials. So things like trying to have true 0 waste to landfill, which we've been doing in a number of our facilities around the world where we're not putting any waste in landfills, trying to get there by 2030s across all of our facilities. From an energy standpoint, we've committed to using 100% locally sourced renewable energy in all of our facilities by 2035. From materials, again, trying to use only recycled, renewable plastics in our vehicles globally. And then water, which is really becoming a critical aspect, as we all know, committing to using freshwater only for human consumption, so that we preserve water there. But also just from an overall efficiency standpoint, how we can use less and less water overall in our operations. From a diversity and inclusion standpoint, we do aspire to be the most diverse and inclusive company from a broader social perspective. It's a real key aspect of our business there. So we do detail those goals in our report. We do measure ourselves relative to the competition using a number of these third-party metrics, but that's how we see ourselves differentiating from the competition is really putting our advocacy behind what we say we're going to do.

So just from an external perspective, just to help us maybe just position different companies that we follow, maybe you could talk about some of the key ESG rating providers that you watch. And how do they view you from the perspective of the external metrics that you provide? How can we use that to sort of rate different companies as far as all the list of things that you discussed?

Rod, before Bob or Cynthia answer that, I think it might be helpful for people to hear how we made that determination. Both Bob and Cynthia report out to the Board several times a year on how we're doing with sustainability. And one question they had was with the proliferation of all of these new indices, which ones are we going to be looking at, which ones should we align with. So maybe, Bob or Cynthia, if you can talk about how you went out that down, so that we could take a more focused approach.

Absolutely. As Lynn mentioned, there's like -- there's a number of ESG providers. There's -- they've increased over fivefold over the last couple of years. I believe there's over 600 ESG raters globally. But the ones that we primarily focus on are the ones that focus on providing -- we look at the ones that rating agents, such as, I think, Bob mentioned, sustainability rate the raters' report. And so we look at that report, and investors typically use Sustainalytics and MCI -- MSCI as more of the broader ESG ratings for more of the broader ESG ratings, and then ISS is associated with governance. So we think those are the key rating sources that we use. We -- and we actively engage with these agencies to ensure that the data that they are reviewing is accurate and correct. So those are some of the things that we look at, and we make sure that folks are actually looking at the different ratings properly. For example, so because there are so many different agencies, they rate things differently. So MSCI, they place a larger emphasis on the social aspect, whereas Sustainalytics places a larger emphasis on the environmental piece. So once we do review things with folks, we make sure that they're actually looking at what that agency is actually rating and then how we fare against competitors.

So can you comment at all about how those -- some of those relatively well-known ratings groups are viewing you? And just how do you stand against some of the competition?

Absolutely. For MSCI, we're rated as a B rating. That is the bottom of the -- bottom 37% of the auto industry. Sustainalytics, we're about 28 out of 61 automakers. And then there's another one, TruValue Labs Momentum Score, we've actually -- we're 73 out of 100, and we're receiving a positive momentum there. So we look at different things. And then we take the scores that we actually do receive from these agencies and look at how can we improve moving forward. And so those are key things that we look at in terms of our sustainability report.

And are these -- it sounds like with 600 firms that are looking at this, it sounds like there's -- it may be difficult to standardize the approach. Are you aware of any initiatives that are being taken to standardize the ratings and just make it clear to investors to just provide a framework for them, so they can make judgments between companies?

Right. I'm not aware of any efforts to standardize. But we definitely -- that's definitely something that we would appreciate and work with folks to help standardize. But there's -- currently, there's no standardized view.

Okay. Can you talk maybe -- just one other thing before I dive into environmental and social, and I see a number of questions that have come in, so thanks, everybody, for sending those. Just maybe the interplay between ESG initiatives and the profitability and cash flow of the business. And Jim, you alluded to this a little bit in your answer earlier. Investors always think that -- or very often think that these initiatives, many of them, especially in the environmental side, could be costly. They're kind of a headwind to profitability because it's regulatory focus. Is that really the case? Can you give us any examples of initiatives on the environmental side that are both positive for ESG and positive for the bottom line? Because there is sort of a mixed perception. You've obviously got people that are focusing on this as a positive that will support sustainability and risk mitigation, but there's others that are concerned about. Jim, you might be muted. I mean you...

Sorry about that. And so thanks, Rod. Yes, we definitely see that there is an opportunity to positively impact the company profitability and cash flow. And the way we think about it is there's short-term opportunities and there's long-term opportunities as well with these ESG initiatives. So in the short term, we have made much success on energy and water efficiency programs, which have reduced resource use while providing actually a shorter-term payback period and the required capital expenditures. So as an example, achieving our corporate goal of improving global facility energy use per vehicle also helped us reduce the cost for that energy. So as part of this initiative, and giving a specific example, many of the Ford manufacturing lighting systems were replaced by LED fixtures, providing significant energy cost savings that we calculated out to be around $320,000 per year per site. So in the mid- to long term then, our ESG investments in the areas of vehicle electrification will position us for sustainable growth as well. So for example, our investment of more than $11.5 billion in electrification by 2022 will help to position us for the success within that growing market segment while simultaneously reducing greenhouse gas emissions consistent with the carbon neutrality goal that we mentioned. So in particular, as Bob mentioned as well, we are excited to launch the all-electric versions of our iconic nameplates within just the next 24 months, and that includes the Mustang Mach-E SUV, the all-electric F-150 pickup and then the all-electric transit van as well.

So I want to just follow on, on electrification. And this target that you've mentioned it earlier, the company's target of achieving carbon neutrality. It's almost hard to fathom what an automaker today would look like as a carbon-neutral company. Maybe you can just describe what you actually mean by carbon neutral. How do your fleet achieve that goal? Are there risks that you see associated with moving in that direction? Or how do you kind of balance the risks of that, which it sounds like it would be fairly costly and a pretty meaningful change for the business versus the opportunities?

Yes. It's a good question, and we don't take a bold commitment like that lightly and recognize we're not going to be able to do it completely on our own. It is going to take a very integrated approach, as we say. But for us, we've primarily, as I've said earlier, been focused primarily on our vehicle emissions and the emissions of vehicles in use. But when you really take a step back and collectively look at the broader ecosystem, the life cycle, if you will, it is much more than that, that has to come together. So for us, beyond the vehicle use, it obviously does come in to -- our operations come into play, so the emissions intensity and absolutes from our manufacturing facilities and different pieces of where we operate and how that all comes together. But as I mentioned also before, the supply base when you look at how the whole integrated system works with how our parts come together and our suppliers' operations are a big part of that as well. So it's really those 3 things that have to kind of come together. But when you think about it, obviously, it starts even further upstream beyond the vehicles and the facilities, right? It is about what is the source of the energy that's coming in. We know there's a lot of -- continues to be a lot of discussion around battery electric vehicles and how truly 0 emissions they are, if they're running with help of power that's coming from coal-fired power plants or what have you. So that's going to be how we're going to get there is by all working together. Carbon neutrality by itself is a definition, is obviously the net effect of any of the emissions you put into the ecosystem, combined with any emissions that you can take out, right, from carbon sequestration or other things. So that's where we get into this neutrality versus just saying, we aspire to be just 0 emissions or what have you. There's a broader opportunity at play with how we can capture carbon and work with partners to do that. But obviously, in the lead up to all that, the focus for us is on our scope emissions around what I talked about. So it is going to take more than just putting out fuel-efficient vehicles or electrified products, which we know is the primary path we're on. And then it also is going to get back to this advocacy piece in terms of what are the policies, right, that are necessary to enable all those things to come together? What are the market considerations that we have to monitor along the way? Because as much as policies may come into play that can mandate certain things or we put out the different technologies, the marketplace ultimately has to accept them. And that becomes part of the -- some would say the risk. But for us, we really see it as the opportunity. And that's where it ties back to our strategy on how do we really be the end solution? How to do both, right? You can get 0 emissions, but you can provide products and services that customers truly value and will pay for even if they're not all the way on the journey of prioritizing a 0 emissions as part of their purchase consideration. And that's how we see, again, back to the competitive aspect of is how we're going to differentiate ourselves. So there are a number of different opportunities in this space, but it is going to be a broader ecosystem that has to come together around vehicles, facilities, energy providers and ultimately, marketplace acceptance.

So just to clarify, Bob, the carbon-neutrality goal, does that also include the carbon emissions of the vehicles that you're producing as they're put out into the market?

Yes, certainly.

Over time, it does. So presumably, a lot of this is -- you're looking at -- eventually, we're going to have electric vehicles as a very dominant source, dominant powertrain. But this is kind of a 30-year target. Your target was 2050, right?

Yes.

So I guess, my question is, and I hope you're not insulted by this, but should investors care? A 30-year target, I have no idea what I'm going to be doing in 30 years, but -- and most investors really have no idea. And they don't -- most don't invest over that longer time frame. Is there something that we should care about as far as hearing this target from an investment perspective that's kind of near term over the next couple of years?

Yes. And again, I think in terms of -- for investors or even for consumers overall, right, I think this is a space that more and more are caring about, and we have to. Because, again, I think people are going to be wanting to do business with companies that are ahead of the curve in this space. 2050, well, it's out there a ways. It is consistent with where as a society as a whole, we think we need to get to. It's the tipping point before the ability to mitigate some of the impacts of climate change, maybe too far. So that's how we coalesced around the 2050 time frame. But the interest for investors and consumers overall in the shorter time frame is going to be who are these companies that are showing they can get ahead of this and be more durable around some of the different scenarios that may play out if we have an acceleration in terms of where energy prices may be or supply or what have you. So it is about mitigating that business risk to and being able to respond depending on what shifts may occur even unexpectedly. But it's going to be a year-over-year obligation in terms of having targets that lead up to it. That's the next phase of what we're going to be doing. It's setting more specific year-over-year targets working with the science-based targets initiative, and so that we can be accountable and transparent in all of that. But the value is going to be in how we can show that we're sustained in this for the long haul as a company.

And similar to the Paris Accord as well, we will revisit those targets every 5 years, just to make sure that we're on track and adjust accordingly.

I have just a question that I wanted to weave in that I got from one of the participants. It's just on the goal of carbon neutrality by 2050. How far does that go down into your supply chain or into your dealership networks and all the other extended enterprises that support Ford? Are you looking to roll up the carbon footprint from everybody? And how do you generally interface with them?

Absolutely. We're going to look at well-to-wheel's approach from not only the vehicle and facility side of the shop at Ford, we're also taking a look at the top suppliers, the ones that had the greatest impact. We're working with them to set targets as well. We'll roll those out probably early next year. So we're looking at not just us, Ford, we're looking at suppliers, we're looking at partners, dealers and the like. So we're taking a look at the entire cradle to grave of a vehicle.

And I'm curious if this is something that you just can tangibly measure in terms of the benefits to the brand. You actually planned a market ESG aspects of your business. Is it something that you see as brand-enhancing from that perspective?

Absolutely. I think that's part of our goal. We are going to talk more about our sustainability strategy. We think the vehicles are great for the planet. We think millennials will catch up on to that and will want to purchase these type of vehicles. So we're going to play to our strengths, again, as Bob mentioned. So the key products, we got the -- we have the Mach-E, we have the F-150, BEV coming and also on the commercial space, we have the Transit. So definitely, we're going to play to our strengths and see how that works for us.