Earth Forum Special: How Are High-Impact Firms Doing in Low-carbon Transition?

World Benchmarking Alliance (WBA)

Three months into 2021, the world seems to slowly be moving towards a return to normalcy. In countries everywhere, people are expressing cautious optimism about our ability to collectively tackle the COVID-19 pandemic thanks to the determination and ingenuity of the scientific community, which has provided newfound hope through vaccination technology. And while concerns around vaccine equity remain high, recent developments – such as the agreement between rival US pharmaceutical companies, Johnson & Johnson and Merck, to collaborate on vaccine production – have reinvigorated perceptions of trust in the ability of institutions, including business, to contribute to a sustainable recovery.

Indeed, business has never been better positioned to rise to the occasion. The recently released 2021 Edelman Trust Barometer startlingly reveals that across 27 countries, business is the only trusted institution, placing higher than NGOs, government, and media on issues that include driving economic prosperity, encouraging long-term thinking over short-term profits, and embracing sustainable practices.

The regional findings of the report are similarly revealing. Consider China for example, where trust in business remains remarkably high, despite dropping 12 points between 2020 and 2021. This data is critical given the central role that business has to play in rebuilding our global economy and achieving the UN Sustainable Development Goals (SDGs). This is especially important in China, which makes up around 19% of global GDP and will be central to ensuring that nobody is left behind in the pursuit of a more sustainable future.

At the World Benchmarking Alliance (WBA), we are building a movement to measure and incentivize business performance towards this future through the development of free, publicly available benchmarks. Our work is rooted in seven systems transformations and focuses on how the world’s 2,000 most influential companies (SDG2000) can drive progress on this agenda across their value chains. These companies are global in nature, spanning 80 countries, employing 102 million people, and representing $46 trillion in revenue. 246 are directly headquartered in China but many more have indirect impact in China due to their supply chains or other business operations.

The global nature of these companies requires us to work in partnership with others to ensure that our benchmarks are built on best available science, reflect societal expectations, and positively influence company behavior. That’s why we are built as a diverse, multi-stakeholder Alliance of over 200 organizations representing business and industry platforms, financial institutions, reporting platforms and standards setters, civil society organizations, research and academia, multilateral bodies, and sustainability consultancies. And while our Allies are global, they are currently concentrated in the global north. With only three organizations currently based in China, our ability to influence Chinese companies, or business engagement in China more broadly, remains limited.

Earlier this year, WBA updated our SDG2000 and included – for the first time – a mapping of how these companies engage with our Allies as network members, platform signatories, assessed or benchmarked companies, and framework or standards reporters. Our analysis found that while 87% of companies were engaged with at least one Ally, only 276 of the 2,000 companies currently engage with five or more Allies. In China, this discrepancy is even more pronounced, with only 5 of the 246 Chinese companies engaging with five or more Allies, despite all of them engaging with at least one Ally. This data suggests that most companies, including those based in China, are insufficiently aware of the role partnerships play in achieving a more sustainable future. Given the magnitude of these companies and their impact across the SDG agenda, a multitude of partnerships is needed, requiring both companies and Allies to step up their mutual engagement.

WBA has been proud to work with Friends of the Earth (HK) over the past 18 months on strengthening our engagement with companies in China on this agenda. As our first Chinese-based Ally, FoE (HK) has been instrumental in supporting our efforts in the region. This includes convening dialogues and roundtables with Chinese utilities companies, for example, on needs and opportunities for increased ambition and action using the methodology and benchmark data from WBA’s Electric Utilities Benchmark. It also includes more targeted policy and advocacy engagement, including submitting a joint statement of support for mandatory emission disclosure by companies in response to the public consultation of the National Energy Administration’s 14th Five-Year Energy Planning Development. These efforts have been critical to laying the groundwork for more substantive engagement moving forward, including around the development of our Oil & Gas Benchmark later this year and on efforts to ensure a just transition in China on the road to decarbonization.

These efforts need be replicated, however, to achieve impact at scale in the region. In recent weeks, WBA has been proud to welcome two more Chinese-based Allies, Ascent Partners and Green Light Year – both of who we forward to working with over the coming years to help guide, and hold to account, Chinese companies for their performance.

As we begin to emerge from the worst of the crisis and transition towards rebuild and recovery, collaboration will be critical to restoring our trust in institutions, empowering business to lead, and ensuring a just and inclusive future for all.

To learn more, please register and join our First Earth Forum on 22 April 2021!


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恒生指數大變身

香港地球之友綠色金融顧問 黃思靈

恒生指數公司於3月1日公佈優化恒生指數諮詢總結的詳情,諮詢建議提出時有一條關於恒指成份股選股考慮的題目,但在總結報告裡並未有被提及。問的是:在挑選恒生指數成份股時,除了考慮市值、流動性和行業代表性外,還有什麼其他值得考慮的因素?由於收到關於這題目的回覆不多,所以也就沒有在諮詢總結裡特別滙報。有趣的是,當中有回覆人士提到加入ESG考量。

其實早在上一次諮詢時恒指公司已經提出過同樣的議題,不過觀乎兩次的諮詢結果,看來對香港來說,ESG仍然有待發展。有人建議對恒指候選公司設最低ESG評分要求,但由於目前社會裡未有一套廣泛接受的ESG評級,倉卒加入此條件似乎較為草率。同時亦有人士表示恒指作為市場指標,應以公司的市值、成交等客觀因素選股,ESG比較主觀且主題性,應另外編算相關標的,而非擾亂恒指的選樣方法。支持和反對兩方各有說法,但目前普遍認為此議題尚未成熟,應否或何時執行仍然有待商榷。

另外在本次諮詢總結裡,恒指公司亦提出把所有成份股的個股權重上限劃一至8%,就是說同股不同權和第二上市的成份股權重上限將從本來的5%提高至8%。同時由於恒指把上市歷史要求由2年縮短至3個月。新規下,估計會納入更多同股不同權和第二上市的公司。假設恒指加到80隻成份股,這些公司的整體比重將由目前約13%增至接近19%。

有人視同股不權和第二上市公司如同甘露,因它們大部份為新經濟企業,有無限發展空間。但亦有人憂慮這些公司的企業管治,不放心投資到它們身上。早前財政司司長陳茂波亦提到,正在研究是否允許特殊目的收購公司(SPAC)到港上市。而SPAC往往被稱為空白支票公司,為了與別家合併而透過首次公開上市(IPO)集資,因而能夠更快速上市,但可見對一般投資大眾而言風險可能更高。SPAC將來不知會否符合恒生指數的資格。或許恒指公司可考慮參考其他指數公司的做法,提供另外一條不含此等另類公司的恒生指數,讓各用家自行選擇,畢竟青菜蘿蔔,各有所愛,不用順得哥情失嫂

優化恒指最終五大方案

1. 擴大市埸覆蓋率
• 最終成份股數目固定為100隻,目標於2022年年中前增加至80隻成份股
2. 擴充行業的代表性
• 按7個行業組別選出成份股
3. 適時納入上市新股
• 縮短上市歷史要求至3個月
4. 保持香港公司代表性
• 維持20至25隻香港公司成份股
5. 改善成份股權重分佈
• 對所有成份股採用8%的權重上限

資料來源:恒生指數公司


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Is “ESG Investing” just a hype?

Serena Mak, Green Finance Advisor of Friends of the Earth (HK)

As more and more investors and governments are recognizing the importance of ESG, we are seeing continuous increase of sustainable and green investments. For example, there were around 265-300bn USD of green bonds issuance in 2020 alone, and social bonds has also taken a serious foothold with over 730bn USD of issuance. The sustainable debt market has grew over 27 times (!) since 2013.

With the exponential growth and interest, different voices has started to emerge, and the effect of lack of ESG reporting standards is also taking its toll. Issuers are being accused of ‘green washing’ (unsubstantiated claim / false impression created for investors that a corporate’s products or services are environmentally friendly, or ‘green’), and even within the same institution we can see opposing views of ESG.

Earlier in 2020, Blackrock’s CEO has issued his annual ‘letter to the CEOs’, where climate change is named as one of the top priorities that he believed that CEOs need to be thinking about. And just a week or two ago, Blackrock’s former chief investment officer for Sustainable Investing has published an opinion piece in a newspaper where he claimed that sustainable investing is “…little more than marketing hype, PR spin and disingenuous promises from the investment community.” If even the investment officer responsible for sustainable investing is saying this is a marketing hype, how should the investment community / retail investors / general public think about it?

In my opinion, just like any new topic that emerges through the evolution of world views, there is meant to be different voices (think about how the topic of gender equality has evolved in the past century, as one example). However, the important part to keep in mind is that at least we have to start noticing and discussing these critical issues such as carbon emission and global warming, which is exactly what the sustainability investing trend is driving at right now.

Standards may take time and global consensus to develop, but one thing does not change – the earth is waiting for us to take prompt actions to save itself (and all lives and resources in it) and it needs to start now. Let’s keep a clear and balanced mind, to make right investment decisions for the environment, and not be derailed or discouraged by the opposing views.

References:

https://www.blackrock.com/corporate/investor-relations/larry-fink-ceo-letter

https://www.usatoday.com/story/opinion/2021/03/16/wall-street-esg-sustainable-investing-greenwashing-column/6948923002/

https://www.climatebonds.net/2021/01/record-2695bn-green-issuance-2020-late-surge-sees-pandemic-year-pip-2019-total-3bn


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Bitcoin mining leads to huge consumption of electricity. Does it meet the ESG standard?

Green Finance Advisor of Friends of the Earth (HK)

Bitcoin’s energy use is “staggering” and becoming a worry for big investors as it conflicts with the new focus on environmental investing. In view of the above, we would like to take a high-level preliminary look on whether ESG and cryptocurrency are compatible investment strategies.

Environmental

The major environmental concerns of ESG relate to reducing the impact of climate change and ensuring sustainable development. It is a huge consumption of electricity for bitcoin mining and it is no secret that the process of validating transactions used by the leading cryptocurrencies such as Bitcoin, Ethereum and Litecoin is incredibly energy inefficient and generates vast amounts of carbon dioxide.

According to the Digiconomist website, Bitcoin mining alone generates as much CO2 as New Zealand, and uses as much electricity as Chile, even more electricity each year than Argentina and Ukraine due to the energy- intensive mining process.

According to Cambridge research, the inefficiency and waste look even worse compared to existing financial infrastructure. The CO2 produced processing one bitcoin transaction is the same as that generated processing 722,705 Visa card transactions.

Renewable Energy

The arguments used in favour of cryptocurrencies from an environmental perspective are that they mostly use renewable energy, and that their energy consumption acts as an incentive to develop more environmentally friendly forms of energy production. 

It is true that a significant proportion of Bitcoin mining is powered by renewables, according to research by the University of Cambridge, but the heavy concentration of Bitcoin mining in China demonstrates a great deal of mining is generated by burning coal and hence CO2 production. Others argue that bitcoin mining can be powered by renewable energy such as hydroelectric power or even wind power, however, the wind power will fluctuate from one minute to the next and may reduce the local bird population. In addition, there are also disadvantages of hydroelectric energy, causing environmental and social threats, such as damaged wildlife habitat, harmed water quality, obstructed fish migration, and diminished recreational benefits of rivers. In view of the above, there are major problems with reliance on renewable energy and hence it is not surprising that bitcoin miners would retreat to traditional sources of energy such as coal burning and shale oil.

In essence, investing in cryptocurrencies would impose challenges to the environment and create environmental concerns under the ESG framework.  Perhaps, more studies and research should be done in the near future as investing in cryptocurrencies has become increasingly popular in the financial world.


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Where Are We with ESG Regulations and Where Do We Need to Be?

Green Finance Advisor of Friends of the Earth (HK)

After a banner year for ESG investing in which flows into ESG related funds was at a record high, the heightened public awareness as a result of the pandemic and the election of a government serious about tackling climate change in the United States, it is perhaps prudent to take a look at where we are in terms of ESG regulation in different jurisdictions and what are the important areas remaining policymakers will need to legislate.

Exhibit 1: European Regulations – Current and Future Expected (Chetwode, S., Bingham, D., Tylenda, E., 2021)
Exhibit 2: Asian Regulations – Current and Future Expected (Chetwode, S., Bingham, D., Tylenda, E., 2021)
Exhibit 3: US Regulations – Current and Future Expected (Chetwode, S., Bingham, D., Tylenda, E., 2021)

Evident from the above summaries of the various regulations already in place and or are expected to be in place in the future in Europe, Asia, and the US, we can say that disclosure requirements are becoming the norm rather than the exception on the corporate side. For the investor, in the same vein, disclosure and some qualitative adherence to ESG compliance is required for the asset manager when choosing investments for large institutional investors. The net effect is such that those securities with appropriate ESG disclosure and are able to qualify compliance with the best practices enjoy more favorable investor scrutiny and which may even translate to lower funding costs.

However, all these capital markets reform may mean nothing in the fight against climate change if how we source our energy is not changed radically. Despite the seeming success in ESG investing, we are yet to see very concrete evidence that the world is moving away from the consumption of fossil fuels and towards renewable energy. This blogpost previously argued that the most effective way to push both producers and consumers away from carbon-based energy towards renewable energy is through the implementation of a cap-and-trade program, in which a price is attached to each ton of carbon produced in the energy production process, and thus allowing market forces of price and quantity, supply and demand drive the process of decarbonization.

In an interview with Michael Greenstone, Director of the Energy Policy Institute at the University of Chicago (EPIC), he highlights some of salient issues needing to be addressed in implementing a cap-and-trade program. The first issue is that the effective price on carbon in most parts of the United States and around the world today is basically zero, so the first and most important step is to raise the price of carbon towards the social cost of carbon. The second issue is that there is an exceptionally wide range of prices for carbon around the world, with Sweden’s price at around $125/ton to EU and California’s prices in the high-teens or low-20s/ton. The result is such that the average world price of carbon is around $2.50/ton, because most of the world has a price of zero. Thus, for any carbon pricing scheme to work in its drive towards decarbonization, the pressing issue is to have all of the governments around the world to commit to having a carbon price, instead of a price of zero, and the second even more difficult issue to resolve is to have a global price of carbon that can be agreed by all of the governments in the world. This second issue will obviously have detrimental implications for developing economies, since they have enormous energy demand but are at the same time less economically capable of paying for clean energy or a more expensive carbon adjusted fossil fuel energy. The success of any cap-and-trade scheme will hinge upon negotiations between developed and developing nations where subsidies in one form or another is made to the latter to participate in the global carbon pricing scheme, where it is understood that the future development of developing economies rather than stifling their growth feeds back to positive growth and economic development of developed economies. (Nathan, A., Galbraith, G., Grimberg, J., 2020.)

For policymakers, they should focus on (i) the enforcement of the carbon price on all economies; (ii) setting a standardized global carbon price; and (iii) negotiate with developing economies the appropriate carbon subsidy such that the global carbon price will not stifle their economic development, and achieve these economies’ buy-in into the carbon cap-and-trade scheme. The achievement of these goals should see a very tangible move in the effort towards decarbonisation of our energy supply chain.

REFERENCES

  • Chetwode, S., Bingham, D., Tylenda, E., (2021), “A look back at 2020 and outlook for 2021, in charts”, Goldman Sachs Global International Research
  • Nathan, A., Galbraith, G., Grimberg, J., (2020), “Investing in Climate Change”, Goldman Sachs Global International Research

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