Michele Leung, Green Finance Advisor of Friends of the Earth (HK)
According to the statistics, automobile manufacturers
contributed approximately 13%* of total global carbon emissions. Vehicle
tailpipe emissions represented nearly 80% of this carbon footprint, which presents
the industry’s biggest challenge in decarbonization.
Due to its large carbon footprint, more regulators who focus
on climate change are shifting their attention to auto industry. In the recent
COP 26, declarations were made by government to work towards all sales of new
cars and vans being zero emission by 2040 or earlier. Similarly, in China, the ’14th
Five-Year’ New Energy Automobile Industry Development Plan is a critical period
for the transformation and upgrading of China’s auto industry. It is targeted
to reach 20% share of passenger new electric vehicles sales by 2025. The
ambition is to reach 100% of passenger vehicles electrified in 2035.
The growth of electric vehicles market is exponential. According to International Energy Agency (IEA), based on current trends and policies, it projects the number of electric cars, vans, heavy trucks and buses on the road worldwide to reach 145 million by 2030, which represents nearly 14 times the number observed in 2020. China, in particular, is leading the market with its new electric vehicle penetration rate rose to 13% in 2021.
However, one should note that while electric vehicles do not
generate tailpipe emissions, the batteries used to power them are charged via
electricity grids which may not be emission free. National grid emissions
depend on a range of energy source mix, including coal and renewables. The fact
is, this reallocation of emission from tailpipe to grid is still considered and
categorized as Scope 3 Category 11 under the Greenhouse Gas Protocol, migrating
from indirect use-phase to direct use-phrase emission. According to an industry
research paper^, it is found that if all vehicles were replaced with electric
equivalents, that industry average Scope 3 Category 11 emissions would have
been reduced by 31%, though it is a significant reduction, it is still far from
the ideal “zero-emission”.
Nevertheless, accelerating the proliferation and adoption of zero emission vehicles is an important step for automobile manufacturers to decarbonize their carbon footprint and the world to achieve Net Zero. In parallel, investors are getting more interested in corporates’ electric vehicles strategies. When evaluating the auto industry, in addition to carbon footprint, investors should also be aware of the ESG risks stemming from social aspects. Investors should pay attention to the product recalls and impacts of Over The Air (OTA) updates under product safety. Investors should also consider how the companies manage their supply chain impacts (especially along the Original Equipment Manufacturer (OEM) model and upstream), as well as the restructuring and talent requirement practices under labour management.
*In 2019 alone, automobile manufacturers constituents of the MSCI ACWI Index as of May 2021 were responsible for nearly 4.7 gtCO2e, approximately 13%2 of total global CO2 emissions.
^ MSCI ESG Research “Electric Vehicles and the Elusive Road to “Zero Emissions”’ by Yu Ishihara, June 2021
Andrew Lam, Green Finance Advisor of Friends of the Earth (HK)
ESG Investing is arguably no longer a niche in the investing world. It is no longer the purview of the select social and sustainable minded investor, and has become something integral to the investment process from highly institutionalized pension funds and insurance companies to the mom-and-pop retail investor.
2020 was the year which saw significant uptick in investment and issuance of ESG related investment products, and if anyone thought that was just a one-off event, they would be sorely mistaken, as 2021 has continued the strong investment flow and new product issuance in the ESG universe. As can be seen in below chart, the acceleration in accumulation in assets under management for ESG assets that began in 2020 has continued into 2021.
Global ESG Exchange Traded Funds
The following exhibits show the number of issuances of new ESG ETFs in a year, and as can be seen, 2021 is continuing the strong record set in 2020.
ESG investments as compared with non-ESG investments
It should be noted that all these interests and investment inflows are backed up by strong performance in ESG investments as compared with non-ESG investments. Take the MSCI World SRI index for example, the year to Nov 30, 2021 return for the MSCI World SRI index is 22.75% versus the MSCI World index of 17.3%, an outperformance of 5.45%.
This is a continuation of the strong performance witnessed in 2020, where the MSCI World SRI index returned 20.48%, versus the MSCI World index’s return of 16.5%, an outperformance of 3.98%.
ESG Debt Issuance
In addition to the positive developments in the equity markets, 2021 has seen a stronger proliferation of ESG investment products in the fixed income space, whereas Investment Grade green bond new issues previously dominated issuance, 2021 saw a sharp uptick in ESG debt issuance in the High Yield space. In fact, both investment grade and high yield has seen record issuance of ESG debt in 2021.
Given the positive developments in the ESG investment universe especially in 2020 and 2021, it is now difficult to imagine investment without ESG. However, making ESG mainstream is only half the battle of the goal of making businesses sustainable. The other half is making sure these ESG reporting and issuance criteria translate to real sustainable impact.
The issue of greenwashing has not been completely dealt with and there remains a lack of empirical evidence linking ESG securities to a measurable ESG metric, for example, does a US$1 billion inflow into the MSCI World SRI Indexed ETF contribute to a measurable amount of reduction in greenhouse gas emissions?
Looking ahead in 2022..
While there is still much work to be done to make our world truly sustainable, what transpired in 2020 and 2021 with regards to ESG investing has been encouraging, however it is our collective responsibility to continue to fine tune the ESG investing process, to hold the issuers accountable to their sustainable declarations and pledges, and most importantly to be able to empirically measure and link investment into ESG products to measurable ESG goals.
Graham, J. S., Prakash, A.,
Chandgothia, A. (2021), “ETF Spotlight: Thematic and ESG – the next legs of
growth”, Goldman Sachs Global International Research
Lynam, A., Karoui, L., Puempel, M.,
Young, M., Rogers, S., Manzo, M., Viswanathan, V. (2021), “ESG Credit
Monitor: A breakout year for HY borrowers”, Goldman Sachs Global
MSCI Inc. (2021) “MSCI World SRI
Index”, MSCI ESG Research Inc
Alexandra Tracy, Green Finance Advisor of Friends of the Earth (HK)
burning and clearing,
generate more than 20 percent of emissions in the Asia Pacific, including 40
percent of methane emissions (largely from livestock farming). Off farm activities, meanwhile, contribute a
growing share of food system emissions across the entire production,
transportation and consumption chain.
We are well aware
of the vulnerability of the farming sector in Asia to potential climate
change. Flooding in China’s Henan
province in 2021 impacted
around 2.4 million acres of cropland, as well as food processing
facilities. India and the Philippines
also experienced torrential rainfall, causing mass evacuations and crop damage.
As the urban
population grows, food security has to be a priority
Asia’s agricultural emissions facesa range of complex challenges. Agriculture is crucial to livelihoods in the region’s emerging markets where
more than 100 million smallholders produce over 80 percent of the food
consumed. In an area where nearly 500
million people are still undernourished, food security is the priority for many
And food security
has to remain an important focus as Asia’s urban middle class is growing at an extraordinary
rate. By 2030, around 555 million people
are likely to have moved into cities, where they will generate increasing demand
for new types of food, especially meat and dairy products. Per capita beef consumption alone in China
could increase by over 40 percent in the twenty years to 2030.
At the same time,
new urban areas are rapidly encroaching on farmland, and as people migrate into
cities, workers leave the agricultural sector. Indonesia could lose about 8 million farmers
by 2030. As fertile land is destroyed and the
numbers of productive workers shrink, previously untouched areas have to be
brought into cultivation.
Government interventions can have negative impacts
Governments in the
region have responded to the challenge of food security with mechanisms such as
tariffs, quotas and subsidies to provide support to farmers. Incentives to increase production create
enormous pressure on natural resources, especially water.
More than 450 million people in Asia already experience very high water
stress, as farmers face increasing competition for water from industrial and
interventions to increase food yields are also pushing up emissions. Subsidies for
chemical fertilisers have led to considerable overuse, generating
substantial emissions of nitrous oxide, a greenhouse gas more than 300 times
more potent than carbon dioxide.
Technology will transform agricultural production and lower emissions …
sector in Asia is in the early stages of a major transformation, which combines
mechanisation and automation with better inputs (seeds, fertilisers) and
greater availability of information about production techniques and market
trends. More machinery reduces the need
for human labour, while increasing adoption of computer systems, electronics
and data management creates cost savings and efficiencies. This has the potential both to increase
productivity and to have a material impact on emissions in the region.
agriculture, involving high technology sensors and analytical tools, is being
introduced to wealthier markets such as Japan and Korea. It uses data to monitor crop status and soil
condition and to manage more efficiently processes such as irrigation, planting
and use of fertilisers and pesticides.
Drones play a key
role in precision agriculture, both for gathering data and by replacing manual
labour. Agricultural drones can spray 40-60 percent faster than
manual spraying, creating 30-50 percent savings in the use of chemicals and up
to 90 percent less water use.
The farming sector
already consumes more than 80 percent of water resources in Asia, and as demand
for meat grows, a great deal more water will be required for its
production. A large proportion of
farmlands in the region is served by pumping groundwater, which is extremely
energy intensive. It is estimated that in India
lifting water for irrigation contributes as much as 11 percent of the country’s
emissions. Drip irrigation helps to
address this, as it feeds the plant instead of the soil, delivering water and
liquid fertilisers straight to the roots, which greatly lowers water
…As will better farming practices
generates around 50 percent of all crop related emissions due to the age old
practice of flooding paddy fields. This
reduces the growth of weeds, but also produces methane, which is more than 20
times more damaging than carbon dioxide.
The Sustainable Rice Platform, based in Bangkok, works with farmers in
Thailand, Vietnam and elsewhere to enable them to develop more sustainable
finance come in ?
In much of Asia,
of course, these new technologies are unaffordable for most farmers.
In some cases,
governments have provided backing for local initiatives, such as in Rajasthan
in India, where financial support from the Ministry of New and Renewable Energy
has led to the state becoming the country’s solar water pump leader, allowing
farmers to replace diesel pumps and giving them higher yields and multiple
harvests per year.
In the private
sector, providers of microfinance have traditionally been active in the farming
sector, and more institutional capital is being directed into climate friendly
agriculture in Asian emerging markets, much of it catalysed by multilateral and
development banks or “patient” philanthropic funding.
Market mechanisms can also provide incentives for poorer farmers, such as the Sustainable Rice Platform’s certification programme which allows them to sell product to global buyers such as Olam International in Singapore.