Tackling Asia’s Agricultural Emissions: Innovation in Technology and Financing

Alexandra Tracy, Green Finance Advisor of Friends of the Earth (HK)

After the industrial sector, agriculture and deforestation are among the largest sources of greenhouse gas emissions in Asia, accounting for more than 20 percent of the total.  Managing and reducing these emissions will be a significant challenge, especially in emerging markets, where improvements are needed throughout the production, transportation and consumption chains.

But the agriculture sector in Asia is changing rapidly, as mechanisation and digital solutions are becoming more affordable.  More machinery reduces the need for human labour, while increasing adoption of computer systems, electronics and data management creates cost savings and efficiencies.  Going forward, more sophisticated, digital tools – such as connected sensors, analytics and artificial intelligence – will deliver future gains, as well as improving management of natural resources and ensuring emissions reductions.

This transformation will require much greater connectivity.  Many parts of Asia are lacking the necessary infrastructure, but analysts expect this to be mostly in place by 2030, even in rural areas.  At the same time, the provision of creative financing solutions will be essential to scaling up technology adoption and allowing poorer farmers access to data and the analytical tools required to extract real value.

Urban agriculture
As Asian populations increasingly move into cities, urban areas will have to play a much larger role in food security, increasing local supply and lowering costs and emissions through reduced transportation and storage.  Ranging from relatively low tech community gardens to highly sophisticated plant factories, the opportunity for urban agriculture in the region is estimated to be around US$20 billion by 2030.

Indoor vertical farming, incorporating hydroponic and aeroponic technologies, controlled lighting and integrated sectors, overcomes weather constraints and allows crops to be grown more quickly on a much smaller land area with significantly greater efficiency.  In Singapore, start up Sustenir Agriculture retrofits existing buildings in the city to create a controlled environment for growing, and is able to sell vegetables at 30 percent of the cost of imported alternatives.  Another local company, Apollo Aquaculture Group, has created a vertical fish farming facility that produces six times more than a traditional aquaculture project.

Data to enable better forecasting and traceability
Use of data, gathered from remote sensors and drones, is becoming essential to precision agriculture and indoor farming practices.  In addition, some companies in the region are exploring the use of artificial intelligence and blockchain technology for demand management and to improve traceability of their products.

The Japan Weather Association recently collaborated with food producers such as Sagamiya Foods, which makes tofu, and sauce company, Mizkan Holdings, to develop an artificial intelligence system to forecast food demand based on weather information and sales data.  The system aims to help companies scale back redundant production and cut food inventory losses. 

Blockchain could radically transform agricultural supply chains in Asia by providing visibility on quality and provenance, creating consumer trust and making it easier for producers to access new markets.  While usage is not widespread among small farmers due to cost, there is huge potential for improving transparency and creating direct payment options.  Early adopters include WOWTRACE, a start up in Vietnam, which uses blockchain to supply data on its operations from selection of cocoa beans to final product in the premium chocolate market. 

Combining Technology with New Sources of Finance
In the Philippines and Indonesia, digital peer to peer lending platforms, which allow urban professionals to make small loans to multiple farmers in rural areas, are experiencing double digit growth.

Combining digital payment and shared service platforms (where farmers pay to use equipment only when they need it) gives smallholders access to essential machinery and resources.  For example, Tun Yat, a start up in Burma, allows farmers to rent tractors and harvesters by the day through a mobile app.  In India, Ergos provides temporary warehousing to rural farmers, enabling them to store and sell their produce in the off season for higher prices.  Farmers can use digital warehouse receipts as collateral to secure short term funding until their crops are sold.

Affordable insurance coverage is also essential to building climate resilience among farming communities.  Better data availability and forecasting ability is leading to more opportunities to offer parametric insurance, which pays out automatically in response to predefined incidents such as wind speed or rainfall.  In the Philippines, for example, CARD Pioneer Microinsurance has developed a low cost product to protect rice and corn farmers against losses caused by typhoons.

ESG Investing in 2022 and Beyond

Green Finance Advisor of Friends of the Earth (HK)

2022 is beginning to be quite different than many in the investment community had anticipated. The consensus for 2022 was for above average growth from the tailwinds of accommodative monetary and expansive fiscal policy on the back economic recovery after the temporary disruption by the pandemic as well as decreasing inflation from the normalization of supply chain bottlenecks. Instead, as we are nearing the end of the first quarter, we are faced with a world where economists across the board are slashing economic growth forecasts and inflation are nowhere near under control in the developed economies.

Besides the obvious factors that caused the persistence in inflation such as (i) the China-US trade war where the tariffs applied to Chinese goods did not only resolve the trade imbalance, the higher costs were actually passed onto US customers who bore the costs of higher prices of consumer products; and (ii) the Russian-Ukraine conflict, which disrupted food and energy trading and production, where again the higher cost is passed onto the end consumer; one factor causing the inflation and perhaps less obvious is the fact that we are amidst a great transition into clean and renewable energy. Consider the fact that due to increasing ESG awareness of investors over the last few years, the Capex spent on fossil fuel extraction is curtailed, leading to lower potential capacity and higher prices of fossil fuels. Instead, the Capex has shifted towards renewable energy, where both shifts in consumer preferences and legislatures such as governments commitment to phase out internal combustion engine powered automobiles has led to a spike in demand for green technology goods such as electric vehicles, however as capacity for this sector is still at its infancy, the supply squeeze is leading to higher prices for these goods. Thus, the consumer is facing both an increase in prices from both fossil fuel related goods as well as products that rely on clean energy.

For the transition to a greener economy, this is a perhaps a welcome development, provided central bank policy makers can manage inflation and not let inflation expectations runaway, and we as advocators for ESG investing should continue to focus on the long-term transformation of capital deployment to ESG investing at the expense of those companies that do not meet adequate ESG standards despite the short-term pain of higher inflationary pressures.

At this inflection point, it is worth considering where ESG will go moving forward by analyzing recent developments in ESG investing: (1) ongoing share gains for ESG-linked AUM, (2) further ‘thematic’ penetration, and (3) the expansion of passive in ESG.

1) Despite seeing slower share gains for ESG investment vehicles in 2021 as compared to 2020, ESG flows continue to punch well above its weight, noting that fund flows volatility is generally lower for ESG than for non-ESG flows. Looking forward, with the standardization of ESG regulations, ESG investments should continue to achieve share gains relative to non-ESG investments, albeit at a slower pace.

Exhibit 1: Flows to ESG Funds vs. Non-ESG funds
Source: Morningstar, Goldman Sachs Global Investment Research

2) Greater development in thematic ESG investments continues to help investor express specific ESG investing goals. While the share gains of thematic vs. non-thematic has slowed, the trend is set to continue with more mix of thematic approaches, providing a more comprehensive set of ESG solutions for the end investor.

3) When it comes to ESG investing, passive strategies are gaining more market share as compared to active managers, which means active managers can no longer rely on screening for high scoring ESG companies for target investment, but will need to add more value through looking for less obvious winners or become more adept at predicting future ESG trends to identify undervalued investment opportunities. (Bingham, D. R., et al., 2022)

Exhibit 2: Passive share gains of ESG investing
Source: Morningstar, Goldman Sachs Global Investment Research

For now, despite the recent shock to global capital markets of the unexpected conflict in eastern Europe, we as advocators of responsible investing should not be distracted but continue to press on and build on recent successes in ESG investing to continue the global transformation into a more sustainable and equitable world led by the capital markets.

REFERENCES

  • Bingham, D. R., et al, (2022), The 3 Shifts Driving ESG Fund Flows into 2022, Goldman Sachs Global Investment Research.

Understanding the Major Drivers of Biodiversity Loss in Asia

Michele Leung, Green Finance Advisor of Friends of the Earth (HK)

The first part of UN Biodiversity Conference (COP 15) took place last year and released the first official draft of a new Global Biodiversity Framework[1], which guides actions worldwide through 2030 to preserve and protect the nature, including specific targets relating to reducing threats to biodiversity.  The second part of COP 15 is scheduled this April, it is expected to be a game changer as more than 195 countries will set their 2030/2050 targets. Investors and corporates are paying closer attention to address negative impacts of their businesses on nature.

My fellow green advisors have previously highlighted the emerging risks in biodiversity loss, how it relates to business practices, as well as different reporting frameworks. This piece aims to explore how investors would do bottom-up analysis on high impact industries that are contributing to biodiversity loss.

To understand the impact of a company’s business on nature, the first step is to identify the main drivers of biodiversity loss, which are the land use, water stress and toxic emission & waste.  A previous research showed that 63% of Asia’s GDP is threatened by biodiversity and nature loss.[2] Looking at large and mid-cap Asian companies, for a total of 1945 constituents[3], Food Products and Metals & Mining are the two sectors that overlapped in all three main drivers, and these sectors play a critical role in biodiversity loss in Asia.

Food Products

Food production has a significant impact on surrounding ecosystem and existing land use practices. Livestock and soil farming trigger irreversible impacts on deforestation. There is a tradeoff between land use and impact on food production. It is especially true for the businesses operate in regions that are rich in natural reserves and would have high biodiversity impacts. For example, the palm oil operations in Malaysia and Indonesia are often alleged contributing to deforestation and loss of endangered wildlife. On the contrary, Thailand and Korea are the areas with lower level of sensitivity. Ideally, companies should have raw material sourcing policy and targets, and work with internationally recognized stakeholder groups to verify its biodiversity sustainability programs. 

In addition, food production is responsible for over 70% of global water withdrawal and over 90% of water consumption, which put another heavy burden on our nature. Good oversight of water management strategy and implementation of water reduction target will be the key for their success in managing the risk.

Investors should identify the food products companies that have material impacts on both land use and water stress, especially those with freshwater withdrawal intensities in multiples (i.e., from 3-17x) of the global leaders’ metrics.

Metals & Mining

Metals & Mining companies have high risks of pollution, in terms of air emissions, massive spills and acid mine drainage. The risk exposure can be assessed based on types of operations, the corresponding volume and toxicity of emissions and hazardous waste. It is crucial for companies to set up their own environmental management and auditing systems, furthermore, they should be able to come up with measurable and comparable metrics like Nitrogen Oxides (NOx) and Sulfur Oxides (SOx) emissions. These toxic emissions, as a result, would disturb the fragile ecosystems, from deforestation to the wider disruptions on ecosystems that depend on natural resources. Particularly for the mining operations that utilize surface mining techniques, it would pose risk of potential liability and regulatory costs. In this regard, companies should make their commitments and policies in minimizing the disturbances and protect the environment as well as the natural resources.  

In the region, concerns are being raised on Chinese mining companies and Indonesian coal companies. While Asian metals & mining companies in general have moderate toxic emission profiles comparing with the industry peers, some companies do stand out with higher-than-average emission intensities.

In conclusion, as investors report and assess their investee companies’ material impacts on nature and biodiversity, they should evaluate business activities, asset locations and management practices. On a holistic level, investors should work together and develop a simple and comparable biodiversity metric, which can enable them to identify industry leaders and laggards, and be integrated into their investment process, as well as portfolio level reporting.

Investors may also assess biodiversity performance by measuring company’s alignment to specific Sustainable Development Goals (SDGs), particularly #6 Clean Water, #12 Responsible Consumption and #14 Life Under Water. The alignment can be measured based on the products and services the companies offer, their practices and operations, as well as some of their past performance indicators.


[1] A New Global Framework for Managing Nature Through 2030: 1st Detailed Draft Agreement Debuts. https://www.un.org/sustainabledevelopment/blog/2021/07/a-new-global-framework-for-managing-nature-through-2030-1st-detailed-draft-agreement-debuts/

[2] “New Nature Economy: Asia’s Next Wave” by Temasek, 2019.

[3] Based on the benchmark MSCI AC Asia ex-Japan, data as of Feb 25, 2022.

ESG報告的效用

香港地球之友綠色金融顧問

大家談到ESG, 不同企業有不同的政策,不同的管理系統,但說到各個企業的ESG 表現,一般可作比較的,就是企業的ESG 報告。很多朋友常常問在下,ESG 報告是否真的有用?公司的披露是否可靠?投資人投資ESG 相關資產,是否真的對世界有貢獻?這是一個很複雜、難以用片言隻語回答的問題,不過在下卻很樂意舉一些例子以幫助大家思考。

香港鐵路有限公司,是一家上市公司,早在港交所於2016年開始要求強制披露ESG報告前十多年,已自願性每年以GRI標準發佈ESG報告,可以說是少數香港企業的ESG先鋒,一向是社會責任的典範。港鐵的ESG 報告,多年來在香港及國際獲獎無數,而在各個國際ESG評分標準中,亦一直獲得極高分數,在任何角度看來,港鐵都應該是令香港人引以為傲的模範學生。可惜,最近有一位藝術家程展緯,秘密化身進入港鐵當清潔工,發現港鐵對低層清潔工的社會責任極為惡劣,詳情大家可以參考報導。在下在此希望指出的是,ESG報告的原意是讓公眾能通過這份報告,了解公司過去一年的ESG表現,但現實是港鐵的ESG報告,一如以往的華麗,一如以往的獲獎無數,但我們作為公眾,不單止無法在這報告內看到港鐵的ESG真正表現,ESG報告也完全無法約制公司的內部管理行為。

再舉另一個例子,香港政府於2009年開始,推出膠袋收費計劃,當時效用立竿見影,在很短時間內,香港棄置在堆填區的膠袋數量大減。我們都知道,膠袋棄置數量完全取決於香港兩間最大連鎖超市,超市依法徵收五毫子,市民樂於環保守法,法例非常成功,打臉當時很多質疑法例的人。大家也應該知道,膠袋收費有豁免機制,我們如購買濕的鮮凍食品,超市會給我們一個很薄的小膠袋,來分隔其他貨品。這法例實行多年,一直效用顯著,沒有任何惡評。

但在數年前開始,超市不再用很薄的小膠袋作獨立分隔,取代的是派發原來收費實施前一模一樣大的膠袋,分別只是膠袋沒有印上超市商標。所以任何人只要買東西時,有任何一件是鮮凍產品,超市都會和未有收費條例前一樣派發膠袋。到最近,超市已沒有理會閣下是否有鮮凍產品了,只要你沒有自帶購物袋,就會自動給你膠袋。法例由行之有效,到超市完全無緣無故拆牆鬆綁,只經歷了三數年。政府可能從反修例到疫情,太多大事要做,我們每天人人可見的公然違例,政府也選擇視而不見。兩間超市的母公司,一所在香港上市,一所在倫敦及新加坡上市,他們都需要每年刊印ESG報告供公眾審閱,但很顯然,他們的ESG報告仍然獲獎,仍然得到機構高評分,原因不是因為他們ESG表現出色,而是因為他們財力雄厚,有能力選擇性披露一份華麗報告,另一方面卻公然利用灰色地帶違規。

寫到這裏,在下仍然不會說ESG完全沒有用途。事實上,ESG可以協助企業有系統地規劃ESG的內部政策,及定下目標去完成理想。在下手頭上不少客戶,也因為ESG條例開始,而大力推動內部改革,有些效果顯著,但如果認為ESG有約制功能,就有點兒天真了。

March 2022 Events on Green Finance/ 2022年3月綠色金融活動一覽

Check out the above calendar for the fantastic green finance events for March 2022! Interested to join and learn more about Green Finance? Browse the links below to check out the upcoming events.

以上一圖看清2022年3月精彩的綠色金融活動!如欲參加及了解上述活動,歡迎瀏覽以下網址:

[1] ESG Global

[2] Proxy Season 2022: tools and resources from the PRI on voting and collaboration

[3] AIGCC Report Launch – Pursuit of Ambitions: Net Zero Investment in Asia

[4] ESG Ratings Optimization

[5] The Impact Management Platform: managing impact for investments

[6] Redefining Sovereign ESG – does sovereign ESG need a new standard?