SUSTAINABLE BUSINESS REVIEW
GREEN FINANCE • INNOVATION • ECONOMICS
Don't Judge A Book By Its Cover
ECONOMICS Why we need quantifiable green metrics
TECHNOLOGY & INNOVATION Tackling food waste with mobile tech
GREEN FINANCE The rise and acquisition of sustainability
INVESTMENT Equity Research Report on Tilt Renewables
IN COLLABORATION WITH
About us The Sustainable Business Review is the UK's first student-led quarterly magazine producing thought-provoking opinion pieces around green finance, environmental economics and innovation. We aim to bridge the gap between corporates and students when discussing sustainability, and want to inspire the next generation of environmentally-driven leaders. We are a team of economists, engineers and business students, and we hope that you find our content insightful and it equips you with the knowledge to help gain a new perspective on our world.
Lead Editors
Professional Guests
Committee
Malaika Cornelio Economics Lead Janina Gleed Economics Lead Rebecca Harrison Innovation Lead Grace De Bohun Finance Lead Jamie Alexander Finance Lead
Jessica Long Head of Sustainability - UK at Ipsos Mori Alex Merkulov Director of Fixed Income Strategy at BlackRock Andrew Bacon OBE CEO of Enactus UK
Abdur Choudhury President Nathan Howell Vice President Laura Loboda Marketing Director Shabbir Farooqi Treasurer Asim Ali Sponsorship Director
Economics Authors
Innovation Authors
Finance Authors
Mihir Shah Dominique Gomez Sania Zaffer Jack Roycroft-Sherry Advait Vaidya
Maxine Miller Rachel Irwin Federico Scolari
Ed Cox Sebastian Thomas Asha Pandit Luke Parsons Vasilios Kyriacou
Gekko Investments Analyst Patrick Harris
Special thanks to Azizul Khan
About Green Finance Discover the world of ESG, corporates and financial markets all in one place. We aim to discuss topics such as green bonds, equities, global relations, company initiatives and investing.
About Innovation
About Economics
Unearth the link between the low Explore the interplay between carbon economy and innovations in economic theory and the technology. We aim to discuss topics environment. We aim to discuss such as renewable energy, deep topics such as inequality, sustainable tech, agriculture, infrastructure and growth, developing economies, and Contact us to have your firm featured on our magazine. fashion. government policies.
ABOUT | 1
Contents
Sustainable Business Review Issue 3
Economics 5 8 12 14 17 20
Business & Government's Sustainability Efforts - Interview with Jessica Long Why We Need Quantifiable Green Metrics Technology: A Threat or an Opportunity for Sustainability? Is Green Hydrogen the Path to a Carbon Neutral Economy? Hitting the 'Green Ceiling': What about Economic Growth? Beyond GDP: Growing Past Old Measures
Innovation On the cover Our cover page focuses on the idea that looks can being deceiving when it comes to analysing firms. Although many corporates have made great strides to working towards sustainability targets in 2020, there are still notable laggards in brown industries who are yet to commit to any serious carbon neutrality efforts. The green bond standard There is an urgent need to improve quantifiable green metrics, due to various issues within equity and bond markets, page 8. Are mobile apps the answer? The level of food waste has hit unprecedent levels - could mobile apps pose a potential solution, or do their limitations mean alternatives should be pursued, page 23. M&A and ESG With M&A having a recent resurgence, could it play a role in improving the sustainability of laggard firms, page 35.
23 Tackling Food Waste With Mobile Tech 27 Re-using Christmas Trees for an Evergreen Future 29 An Algorithmic Green Recovery
Green Finance 32 Launching ESG Funds and Sustainable Policies - Interview with Alex Merkulov 35 The Rise and Acquisition of Sustainability 38 All That Glitters Is Not Gold 40 The Climate Minsky Moment 42 Back to Black: Exxon Hopes it Can Drill to Victory 45 Looking Beyond Carbon: The Rise of Natural Capital
Investment 47 ESG Equity Research Report on Tilt Renewables 53 Climate Change Report by Invesco
Article from Andrew Bacon OBE
Q&A with Jessica Long
Q&A with Alex Merkulov
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Page 5
Page 32
@nottinghamgesoc
www.linkedin.com/company/nottsges nottinghamgesoc@gmail.com
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The race to carbon zero: The challenges ahead
While government policy and media focus shines a light on the challenges and investment into homes and industry, what is happening to address our most challenging obstacle? Agriculture – the hardest sector to abate. And how can social enterprise be a part of the solution? By Andrew Bacon OBE, CEO Enactus UK
In December 2019, the European Commission produced an ambitious proposal for all member states to achieve carbon-neutrality by 2050. In December 2020, the Sustainable Development Solutions Network and the Institute for European Environmental Policy produced an updated report on meeting the Sustainable Development goals in the face of the COVID-19 pandemic. The ambition to reduce carbon emissions to zero, or at least carbon neutrality, underpins many of the individual development goals. Even without the impact of the pandemic, achieving the European Union's climate goals would require a major improvement on the current performance of all member states and the organisations whose commercial interests span them. Since the investment needed and the impacts of the required transition will be unevenly distributed and create differing challenges for many individual companies and organisations, it will be important to ensure that the most challenging sectors are not left behind while the focus is placed on the ‘low hanging fruit’. Clearly sectors will differ as will the role that each member state plays in the post-pandemic carbon footprint. It is surely positive news that it is predicted by some analysts (McKinsey & Company – Net Zero Europe) that the Transportation sector will approach climate neutrality by 2045. Although Electric Vehicles are already in the stages of early adoption, it is thought it will still take ten years or more to set up the infrastructure to support adoption at 100 percent EV sales. The adoption of hybrid vehicles will fragment and delay adoption for 100% EV. Aircraft and shipping however, are different challenges and must opt for the more expensive solutions such as switching to biofuels, ammonia, or synthetic fuels.
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1.
Buildings
Most of the technology, products and supply chain required to decarbonize the Buildings sector is already available if not affordable for the average dwelling owner without government subsidies. However, it is thought that renovating large portions of the European Union’s building stock is not to be assumed a demand-driven process. For example, the share of offices, factories and dwellings using renewable heating sources would need to increase to 100 percent from just 35 percent today. Gas usage in buildings would also need to fall by more than half. To meet overall goals, the buildings sector ideally would need to reach netzero in the late 2040s according to the report.
2.
3.
Agriculture
Agriculture - Using more energy and carbon efficient farming practices could reduce agricultural emissions but it is by far the hardest sector to abate because more than half of agriculture emissions come from raising animals for food and can't be reduced without significant changes in meat consumption or technological breakthroughs. But are there other cost-optimal ways of reducing emissions?
Industry
The most expensive sector to decarbonise - Industry would need solutions and technology that are still under development. As a result, it would probably only reach netzero by 2050. Even then, the sector would continue to generate some residual emissions from activities such as waste management and heavy manufacturing, which would have to be offset.
Without intervention, European Union agriculture emissions are projected to drop only 3 percent by 2050, according to the United Nation’s Food and Agriculture Organisation. We need to focus more on animal digestion processes and emissions across the EU-27 and make them financially sustainable for all farmers.
Reducing agricultural emissions is particularly challenging and there is currently no solution that can 100% prevent enteric methane emissions from cows. The most advanced feed additives are expected to reduce methane emissions by 30 to 40 percent. Then there is the issue of there being more than 10 million farms that would need to change their practices and find the finance to fund such additives
purchased commercially without subsidies. Changing the practices of millions of farmers takes time given the need to create the right incentives and to build new skills and processes. Working with retailers and food producers, farmers must balance a range of goals including production (to both fulfil nutritional needs and ensure food security), rural welfare, and sociocultural and landscape heritage.
Enactus UK launched the ‘Race to Carbon Zero’ to help accelerate research and solutions into action. The aim of the race was to inspire students to develop and deliver financially sustainable impact projects in a social enterprise context. One such project is the result of student-led innovation from the University of Nottingham and their Enactus Nottingham team with their project EcoThrive. The project is split into three core parts. First, the personal carbon calculator and fundraising/offset platform engages individuals looking to address their personal carbon footprints in a direct and visible way. The development of Enactus Nottingham’s ‘Carbon Cow-culater’ is going well and will launch a pilot test in the week commencing 7th December 2020. People sponsor a donkey so why not a low carbon cow? The second part of the project is the supplement development where
three potential routes include microalgae, seaweed supplement and fumaric acid. The team are working with researchers from the university on their very own working dairy farm to develop the possibility around all three in terms of a pilot. Challenges exist in how to grow seaweed sustainably on the farm as the water filtration and area size needed for the finished product is huge. This has led the team to look at microalgae. The third part of the project is the development and marketing of a low carbon product range for dairy products working with Arla Foods and ASDA. The team have started to conduct market research on the thoughts of customers around a low carbon or carbon free product range. Perhaps there are opportunities to change some of the negative views of people towards eating and drinking meat and dairy? This would certainly not be the first time with Burger King having previously launched its Whopper range with a stated 3% methane reduction in its supply chain. Enactus Nottingham and EcoThrive is in good company. Social Enterprises, start-ups and organisations looking to have a wide impact socially and for the benefit of the environment across Europe, are in full swing to make cows as low carbon as possible.
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Q&A Jessica Long Head of Sustainability at Ipsos Mori
Jessica Long Would you please introduce yourself and give us a little background on how you got where you are? My background is in international development, which is basically social policy and the study of economics of developing countries and how to leverage social initiatives to help marginalised and vulnerable people. I graduated from university in 2006, so right before the recession. I didn’t have any jobs lined up, so I took a gap year and that’s when I fell in love with international development. That took me to London eventually in 2010, when I got my masters from LSE. I did some work in the House of Lords, where I also managed to work directly with
As an agency, we track our own carbon emissions and partner with a number of small NGOs or even consultancies some Heads of State which was very exciting. I wanted to stay in London eventually so I needed to have a VISA lined up, which led to me doing some work in social purpose and market research. I started out with an agency for a couple of years, working with Nike Foundation using peer-to-peer research in Sub-Saharan Africa. The more I got exposed to this work the more involved I got with sustainability, but it wasn’t something I focused on specifically. When we talk about sustainability, most people really only think of the Environment but there’s also the Social and good Governance side of things as well. I started to see these things line up and that led to me working at Ipsos for the last 2 years, I just kind of fell into this role as we did a lot of Environmental and Social work across Ipsos but there wasn’t a joined
up unit sharing information across the firm. Our CEO then said this focus on the environment wasn’t going away soon, he thought before the pandemic happened that this year was going to be the time of mass climate action due to growing global concern. That was really the driving force behind what we now call Ipsos Green Economy. Can you expand on what role market researchers such as Ipsos MORI have in driving change and maybe an example where Ipsos Mori has lived up to its mission this year? As an agency, we track our own carbon emissions and partner with a number of small NGOs or even consultancies which are actually working in this space. However, the real big challenge in our role as market researchers is to be the objective voice for the public. What we can’t be is activists, as at the end of the day our clients come to us and say “tell us what the public really want” and if it looks like we have a slant or bias in our approach, then we undermine our credibility. We saw from our global trend survey in 2019, climate change was the number one concern of the public. There was also a rising concern of what we call “climate antagonists” who are sick of hearing about the environment, which does tend to skew to the older generation. We also have to be mindful of these people, as they can often be sitting in the C-suite of businesses or be relatively high up at government level and not quite as engaged with the climate change movement. They know they have to do something as they don’t want to be left behind or become outdated, so at the end of the day they need to listen to the opinions of the public. I think one element of our role is being able to distil the voice of the consumer. Another is to work and
help become the communicator and educator in the space. It’s very difficult for our clients in both industry and government to wrap their heads around these complex issues. One example is recycling of packaging, there are over 87 different labels in the UK which is very confusing as a consumer to know which one to pick. Consumers sometimes have to weigh up environmental vs social concerns, or social concerns vs governance concerns and these decisions can be really difficult to navigate even if they care about a topic. This is where we come in, to help guide people through this really confusing space. One issue that frequently arises is the gap between attitudes and behaviour, or what people say versus what they do. Some people suggest consumers must take on responsibility to address this gap, others point towards behavioural nudges to facilitate this closure of the ‘say-do’ gap. How does this ‘say-do’ gap pertain to sustainability and how, in your opinion, can we navigate this complicated space? The say-do gap comes up in a lot of conversations. I personally feel we need to move away from nudges and more towards navigation due to how complicated the space is. The other challenge is who should actually enact change. So far the dialogue has mostly focused on the general public and how we can make the public take action. From our research, we found that most people already feel like they are doing as much as they possibly can and their intent to live more sustainably is very high but the actual level of this is mostly unchanged over the past few years. We have seen concern for the environment skyrocket, but a major reason for the level of sustainability remaining relatively constant is that they don’t believe the impetus should
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Jessica Long
be on them to change and it should instead be on the government and industry. We actually just published a study with EDF which found that 75% of the public believe that the government should be the ones leading this change. Government and industry both have a mandate to act and they don’t really require anyone’s permission to do so.
75% of the public believe that the government should be the ones leading this change For example the congestion charge in London was just implemented without a referendum or anything like that, and has shown tremendous value in reducing emissions. Now they are considering expanding the congestion zone, which is now causing lots of debate as people feel it is unfair that they should be charged to drive for a small amount of time. We need to reframe the way we look at the say-do gap and decide if we are focusing more on nudges, are we focusing on navigation and are we focused on keeping it fair for the general public. How has what businesses ask from Ipsos changed over the years? We’re lucky at Ipsos as we also have a consultancy arm. Some of the businesses who are still refining their sustainability offering, they are needing more
than just research. They also need some consultancy work on helping them with their strategy and how they should approach these complex issues. Another challenge is that businesses who are slightly behind with their progression on sustainability issues want to start by advertising what change they are doing before really starting on the work. We are helping businesses shift away from just communicating what they are doing and talking to them about what they actually need to be doing from our research so they don’t just start a plan that won’t work. What would your advice be to an Undergraduate interested in pursuing a career in sustainability or becoming an Economics contributor at a reputable market research company like Ipsos Mori? I’ve been really fortunate that I’ve worked in the voluntary sector, the public sector and the private sector. I’m really glad that I did this, as it’s given me a real insight into what’s fundamentally important to businesses and governments and how they work. They don’t speak to one another often and understanding what is important to each of these very distinct entities is actually integral to working in sustainability. When speaking with government clients or private clients, I’ve been able to draw upon where everyone is coming from and this has been really helpful for me. I would really encourage people interested in working within the sector to get some private-sector and public-sector experience so they can have a real breadth of lessons learned and best practices to expand on as they move forward with working in sustainability.
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ECONOMICS
The Green Bond Standard
Why we need quantifiable green metrics by Jack Roycroft-Sherry
ALSO IN THIS SECTION
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Is green hydrogen the path to a carbon neutral economy?
17
Hitting the 'green ceiling': what about economic growth?
FEATURED
ECONOMICS
Why we need quantifiable green metrics By Jack Roycroft-Sherry Sometimes investors and stakeholders want to see the broad picture of a business. Other times they desire a fine, detailed portrait, analysing technical minutiae and fundamentals. Whichever way a business can be painted, the paints used are numbers. Numerical figures and statistics. We put our faith in them. They make businesses accountable and transparent. Whatever a business does, its results can be converted into a manuscript of accounting that makes its position clear. There is an exception: its influence on the world’s environment and its citizens. To understand the impact of a business' processes on the environment, more quantifiable data is required. We need governments and regulatory bodies to step up and enforce stricter and clearer guidelines for documenting environmental, social and governance (ESG) factors of a business. Quantifying the carbon footprint of a supply chain in tonnes, for example, would go a long way towards calculating the full environmental impact of a business venture.
The problem of tracking businesses A method at present purported to qualify carbon performance are ESG ratings. ‘At least $3trn of institutional assets now track ESG scores, and the share is rising quickly’ (The Economist, 2019 (1)). ESG exchange-traded funds can promote large scale investment into green projects, the likes of which will be crucial for timely success in battling climate change. Rating agencies track a medley of metrics to gauge ESG scores. These scores, however, are often largely subjective (Nauman, 2020). ‘ESG-rating firms disagree about which companies are good or bad.’ (The Economist 2019 (2)) One ratings agency may rate a firm highly in terms of ESG criteria, whilst another rates that same firm far less generously (see Figure 1). ESG criteria are often unquantifiable, vague and arbitrary. In FTSE Russell’s ESG rating, Tesla, an electricvehicle maker, does worse than firms producing fossil fuel consuming vehicles (The Economist, 2019 (3)). It is therefore no wonder such ESG scores fail to be meaningful. There are also few regulatory requirements for companies disclosing ESG data, therefore rating agencies must rely on
Figure 1 (The Economist, 2019) third-party data sources and proprietary information to judge the businesses (Nauman, 2020). As of now, bigger firms with larger funding can afford better disclosure, often giving them better ESG scores. Sloppy outcomes are unsurprising.
A dilemma of classification in bond markets Green bonds suffer a similar fate due to a lack of uniform standards. The European Central Bank is considering buying a greater proportion of green bonds in future rounds of bond purchases amidst pressure to meet their obligations to fight climate change (Khalaf and Arnold, 2020). Issuers of green bonds would find it easier to raise funding if this came to fruition (Fitch Ratings, 2020). Yet there is the risk of funding projects that fail to achieve positive environmental and social change, or ones which never intended such outcomes in the first place, because there is as yet no EU legislation in place specifying the requirements for debt instruments to qualify as green bonds (Guttenberg and Mack, 2020). The European Commission’s Technical Expert Group on Sustainable Finance, an advisory group, has proposed WHY WE NEED QUANTIFIABLE GREEN METRICS | 9
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an EU Green Bond Standard. It would determine whether a bond can be classified as green or not (Guttenberg and Mack, 2020). This is promising. The draft green bond standard would use the EU Taxonomy Regulation where a bond is classified as ‘green’ if it clears the bar set for an activity to be sustainable (Guttenberg and Mack, 2020). But why not improve bond standards a step further and qualify just how green, how beneficial, a prospective bond is? This would further incentivise positive action and help investors differentiate between projects effectively (see Figure 2). More carrot and less stick could prove beneficial. It could help avoid new guidelines being a mere tick-box exercise. Shareholders’ perspectives could thus be sculpted to perceive ESG improvement as a way to improve the foundations of the business, rather than as a burden to be overcome.
Solutions By 2025 climate risk assessments will be mandatory across the UK (Leslie Hook and Matthew Vincent, 2020). Disclosure is often poor when it is optional. This, then, is a step forward. But new rules will not require firms to disclose the emissions generated by the products they sell or from their supply chains (Hook and Vincent, 2020). The problems laid bare here could be solved if governments were to set firmer regulatory requirements for judging ESG factors. More numerically orientated targets, along with provisions to regulate and facilitate good practice, may force shareholders to assign the same importance to ESG goals as financial goals. In a statistical utopia, a business would be able to track its net carbon footprint across all its operations, from emissions within the supply chain to the impact of all combined stakeholders, as well as from the consumption and production of end products. If institutions wail at the potentially high costs of such a procedure, then uniform, defined ESG metrics could remedy most of the damage. Perhaps governments should intervene in funding disclosure for the new metrics they
Figure 2: What an improved green bond might look like. require to be accounted for. Especially because figures are often disclosed too late to be useful. There would be nowhere to hide if the government took decisive action.
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References The Economist. 2019 (1) Poor Scores: Climate Change Has Made ESG A Force In Investing. [online] Available at: <https://www.economist.com/financeand-economics/2019/12/07/climate-change-has-made-esg-a-force-ininvesting> [Accessed 10 November 2020].
Guttenberg, L. and Mack, S., 2020. Building EU Green Bonds That Deserve Their Name. [online] Hertieschool-f4e6.kxcdn.com. Available at: <https://www.delorscentre.eu/en/publications/detail/publication/buildingeu-green-bonds-that-deserve-their-name> [Accessed 13 November 2020].
The Economist. 2019 (2) Poor Scores: Climate Change Has Made ESG A Force In Investing. [online] Available at: <https://www.economist.com/financeand-economics/2019/12/07/climate-change-has-made-esg-a-force-ininvesting> [Accessed 10 November 2020].The Economist. 2019 (3)
Khalaf, R. and Arnold, M., 2020. Lagarde Puts Green Policy Top Of Agenda In ECB Bond Buying. [online] Ft.com. Available at: <https://www.ft.com/content/f776ea60-2b84-4b72-9765-2c084bff6e32> [Accessed 23 November 2020].Leslie Hook, L. and Matthew Vincent, M., 2020.
Poor Scores: Climate Change Has Made ESG A Force In Investing. [online] Available at: <https://www.economist.com/finance-andeconomics/2019/12/07/climate-change-has-made-esg-a-force-in-investing> [Accessed 10 November 2020].Fitchratings.com. 2020.
Green Business Reporting Rules At Risk Of Pale Response. [online] Ft.com. Available at: <https://www.ft.com/content/ad01f2c9-9eb0-4db6-9898220c688d16c2> [Accessed 23 November 2020].Nauman, B., 2020.
ECB's Green Bonds Buying To Boost Eligible Issuers' Liquidity. [online] Available at: <https://www.fitchratings.com/research/banks/ecb-greenbonds-buying-to-boost-eligible-issuers-liquidity-09-07-2020> [Accessed 17 November 2020].
How To Separate The Good From The Bad And Ugly ESG Funds. [online] Ft.com. Available at: <https://www.ft.com/content/a0dcaf41-cc2e-401c9742-24544fd97524> [Accessed 11 November 2020].Nauman, B., 2020. ESG Surges As Investors Search For Better Corporate Citizens. [online] Ft.com. Available at: <https://www.ft.com/content/20f6c929-2fbf-47d5-973c8c18607fc604> [Accessed 12 November 2020].
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Technology: A Threat or an Opportunity for Sustainability? By Sania Zaffer Technology is viewed as an essential tool in today’s world, and its popularity is on an unstoppable rise. While its importance in day to day and professional situations is well acknowledged, the extent to which we rely on technology was highlighted during the COVID-19 pandemic where many people turned to technology to maintain a sense of normality in their lives. Needless to say, technology has a huge impact on our daily lives. While being such a large part of innovation, technology struggles to maintain integrity regarding its sustainability while balancing high levels of growth. The overconsumption of technology products alongside the use of unsustainable commodities in production diminishes the image of technology as being sustainable. Despite this, technology can assist in the advancement of sustainability practices. Therefore, the question remains; is technology a threat or an opportunity for sustainability?
Technology as a Threat Technology, an established essential good in today’s world, has a significant impact on the environment through its production and sourcing of materials, a large portion of which can be considered damaging. Technology products are extremely energy-intensive to both produce and consume, leaving behind an excessively high carbon footprint. Due to the global nature of the supply chain, technology products often travel around the globe from the west to developing countries in order to be assembled and packed which significantly contributes to greenhouse gas emissions (George, 2019). Furthermore, when consumed, the carbon footprint of our gadgets and accessing the internet accounts for 3.7% of greenhouse global emissions, which is similar to the carbon footprint of the airline industry (Griffiths, 2020). There is also a consumerist environment surrounding technology products since they are marketed to instigate higher consumption in timelines which do not maximise the life cycle of the product. Most smartphones and tablets have a life of around three years
Image: A stack of tablets however, with little regard given towards the environment, firms attempt to draw consumers to the new, flashier products. Even the biggest brands are guilty of planned obsolescence. For instance, Apple and Samsung were both fined €10m and €5m respectively for maintaining unethical commercial practices where they released software updates to cause malfunctions in the performance of older models to boost the sales of their new devices (Gibbs, 2018). However, consumer sovereignty also plays a large role in this consistent consumption as consumer tastes and preferences drive the production cycle. Therefore, while producers focus on generating a sense of necessity for their products in the eyes of consumers, it is consumer behaviour that instigates the production.
Technology as an Opportunity Nevertheless, technology has innumerable benefits too. There is already a well formed presence of technology in multiple key industries like healthcare, education, finance and more. Businesses are using technology as a means to advancement, and this may be a positive enforcement for sustainability-based start-up companies that struggle to kick their businesses off the ground.
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ECONOMICS Technology provides innovative opportunities to make supply chains and manufacturing processes more efficient, cheaper and less wasteful, which proves to be a positive reflection on sustainability. The well advanced technological capabilities that currently exist allow for the diversification of goods in many industries which develops competitive advantage. If targeted, this may lead to higher consumption of sustainably produced goods.collaborating with international institutions successfully (Bukachi & Pakenham-Walsh, 2007). This has had a significantly positive impact on the healthcare indicators, reinforcing the positive impacts that can arise from the effective application of technology.
Good or Bad? Given the numerous benefits that technology supplies into all aspects of life, technology cannot be classified as unfavourable. However, it is important that consumers pay attention to the origin of the devices that we use for our personal enrichment and demand better practices from companies that supply and produce them. Reflection is required to ensure that we, as consumers, are maximising the use and benefits of technology whilst minimising downsides and environmental consequences. Additionally, extracting the benefits that technology showers upon the transformation of businesses and various industries should be done in a manner that targets sustainability practices. If businesses incorporated technologies within a framework of sustainability, the potential net benefits of technology for society could be enormous.
Image: Doctor holding a cellphone Whilst technological innovation is prevalent in most developed nations, such innovation is becoming widespread in the developing world too. Developing countries often seek to gain and engage in long-term technological innovation since it is beneficial for both the development and the growth of the economy. It allows countries to achieve many health and education related sustainability goals that have been set by the UN. A brief study that reviews health services growth in Sub-Saharan Africa discloses that following the high growth in internet access in urban areas, health-care workers are able to communicate efficiently, have access to relevant healthcare information alongside collaborating with international institutions successfully (Bukachi & Pakenham-Walsh, 2007). This has had a significantly positive impact on the healthcare indicators, reinforcing the positive impacts that can arise from the effective application of technology.
Image: Device controlling an agricultural robot
References Bukachi, F., & Pakenham-Walsh, N. (2007). Information technology for health in developing countries. Chest, 132(5), 1624-1630. George, Kat (2019). The tech industry has a serious sustainability problem. [online] Huck Magazine. Available at: https://www.huckmag.com/art-and-culture/tech/the-tech-industry-hasa-serious-sustainability-problem/ [Accessed 23 Nov. 2020]. Gibbs, S. (2018). Apple and Samsung fined for deliberately slowing down phones. [online] the Guardian. Available at: https://www.theguardian.com/technology/2018/oct/24/apple-samsungfined-for-slowing-down-phones [Accessed 23 Nov. 2020]. Griffiths, S. (2020). Why your internet habits are not as clean as you think. [online] Bbc.com. Available at: https://www.bbc.com/future/article/20200305-why-your-internet-habitsare-not-as-clean-as-you-think [Accessed 23 Nov. 2020]. Vigo, J. (2019). The Ecological And Human Rights Impacts Of New Technology. Forbes. [online] 12 Jan. Available at: https://www.forbes.com/sites/julianvigo/2019/01/12/the-ecological-andhuman-rights-impacts-of-new-technology/?sh=3864b0ae3418 [Accessed 23 Nov. 2020].
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Is green hydrogen the path to a carbon neutral economy? By Advait Vaidya Green Industrial Revolution Imagine a resource that is energy dense, transportable and emits negligible amounts of pollutants or greenhouse gases. Green hydrogen is all these things; it is one of the most abundant elements on the planet and makes up 75% of the mass of the universe (National Grid, 2020). In gaseous form it is a promising clean energy source, producing only water as a by-product (Argonne, 2016). However, hydrogen is rarely found in this form naturally and usually has to go through a convoluted extraction process before it can be used. Figure 1 outlines some of these methods (Hydrogen Europe, 2017). Many of these processes are far from environmentally friendly, but clean hydrogen can be extracted through a renewable electrolysis process, as explained in Figure 2 (Mason, 2020). Hydrogen obtained from renewable extraction processes is coined “green hydrogen” while fossil fuel based hydrogen is known as “grey hydrogen”(Feblowitz, 2020). The rest of the article examines how governments are facilitating the use of green hydrogen, and scopes its economic viability as well as its exciting new industrial applications.
Green hydrogen is currently experiencing an unprecedented level of enthusiasm. Spurred by the Paris Climate Agreement, many countries have committed to a green economic recovery from the COVID-19 pandemic, and green hydrogen is central to their plans. Boris Johnson has touted the next few years as the “Green Industrial Revolution" and proposed an ambitious 10-point plan to achieve the UK’s economic and climate targets (Farand, C. 2020). The plan allocates £12 billion towards achieving carbon neutrality, and the use of green hydrogen is somewhat of a focal point (Farand, 2020). The EU is also looking to exploit this resource with plans to install enough renewable hydrogen electrolysers to produce up to 11 million metric tons of clean hydrogen by 2030 (Fawthrop, 2020).
Economic Viability One of the biggest challenges facing producers is keeping costs low. Grey hydrogen currently costs $1 - $1.8/kg whereas green hydrogen is more than double in price at $3-$6/kg (Bennett, 2020).
Figure 1: the diverse methods used to extract hydrogen gas. Taken from Hydrogen Europe website. IS GREEN HYDROGEN THE PATH TO A CARBON NEUTRAL ECONOMY? | 14
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Figure 2: Green hydrogen production process. Image taken from Solar Thermal World website as cited in Mason (2020)
Currently, green hydrogen only accounts for 0.1% of global hydrogen production and 95% of hydrogen produced comes from natural gas and coal (Mackenzie, 2020 as cited in Frangoul, 2020). However, there is reason to be optimistic, as falling renewable energy prices coupled with increasing fossil fuel prices are likely to make green hydrogen more competitive in the future (Fawthrop, 2020). A recent study by Wood Mackenzie stated that the costs of renewable-energy based hydrogen extraction methods could fall by 64%, and be equal in cost to fossil-fuel based hydrogen by 2040 (Fawthrop, 2020). These predictions are contingent on the price of renewable energy sources continuing to fall as they have done for the past two decades. If this is the case, we could even see green hydrogen prices fall to $1.5/kg by 2050 and could perhaps even fall below $1/kg making green hydrogen cheaper than even natural gas and diesel (Bennett, 2020). Another challenge concerning green hydrogen is the storage and transportation cost.
To reduce the costs, money will need to be invested in infrastructure. The EU is already looking into transporting hydrogen via repurposed existing gas pipelines. The average transportation costs are also likely to come down when more hydrogen is produced as the existing infrastructure can be reused multiple times (Janssen, 2020). This phenomenon is known as external economies of scale. While producing and transporting green hydrogen is costly now, there are certainly promising signs for the future.
Industrial Applications Pressure from regulatory bodies, investors and the public, is forcing image-conscious corporations to consider more environmental, social, and corporate governance (ESG) metrics, for both profitability and legal compliance. This means that high polluting firms are on the hunt for more renewable energy sources. As a result, demand for green hydrogen has steadily increased over the past few decades and continues to do so (IEA, 2019), especially in hard to abate industries such
IS GREEN HYDROGEN THE PATH TO A CARBON NEUTRAL ECONOMY? | 15
ECONOMICS as steel and transport where green hydrogen is seen as the frontrunner to replace fossil fuels. This shift can be seen by certain transport companies already shifting to produce vehicles that run on hydrogen. Markedly, Hyundai motor company has produced its first seven hydrogen-powered trucks and intends to make 2000 trucks annually by next year. Furthermore, tech giant Apple is leading the way in terms of innovation and has ambitious plans to power devices using hydrogen fuel cells. In a recent patent application, Apple requests the “design of a portable and cost-effective fuel cell system for a portable computing device” (Mason, 2020). This bold strategy looks to convert fuel into electricity to improve battery life. The plan is ambitious and numerous technical challenges lie ahead but if successful, it could allow computers to operate for weeks without needing to refuel (Hicks, 2020).
Conclusion It is not unreasonable to think that a future exists where we have laptops, trucks and cities that run on hydrogen. The EU is certainly optimistic as it outlines a large amount of investment into the ’Green New Deal’. However, the issues of costs and logistics are challenging and to overcome this it will require large amounts of investment and ingenuity.
References Farand, C. (2020). ’Boris Johnson sets out 10-point plan to get UK on track for net zero’, Climate Home News [online], 17 November. Available at: https://www.climatechangenews.com/2020/11/17/boris-johnson-sets-10point-plan-get-uk-track-net-zero/ (Accessed 23 November) National Grid (2020). ‘What is hydrogen?’ [online], Available at: https://www.nationalgrid.com/stories/energy-explained/what-is-hydrogen (Accessed 23 November) Argonne national library (2016). ‘Six things you might not know about hydrogen’ [online]. Available at: https://www.anl.gov/article/six-thingsyou-might-not-know-about-hydrogen (Accessed November 23) Hydrogen Europe (2017). ‘Hydrogen production’. Available at: https://hydrogeneurope.eu/hydrogen-production-0 (Accessed 23 November) Frangoul, A. (2020). ‘The investment opportunities in ‘green hydrogen’ might not be where you think’, CNBC [online], 13 October available at: https://www.cnbc.com/2020/10/13/investment-opportunity-in-greenhydrogen-may-not-be-where-you-think.html# (Accessed 23 November) Mason, R. (2020). ‘Apple and Hyundai set their sights on Green Hydrogen Fuel Cell Technology’, Value The Markets [online], 29 October, available at: https://www.valuethemarkets.com/2020/10/29/apple-and-hyundai-settheir-sights-on-green-hydrogen-fuel-cell-technology/ (Accessed 23 November) Fawthrop, A. (2020). ‘A green hydrogen economy is looking more realistic as production costs are set to tumble’, NS Energy [online], 27 August, available at: https://www.nsenergybusiness.com/features/greenhydrogen-costs/ (Accessed 24 November)
Figure 3: Forecast of future hydrogen production costs. Taken from The Economist.
Janssen, D. (2020). ‘Hydrogen transport costs will vary on a case-bycase basis, industry says’, EURACTIV [online], 14 October, available at: https://www.euractiv.com/section/energy/news/hydrogentransport-costs-will-vary-on-a-case-by-case-basis-industry-says/ (Accessed 24 November) Bennett, V. (2020). ‘Is green hydrogen the sustainable fuel of the future?’, European Bank [online], 22 June, available at: https://www.ebrd.com/news/2020/is-green-hydrogen-the-sustainablefuel-of-the future-.html#:~:text=There%20remains%20the%20question%20of,red uce%20the%20cost%20of%20electrolysis. (Accessed 24 November) ‘Hydrogen power – After many false starts, hydrogen power might now bear fruit’, The Economist [online], 4 July, available at: https://www.economist.com/science-andtechnology/2020/07/04/after-many-false-starts-hydrogen-powermight-now-bear-fruit (Accessed 24 November) Institute of Economic Affairs (2019). ‘The Future of hydrogen’ [online], available at: https://www.iea.org/reports/the-future-ofhydrogen (Accessed 27 November) Hicks, M. (2020). ‘Gas up your Mac: Apple patents hydrogen fuel cells for MacBooks and iPads’, techradar [online], available at: https://www.google.co.uk/amp/s/www.techradar.com/uk/amp/news/ apple-patent-hydrogen-fuel-cell-macbook-ipad (Accessed 30 November) Feblowitz, J. (2020). ‘The Colors of Hydrogen - Brown, Grey, Blue and Green - Think About it’, Utility Analytics [online], 27 October, available at: https://utilityanalytics.com/2020/10/the-colors-of-hydrogen-browngrey-blue-and-green-think-about-it/(Accessed 30 November)
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ECONOMICS
Hitting the ‘Green Ceiling’: What about Economic Growth? With the world’s focus on ensuring a ‘Green’ exit from the Coronavirus pandemic, the question needs to be posed: can we become too green?
M
by Mihir Shah
ost disasters in human history typically feature a silver lining. The Great Depression, one of the many lows of the 20th Century, brought about President Roosevelt’s New Deal, which revolutionised the relationship between the American government and the US economy for decades to come. Presently, we are yet again faced with a sizable threat to civilisation: the COVID-19 pandemic. Despite the lows, there is yet again a silver lining: a chance for the environment to hit the reset button and make amends to rectify our historically dire entanglement with climate change. However, it is important to curb human inclinations towards the extreme ‘Green Ceiling’, wherein policies cause a trade-off between economic growth and sustainability to arise. The two do not have to be mutually exclusive, the challenge now is finding the right balance.
ment can create policies which incentivise environmentally friendly actions, such as exemption from paying road tax if you drive an electric car (Errity, 2020). Figure 2 provides a graphical representation of the impacts of such policies. It shows that implementing a policy such as the carbon tax or plastic bag charge increases the cost of production for the producer, which then translates to an increase in price for the consumer (P1-P2). Basic economic theory stipulates that an increase in price will see a decrease in demand (Q1-Q2), and therefore the quantity sold. The theory suggests that these policies have a purely positive impact, however in real life, a much wider impact in terms of private and social costs is expected.
Green Policies and their Economic Impact CO2 emission taxes, pollution permits, and more famously, the 5p plastic bag charge (Pettinger, 2019) are some examples of environmental policies that have an impact on economic growth. The purpose of these policies is to reduce unsustainable consumer and producer actions, therefore reducing the negative environmental impact. On the other hand, the govern-
Figure 2: Welfare impact of environmental tax, for example the plastic bag charge (Pettinger, 2019)
The Green Pit
Figure 1: UK Government announces 5p plastic bag charge (Gov.UK, 2015)
The impact of environmental policies is to benefit the environment as a whole, however, these policies affect some industries more than others. The OECD’s analysis on international trade and environmental policies found that stringent
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ECONOMICS environmental policies have ‘significant effects on comparative advantage’ (Agrawala and Koźluk, 2016). This is because the environmental policies increase costs of production, therefore making domestic producers’ goods less competitive against international producers’ homogenous goods. This means that for economies that rely heavily on one, unsustainable industry, environmental policies are harmful, especially in the short-run, as the economy will inevitably shrink from the reduction in consumption and exports. Therefore, while countries may want a ‘green’ exit from the COVID-19 pandemic, environmental policies may not be beneficial in the short run, unless a balance is struck.
A Balance is Possible The case of China depicts how either economic growth or environmental protection does not have to be compromised with. When the Chinese government implemented a market economy in 1979, it grew faster than any country ever before, but at the expense of sustainability. Beijing was previously known for its smog, although in recent years, through a re-emphasis on innovation and a move away from coal, they have balanced reducing their environmental impact with maintaining economic growth. China’s coal usage dropped from 72% in 2005 to 59% in 2018, while wind, nuclear, and solar power usage increased (Tianjie, 2019). During this same period China’s GDP, a good measure of economic growth, stayed above 6%, which is double what is generally considered to be a healthy GDP, therefore showing
they have struck the balance that all countries should strive for.
The Green Ultimatum Ultimately, it is clear that the natural human tendency to be complacent in extreme situations must be curbed, because hitting the ‘Green Ceiling’ will create another crisis. Therefore, it is important, as China has shown, to find the correct balance. This will not be the same for all countries, given we are all at different stages of the development trajectory, however, it is possible. It is also important to mention that, economic growth has its limitations when it comes to measuring national wellbeing. GDP per capita, life expectancy, and human rights are all equally as important, and must be factored into finding the balance that we all strive for. This was also noted by Simon Kuznets, the brain behind the concept of the GDP measure.
Figure 3: Smog covers buildings in Lianyungang, China (Time, 2013)
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ECONOMICS
References Agrawala, S. and Koźluk, T., 2016. Environmental Policies And Economic Performance. [online] Green Growth Knowledge Platform. Available at: <https://www.greengrowthknowledge.org/blog/environmental-policiesand-economic-performance> [Accessed 17 November 2020]. Chevallier, R., n.d. Balancing Economic Growth And Sustainable Development | Www.Sidint.Net. [online] Sidint.net. Available at: <https://www.sidint.net/content/balancing-economic-growth-andsustainable-development> [Accessed 22 November 2020]. Errity, S., 2020. [online] Drivingelectric.com. Available at: <https://www.drivingelectric.com/your-questionsanswered/100/electric-cars-and-road-tax> [Accessed 16 November 2020]. Gov.UK, 2015. Plastic Bag Charge. [image] Available at: <https://www.gov.uk/government/news/plastic-bag-charge-introducedin-england> [Accessed 20 November 2020]. Higgins, PhD, K., 2013. Economic Growth And Sustainability – Are They Mutually Exclusive?. [online] Elsevier Connect. Available at: <https://www.elsevier.com/connect/economic-growth-andsustainability-are-they-mutually-exclusive> [Accessed 22 November 2020]. Macrotrends.net. 2020. China GDP Growth Rate 1961-2020. [online] Available at: <https://www.macrotrends.net/countries/CHN/china/gdpgrowth-rate> [Accessed 12 December 2020].
Missick, S., 2016. Socotra: The Mysterious Island Of The Assyrian Church Of The East. [image] Available at: <https://bethkokheh.assyrianchurch.org/articles/235> [Accessed 21 November 2020]. Pettinger, T., 2019. [image] Available at: <https://www.economicshelp.org/blog/11077/environment/policies-toreduce-pollution/> [Accessed 16 November 2020]. Pettinger, T., 2019. Policies To Reduce Pollution - Economics Help. [online] Economics Help. Available at: <https://www.economicshelp.org/blog/11077/environment/policies-toreduce-pollution/> [Accessed 14 November 2020]. Tianjie, M., 2019. How Green Is China?. [online] New Internationalist. Available at: <https://newint.org/features/2019/10/16/how-green-china> [Accessed 12 December 2020]. Time, 2013. Buildings In Lianyungang, China, Are Shrouded In Smog On Dec. 8, 2013. [image] Available at: <https://world.time.com/2013/12/09/china-here-are-some-great-thingsabout-toxic-air/> [Accessed 12 December 2020]. Wu, B. and Flynn, A., 1995. SUSTAINABLE DEVELOPMENT IN CHINA: SEEKING A BALANCE I BETWEEN ECONOMIC GROWTH AND ENVIRONMENTAL PROTECTION. [ebook] Available at: <https://onlinelibrary.wiley.com/doi/epdf/10.1002/sd.3460030102? saml_referrer> [Accessed 21 November 2020].
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ECONOMICS
Beyond GDP: Growing Past Old Measures by Renee Gomez
G
GDP - What is it good for? DP is the most dominant measure of the economy’s health. It is what economists and politicians endlessly chase, how recessions
are declared, and where the public's beliefs lie in times of prosperity. However, is also woefully inaccurate for measuring almost anything of worth. One such object of worth is the environment, with its beauty, uses and limits. GDP has always been chased without regard for its relation to environmental sustainability – especially when it harms the efforts of so. But what if we could have the best of both worlds? A primary indicator that reflects the true state of the economy – not just its wealth, but its progress – as well as the environmental impact the economy is having is greatly sought after as of late, and will be further explored here.
The Green Gross Domestic Product (GGDP) To begin with, let’s look at a twist on the traditional GDP measure: Green Gross Domestic Product (GGDP). Its mission is to measure and account for environmental damage incurred on the quest for growth. This addresses the major criticism of GDP, namely that it doesn’t track the depletion of the assets that go into producing output. This indicator has been a work in progress for a long period. Many different variations were conceived by economists throughout the 20th century, before the most famous version (pictured in the top right) was adopted by the Chinese premier Wien Jiabao in 2004 in place of GDP (Marketplace, 2010). Before disclosing how this experiment ended, let’s first look at what GGDP actually tells us. The intuition behind it is that as the economy grows, the environmental harm caused by unsustainable growth will eventually drag it down.
Figure 1: The formula for Green Gross Domestic Product (MBA Articles)
This is, of course, a very fair assumption, and this index helps us to forecast that effect. But here lies a problem: putting ecological damage into the same terms as GDP (i.e. monetary cost) is very tricky. It involves huge amounts of forecasting and the arbitrary assignment of value of ‘natural capital’ that can make efforts amount to mere guesswork at times. In fact, on a larger scale, valuating environmental factors can affect the actions of the economic agents who use them, and thus impact GDP (ResearchGate, 2019). Furthermore, an uncomfortable question lies at the heart of GGDP: will policy makers take it into account by reducing degradation, or super-charging GDP? Given the current priorities of limitless growth, the latter seems far more likely. Suffice it to say that the experiment in China – replacing GDP with GGDP – failed spectacularly. The project was scrapped within a year because the subtraction of ecological costs from GDP lead to a serious fall in growth (Reuters, 2007) – something that indoctrinated policy makers couldn’t abide by. This strikes at the heart of the problem: the need to pivot away from GDP, and focus efforts on understanding the real and tangible, instead of just pricing them. HAVE WE OUTGROWN THE GDP MEASURING SCALE? | 20
ECONOMICS
The Better Life Index (BLI)
The Happy Planet Index (HPI)
Another institution to take on the challenge of replacing GDP was the OECD. In May 2011, the Better Life Index (BLI) was created with the goal of measuring the overall wellbeing of each country’s citizens. Whilst in GDP wellbeing is implicitly – and inaccurately – derived, the BLI makes people’s subjective experiences the focal point. This is done by measuring 11 different dimensions that are important to maintaining quality of life directly. Unlike GDP, the approach taken here certainly answers the right questions regarding sustainability, inequality, happiness, etc. As might be expected, Western countries take the lead overall. That said, comparing the position of the USA in the
Our final indicator to review is the Happy Planet Index (HPI), created in 2006 by the New Economic Foundation. Like the BLI, this index uses measures of subjective wellbeing to rank the true quality of life for inhabitants in each country. However, it uses a much more succinct calculation. The HPI measures reported happiness, life expectancy and inequality, subject to the ecological footprint created. At face value, this may seem like a slightly more eco-friendly rehash of old indicators such as the Human Development Index. But what makes the HPI truly promising is the inclusion of the Ecological Footprint, measured in global hectares. This measures the average amount of land needed (per head of population) to sustain a typical country’s consumption patterns (NEF, 2016). In effect, HPI is an ecological efficiency measure that constrains a reported increase in wellbeing by
BLI rankings to that of GDP – 10th and 1st place respectively (Cleverism, 2020) – shows that a focus on GDP has caused countries to miss out on improvement in essential Figure 2: The 11 dimensions of the areas. However, considering that the US Better Life Index (DQ Institute) is the 2nd highest emitter of CO2 (UCS, 2020), its placement on BLI may seem generous to the ecologically concerned. This begs the question: what the environmental cost of any progress. If the Ecological about the environment? The BLI splits the measure of Footprint goes up it will always negatively impact the environmental quality into two areas, air quality and index. This index makes the message clear: no progress is water quality (ROIW, 2015). But considering the breadth viable unless the planet is respected. It encourages us to and urgency of the environmental issues plaguing the create real, tangible benefits to human lives within our world today, these indicators come across as incredibly planetary constraints. In addition, it’s interesting to note basic and limited. Even more concerning is the fact that how loose HPI’s relationship is with GDP. The dominant the environment is merely 1 indicator out of 11. As seen index features very little in calculation, and in fact the with the case of the USA, richer countries that can GDP/HPI correlation is a measly 0.11 (Medium, 2017). increase the other 10 indicators can also afford to be the Unsurprisingly, Western developed countries have done largest polluters without an impact on their ranking. less well in the rankings compared to more modest Overall, the BLI gets a lot of things right. The use of economies such as Central America. For example, the subjective data from the Gallup World Poll (OECD, 2020) USA - a global titan of wealth - is ranked at an itself is a gamechanger. If policymakers adopt this embarrassing 108th compared to Costa Rica at 3rd approach, there could be a shift towards more (Friends of the Earth, 2006). If both the policy makers and humanitarian concerns. However, the BLI also shows the the public shifted their focus to HPI, the results would importance of questioning not just what economic definitely make, well, a Happy Planet. prosperity is used for, but how – and at what cost.
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ECONOMICS
Figure 3: How to calculate the Happy Planet Index (New Economic Foundation) REFERENCES Marketplace. 2010. Alternative Indicator: Green GDP Marketplace. [online] Available at: <https://www.marketplace.org/2010/12/03/alternative-indicatorgreen-gdp/> [Accessed 16 November 2020]. Stjepanović, S., Tomic, D. and Skare, M., 2019. Green GDP: An Analysis For Developing And Developed Countries. [ebook] ResearchGate. Available at: <https://www.researchgate.net/profile/Daniel_Tomic/publicatio n/337669166_Green_GDP_an_analysis_for_developing_and_deve loped_countries/links/5de76d63a6fdcc2837036dcb/Green-GDPan-analysis-for-developing-and-developed-countries.pdf> [Accessed 17 November 2019]. Buckley, C., 2007. China Silences Green GDP Study, Report Says. [online] U.K. Available at: <https://uk.reuters.com/article/environment-chinaenvironment-dc/china-silences-green-gdp-study-report-saysidUSPEK21998120070723> [Accessed 17 November 2020]. Belyh, A., 2020. Five Better Growth Indicators Than GDP. [online] Cleverism. Available at: <https://www.cleverism.com/five-better-growth-indicators-thangdp/> [Accessed 18 November 2020]. Union of Concerned Scientists. 2020. Each Country's Share Of CO2 Emissions. [online] Available at: <https://www.ucsusa.org/resources/each-countrysshare-co2-emissions> [Accessed 18 November 2020]. Durand, M., 2015. [online] Roiw.org. Available at: <http://www.roiw.org/2015/n1/02%20-%2012156.pdf> [Accessed 19 November 2020]. Stats.oecd.org. 2020. Better Life Index. [online] Available at: <https://stats.oecd.org/Index.aspx?DataSetCode=BLI> [Accessed 20 November 2020]. 2016. Happy Planet Index 2016 Methods Paper. [ebook] New Economics Foundation. Available at: <https://static1.squarespace.com/static/5735c421e321402778ee0c e9/t/578dec7837c58157b929b3d6/1468918904805/Methods+paper_ 2016.pdf> [Accessed 21 November 2020]. Li, S., 2017. How Happy Is Your Country? — Happy Planet Index Visualized. [online] Medium. Available at: <https://towardsdatascience.com/how-happy-is-your-countryhappy-planet-index-visualized-32220715adaf> [Accessed 21 November 2020]. 2006. The Happy Planet Index. [ebook] Friends of the Earth. Available at: <https://neweconomics.org/uploads/files/54928c89090c07a78f_y wm6y59da.pdf> [Accessed 22 November 2020].
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INNOVATION
Are Mobile Apps the Answer?
Tackling food waste with mobile tech by Rachel Irwin
ALSO IN THIS SECTION
27
Re-using Christmas trees for an evergreen future
29
Can big data pave the way for a sustainable future?
FEATURED
INNOVATION
Tackling food waste with
MOBILE TECH By Rachel Irwin
The scale of global food waste has hit unprecedented levels, with a shocking one-third of all food produced annually going to waste (FAO, 2013). Not only is this figure outrageous considering that almost 1 billion people on the planet suffer from hunger, but the consequences of excessive food waste also have disastrous implications for our environment. Immediate action must be taken, and we can now do this through the most convenient of methods – by downloading an app. Food that is fit for consumption is discarded at every point along the food chain. Food waste is undoubtedly a major culprit of CO2 emissions and when disposed of in landfills it also releases methane, one of the most damaging greenhouse gases. When ranked alongside countries, food waste is the world's third-largest producer of carbon dioxide, after the USA and China (FAO, 2011), as shown by Figure 1.
Figure 1: Total greenhouse gas emissions of top three emitting countries vs food waste emissions (Our World in Data, 2017) (National Geographic, 2015)
A solution in apps Although food waste appears to be an ever-growing problem, it is one that we can help combat by making conscious decisions as consumers and businesses. Fortunately, the growth of mobile apps designed for this purpose makes this an easy task. A prevalent example is Too Good To Go, which connects customers searching for a bargain meal with businesses offering surplus food, in the form of a ‘magic bag’– a surprise mix of leftover food at a substantially reduced price. This app is ideal for consumers wishing to eat on a budget but also businesses who wish to cut their waste, attract new customers, and win back sunk costs. So far, the Too Good To Go team approximates they have rescued 25 million meals, resulting in around 21,000 tonnes of CO2 emissions saved.
Figure 2: Infographic showing the extent of global food waste (FoodCloud, 2020)
FROM THE COVER: SOLVING THE FOOD WASTE CRISIS | 24
INNOVATION
FoodCloud is another app striving to tackle the environmental impact of food waste, in addition to Britain's hunger problem. 2.2 million Brits currently find themselves food insecure – the highest reported level in Europe (EAC, 2019). FoodCloud connects establishments with surplus food to charities and homeless shelters. Through their domestic and international partnerships with the likes of Tesco and Waitrose, they redistributed almost 30,000 tonnes of food from 2014-2019 and have avoided, on average, 24,000 tonnes of CO2 equivalent annually (FoodCloud, 2019).
Obstacles to success
(Food.Cloud, 2020)
Despite their success in redistributing excess food and avoiding excess emissions, these apps have notable limitations. The range of establishments offering surplus food is highly concentrated in cities, leading to a lack of choice for customers in rural areas. This severely limits app engagement amongst many potential users. Dietary requirements and allergies isolate an additional significant proportion of the app's target audience. Such customers are recommended not to use Too Good To Go’s ‘magic bag’ service, as stores cannot precisely predict what food the bags will contain. Further expansion into vegan and vegetarian eateries could reduce this effect. The lack of global expansion also continues to hinder the effectiveness of these apps in addressing such an enormous challenge. Although developing countries suffer most from the consequences of food waste – both from environmental degradation and starvation – foodsharing apps apply more to developed countries as they only deal with food wasted at the consumer or retail level. Poorer countries lose most of their food in harvesting processes, transport and storage, with parts of Vietnam wasting as much as 80% of their rice harvest (Earthbound, 2013). Unfortunately, an app cannot solve this problem; these countries urgently require other technology, such as refrigeration that keeps food fresh during transport and storage, before they can even consider the use of apps. A possible approach for charitable apps such as FoodCloud could be to send food packages to developing regions from areas located near the recipient. Although transporting the food further than usual may emit more CO2, these emissions would still not match the amount emitted if the food was wasted, especially if food packages are delivered in bulk.
Figure 4: Location of food waste along food chain (Global Landscapes Forum, 2020)
Is there a future for food-sharing apps? There certainly appears to be a place for food-sharing apps in the fight against food waste. They have achieved remarkable results in benefiting the environment and assisting local communities. However, unless they can expand worldwide, particularly into developing countries which contribute significantly to food waste annually, the overall impact of these apps will be insufficient in solving the global food waste crisis. Nevertheless, consumer use in the developing world seems to be only growing; Too Good To Go gains an additional 45,000 users daily. Through actively using these apps, perhaps we can at least partially reduce the 3.3 billion tons of carbon emissions resulting from food waste each year. Whilst food has an expiry date, our planet should not. References Food and Agriculture Organisation of the United Nations (2013). Food Wastage Footprint- Impacts on Natural Resources. Available at: http://www.fao.org/3/i3347e/i3347e.pdf#:~:text=FAO%20estimates%20that% 20each%20year%2C%20approximately%20onethird%20of,and%20resources%20use%20from%20food%20chains.%20Altho ugh%20there (Accessed 24 November 2020) ·Food and Agriculture Organisation of the United Nations (2011). Food Wastage Footprint and Climate Change. http://www.fao.org/3/a-bb144e.pdf (Accessed 24 November 2020) · BBC News (2020). The entrepreneur stopping food waste. Available at: The entrepreneur stopping food waste - BBC News (Accessed 24 November 2020) · House of Commons Environmental Audit Committee (2019). Sustainable Development Goals in the UK follow up: Hunger, malnutrition and food insecurity in the UK. Available at: https://publications.parliament.uk/pa/cm201719/cmselect/cmenvaud/1491/1 491.pdf (Accessed 24 November 2020) · FoodCloud (2019). 2019 Annual Report. Available at: FoodCloud-AnnualReport-2019-Final.pdf (Accessed 24 November 2020)
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FoodCloud (2020). Image retrieved from https://food.cloud/ (Accessed 19 December 2020) Ethical Consumer (2019). Four useful apps for cutting food waste. Available at: https://www.ethicalconsumer.org/food-drink/four-useful-apps-cuttingfood-waste (Accessed 24 November 2020) FoodCloud (2020). How FoodCloud Works. Available at: https://food.cloud/how-foodcloud-works-explanation/ (Accessed 24 November 2020) ·Our World in Data (2017). CO2 and Greenhouse Gas Emissions Database. Available at: https://ourworldindata.org/co2-and-other-greenhouse-gas-emissions (Accessed 24 November 2020) National Geographic (2015). How Reducing Food Waste Could Ease Climate Change. Available at: https://www.nationalgeographic.com/news/2015/1/150122-food-waste-climate-changehunger/#:~:text=The%20energy%20that%20goes%20into%20the%20production%2C%20harvesting%2C,of%20greenhouse%20gases%2C%20behind%20the %20U.S.%20and%20China (Accessed 24 November 2020)
Photo from Unsplash
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INNOVATION
RE-USING CHRISTMAS TREES FOR AN EVERGREEN FUTURE By Maxine Miller Christmas may be the most wonderful time of the year but it is certainly not the most sustainable â&#x20AC;&#x201C; particularly when it comes to the seven million live Christmas trees that end up in UK landfills every year (GOV.UK 2020). Though most are aware of the environmental impacts, the festive emblem of a Christmas tree is not a tradition that people will readily forsake. According to the Carbon Trust, a single tree discarded to landfill has an average carbon footprint of 16 kg CO2. It is, therefore, imperative that we begin employing new methods to mitigate these adverse effects.
A tree is for life, not just for Christmas Comparatively, the footprint of producing an average 2-metre artificial Christmas tree is estimated at 40kg CO2. In order to counteract their greenhouse gas emissions, the Carbon Trust recommend that artificial trees be re-used for at least twelve years. However, keeping these trees for this duration of time poses serious health risks. The majority of artificial trees are produced using PVC film: a plastic that contains chemical additives, including traceable amounts of lead. As PVC degrades over time, it has been found to cause harmful levels of lead contamination after approximately nine years (Levin et al. 2008). Furthermore, the fossil fuel-reliant production of PVC additionally results in the release of multiple carcinogens. Live trees avoid the intensive carbon emissions that are associated with producing artificial trees. Yet, it should be recognised that Christmas tree plantations are not an ecologically sensitive use of land. Although these plantations sequester
carbon from the atmosphere, they remain mono-crop systems that fail to offer the benefits that a natural forest would deliver to the local ecosystem. Their reliance on herbicides and pesticides imposes further harm on surrounding environments. There is no definitive answer to the live vs. artificial tree debate but there now exists numerous substitutes, which even include Christmas tree rental schemes. Nonetheless, if we must dispose of our live trees, there are sustainable alternatives to sending them to landfill. Other European countries have demonstrated how these trees can be re-purposed. For example, Paris recycled over 115,000 Christmas trees at the start of 2020 by chipping them into 2300mÂł of shredded material to use as mulch and improve soil quality across the French capital.
Turning pine needles into new products A significant proportion of innovation in this domain is aimed at re-purposing tree needles, just like the thousands typically found on our Christmas trees. These needles require significant time to decompose and, when they eventually decay, they emit huge quantities of greenhouse gases including methane, which is 25 times more potent as a greenhouse gas than carbon dioxide. Fortunately, there are means to capitalise on this biomass.
A MORE SUSTAINABLE CHRISTMAS | 27
INNOVATION
Research by the University of Sheffield in 2018 found that valuable chemicals could be extracted from pine needles by breaking down their chemical structure into a liquid (bio-oil) and a solid by-product (bio-char). Both by-products contain chemicals that can be used to manufacture goods including paint, adhesives, food sweeteners, and vinegar. These chemicals could serve as a sustainable alternative to the products that are currently being used in industry. In India, Vasshin Composites have demonstrated that pine needles can be converted into an all-natural material. They have been using this to produce their collection of biodegradable products, ranging from tableware to cutlery, since 2019. Amid the Covid-19 pandemic, Vasshin Composites are even producing face coverings using this material, offering a biodegradable alternative to plastic face coverings, which can take up to 450 years to decompose.
Generating power from pine needles Pine needles are also an effective fuel for power generation. Uttarakhand, a town in India, has been generating energy from this biomass since 2009. This method, known as ‘biomass gasification,’ involves heating the needles in low-oxygen conditions, triggering the release of gases which can then be burned to produce steam to drive generators. This represents a low-cost energy source with a lower environmental impact than fossil fuels. Moreover, Uttarakhand’s power plant is zero-waste, as the carbon powder left over from the production process is bound with locally-made glue to form briquettes, which are then burnt as a sustainable form of cooking fuel. To end on a promising note, the aforementioned innovations offer potential methods for better utilisation of UK Christmas trees; an otherwise wasted resource. While the specific use of pine trees is not yet a wide spread source of biomass, the design of biomass gasifiers is continually evolving in terms of efficiency, and becoming increasingly competitive with conventional fossil fuels. If our Christmas trees were to be systematically collected and processed along with other readily available sources of biomass, the UK could benefit from these natural assets and decrease its carbon footprint - helping to ensure our future is merry and bright.
References Carbon Trust, 2013. Carbon Trust Christmas Tree Disposal Advice. [online] Carbon Trust Press Release. Available at: <https://www.carbontrust.com/newsand-events/news/carbon-trust-christmas-tree-disposal-advice> [Accessed 15 November 2020]. GOV.UK, 2020. Recycle Or Replant Your Tree For A Greener Christmas. [online] GOV.UK. Available at: <https://www.gov.uk/government/news/recycle-orreplant-your-tree-for-a-greener-christmas> [Accessed 15 November 2020]. Keeler Johnson, J., 2016. How To Start A Christmas Tree Farm For Profit - Hobby Farms. [online] Hobby Farms. Available at: <https://www.hobbyfarms.com/starta-christmas-tree-farm/> [Accessed 15 November 2020]. Laville, S., 2018. Are Real Or Fake Christmas Trees Better For The Planet?. [online] The Guardian. Available at: <https://www.theguardian.com/lifeandstyle/2018/dec/08/are-real-or-fakechristmas-trees-better-for-theplanet#:~:text=A%206.5ft%20artificial%20tree,real%20tree%20which%20is%20bu rnt.> [Accessed 15 November 2020]. Levin, R., Brown, M., Kashtock, M., Jacobs, D., Whelan, E., Rodman, J., Schock, M., Padilla, A. and Sinks, T., 2008. Lead Exposures in U.S. Children, 2008: Implications for Prevention. Environmental Health Perspectives, [online] 116(10), pp.1285-1293. Available at: <https://www.ncbi.nlm.nih.gov/pmc/articles/PMC2569084/> [Accessed 15 November 2020]. Paris.fr, 2020. Plus De 115 000 Sapins Récoltés Et Recyclés Cette Année. [online] Paris.fr. Available at: <https://www.paris.fr/pages/recyclons-nos-sapins-3193> [Accessed 15 November 2020]. Poulter, S., 2012. 'Just One In Five Homes' Will Have A Real Tree This Christmas As Half Of Households Opt For Artificial Alternatives. [online] Mail Online. Available at: <https://www.dailymail.co.uk/news/article-2234929/Just-homes-realtree-Christmas.html> [Accessed 15 November 2020]. University of Sheffield, 2018. Pine Needles From Christmas Trees Could Be Turned Into Paint And Food Sweeteners: New Process Could Lead To Reduction In Carbon Footprints. [online] ScienceDaily. Available at: <https://www.sciencedaily.com/releases/2018/12/181227102059.htm> [Accessed 15 November 2020]. Wilson, G., Staffell, I. and Godfrey, N., 2020. Britain's Electricity Since 2010: Wind Surges To Second Place, Coal Collapses And Fossil Fuel Use Nearly Halves. [online] The Conversation. Available at: <https://theconversation.com/britainselectricity-since-2010-wind-surges-to-second-place-coal-collapses-and-fossil-fueluse-nearly-halves-129346> [Accessed 15 November 2020].
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INNOVATION
AN ALGORITHMIC GREEN RECOVERY CAN
BIG DATA
PAVE
THE
WAY
TO
A
SUSTAINABLE
FUTURE?
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By Federico Scolari Every crisis is an opportunity for innovation. Faced with severe disruption imposed by Covid-19, both businesses and governments are racing to identify innovative solutions for “the Green Recovery," a “winwin strategy and a once-in-a-lifetime opportunity," as defined by the OECD (2020). There are trade-offs to be considered and adjustments to be implemented, but institutions worldwide seem to hold general consensus regarding the immediate need for long-term greener policies. Crucially, Big Data and algorithmic approaches might hold the definitive answer to the Green Recovery puzzle.
The Rise of Big Data
Big Data is often an imprecise nomenclature. Generally, it refers to large amounts of high-velocity, high-variety and complex information that requires advanced computational tools for production, storage and interpretation (Gandomi, 2015). While it may appear to be a futuristic abstraction, Big Data is already defining much of our lives, particularly following the rapid digitalisation induced by the global pandemic. Thousands of companies have adapted to remote working and have discerned a number of benefits from its long-term employment. The amount of data flowing across the globe has increased accordingly, pointing to an incoming and unpreventable digital revolution. If something cannot be prevented, it should be embraced, and a number of innovative companies have understood this. To cite a few monumental examples, Tesla has championed Big Data analytics and automated services for well over a decade, yielding unprecedented results in the transport industry - an astonishing reduction of 4 million metric tons of CO2 (Tesla, 2019); Google’s DeepMind Lab is developing
Volume of Data Created Worldwide, 2005-2020, Zetabytes (1 sextillion bytes).
50
40
30
20
10
0
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Statinvestor, 2020. "Volume of data/information created globally, 2005-2025"
efficient data interpretation to energy-grid distribution, with wind farms scheduling energy deliveries based on predictability models (Google, 2019); Microsoft’s AI for Earth is funding hundreds of green, data-centred businesses using the Azure Cloud Computing data hub to improve environmental monitoring, with 480 grants creating impact across 79 countries (Microsoft, 2020). Industry giants are remarkable outliers, yet a higherthan-ever share of young, data-driven companies are catching up on an analogous path to scalability, some of which could lay the foundations for the Green Recovery. In the UK, more than £1 billion has been invested in AI startups in 2019 alone, showing positive trends ahead. Examples include Greyparrot, which builds next
A DIGITAL ECONOMIC RECOVERY | 29
INNOVATION
Big Data Global Market Value, 20112020, billions US dollars 60
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generation waste recognition software to monitor and sort waste at scale, obtaining an impressive £3.8 million of funding in two rounds (Greyparrot, 2020); and Orbital Insight, which employs algorithmic strategies to track and identify forest loss.
2019
2020
green enterprises are ever-changing and perpetually up to date, providing accurate predictions that reduce risk, a major concern for green investors. Crucially, Big Data companies for green solutions are both regulation and future-proof.
Advantages of big data risk-proof
As opposed to
adaptable
traditional regulationfriendly
businesses, Big Data
dynamic
strategies for COSTEFFECTIVE
the Green Recovery are:
diversifiable
Statista, 2020. "Big Data Market Size & Revenue Forecast 2011-2027"
However, stakeholders are hesitating to invest in risk-heavy startups, given the inherently complex mechanisms that govern their algorithmic business operations. Governments need to reassure the public with concrete action - and some promising signs are arising from the public sphere. The EU has promised to devote a record €550 billion to green projects over the next seven years as part of their recovery fund, complemented by a €307 million investment package granted by the European Innovation Council for 64 green startups (EU, 2020). The UK has launched its own £40 million Clean Growth Fund, with matching poundper-pound private investment that is projected to reach £100 million by 2021 (UK Gov, 2020). Yet, it is crucial for funds to be spent wisely. Data-driven businesses offer a clear and specific base for investment, promising both quicker returns and a risk-proof framework. Most importantly, they have desirable traits that traditional companies have been unable to adopt. Big Data businesses are cost-effective, given the learning processes that define their algorithms. They are more adaptable, more efficient, diversifiable and particularly inclined to scalability. The data points employed by
There is no good time for a crisis, but there could not be a better one. While the pandemic has shown fundamental flaws in the world economy, it has also suggested that there are exciting opportunities ahead. Big Data can serve as a dynamic tool in exploring these possibilities, providing efficient solutions to structural problems. Scepticism with regards to new technology is always natural and legitimate, and a cautious approach is required, as with any other innovation. But failing to integrate Big Data in the world's recovery plans would pose a much greater threat to our sustainable development. References Gandomi, A. & Haider, A. (2015). Beyond the hype: Big Data Concepts, Methods, and Analytics. International Journal of Information Management. Tesla (2019). Annual Impact Report. [online] tesla.com. Available at: https://www.tesla.com/ns_videos/2019-tesla-impact-report.pdf DeepMind Lab (2019). Machine Learning can boost the value of wind energy. [online] deepmindlab.com. Available at: https://deepmind.com/blog/article/machine-learning-can-boost-valuewind-energy Microsoft (2020). AI for Earth Website. [online] microsoft.com. Available at: https://www.microsoft.com/en-us/ai/ai-for-earth
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INNOVATION
Greyparrot (2020). Funding and Startup. [online] greyparrot.co.uk. Available at: https://greyparrot.ai/media/ EU (2020). Europe's Moment: Repair and Prepare for the Next Generation. [online] ec.europa.eu. Available at: https://ec.europa.eu/commission/presscorner/detail/en/ip_20_940 OECD (2020) Focus on the Green Recovery. [online] OECD.org. Available at: https://www-oecdorg.ezproxy.nottingham.ac.uk/coronavirus/en/themes/green-recovery UK Government (2020). Investing in Innovation that Deliver Clean Growth. [online] GOV.CO.UK. Available at: https://www.cleangrowthfund.com/
Image from Canva
A DIGITAL ECONOMIC RECOVERY | 31
Q&A Alex Merkulov Director of Fixed Income Strategy at BlackRock
Alex Merkulov How would you define ESG investing? ESG investing in general is an evolving topic. Myself and the team that I work with have been involved with ESG investing for over five years now. As a team, we launched the first active Fixed Income fund at BlackRock, which was quite interesting as we had to define what ESG meant for Fixed Income for BlackRock. There are a number of competing schools of thought as to what ESG is, but we can split these fairly easily into two opinions. One, which is probably a more popular point of view, is ESG is a measure of ‘goodness’, the sort of ‘do no evil’ approach. Breaking this down for investors, this means that they don’t invest into companies that do bad things and two, they also try to invest into sectors within the economy that do good things i.e. invest more into solar energy, invest more into green bonds. So that is the ‘goodness’ part. The other part is that you can use ESG factors to quantify qualitative risk. In other words, when you analyse a country or company that you want to invest in, there will be some factors that the numbers do not capture. When looking at a given company that looks solid now, it may look bad for a variety of reasons next week. We know that ESG ratings do have some predictive value, as there are companies such as Volkswagen, Deutsche Bank and Danske Bank which had huge corruption scandals and they all had low ESG scores before these scandals came to light. There were failings at various levels, such as board composition, reporting standards, etc. Investors in this second group may not necessarily care about the ‘goodness’ part of the equation, but do still look at ESG factors as another way to add a different dimension to their analysis. At BlackRock, we try to
do both as that is what is required from the market. There is also a new flavour of funds that is coming online now are what are called impact bonds. These are the funds where the financial element is less relevant compared to the impact objective which involves delivering a form of change in society. For example, these funds only invest in firms which build solar energy farms, or green bonds which fund social housing, clean water projects, forest management and so on. What impact has the rise of sustainable investing had on your work in the past few years and how have Blackrock’s policies adapted to meet the changing market demands? It’s a constant adaptation. We have a number of internal committees at BlackRock that push for change, which ranges from our investment policy to what type of cups we use in the office. Very recently we have rolled out a new analytics platform called Aladdin Climate, which helps investors to see what impact on the climate the companies that they are investing in are likely to have. As a company, we have rolled out a few teams over the last several years such as the sustainable investing team who look at broader policy and also publish papers that are used for external consumption, such as examining the regulation of different countries that our investments are involved in or climate related issues. They also look at policies internally at BlackRock. For example, if various different teams wanted to launch ESG funds, it would make sense to have a common set of rules which the sustainable investment team would create. For example, one
There are a number of competing schools of thought as to what ESG is
of the outcomes of that was embedding ESG metrics into our credit research. Before, our creditors didn’t consider ESG into their analysis but now are required to have a view on any ESG matter that can impact the credit worthiness of an investment. The way this all works in our team, or the fixed income department in general, is that every time a credit research analyst writes a piece on a company, they look at the ESG issues a company might face, and if a company is facing an issue of a certain severity, which may impact the firm specifically or the industry in which they operate, we first ask the company what they are doing about this issue and follow their progress closely to make sure they live up to their promise.If they don’t follow through, we would then feedback this to the company through the analysts but also through the BlackRock Investment Stewardship team. The Investment Stewardship team then votes on behalf of our clients in board meetings in their best interests, so if they think something is of ESG concern they will vote accordingly. I am aware you worked on the first active ESG fixed income fund at Blackrock in 2016. What differences did this bring to your work than what you’ve experienced from the more traditional fixed income funds and what were the key challenges faced? When we first started, we essentially had to figure out what ESG was, what can we do from an ESG perspective and what would be in demand in the market. It is very much a moving goal as the way we managed the fund originally is not the same way we manage it now. Our approach has evolved as we have access to better data now and new regulations have also been introduced. When we think about where we should sit and what kind of flavour we want to offer investors, balance is difficult to
Q&A | 33
Alex Merkulov achieve as what investors consider ESG is almost a personal opinion. For example, I had two very similar investors where one considers nuclear energy “evil” and they don’t want it in their portfolio while the other had opposite feelings, stating that they would like as many nuclear energy investments as possible. So when setting up a fund you need to offer a service which appeals to the broadest possible market. The reason you do
Our approach has evolved as we have access to better data now and new regulations have also been introduced this, is that if you offer a pure ESG fund which doesn’t offer any financial return, you won’t raise any assets so you then can’t really impact the market. But if you raise more assets, you can then push ratings providers for better data, so that balance between returns and ESG considerations is difficult to maintain. We also don’t aim for the balance now, we aim for the balance of where the market will be in a year or two, so we always keep moving the goal posts to innovate and meet changing needs. For our team specifically, we had to learn a whole host of new things such as carbon metrics and how they are applied, what ESG ratings are and I would say the amount of information that we use now that is ESG specific probably rivals the amount of information that is fixed income specific. Currently, ESG only makes up about 5% of our assets; they’re growing very quickly and command a lot of attention but they are still quite small. Also, the market evolves regularly. What we heard from clients back when we started is not what we hear from clients now.
Could you talk us through the process of launching your new ESG fund, what it took to get to that stage and how Blackrock incorporates sustainability within this? The first fund that we launched is an aggregate fund which is a mixture of corporate and government bonds, the second was a corporate fund and the third is a short duration fund where it’s a portfolio where the majority of the investments are in short-term bonds up to three to five years. In Europe, the Central Bank rates are negative so if you sit in a money market fund typically you get negative rates. Short duration funds are created in such a way that they generate a lot of yield; our fund is like a cash-proxy so we measure it’s performance against that benchmark, but it’s slightly more aggressive and provides slightly higher returns, but doesn’t provide a full market snapshot like our first fund did. So the difference in the three funds is essentially the benchmark, but the ESG policy that we apply is the same. Another aspect that differentiates the ESG-branded portfolios are the two different levels of screening that we do. One is indiscriminate best-of-class, which means that you look at every industry and you take out the worst of the worst regardless of what industry they are. The second is the type of company or industry that you don’t want to invest in no matter what so for example, tobacco companies, weapons manufacturers, adult entertainment, just industries that are universally considered ESG-unfriendly. We essentially consider the best rated firms in each industry, but also avoid certain industries entirely as this is what our clients demand. There are different flavours of that, such as when we use MSCI ratings, which look at each industry, and build a normal distribution of how companies are
tackling ESG issues that are relevant to them. We then don’t invest in the bottom 10-20% of firms on an industry level. Our responsible investing team has also developed a framework that reviews the ‘greenness’ of green bonds, because a company branding a bond ‘green’ doesn’t mean that we automatically buy it, as we want to see what they are spending the money on and how credible these issues are. So we try to not only get more green bonds into our portfolio but also make sure these bonds are of better quality. If you could give one piece of career advice to students what would it be? In terms of advice, I would say perseverance is a very important factor. Being patient and know what you're doing and why you're doing it. There is always more than one way to get to where you want to go. So for example when you work in the middle office and want to get into the front office it's difficult and for good reasons. My team has 14 people, we have not hired anyone in the last 5 years because no one has left and we don’t want to grow the team. In BlackRock we have maybe 20-25 teams like this, so you can imagine the opportunities that may arise in these front office positions, maybe about 10 people a year get hired at a graduate level. I went to Draxler University which is a good school but it's not Harvard and you just have to be realistic about your expectations. So when I was deciding what I wanted to do, I thought what can get me there? I can either move internally which I ended up doing, I can go get my MBA or I could leave the company and work in a role that would get me closer. And it took me 3 and a half years to get into the front office so it's not something that I got instantly.
Q&A | 34
GREEN FINANCE
M&A and ESG
The rise and acquisition of sustainability by Asha Pandit
ALSO IN THIS SECTION
40
The Climate Minsky Moment
42
Back to Black: Exxon hopes it can drill to victory
FINANCE FINANCE
FEATURED
The Rise and Acquisition of Sustainability By Asha Pandit
Today, is it clear that M&A is becoming more important than ever. M&A activity has experienced a laudable rebound from the earliest days of the pandemic, seeing the busiest summer for deal making since records began in the 1980s. This surge in M&A activity is fuelled, in part, by companies’ keenness to be reshaped to deal with the pandemic. This involves companies seeking innovation, diversification, disrupting competitors and, yes, scoring higher on ESG factors. As outlined in a report by JP Morgan (2020), COVID-19 will likely prove to be a “major turning point for ESG,” as investors who were already turning more conscious prior to the pandemic are putting an increasing level of importance on these non-financial factors. There is a strategic importance of management taking strong measures to combat climate change, as it illustrates that they're taking a long-term view on their firm to ensure it will continue to scale up and be successful despite climate challenges ahead. Nestlé have accepted the real challenge in implementing these changes within their vast supply chain, and as such a huge multinational organisation it will certainly have a knock-on effect. Take Morgan Stanley’s recent announcement to acquire Eaton Vance for $7bn in a cash-and-stock deal, paying $28.25 and 0.5833 of a share for each share of Eaton Vance - a 38% premium. The deal will create one of the largest asset managers with $1.2 trillion assets under management. Reasons cited for the deal include establishing a foothold in the lucrative asset management industry, in time for the stock market rebounds optimistic investors are expecting
Source: GCA Altium (2020) post-pandemic, as well as offering new products in fixed income and ESG investing – a division which currently delivers under 10% of the bank's revenues. Consequently, the move will leave Morgan Stanley better positioned to compete against rivals like BlackRock, which has committed itself to 100% of its portfolios integrating ESG metrics by the end of 2020. Moreover, companies such as Amazon, which has found itself caught up in a range of media feuds casting doubt onto their commitment to sustainability, have recently announced plans to acquire Zoox, a self-driving startup, for over $1.2bn. This comes following prior deals whereby Amazon acquired THE RISE AND ACQUISITION OF SUSTAINABILITY | 36
FINANCE FINANCE Rivian, an electric truck start up, for $700m, to help reach its goals of making its deliveries more sustainable. However, whilst the general trends seem to indicate that ESG is an important concept for companies to grasp and will become an increasing part of many M&A strategies, there will always be some element of risk involved. Notably, ESG strategies are usually long-term strategies, which take time to build value. As a consequence, companies, especially those who have been hit hard from the pandemic, may feel the need to stray away. Whilst this is a possibility, it is however one which is likely to diminish with time due to the increased transparency of ESG results. Earlier this summer, Refinitiv launched its “Sustainable Finance League Tables.” This is the first league table to combine both sustainable products and sustainable companies, making it easier to spot sustainable targets and thus encouraging companies to score higher on these metrics. This complements Refinitiv’s already existing ESG data, covering 80% of global market cap and over 450 metrics, helping investors make more sustainable decisions. Given the currently turbulent economic conditions, it is more likely than ever companies will do all they can to win over increasingly conscious shareholders. Emerging from this pandemic, we are thus likely to not only see a recovery categorised by an increase in M&A, but greener deals which are more likely to appeal to investors and contribute to a more sustainable future.
References
Altium, G., 2020. ESG Industry Update. Harvard Business Review, 2016. M&A: The One Thing You Need to Get Right. pp.42-48. J. P. Morgan, 2020. Why COVID-19 Could Prove To Be A Major Turning Point For ESG Investing. [online] Available at: <https://www.jpmorgan.com/insights/research/covid-19-esginvesting?source=cib_pr_cc_esginvestinga0620> [Accessed 20 November 2020].
THE RISE AND ACQUISITION OF SUSTAINABILITY | 37
FINANCE
All That Glitters Is Not Gold Can Investment In The Shiny Metal Ever Be Considered "Green"? By Sebastian Thomas The incoming Joe Biden of the United States, among many other political figures, are using the mantra “Build Back Better” to describe their responsibly planned recoveries from the coronavirus pandemic. However, the lingering high levels of global political and macroeconomic uncertainty means gold’s price is still at record highs. The precious metal is not known as being particularly environmentally friendly, so could its prevalence in 2020 portfolios and the slogan reflect one another?
Please Remain Seated, The Seatbelt Sign Is On
Gold’s price experiences turbulence. 50 years ago, an ounce of gold was $100. In August 2020, it was over $2,000. Only around 197,576 tonnes of the rare metal exist above ground, as of the end of 2019 (World Gold Council). This is very small, and equal to a 21.7m² cube, though around 3,000 tonnes are extracted yearly from the estimated 54,000 tonnes remaining below ground. This limited supply naturally catalyses price hikes during high demand. 50% of new gold is used in jewellery, 40% in private investments and official holdings, and 10% in industry (Soos, 2011). The major producers in the gold mining industry are highlighted in the graph on the top right of this page and there is a strong positive correlation between some of these nations’ currencies, like the Aussie dollar, and gold due to its importance for exports (World Gold Council, 2020). Gold, as quoted by Ed Moy, former head of the U.S. Mint, has “traditionally been one asset people go to for safety” (FoxBusiness, 2020). The metal acts as a store of value, a tangible asset, maintaining its purchasing power for thousands of years as an inflation hedge. This “safe haven” brings diversification to a portfolio, in theory to help investors weather the storm when riskier assets
underperform. Research shows that behavioural biases associated with gold’s history as a currency alongside this are what increases the enamorability of holding gold during panic times such as the Lehman Brothers bankruptcy (Baur and McDermott, 2016). This relationship between gold and inflation appeared to break down in the 21st century as shown in the graph on the following page (Duncan, 2017). “If you look at 2003-2012, gold’s price rose in basically every scenario – boom, bust, crisis, no crisis. Then for a few years it just went down every year” explains Andrew Sheets, chief cross-asset strategist at Morgan Stanley (Hobson et al., 2020).
Is Holding Gold a Gold Hold? Gold loves a crisis, as the old adage goes. And with current prices breaking the record highs in 2011, it continues. Similar to 2008, early gold prices fell sharply as a broader plunge across assets from coronavirus-induced economic panic forced investors to raise money by selling. In addition, both crises then saw investors moving back to gold from the fuel applied by the CAN GOLD BE GREEN? | 38
FINANCE project, an additional $3 or more is generated elsewhere in the economy of the host country. To ensure that gold is produced sustainably and responsibly, the industry has created a range of standards to give stakeholders, consumers and investors greater confidence in the provenance of responsibly sourced gold (Mulligan, 2020). To guide this progress, the World Gold Council recently launched the Responsible Gold Mining Principles. Like the UN’s SDGs, they are a comprehensive framework through which gold mining companies set out their position on a wide range of ESG factors. Plans are highlighted in the flowchart below (World Gold Council, 2019). uncertainty and monetary stimulus that raised the risk of inflation, devaluing other assets. This facilitated the record-breaking $2,000 price tag for spot gold in early August. Bank of America Merrill Lynch has even said it could touch $3,000 by the end of next year (Hobson et al., 2020) despite the ‘Build Back Better’ mantra. Are these goals conflicting, or are they complementary?
The Making Of A Malicious Metal Considering the gold mining industry is fraught with various social, environmental and governmental issues yet the metal’s price has skyrocketed, the answer is probably that they conflict. Gold extraction is most economical in large, easily The Grass Is Getting Greener mined deposits. "Easy gold" has already been mined Perhaps the price of gold is starting to go hand in hand with though; miners now must dig deeper to access quality sustainability? However, the announcements of Pfizer, Moderna gold reserves where they are exposed to additional and Astrazeneca vaccines have given people hope again – hope hazards, and the environmental impact of extraction is that is correlated with the recent downtrend in the price of gold. heightened. Requiring 25kWh of electricity per gram of Combine this with the improving sustainability of the gold (Norgate and Haque, 2012), these additional costs of technology to extract the metal, and soon enough gold can be production lead to higher gold prices. considered a “safe” and “responsible” investment. 16 tonnes of CO² are produced by mining a kilogram References of gold, while recycling that kilogram produces 53 aniuk, C. (2020). Why it’s getting harder to mine gold [Online]. Available at: kilograms of CO² equivalent (Baraniuk, 2020). In https://www.bbc.com/future/article/20201026-why-its-getting-harder-to-mine-gold. Baur, D. and McDermott, T. (2016). Why is gold a safe haven?, Journal of Behavioural and Experimental addition, 30 tonnes of used ore is dumped as waste for Finance, Volume 10, Pages 63-71, ISSN 2214-6350. R. (2017). Will The Price Of Gold Rise Or Fall? [Online]. Available at: https://www.richdad.com/willproducing one troy ounce of gold, containing many Duncan, price-of-gold-rise-fall?feed=RichDadNews (Accessed: 11th November 2020). dangerous heavy elements which can form sulfuric acid, FoxBusiness. (2020). Why is gold a safe haven during market turmoil? [Online]. Available at: https://www.foxbusiness.com/markets/why-is-gold-a-safe-haven (Accessed: 12th November 2020). making its way into surface and ground water (Perlez & Hobson, P., Jadhav, R. and Iqbal Ahmed, S. (2020). Can gold love a coronavirus crisis? [Online]. Available at: Johnson, 2010). Producing gold for one wedding ring https://uk.reuters.com/article/uk-health-coronavirus-gold-analysis/can-gold-love-a-coronavirus-crisis International Council on Mining & Metals. (2016). Role of Mining in National Economies, 3rd edition. alone generates 20 tons of waste (Septoff, 2004). Cyanide Norgate, T. and Haque, N. (2012). Using life cycle assessment to evaluate some environmental impacts of gold production, Journal of Cleaner Production, Volumes 29–30, Pages 53–63, ISSN 0959-6526. from gold ore also occasionally spills from gold mines Perlez, J. and Johnson, K. (2010). Behind Gold’s Glitter: Torn Lands and Pointed Questions [Online]. and its effect on killing living creatures has been Available at: https://www.nytimes.com/2005/10/24/world/behind-golds-glitter-torn-lands-and-pointedquestions.html (Accessed: 13th November 2020). compared to Chernobyl’s nuclear disaster (Deseret, Septoff, A. (2004). How the 20 tons of mine waste per gold ring figure was calculated [Online]. Available at: https://www.earthworks.org/publications/how_the_20_tons_of_mine_waste_per_gold_ring_figure_was_cal 2000). culated/ (Accessed: 13th November 2020). However, there are reported ESG benefits from gold Soos, A. (2011). Gold Mining Boom Increasing Mercury Pollution Risk [Online]. Available at: https://oilprice.com/Metals/Gold/Gold-Mining-Boom-Increasing-Mercury-Pollution-Risk.html (Accessed: mining. The International Council on Mining and Metals 13th November 2020). World Gold Council. (2020). Gold mine production [Online]. Available at: (2016) estimates that for every $1 invested by a mining https://www.gold.org/goldhub/data/historical-mine-production (Accessed: 12th November 2020).
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The Climate Minsky Moment
By Vasilios Kyriacou
My message today is simple. Climate change poses significant risks to the economy and to the financial system, and while these risks may seem abstract and far away, they are in fact very real, fast approaching, and in need of action today” -SARAH BREEDEN
At the highest levels of economic power, there is a grave concern that the next financial crisis will be a climate induced one and for good reason too. This year alone, we have seen recorded breaking temperatures in North America and Europe, we have seen wildfires scorch the earth in the Amazon basin, California and Australia. Whilst the environmental losses are unmeasurable – the financial loss is. It is clear changes have to be made, and have to be of the combined effort between the private and public.
What is a ‘Minsky Moment’? A Minsky moment describes how periods of relative calm in the financial system can be abruptly punctuated by episodes of financial instability. The tendencies towards speculative investment and easy credit, that are especially pronounced in lightly regulated markets, can lead to asset values plummeting and market liquidity drying up. For many, the 2008 financial crisis was an example of this. However, the financial crisis may not be the last time we experience a Minsky Moment. In 2015, Mark Carney, argued that climate change is the principal danger to global financial security. It presents a series of risks, both through the
physical phenomena and transitional response to climate change, which perpetuates challenges that can undermine the stability of the financial system.
Physical Effects of Climate Change The physical expressions of climate change can lead to a rise in damage to property, land, and infrastructure, caused by catastrophic weather events and broader climate trends. Some of the physical manifestations identified or predicted by scientists include but are not limited to; hurricanes, rising sea levels, storms, droughts, or floods. But, how do these physical changes feed into the financial system causing instability? The physical risks impact our society and economy directly. If these physical damages become more frequent, then firms and individuals become more reliant on insurance companies to cover the cost of potential damage. An increase in weather-related insurance claims causes the premiums to rise as they have to pay out more. The graph to the right shows the level of damage the physical side of climate change has on the economy.
Transitional Risks of Climate Change How, in turn, might the transitional risks undermine financial stability? The Task Force on Climate-Related Disclosure (TFCD) outlined one of the non-physical risks as market/economic risks. This is the risk to firms being negatively affected by changes in consumer preferences and competition is the commercial landscape according to climate change. The supply and demand profiles of firms change, with some business models becoming markedly less viable, such as those reliant on fossil fuel extraction and exploitation. Subsequently, sudden reevaluations on the worth of financial securities issued by these firms operating in these sectors would become a financial stability concern. MINSKY MOMENT | 40
FINANCE These non-physical risks are considered more likely than the physical risks to influence the stability of the global financial system (Christophers 2017, Zenghelis & Stern 2016). As such, regulators and policy makers need to be careful in how they implement new rules, and how they enforce them. If the new regulations are too drastic and happen suddenly, it could be too destabilising on the markets and the economy. On the other, if the changes don’t come gradual enough and are not substantiated with the necessary enforcement, then it may be too late to act. A fine balance needs to be struck, one where economic/market changes doesn’t cause a sudden re-evaluation of securities (potentially leading to a firesale), but also quick enough to prevent a Minsky moment.
Disclose, Disclose! Central to preventing a schism in security pricing is transparency. But, can the market effectively price the systematic risk induced by climate change? Within the framework of the effective-market-hypothesis (EMH), it is only when security prices fully reflect information, that they can give accurate informational signals. To achieve this, firms must disclose the relevant risks they’re exposed to, providing the market with a transparency which allows them to accurately gauge the prices for securities issued by firms. However, it’s not that easy. As it stands,
there are over 400 measures for guidance on disclosure (TCFD, 2016a), and this creates a problem. The lack of co-ordination creates a highly fragmented system, especially since the disclosure is not mandatory. If firms don’t provide enough disclosures and to a high quality, then it can lead to a schism in their security prices. Nonetheless, if done right, climate-risk disclosure can foster early assessments of such risk, facilitating market discipline (de Galhau, 2015), which prevents excessive risk taking. Mitigating the risks of climate change is not going to be an easy feat, and whilst it’s clear that efforts are being made to prevent further exacerbation of the matter, more needs to be done in dealing with the damage that’s already underway. To prevent the next Minsky moment being a climate induced one, security prices need to accurately reflect climate risk, and not be inflated by ‘doing the right thing’ investing. The first step towards this, is transparency through disclosure. Policies on this are being put in place, but they most of them lack clarity and enforcement. Nonetheless, disclosure is the right place to start and can be a powerful tool to build trust with investors.
References Christophers, B., 2017. Climate change and financial instability: Risk disclosure and the problematics of neoliberal governance. Annals of the American Association of Geographers, 107(5), pp.11081127. https://www.bankofengland.co.uk/-/media/ boe/files/quarterly-bulletin/2017/the-banksresponse-to-climate-change.pdf https://www.ecb.europa.eu/pub/financialstability/fsr/special/html/ecb.fsrart201905_1~ 47cf778cc1.en.html#:~:text=As%20climate%2 0change%20advances%2C%20the,large%20n umber%20of%20financial%20institutions. https://www.imf.org/external/chinese/pubs/f t/fandd/2019/12/pdf/a-new-sustainablefinancial-system-to-stop-climate-changecarney.pdf Task Force on Climate-Related Financial Disclosures (TCFD). 2016a. Phase I report of the Task Force on Climate-Related Financial Disclosures. Truant, E., Corazza, L. and Scagnelli, S.D., 2017. Sustainability and risk disclosure: An exploratory study on sustainability reports. Sustainability, 9(4), p.636. Villeroy de Galhau, F., 2015. Climate change: the financial sector and pathways to 2 C. Speech at COP21 Paris, Banque de France, November, 30. Zenghelis, D. and Stern, N., 2016. The importance of looking forward to manage risks: submission to the Task Force on Climate-Related Financial Disclosures.
Source: Bloomberg
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Back to Black: Exxon hopes it can drill to victory By Edward Cox
Once known for making headlines due to its recordbreaking quarterly profits and for being the world’s most valuable company, Exxon Mobil has been in the news for the wrong reasons this year; from falling out of the Dow Jones index to information leaks revealing an incredibly dirty growth strategy. Things might look bad now, but Exxon still has a future, it just may not be as bright as it once was. Chevron dethroned Exxon as the most valuable Oil and Gas producer as both of their stock fell this March. Hardly a satisfying win, but this suggests a difference in prospects for the two firms. Share price can reveal a lot about investors’ sentiments, attitudes and expectations of future performance, not just company value. With the conversation about ESG investing getting louder, and publication of predictions that global oil production may peak sooner than expected, many analysts have put Exxon’s poor performance relative to Chevron down to the company’s bad track record on ESG issues and the resulting scepticism that Exxon will be able to change with the times.
and BP has begun preparations for the restructuring of their businesses with a focus on low carbon fuels and renewable energies (Reuters). Exxon on the other hand has undertaken extensive marketing campaigns that are widely considered greenwashing. The firm’s green ambitions hinge on its development of biofuel from algae; a currently wildly expensive method of turning soil to oil that has been
Part of the Pollution
In case it wasn’t abundantly clear, Exxon is not a green company. Where other giants in the Oil and Gas industry have made explicit commitments to carbon neutrality or deintensification targets, Exxon has made none. Both Shell
Figure 1. Data sourced from Yahoo Finance EXXON DRILL TO VICTORY | 42
FINANCE written off by many others in the industry (E&E). The fact that Exxon has spent five times as much on advertising in the last decade than on biofuel development is quite telling of where the company’s priorities lie. At the beginning of this year, an internal Exxon report was leaked that revealed that pre-pandemic expansion plans would lead to the emission of an additional 21 million tonnes of CO2 per year, bringing yearly emissions to 143 million tonnes by 2025 (Bloomberg). What makes this even more shocking is that these estimates only account for scope 1 emissions (those produced by Exxon itself during production) and misses the emissions produced when customers use Exxon’s products (which could be up to five times as much).
NextEra's 'Golden Hills Wind Farm in Alameda County, California. Source: Steve Proehl
share price buoyant relative to others. ESG considerations may not be particularly important to those making investment decisions within the Oil and Gas sector, however, they are likely to play a role when making investment decisions across sectors.
Renewables are in the Green Source: Getty
Part of Exxon’s dethronement to Chevron has been attributed to the firm’s lack of capital investment over the past few years. The leaked plans revealed that Exxon was preparing to enter a period of increasing production again, and although capital expenditure is set to be cut for next year, investors are happy that the company is signalling that it wishes to pursue more modest expansion. Exxon is projected to grow at around the same rate as the rest of the industry next year, and its consensus price target has not changed, showing that the intrinsic value of the business is the same as it was (Yahoo Finance). Even if the firm’s dirty future had left a sour taste in the mouths of investors, Exxon sweetened the deal by refusing to cut its dividend when many others in the industry did. The result of all this? The firm has managed to keep its
During this turbulent period, a provider that is sure to shape the next era of energy production has emerged. NextEra Energy is now the most valuable publicly listed energy provider on earth, and it’s worth more than both Exxon and Chevron. Though it’s generation mix consists of both renewable and non-renewable sources, as earth’s largest single renewable energy producer, NextEra has benefitted from falling renewable energy costs in recent years and has generated returns of 530% over the past decade. Yes, 530%. In comparison, Exxon has produced a negative 30% return (Motley Fool). And where others have slashed capital spending plans, NextEra has managed to keep earnings forecasts above average by sticking to its huge energy development plans. Although it may seem unfair to compare the two; Exxon’s primary business has just been destroyed by external factors, such success on behalf of NextEra is indicative of where the energy industry is headed as the cost of renewables continues to plummet. EXXON DRILL TO VICTORY | 43
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environmentally friendly and profitable alternatives like NextEra will become the obvious investment choice, but in the meantime, the industry will continue being a star player in the degradation of our environment. References:
Figure 2: NextEra Energy has performed better this year than the Energy Select Sector SPDR Fund, a fund made up of the largest Oil and Gas producers. Data sourced from Yahoo Finance
The sun still shines through the Smoke Despite the setbacks of 2020 though, Exxon is still determined to stick to its unique path. Darren Woods, Exxon’s CEO, rejected claims that the pandemic would kill his industry, projecting that ‘the needs of society will drive more energy use’ and an ongoing need for Exxon’s products (E&E). He is likely to be right. Aggregate debt write-offs in the US Oil industry totalled $175m by quarter three this year, indicating that low oil prices have severely damaged producers. This is good news for Exxon because, combined with many of their rival’s plans to focus on greener products, it means it will face less competition in both acquisitions of assets and sale of products. As the world’s third-largest plastic producer, Exxon will benefit from the projected fivefold increase in plastic demand by 2050, and ownership of vehicles housing internal combustion engines is not set to peak until after 2040, thanks to growth in demand in developing countries. While all good things must come to an end, it has also been said that all bad things go on forever. The old-fashioned oil industry that Exxon represents may not return to its former glory, but it also won’t die overnight. Steadily more
https://stockhead.com.au/energy/peak-oil-demand-could-be-hereby2028/ https://www.reuters.com/article/us-shell-costsexclusive/exclusive-sh ell-launches-major-cost-cutting-drive-to-prepare-for-energytransition-idUSKCN26C0GI? source=content_type%3Areact%7Cfirst_level_url%3Anews%7Csec tion%3Amain_content%7Cbutton%3Abody_link https://www.eenews.net/stories/106371752 https://www.bloomberg.com/news/articles/2020-10-05/exxoncarbon -emissions-and-climate-leaked-plans-reveal-rising-co2-output https://finance.yahoo.com/news/heres-analysts-forecastingexxonmobil-182326264.html? guccounter=1&guce_referrer=aHR0cHM6Ly93d3c uZ29vZ2xlLmNvbS8&guce_referrer_sig=AQAAACr3G066dINiKufbI A-fskc_ aMBzVRy9c38v9G0G8WRDGAAqhl_BDKzJTtR3c3YV1Vrk3MGAoo8 ACN_NPcQLFJMFRq57-ZYMODHIJMFYBaeKnWlfSvp-dEDq_3fKZg7mprniKaH4gd E7tdi5wMazs8yBNHDnoFv43RpAb3h4W_B https://www.fool.com/investing/2020/11/07/forget-exxon-these-3ener gy-stocks-are-better-buys/ https://finance.yahoo.com/quote/XOM/history?p=XOM https://finance.yahoo.com/quote/CVX?p=CVX&.tsrc=fin-srch
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FINANCE
Looking Beyond Carbon: The Rise of Natural Capital By Luke Parsons
What is natural capital?
Natural capital is the stock of natural resources that combine to yield a flow of benefits, known as ‘ecosystem services’ – services which underpin every aspect of life, from providing goods such as food and timber, to regulating environmental conditions and even supporting recreation and other cultural practices. Over half the world’s economy is highly or moderately dependent on this stock (WEF, 2019), however, the last half century has been characterised by the prodigious loss of natural capital. For instance, 50% of mangroves, which provide invaluable coastal protection, have been lost (Global Mangrove Alliance) and terrestrial diversity has fallen 39% (WWF, 2018). To date, climate conscious investors have predominately focused on tackling carbon emissions. Investment in natural capital, through projects protecting and restoring natural assets and financial instruments linked to them, accounts for a tiny proportion of the sustainable finance market. However, preserving global ecosystems will require an enormous $200bn-$300bn of additional capital (Credit Suisse, 2016); growth of private investment is the only way to seriously address this gap, and things are starting to change.
Why are investors starting to care?
Natural capital is finally moving up investors’ agenda primarily due to greater awareness. Science-based reports are helping investors understand natural capital, recognise companies’ dependence on it and therefore risks associated with its decline. Namely, they realise natural capital’s decline can materially reduce the performance of companies and thus investments. For example, a reduced supply of just 6 ecosystem services is conservatively estimated to cause a global loss of $10 trillion up to 2050 (WWF, 2020). Secondly, natural capital’s crucial importance in the context of climate change is becoming better understood. Griscom et al (2017) find that nature-based climate solutions could provide over one third of the cost-effective climate mitigation needed by 2030 to stabilise warming below 2 degrees. Accordingly, resilience against climate change is the most frequently cited driver of current and future natural capital investment (The Nature Conservancy & Environmental Finance, 2019). Finally, the rising tide of interest reflects societal changes in attitudes to environmental issues. Environmental considerations are now given more weight and as a result, investors, especially large ones, are investing in natural capital to boost their reputation and differentiate themselves in an increasingly competitive industry. THE RISE OF NATURAL CAPITAL | 45
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Why has private investment been lacking? The largest barrier to private investment is generating reliable revenue streams and returns on par with traditional assets (Aldersgate Group, 2017). As a public good, natural capital provides benefits to many, not just those who finance it, meaning realisable returns are just a fraction of true benefits. What’s more, many of these benefits are avoided costs which don’t constitute revenue. For example, UK woodlands have been valued at £1.8bn based on avoided healthcare costs and life gained from their removal of pollution (ONS, 2017). Also, the structure of natural capital projects hinders scaling up private investment. Projects vary tremendously, ranging from biodiversity conservation to fisheries, and typically have a small, local scale. Institutional investors with minimum investments of $25m-$50m therefore struggle to access the market. Investors are further deterred by high transaction costs due to the cost of sourcing projects as well as the illiquidity of the assets caused by their limited trading market (Aldersgate Group, 2017). Moreover, heterogeneity means that aggregating projects into liquid assets with lower transaction costs (securitisation), is largely not feasible. Conservation-linked bonds remain a small proportion of the booming green bond market, restricting investors’ access to natural capital. Lastly, a lack of data, disclosure and transparency is preventing greater private investment (Blacksun plc, 2020). Since the key feature of natural capital investment is a positive environmental impact, investors require standardised data and tools with which to measure and ensure environmental outcomes. Yet currently no such standards exist, and companies have no obligation to report their dependence and impact on natural capital.
The outlook for natural capital
Fortunately, it appears that the rapid rise in attention around natural capital is finally translating into tangible and encouraging developments. For example, HSBC Global Asset Management has created a joint asset management venture focusing on natural capital (Reuters, 2020). The venture’s first fund will raise $1bn from some of the largest institutional investors, illustrating the potential to scale up investment. Investors are also starting to invest in natural capital through ‘blended finance’, which reduces their risk exposure by combining private capital with development finance and philanthropic funds. The strategy has successfully catalysed capital flows to other nascent markets and in natural capital it has already facilitated 30 transactions, totalling $3.1bn (Convergence, 2019).
Additionally, the Coalition for Private Investment in Conservation has created blueprints standardising transaction structures for conservation. By creating replicable transactions, they aim to increase investor confidence and accelerate aggregation of transactions into accessible financial instruments (The Nature Conservancy & Environmental Finance, 2019). While these developments show much promise, it must be emphasised that private investment in natural capital is growing from an exceedingly small base. These are the first of many steps needed to get investors to realise the immense value of the natural world.
References lAdersgate Group. (2017). Increasing investment in natural capital. Available at: https://www.cusp.ac.uk/wp-content/uploads/2017-11Increasing-investment-in-natural-capital.pdf (Accessed 22nd October 2020). Blacksun pls. (2020). Natural capital rising up the investor agenda. Available at: https://www.blacksunplc.com/en/ourthinking/insights/blogs/natu ral_capital_is_rising_up_the_investor_agenda.html. (Accessed 1st November 2020).Convergence. (2019). Blending in Conservation Finance. Available at: https://www.convergence.finance/resource/ GucIHtU8jyKUePBuz4G5l/view. (Accessed 14th November).Credit Suisse & and McKinsey Center for Business and Environment. (2016). Global Mangrove Alliance. Available at: http://www.mangrovealliance.org (Accessed 4th November 2020). Griscom BW, et al. (2017) Natural climate solutions. Proc Natl Acad Sci USA 114:11645–11650. Available at: https://www.pnas.org/content/pnas/114/44/11645.full.pdf. (Accessed 27th October 2020). Reuters. (2020). HSBC teams up with Pollination for 'natural capital' venture. Available at: https://uk.reuters.com/article/ukclimate-change-hsbc-pollination/hsbc-teams-up-with-pollinationfor-natural-capital-venture-idUKKBN25M1IP (Accessed 14th November 2020). The Nature Conservancy & Environmental Finance. (2019). Investing in Nature. Private finance for nature based resilience. Available at: https://www.environmentalfinance.com/assets/files/reports/tnc-investing-in-nature.pdf (Accessed 16th October 2020). World Wildlife Fund (WWF). (2018). Living planet report–2018: Aiming higher. Grooten, M., & Almond, R. E. A. WWF, Gland, Switzerland, 22-100. Available at: https://www.wwf.org.uk/sites/default/files/201810/LPR2018_Full%20Report.pdf (Accessed 21st October 2020). World Economic Forum (WEF). (2019). The Next Frontier: Natural Resource Targets
THE RISE OF NATURAL CAPTIAL | 46
Equity Research Report January 2021
FEATURED
EQUITY RESEARCH REPORT
Company: Tilt Renewables Headquarters: China Founded:1997 Industry: Photovoltaics Ticker: TSL Price: 15.66 CNY Market Cap: 32.39 Billion CNY Target Price: 17.29 CNY Investment Recommendation: BUY Company Tilt Renewables (or “the company”) is a developer, owner, and manager of renewable energy assets in Australia and New Zealand. The company is dual-listed on the Australian and New Zealand stock exchanges. For simplicity, this report will use price data from the Australian listing. Tilt currently operates 6 wind farms (3 in New Zealand and 3 in Australia) that produce an enormous total of 1,835 Gigawatt hours (GWh). To put into perspective what 1,835GWh equates to in terms of the electrical capacity, A GWh is equivalent to 1 million kilowatt hours of electricity... that is enough to power around about 1 million homes with ten, 100-watt lightbulbs each for 1 hour. Moreover, the company has an additional 2 wind farms under construction: one in Australia and the other in New Zealand. In the table below you can find details regarding each operational asset and some maps to gain a better geographical compass. The company has a strong pipeline consisting of 14 projects of which 10 have already consented – (consent is given by local and other government authorities based on a myriad of subcategories such as noise, site boundary, environmental assessment, etc.). More interestingly, the pipeline includes projects associated with the development of storage and firming technology which will be crucial for the renewable energy sector going forward. Furthermore, the company received $541M from the sale of one its Australian assets “Snowtown 2 Wind Farm”. As a result, Tilt reduced its gearing ratio from 48% to 12% as it used part of the proceeds to retire debt, as well as return circa $260M in excess cash back to shareholders. These major milestones as well as the growing social awareness of Environmental, Social and Governance (ESG) factors may support Tilt’s strong 2-year historical share price performance relative to the ASX-200 index, that increased more than 100% since its February 2018 price.
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Industry Australia’s energy generation and consumption is dominated by fossil fuels, accounting for circa 80% of the energy generated in 2018 with the remainder generated from renewables. However, the Australian Energy Statistics reported that energy used to generate electricity fell by 2% despite a 1% increase in electricity output, reflecting reduced fossil fuel generation and an increase in renewable energy generation. This has started to become a recurring trend with renewable energy generation in 2019 accounting for 24% i.e. a 4% increase. Wind is the dominant form of renewable energy generation in Australia, followed closely behind by solar constituting a combined 68% of renewable energy generation (see chart below). Moreover, it is likely that the renewable energy industry will continue to flourish into the near future as investors become more environmentally conscious about their investment decisions as well as banks reducing their funding exposure to fossil fuel companies.
A list of comparable companies to Tilt are compiled into a table on the following page, which have been carefully selected to provide a holistic representation of the financial characteristics and performance of the renewable energy sector that is relevant to Tilt. Moreover, these companies have wind and solar assets that are geographically similar to those of Tilt’s. As somewhat expected, the industry Beta average is relatively low (0.532), this is because companies and households need things like electricity irrespective of the business cycle. Put differently, if the market moves up by 1%, on average the renewable energy industry will move up circa ⁄ %. Additionally, the Australian government’s renewable energy agenda appears to be focused on technical, regulatory and market amendments that accept more renewables into the energy mix, highlighting the political sentiment on renewables penetration. On balance, the renewable energy sector appears set to rapidly expand as the components of ESG are in the best interest of both the private sector and government bodies for their long-term success.
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Financial Analysis and Valuation Tilt’s overall financial performance is impressive. The company has maintained relatively stable gross profit margin of circa 70% over the past 3 financial years. Moreover, the company has seen circa 13% annual growth in total assets over the same period. However, group revenue was down 11% in 2020 ($193m to $170m), but this was expected due to the sale of their wind asset ‘Snowtown 2’. Other concerning signs to Tilt’s historical performance is its declining dividend growth from $0.03/share (2016) to $0.016/share (2018). However, Tilt’s strategic goal is to more than double their current renewable energy generation – which intuitively suggests the company has undergone large capital expenditures, which may have contributed to the lower dividend payouts. Additionally, the sale of Snowtown 2 can be clearly reflected in the company’s growth in shareholder’s equity and reduction in debt from 2019 to 2020 (see chart below) that provides the company more breathing room to weather economic downturns such as the COVID-19 pandemic and have the ability to fund near-term investment opportunities given its cash position of circa $230m.
Assessment of the company’s capacity to service debt has improved with time. The liquidity ratio improved from 1.15 (2018) to 1.54 (2019) and 7.89 in 2020. In other words, for every $1.00 of liabilities generated in 2020, the company generated $7.89 in assets. Additionally, the company’s EPS has grown at an annualised rate of 28.56%, which is significantly higher than the industry average of 5.72%. Tilt’s financial performance accompanied by their improved strategic position ex-post the sale of Snowtown 2 has provided a solid platform for growth. Tilt’s pipeline of projects is expected to have an additional 3000MW of electrical capacity, that is the amount of electrical power the assets could supply at a given point in time, 336MW of which is associated with the Dundonnell Wind Farm, which is in the final process of being commissioned. This will be Tilt’s largest wind farm and is expected to generate 1200GWh annually, increasing the company’s annual electrical generation by circa 60%. The Dundonnell Wind farm is expected to be operational by early 2021. There are two distinct methods to determine the value of a company, the first is relative, and the second fundamental. The former is a quick method that uses information from comparable companies and applies them to the target company. Given Tilt’s impressive pipeline and
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progress in regard to its current financial position, it is surprising to see that Tilt currently has a Price to Earnings (P/E) ratio of circa 3 times, which is well below the industry average of 32 times. Commonwealth Securities have estimated the industry average P/E ratio for renewable utilities to be 37.18 times, which falls between the average P/E ratios calculated in the comparable company table. By using the method of bootstrapping we can derive an estimate of Tilt’s equity value per share. This is done by taking Tilt’s Earnings per share ($1.0175) and multiplying it by the comparable company average P/E ratio (32x) equals $32.56. This is way higher than the company’s current share price, and it is clear that the sale of Snowtown 2 has distorted the earnings per share figure and hence, should be treated as a one off. Therefore, by using the fundamental approach we may derive a better estimate for Tilt’s fair value. This is done using a discounted cash flow analysis. To do a discounted cash flow analysis we need to project the free cash flow to the firm forward and discount them using an appropriate discount rate, which in this case we calculated using the Weighted Average Cost of Capital (WACC) as an appropriate discount rate. After re-levering the unlevered comparable company beta using Tilt’s capital structure, we can estimate the expected return (or the cost of equity) using CAPM which yielded 4.33%. Tilt’s after-tax cost of debt is 3.50% and its current gearing ratio is 12%, plugging into the WACC formula, equalled 4.23% which completes the necessary components of WACC. Additionally, the valuation made the assumption of going concern – that the company will continue to operate and meet its obligations into the foreseeable future. Based on that assumption the model predicted the company will grow at 2% into perpetuity (assuming the company grows at an average inflation rate of 2%). However, in the table below, we flex the rate of perpetual growth and WACC simultaneously to provide a range of equity values and demonstrate the sensitivity of the company’s fair value to changes in these assumptions. Based on the fundamental analysis, the model derived a fair value per share of $4.46, therefore, it is suggested that Tilt Renewables is currently undervalued, and the investment recommendation is to buy. To clarify the table below, it makes sense that the value of the firm will increase if WACC decreases, ceteris paribus, because we are discounting the future cash flows at a lower rate.
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Environmental, Social and Governance E – Tilt Renewables core business is focused on the construction and generation of renewable energy assets. Additionally, Tilt are committed to the preservation of land and habitats that encompass theirassets. S – Tilt Renewables places great importance on matters concerning social issues around thedevelopment of its assets and wider communities. One particular example was the Waipipi wind farm development where various cultural blessing and cultural inductions of the land and staff members were conducted prior to site works. Identifying clearly that Tilt has commitment to the preservation cultural heritage. Additionally, Tilt has a strong community presence in the various regional areas across Australia and New Zealand that support their economic wellbeing. The company also has two unique community alliances with Women’s Housing Limited and Warrnambool-based Emma House Domestic Violence Services Incorporated (EHDVSI), that are focused on providing housing specifically for women and children from south-west Victoria who are at risk of homelessness due to family violence. This reflects the social commitment and awareness to Tilt’s immediate and wider communities. G – Assessment of Tilts remuneration packages for executives and employees are consistent withsound governance. A good majority of the remuneration is based on their key performance indicators which comprise of mainly non-financial measures such as health and safety. The company has also seen significant improvement in their health and safety performance. By focusing remuneration on non- financial measures such as health and safety, provides a clear effortinducing signal to employees to be focused on reducing the probability of accidents through their direct actions, and in return, will be rewarded monetary compensation.
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TCFD and Climate Change Report Provided by Invesco Asset Management Limited, courtesy of Cathrine de-Coninck Lopez
INVESCO REPORT
Summary of TCFD and Invesco's Climate Change Report Invesco ESG Initiative: The Task Force on Climate-related Financial Disclosures (TCFD) The Task Force on Climate-related Financial Disclosures (TCFD) put in place a framework for reporting on the important financial risks and opportunities of climate change, calling for the integration of climate-related risks and opportunities into asset management and investment practices. This reflects not only a commitment to the global cooperation needed to meet international climate targets, but also the strategic necessity of minimising risks to ensure that portfolios align with changing market conditions. In March 2019, Invesco signed the ‘Statement of Support’ for the Task Force on Climate-relate Financial Disclosures (TCFD). Our aim was twofold: to leverage it for our engagement activities, and to implement our own climate change risk management and reporting process. The TCFD framework aligns with our belief: climate change is a strategic business issue that can impact long-term financial performance. This belief guides our approach as a corporate, making the TCFD a valuable frame of reference for engaging with investee corporates on issues relating to their own climate strategy. The TCFD recommends disclosing climate-related financial risks through four pillars: Governance, Strategy, Risk Management, and Metrics and Targets, with each section exploring what is currently being done, our next steps, and future plans.
Introduction We are already seeing the consequences of 1°C of global warming over pre-industrial levels, including more extreme weather, rising sea levels and diminishing Arctic sea ice. According to the Intergovernmental Panel on Climate Change, an effective reduction in the impact of climate change on ecosystems, health and well-being could be achieved by limiting global warming to 1.5°C rather than 2°C [1]. The Paris Agreement is the first truly global effort to reduce emissions. To date, 160 countries have made voluntary pledges to reduce emissions by 2030, including China, the US[2] and the European Union (on behalf of the UK and other EU nations). The main aim of the agreement is to hold the increase in global average temperature well below 2°C while pursuing efforts to limit warming to 1.5°C. Taken together, current pledges would lead to lower global emissions than previously forecast, but further action will be required to keep total warming below 1.5°C.
[1] ‘Limiting global warming to 1.5 °C compared with 2 °C would reduce challenging impacts on ecosystems, human health and well-being, making it easier to achieve the United Nations Sustainable Development Goals,’ Priyardarshi Shukla, Co-Chair of IPCC Working Group III. [2] On 1 June 2017, President of the United States, Donald Trump, announced that the US would cease all participation in the 2015 Paris Agreement. In accordance with Article 28 of the Paris Agreement, a country cannot give notice of withdrawal from the agreement before three years of its start date in the relevant country, which was 4 November 2016 in the case of the United States. On 4 November 2019, the administration gave a formal notice of intention to withdraw, which takes 12 months to take effect. So, the earliest possible effective withdrawal date by the United States cannot be before 4 November 2020, four years after the Agreement came into effect in the United States and one day after the 2020 US presidential election. Until the withdrawal takes effect, the United States is obligated to abide by its commitments under the Agreement, such as the requirement to continue reporting its emissions to the United Nations.
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Climate change background: physical and transition risks and opportunities Much more needs to be done. As climate policy action to date is not sufficient to meet the targets of the Paris Agreement, there is no clarity on the timing and scope of any transition to a low-carbon economy. Not knowing when these changes to climate policy will take place, let alone what they will look like, creates significant uncertainty. In view of this, the development of a corporate understanding of the effects of climate change on business, strategy and financial performance is highly challenging. The uncertainty has only worsened with the advent of the COVID-19 pandemic. While climate change is not slowing down, financial decisions are being made in response to the pandemic; decisions that will have a lasting impact on the global economy. As Christiana Figueres[3] has said: ‘...the COVID-19 pandemic has collided with the climate change emergency. The pandemic induced financial decisions made over the next 12 months will shape the global economy for the next decade. We must integrate the solutions to both crises into a coherent response. After immediate health, safety and social protection measures, inclusive recovery programmes must propel the global economy towards sustainable growth and increased resilience’.[4] Such solutions are urgently needed, with the financial risks and opportunities associated with climate change becoming increasingly apparent. As policies to avoid dangerous climate change become more and more stringent each year, the associated transition risks in financial markets also increase. Policy and technology shifts have already begun to affect the competitiveness of emissions-intensive companies and their low-carbon alternatives alike. Meanwhile, we are seeing the physical consequences of climate change with ever-increasing frequency and ferocity. As global warming continues, the risks only multiply.
Transformation of the economy to mitigate climate change brings its own set of risks. The Task Force divides climate-related risks into two major categories: risks related to the physical impacts of climate change and risks related to the transition to a lower-carbon economy. The TCFD also defines climate transition opportunities. The definitions are as follows[5]: Physical Risk - Physical risks resulting from climate change can be event-driven (acute) or longer-term (chronic) shifts in climate patterns. Physical risks include changes in precipitation and water availability, in temperature, in the location and/or frequency of extreme weather, in fire behaviour, and in sea levels and chemistry. Physical risks may have financial implications for organisations, such as direct damage to assets and indirect impacts from supply chain disruption. An organisation’s financial performance may also be affected by issues relating to the availability, sourcing and quality of water, by food security, and by extreme temperature changes that affect premises, operations, supply chain, transport requirements and employee safety.
[3] Christina Figueres is a world authority on global climate change and was the Executive Secretary of the UNFCCC (United Nations Framework Convention on Climate Change) 2010–2016. https://christianafigueres.com/#/ [4] Source: Financial Times, ‘Can we tackle both climate change and Covid-19 recovery?’, Christina Figueres and Benjamin Zycher, as of 6 May 2020. [5] Source: TCFD https://www.fsb-tcfd.org/
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Transition Risk - Transitioning to a lower-carbon economy involves mitigation and adaption in response to climate change. This may entail extensive policy, legal, technology and market adjustments. Depending on the nature, speed and focus of these changes, transition risks may pose varying levels of financial and reputational risk to organisations. For example, the major initial change needed in most economies is a shift away from the use of fossil fuels, towards the use of energy sources with lower emission levels. This shift has direct downstream implications for commodity volumes, prices and logistics. However, it also has implications for energy prices, and for areas of opportunity such as renewable energy, electric mobility, hydrogen, carbon capture and storage, efficiency and various other factors. Transition impacts go well beyond just energy, affecting many sectors and also including legal risks and risks to the social licence to operate. Climate Opportunities - Efforts to mitigate and adapt to climate change also produce opportunities for organisations, for example through resource efficiency and cost savings, the adoption of low-emission energy sources, the development of new products and services, access to new markets, and building resilience along the supply chain. Climate-related opportunities will vary depending on the region, market and industry in which an organisation operates.
Invesco’s emissions intensity, temperature alignment and scenario analysis - Emissions Intensity and Temperature alignment To enhance our understanding of the contribution of our investments to global carbon emissions, Invesco sought to establish the current emissions intensity and temperature alignment of our investments.[6] Vivid Economics assessed the scope 1, 2 and 3 emissions intensities of GIVZ Equity in terms of tons of CO2 emitted per millions US$ of revenue generated by the issuer. These intensities are intended to reflect the proportion of a company’s emissions Invesco ‘owns’ through its equity or debt holdings. Our GIVZ Equity basket exhibits slightly lower emission intensity than the MSCI ACWI benchmark for all three scopes.
Findings Our GIVZ Equity basket exhibits slightly lower emission intensity than the MSCI ACWI benchmark for all three scopes (Figure 9). A significant proportion of our holdings’ overall emissions intensity is contributed by companies in a small number of high-emitting sectors, including Energy, Materials and Utilities. While these sectors together represent around 10% of our holdings in terms of value, their contribution to the overall emissions intensity is higher across all three scopes. For GIVZ Equity, companies in the Utilities, Materials and Energy sectors contribute more than 75% of the scope 1 emissions intensity, and around 25% of the scope 2 and 3 emissions intensities. Examining the emissions intensities on a sector level allows us to identify and engage with those corporates that contribute most to the overall result. Scope 1 emissions intensities can also provide a picture of the temperature pathway with which our investments are currently aligned. As one firm’s scope 2 and 3 emissions are another firm’s scope 1, this analysis uses only scope 1 emissions in this step to avoid the double counting of emissions. The global economy’s emissions intensity varies across temperature pathways, allowing us to map our holdings’ current intensities to the temperature pathway with which they are most consistent.
[6] We focused on results from the analysis of our universe of listed global equities (GIVZ Equity) and global corporate bonds (GIVZ Bond) investments as of 31 December 2019. GIVZ Equity represents a basket of Invesco’s total equity holdings as of December 2019. Similarly, GIVZ Bond is a proxy of corporate bond holdings, representing 20% of Invesco’s total corporate bond holdings as of December 2019. Throughout, we use the MSCI ACWI[6] as a global benchmark to provide context for results.
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Our equity holdings are currently estimated to be aligned with warming of 2.8 °C. This places them significantly above the Paris Agreement’s target of well below 2°C warming, but is in tune with the MCSI ACWI alignment of 3.1°C.
Scenario Analysis In addition to our emissions intensity and temperature alignment assessments, Invesco explored the use of scenario analysis through a pilot project with Vivid Economics. As recommended by the TCFD, the scenario pilot incorporates separate analysis for each of transition (policy-driven) and physical (climate-driven) climate change risks. Vivid Economics conducted scenario-based analysis for Invesco using its Climate Risk Toolkit, analysing the impact of a high policy stringency scenario (1.5 °C) and a scenario with no further climate action (4 °C) on a variety of portfolios. Impacts are expressed relative to a baseline (3 °C) scenario which sees countries implement their Nationally Determined Contributions (NDCs) to the Paris Agreement. Inaction may present possible gains. These gains can be outweighed, however, by mitigating portfolio risks from a 1.5 °C scenario to avoid potential losses. We can’t afford not to exceed +1.5 °C; the cost that this involves is one that must be borne for the sake of our future. Our role as active managers is to engage with our current holdings as well as search out and find new investments in issuers that are investing in technologies and other adaptations to both limit the temperature increase and create value for our investors. This would be a long-term climate strategy that would be true to our company values and be worth pursuing for the benefit of our clients and our shareholders at large.
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Findings Transition Risks outweigh Physical risk impacts. The physical risks from climate change are long-term risks, anticipated to increase significantly over the period to 2100 and beyond. This means a significant proportion of these risks cannot be reflected in equity valuations today when using standard financial discounting, which places more weight on earlier years. In addition, physical risks will be concentrated in developing countries, which tend to contribute less to the value of global equity portfolios than developed countries. To mitigate long-term physical risks, climate policy and resultant transition must take place in the short term. This will be critical to maintaining stable economic growth and asset values in the long term. Invesco recognises these underlying mechanisms and emphasises that we see opportunity in mitigating our portfolio risks from a 1.5 °C scenario, with the avoidance of possible losses in the longer run outweighing any possible gains from inaction. The majority of transition risk impacts are driven by a small number of sectors (Energy, materials â&#x20AC;&#x201C; Figure 14).
Impacts from chronic physical risk are more significant than from acute physical risk. Broadly speaking, there are two types of physical risk: acute and chronic. Acute physical risks arise from changes in the weather (day-to-day expression of the climate), while chronic physical risks are due to changes in the climate (long-term trends intemperature). Acute physical risks can be mitigated through adaptation, for example by building flood barriers. On average, equity valuations are worse affected than debt valuations.
Investment risks The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.
Important information Where individuals or the business have expressed opinions, they are based on current market conditions, they may differ from those of other investment professionals and are subject to change without notice. Issued by Invesco Asset Management Limited, Perpetual Park, Perpetual Park Drive, Henley-on-Thames, Oxfordshire RG9 1HH, UK. Authorised and regulated by the Financial Conduct Authority.
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Sustainable Business Review Green Economy Society Nottingham nottinghamgesoc@gmail.com
Sustainable Business Review, 2020. Published January 2021.