Month: September 2024

[Certified ESG Analyst Insights Sharing] Delton Lau, CESGA 

Green bonds have become a viable and quantifiable fixed income option for facilitating a significant shift in the energy landscape. The willingness to engage, foster open discussions, and exchange best practices positions the green bond market as an area that governments and policymakers globally are eager to support. Following a phase of satisfactory returns and minimal volatility, sustainable bond funds faced challenges during the period of elevated interest rates. However, with major central banks such as the Federal Reserve (FED) and the European Central Bank (ECB) beginning to lower rates, the future prospects are becoming more favorable.

l   What Are Green Bonds & Sustainability-linked Bonds?

Green bonds are designed to generate funds specifically for the financing of new or existing projects that yield a beneficial effect on the environment. Such projects may encompass renewable energy, energy efficiency, waste management, sustainable transportation, and various other eco-friendly initiatives. In addition to green bonds, there exist other categories of sustainable bonds; for instance, social bonds are aimed at funding new projects and refinancing existing ones that have a positive social impact. These initiatives typically focus on assisting low-income, unemployed, or otherwise marginalized segments of the population.

On the other hand, sustainability-linked bonds (SLBs) possess structural characteristics, such as interest rates, that are contingent upon the attainment of sustainability objectives. Unlike green bonds, SLBs are not tied to the execution of a specific sustainability project. The funds raised through these bonds can be allocated for general purposes that align with a broader sustainability strategy, featuring measurable targets assessed annually. This category of bonds is considered the most versatile within the ESG fixed income market, as it may encompass environmental goals, social objectives, or a combination of both.

In 2023, approximately $870 billion in new sustainable bonds were issued globally, resulting in a total outstanding amount nearing a record $4.4 trillion by year-end, across more than 43,000 individual bonds worldwide, as reported by the non-profit Climate Bonds Initiative. (1)

l   Recent Funds and ETFs Exposed to Sustainable Bonds

There are approximately 300 bond funds and exchange-traded funds (ETFs) in Europe are categorized under Article 9 of the Sustainable Finance Disclosure Regulation (SFDR), which was implemented in March 2021. These funds are characterized by their focus on a “clear sustainable objective” and are commonly referred to as “dark green” strategies. (2)

The significance of Europe was reaffirmed last year, as it emerged as the largest provider of sustainable debt instruments, with a total issuance of $405 billion, accounting for 46% of the overall total in 2023. In the initial four months of the year, these funds experienced net inflows of EUR 4.2 billion, reflecting an organic growth rate of 5.4%, surpassing the 3.3% growth rate of the broader category of Europe-domiciled fixed income funds. By the end of April, the assets under management in these funds reached EUR 75 billion.

As of July 2024 (3), Germany led the issuance by country, with $24.41 billion in issuance volumes during the April to June quarter, followed closely by France at $22.65 billion and Italy at $15.54 billion. The United States ranked fourth, concluding the quarter with $14.39 billion in green debt issuance. Europe maintained its position as the largest regional issuer of green bonds, with $91.76 billion in green debt issued during the quarter, significantly outpacing the $31.24 billion issued by entities in the Asia-Pacific region and the $20.01 billion from North American entities. However, Europe’s issuance in the second quarter decreased from $108.03 billion recorded in the first quarter.

l   Latest outlook of Global Green Bond

Following the Federal Reserve (Fed) has kicked off the rate reduction in September. In light of the recent rising unemployment data and slowing down inflation trend, there is now an anticipation that the Fed may potentially lowering the federal funds rate to approximately 4.4% by the end of 2024. On the European front, the European Central Bank (ECB) has not indicated a definitive strategy for rate reductions following its initial cut in June. ECB President Christine Lagarde remarked that a decision in September remains “wide open,” noting that the risks to economic growth are “tilted to the downside.” She also indicated that inflation is expected to remain at current levels for the remainder of the year before decreasing in the latter half of 2025. The interplay of robust wage growth and subdued productivity in the Eurozone suggests that services inflation will likely stay elevated throughout most of this year. The recent uptick in growth momentum diminishes the immediate need for rate cuts. It is anticipated that the ECB will reduce the benchmark rate to 3% or below at the end of 2024. Europe, which accounted for nearly half of all global green bond issuances in 2023, is at the forefront of this recovery, as recent fund flow data indicates a resurgence of investor interest in this asset class.

The IMF eLibrary indicates that green bonds exhibit a longer average maturity compared to conventional bonds, with green bonds averaging 17 years and conventional bonds averaging 12.2 years (4). This trend supports the notion that green bonds can assist countries in extending the maturity profiles of their debt. The extended maturity aligns with the long-term return expectations associated with green investments. Given that green bonds typically possess a higher duration, they are more sensitive to fluctuations in interest rates. While this sensitivity can pose challenges during periods of rising rates, it can also yield advantages when rates decline. The green bond market is anticipated to continue its growth, primarily driven by institutional investors. Furthermore, the introduction of new standards for green bond issuance in the region, set to take effect in January 2025, is expected to enhance market transparency, comparability, and credibility, thereby facilitating the evaluation of issuers’ environmental, social, and governance practices. These new regulations mandate that at least 85% of deals align with the EU’s green taxonomy.

Nevertheless, the green bond market may encounter certain obstacles. Should Donald Trump secure victory in the upcoming US presidential election, some analysts speculate that he might withdraw the United States from the Paris Agreement on climate change. Additionally, investors must remain vigilant regarding the quality of each issuance and be cautious of marketing claims. A focus on selectivity and transparency is essential to ensure that the most relevant and impactful green projects receive adequate funding. As the market is still developing and grappling with issues of greenwashing, thorough research on issuers is vital for investors. Morningstar ratings provide valuable insights into the historical performance of these strategies (Star Rating) and offer projections on their future performance (Medalist Rating) in comparison to their category peers.

Source:

1. Morningstar: https://www.morningstar.co.uk/uk/news/250418/rate-cuts-may-boost-esg-bond-funds.aspx
2. Morningstar: https://www.morningstar.co.uk/uk/news/250348/green-bond-funds-attract-sustainable-flows.aspx
3. S&P Global: https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/global-green-bond-sales-may-pick-up-after-q2-dip-as-rate-cut-expectations-grow-82600130
4. IMFeLibrary: https://www.elibrary.imf.org/view/journals/001/2023/080/article-A001-en.xml

Article is written by EFFAS Certified Environmental, Social, and Governance Analyst (CESGA). CESGA is highly recognized in Europe and globally which has been steadily increasing in the worldwide. If interested in enrolling, please refer to https://bit.ly/3tFUQ1M

Ms. Serena Mak CESGA, Honorary Secretary & Board Governor of Friends of the Earth (HK)

For a company’s greenhouse gas (GHG) emissions, “Scope 3” (or value chain emissions)  often represent the largest portion . Yet these indirect emissions can be the most difficult to measure and cut down. At the recent Rethink conference, I had the fortune to moderate a panel with industry practitioners to explored the challenges and hear them share their experiences on tackling this topic.

Here’s a few key takeaways that resonated through the conversation with Fabrice from Palo IT, Athena from China Overseas Land, Sam from Reset Carbon, and Dipjay from Adidas.

80/20 rule applies when it comes to scope 3 emissions too

When it comes to measuring and monitoring scope 3 emissions, the 80/20 rule still works – i.e. conducting a materiality assessment will bring insights and make the topic much less daunting. Sam from Reset Carbon advises focusing on the hotspots, prioritizing areas where reductions will have the greatest impact and where your organization has the most influence. Also note imperfection is understandable too – it is important to start somewhere.

Engagement with stakeholders with incentives – the carrot, and the stick

Dipjay shared how Adidas engages its global supply chain in a staged approach. For initiatives that are feasible today and have an attractive business case, suppliers are given a set of environmental best practice guidelines to benchmark and follow. Where initiatives require a modest investment and hence a more rigorous testing of business cases, suppliers that takes the investment will be more favorably rated in the overall supplier scoring mechanism. 

One key thing I took away is how Dipjay emphasized the importance of treating suppliers as partners, “the relationship between a supplier and a brand is like a family”.

Development of digital enablers will be a lever to scope 3 emissions monitoring

Fabrice highlighted the importance of starting small with scope 3 reporting, focusing initially on a few key suppliers rather than attempting to cover all categories and geographies simultaneously (this is 80/20 rule + digital solution combined). The approach should be to start small, prove value, and then scale progressively. Tools such as IoT for real-time data, or API-based data collection platform, are existing solutions that can be deployed, even with more sophisticated tools like blockchain. 

Collaborate Through Industry Partnerships

Athena from China Overseas Land underscored the power of collaborating with industry partners to tackle scope 3 emissions, as your scope 3 is someone else’s scope 1 and 2. By working together to engage common suppliers, competitors can amplify their impact, with industry associations serving as neutral facilitators. China Overseas Land has successfully employed green leases and smart metering to align incentives with tenants and drive emissions reductions.

Most panelists spoke about the power of partnerships. From an industry-wide data sharing platform from Fabrice, to tenant engagement programs from Athena, then to real estate decarbonization initiatives shared by Sam, and to apparel sector’s industry initiatives shared by Dipjay – it is very apparent to me that a broad topic such as scope 3 emissions, would be most effectively tackled on industry-wide basis. After all, the challenges and levers that companies face in this topic in the same industry would likely be quite similar.

Shift the Mindset

Panelists acknowledged that scope 3 reporting can seem daunting but encouraged the audience to see it as an opportunity. By approaching value chain partners with curiosity and an open mind, companies can uncover inefficiencies, show innovation, and build trust. Decarbonization is a team sport requiring perseverance and cooperation.

I hope the audience took away practical tips to begin measuring their scope 3 footprint, engage suppliers and customers, and tap into emerging digital solutions.

Sustainability is a Team Sport

The Rethink forum provided a valuable opportunity to connect with peers to share challenges and best practices.

I quoted this from Dipjay a few times – and maybe as I have also shared in another forum, it takes a village to move the needle on sustainability. It’s great to see the Rethink forum evolving and this year I can see many solution providers from IoT to data visualization and to showcasing some newer technologies. Really looking forward to see the growth of the sustainability village!

香港地球之友綠色金融顧問

竹子——這種遍布亞洲和太平洋地區的堅韌多功能草本植物，具有快速生長和顯著碳吸收的特點。這使它成為解決發展中國家金融普惠、可負擔住房和經濟韌性問題的潛在關鍵。通過將現代技術與竹子種植相結合，我們可以在推動經濟發展的同時，減少對環境的影響。

在許多發展中國家，獲得金融服務仍然是一個挑戰，尤其是對於低收入、未受銀行服務或保障不足的個人和家庭而言。傳統的住房解決方案不僅成本高昂，而且通常不環保，進一步加劇了住房短缺和環境退化的問題。此外，包容性經濟增長也受到過時技術、投資不足和政策缺陷的阻礙。應對氣候變化的迫切需求使這些挑戰更加複雜，許多發展中國家難以在經濟發展和環境保護之間取得平衡。

這些相互關聯的問題需要創新的解決方案，能夠同時解決金融普惠、住房可負擔性、經濟增長和環境可持續性等問題。而竹子，或許就是解決這些問題的關鍵所在。

以下是竹子在這些領域（特別是在發展中國家）發揮變革作用的五種方式：

1. 利用金融科技釋放竹子的金融潛力：將竹子作為一種安全、有價值且可交易的資產，通過使用衛星和無人機獲取的地理編碼和地理空間數據，再結合人工智能技術，可以精確評估竹子資產的價值和未來現金流。這對於抵押評估、獲得信貸、有效管理風險和吸引投資者至關重要。金融科技創新可以提高數字素養，從而增加技術採用、優化金融產品設計、提高效率並提供實時數據。
2. 增加可負擔和可持續住房的供給：竹子的快速生長和碳吸收能力使其成為理想的可負擔和可持續住房材料。竹子住房可以推廣綠色建築，減少森林砍伐，緩解氣候變化。它提供優質住房，改善健康狀況，增強抗災能力，促進社會包容。此外，竹子的本地供應和種植可以創造農村就業機會，支持地方經濟和原住民社區。
3. 支持經濟增長和環境可持續性：竹子加工可以生產高價值產品，如地板、紡織品和紙張，提高市場價值，支持經濟發展。對研發的投資可以創新竹子產品，實現市場多元化，為中小企業創造機會。質量控制措施可以確保高標準，吸引注重環保的消費者。竹子的堅固靈活性可以抵禦自然災害，其天然絕緣性能可以打造節能建築，進一步提高可持續性。
4. 有助於緩解氣候變化：竹子的快速生長可以捕獲大量二氧化碳，為緩解氣候變化做出重大貢獻。當用於建築時，竹子可以延長碳儲存時間，降低溫室氣體濃度。竹子可以替代鋼鐵和混凝土，減少排放，並通過再造林增強土壤穩定性和生物多樣性。利用竹子的住房項目可以產生有價值的碳信用額，可以出售給致力於抵消排放的公司和政府，或在碳市場上交易，為可持續竹林提供財務支持。
5. 通過替代數據增強金融健康：地理編碼和地理空間數據，再加上人工智能，可以提供準確的竹子資產估值，幫助財務管理和規劃。這種數據驅動的方法允許精確評估資產、預測未來收入和有效管理風險。人工智能平台可以實時監控財務健康指標，發送警報和建議，以維持財務穩定。保險公司可以使用無人機和地理空間數據來評估風險，提供定制保險產品，包括在自然災害中快速理賠。

通過利用竹子的優勢，將其與現代技術相結合，發展中國家可以創建一個更加普惠的金融生態系統，支持可持續的經濟發展和韌性。但首要的是，我們需要將竹子打造成一種安全、有價值且可交易的資產。竹子有潛力在發展中國家從根本上改變金融、住房和可持續性。

Check out the above calendar for the fantastic green finance events for Sep 2024! Interested to join and know more about the events? Click the links below for details:

以上兩圖看清2024年9月精彩的綠色金融活動！如欲參加及了解活動詳情，歡迎瀏覽以下網址:

11 Sep [1] ACGA-PRI webinar: Corporate Governance in Asia-Pacific – A New Order?

11 Sep [2] Climate Resilience and Adaptation Dialogue with Financial Industry Leaders

12 Sep [3] Transforming Asia: Mobilising finance at speed and scale

12 Sep [4] State of the transition: Analysing the pathways to net zero

12-13 Sep [5] ReThink HK 2024 – Sustainable Business Forum & Solutions Expo

16 Sep [6] HKMA – DFSA Joint Climate Finance Conference: Building a Net-zero Asia – Middle East Corridor

19 Sep [7] IPR Quarterly Briefing: Q3 & Deep Dive – Forecasting the Climate Transition

19 Sep [8] The evolution of climate investing: what are investors looking for?

24 – 27 Sep [9] 6th United Nations Responsible Business and Human Rights Forum – The Remedy Blueprint: Bridging Gaps and Accelerating Access

Green Finance Advisor of Friends of the Earth (HK)

The APAC Climate Action Progress Report by MSCI ESG Research delves into the critical aspects of climate action in the Asia-Pacific region, focusing on emissions reporting, climate targets, transition risks, and opportunities. The report underscores the pressing need for corporations in the region to address climate change effectively, given the escalating global temperatures and the associated physical risks.

Asia-Pacific economies have experienced significant growth in recent years, contributing substantially to global GDP. However, this growth has come at a cost, with the region heavily reliant on fossil-fuel-powered generation, accounting for over 40% of global greenhouse gas emissions in 2023. This reliance poses challenges, particularly in the face of increasing climate-related risks such as coastal flooding and extreme heat, which could have severe implications for economic hubs in the region.

To combat these challenges, governments in the Asia-Pacific region have intensified their regulatory efforts to define decarbonization pathways. Many APAC markets have committed to nationally determined contributions under the Paris Agreement and are working towards achieving net-zero emissions by around mid-century. These targets often hinge on international financial support, highlighting the interconnected nature of global climate action.

The report emphasizes the role of corporations in driving climate action forward. It highlights the increasing trend of emissions reporting and the setting of climate targets among APAC companies. This shift towards transparency and accountability is crucial for measuring progress towards decarbonization goals. While larger corporations are leading the way in this regard, smaller and mid-cap firms are lagging behind. However, as they face mounting investor pressures and regulatory requirements, there is a growing demand for these companies to disclose their emissions and set climate targets.

In the realm of energy transition, the report discusses the shifting energy mix for utilities in the Asia-Pacific region. APAC utilities are gradually transitioning towards renewable energy sources while still maintaining coal-fired electricity generation capacity. Factors such as energy security and affordability play a significant role in determining the pace of this transition. The early retirement of coal-powered plants is identified as a crucial step for utilities to align with net-zero pathways and reduce their carbon footprint effectively.

Moreover, the report sheds light on the innovation and deployment of clean technologies by APAC corporations. These companies have emerged as key players in driving clean-tech innovation, with some industry leaders leveraging their supply chains to scale up the deployment of clean technologies and accelerate research and development efforts. The adoption of clean technologies, such as hydrogen fuels, presents a significant opportunity for companies in the region, especially with potential government subsidies and tax credits to support these endeavors.

The report also delves into the financial implications of climate change for APAC corporations. It introduces the Climate Value-at-Risk (Climate VaR) model, which assesses the potential financial losses due to physical climate hazards under different emissions scenarios. In a worst-case scenario where global temperatures rise to 5°C above preindustrial levels, the estimated discounted loss due to physical risk hazards could amount to a substantial portion of the enterprise value of companies in the MSCI AC Asia Pacific Investable Market Index (IMI). This underscores the urgent need for robust climate action to mitigate these risks effectively.

In conclusion, the APAC Climate Action Progress Report by MSCI ESG Research paints a comprehensive picture of the climate challenges and opportunities facing corporations in the Asia-Pacific region. It highlights the increasing momentum towards sustainability, driven by regulatory changes, investor demands, and the imperative to address climate-related risks proactively. The report emphasizes the importance of transparent emissions reporting, ambitious climate targets, and the adoption of clean technologies as key pillars in the region’s journey towards a more sustainable and resilient future.

References

MSCI ESG Research, APAC Climate Action Progress Report