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

Visit www.foe.org.hk for more news about Friends of the Earth (HK)!
Green Finance Facebook page: https://www.facebook.com/greenfinancefoehk/
FoE (HK) LinkedIn page: https://www.linkedin.com/company/friends-of-the-earth-hk/