Examples of ESG Thought Leadership
What’s happening? More than half of European fund managers decline to invest in companies that contribute to climate change, compared to fewer than 33% of their US counterparts, according to a survey of 101 North American, European and Asian institutions by PGIM and Greenwich Associates. The survey also revealed North American funds were slower to stress-test their portfolios to climate risk and support firms trying to mitigate the effects of climate change.
Why does this matter? Climate change is anticipated to have a notable impact on investment portfolios globally. This is clearly reflected in the sentiment of the global investors in PGIM’s survey, with almost 90% considering climate change to be “very or somewhat important”. Yet, despite this acknowledgement, there remains a gap in terms of tangible climate action – with almost 40% of surveyed investors not yet factoring climate change into their investment process. This gap varies across regions, as shown in this survey and beyond. Analysis from the think tank InfluenceMap also found US fund managers, including Vanguard and Fidelity Investments, lagged European counterparts in aligning their portfolios with the Paris Agreement.
More broadly, the PGIM white paper also found escalating risks like climate migration, and civil unrest over water scarcity, could eventually “overwhelm the direct effects from climate change”. Even looking to the near horizon, climate change is already anticipated to displace as many as 143 million people globally by 2050. Investors adopting a regional focus will need to account for these knock-on effects alongside the direct impacts of climate change.
Despite the risks there are also opportunities for investors to uncover on climate change, even where the wider market sees restricted value. PGIM’s white paper advocates investors deploy forward-looking climate analytics, as only one in five currently use alternative data like flooding maps and air quality to help inform decisions.
Building on this, investors focused on the real estate, infrastructure and agricultural sectors could also use alternative resources, like geospatial technology, to hedge risks and increase alpha. In Europe, initiatives like Oxford University’s launch of a spatial finance centre this month reflect a rising area of opportunity for green investing. Meanwhile, investors in Asia and the US could avail the region’s increasing leverage of leveraging geospatial data, in order to assess the physical climate risks tied to their portfolios.
Finally, it is worth noting differing attitudes towards accounting for climate change on each side of the Atlantic may shift in the future, amid emerging legislation and changes in investor sentiment. We are already seeing nascent US prospects for climate regulation, with stress tests for the financial sector potentially on the horizon. Meanwhile, MSCI’s 2021 Global Institutional Investor Survey found 59% of the 200 firms surveyed hoped to “completely” or “to a large extent” incorporate ESG issues into their investment decisions by the close of 2021.
What’s happening? French bank BNP Paribas has announced that agricultural business clients producing or buying beef or soyabean in Brazil’s Amazon or Cerrado regions will be required to enact a strategy to reach zero-deforestation in their supply chains by 2025. Additionally, the firm will not provide financing to users producing or buying the products from Amazon land that was cleared or converted after 2008, while advising customers not to use land cleared or converted in the Cerrado after 1 January 2020.
Why does this matter? The Brazilian Amazon Rainforest lost 11,088 sq km of forest between July 2019 and July 2020 – the largest area in 12 years. Much of this was due to the administration of President Jair Bolsonaro dismantling environmental laws, which he claimed unfairly targeted farmers.
While deforestation has an obvious impact on biodiversity, it’s also harmful for efforts to stem the impact of climate change. In 2019, Brazil’s carbon emissions rose almost 10% year-on-year, with emissions from deforestation comprising 44% of the country’s total CO2-equivalent emissions. Recently, a cohort including Greenpeace and Indigenous people’s group APIB have taken legal action against the Brazilian government, claiming its facilitation of Amazon deforestation violates constitutional protections and international commitments.
Amid concerns over deforestation in the Amazon, financial institutions have been scrutinised, with many accused of lending to companies contributing to harmful activity in the region. A report from the Bureau for Investigative Journalism and Greenpeace last year claimed UK-based banks and investors had provided more than $2bn in backing in recent times to firms linked to deforestation, including Minerva, Marfrig and JBS. More recently, a World Wide Fund for Nature report claimed two-thirds of Southeast-Asian banks disregarded deforestation risk.
Some lenders have previously made commitments to minimise their exposure to activities linked to harmful deforestation. In 2017, for example, HSBC said it would no longer provide funding to palm oil companies involved in deforestation or peatland clearance. The bank, however, was named in the aforementioned report among those reportedly providing financial support to beef suppliers with links to logging in the Amazon.
Against this backdrop, efforts are being made to reduce exposure to products with ties to deforestation. In December last year, for example, French authorities signalled the country would lessen its dependence on Brazilian soy. The country offered French producers a grant of €100m ($121m).
Of course, excluding Brazilian soy from supply chains isn’t without impact. To mitigate this, Brazil’s government signalled last year an intent to introduce an agricultural and environmental economic plan for the Amazon region. Officials suggested harnessing the region’s biodiversity for the pharmaceutical or chemical industries could help a move away from more destructive industrial activity.
What’s happening? Bank of America (BoA) has become the latest large institution to target net-zero status via its financing before 2050, after Morgan Stanley and JPMorgan Chase made similar commitments. BoA also pledged to disclose its financed emissions by 2023 at the latest, following its participation in developing the global GHG accounting and reporting standard for the financial industry. The bank estimated the potential market cap of companies tackling climate change across industries including ESG, EVs and renewables at around $6tn.
Why does this matter? BoA’s intention to achieve net-zero emissions status via financing activity comes on the heels of a cluster of sustainability focused actions from the lender.
In January, the bank was among 60 firms that agreed to adopt an ESG standards reporting framework supported by the World Economic Forum and developed in partnership with the “Big Four” consultancies. BoA was also given a top rating by non-profit CDP with regards to making voluntary climate disclosures. As the above article notes, the bank was also involved in developing the Global GHG Accounting and Reporting Standard for the Financial Industry via its involvement as a member of the Partnership for Carbon Accounting Financials.
This is not the first time BoA has lagged its competitors in adopting environmental policies. In December, the lender formally excluded Arctic oil and gas exploration projects from its financing, a move that had previously been taken by both the aforementioned banks, as well as Wells Fargo, Goldman Sachs and Citigroup.
BoA’s decision to formerly deny these projects access to financing arrived amid pressure from grassroots environmental organisation the Sierra Club and activist investor Trillium Asset Management, which had filed a proposal raising concerns about the bank’s refusal to rule out the backing of Arctic drilling. For its part, BoA justified its delay in officially excluding Arctic exploration from its financing activities, noting it historically hadn’t provided support for projects impacting the Arctic’s biodiversity. Its step in December was simply “codifying” its approach, a spokesman said.
More broadly, BoA has faced the same criticism as many large financial institutions regarding the historical financing of fossil-fuel companies and projects. A report published by 18 climate groups in December said the lender, together with JPMorgan and Citigroup, had provided almost $300bn to fossil-fuel projects since 2016.
What’s happening? Decarbonisation and green energy plans could wipe a cumulative $13tn (current value) off government revenues of oil and gas producing countries by 2040, according to a report from think tank Carbon Tracker. The report predicts 40 “petrostates” will be hardest hit, suffering an average 46% loss in oil and gas revenues. Some of the countries in this cohort are also among the world’s poorest, the report states, adding diversification into other industries is urgent. Carbon Tracker suggests there is a moral obligation for the rest of the world to support the transition in poorer countries to achieve climate results and ensure stability.
Why does this matter? The move to a Paris Agreement-friendly economy will result in winners and losers. Carbon Tracker, which often points its analysis towards the stranded assets that could be left behind in the transition to a low-carbon economy, has assessed the countries set to suffer without a rapid diversification of their energy sources.
It’s Beyond Petrostates report says the world’s most oil and gas-reliant countries, located mainly in the Middle East, South America, and North and West Africa, would see government revenues collapse amid a low-carbon transition due to a sharp drop in oil prices. Angola, Azerbaijan, Oman and South Sudan are ranked among the most vulnerable in terms of their fiscal dependence on oil and gas revenue and their total projected shortfall.
Alongside this sovereign risk, among the 19 most vulnerable states, which are home to around 400 million people, 10 rank as “low” in the UN’s Human Development Index, underscoring the need for forward planning to also alleviate potential social implications. On top of oil prices, efforts from developed nations to account for the carbon emissions outside their borders could exert further pressure on such nations.
Carbon Tracker’s arguments it should be a moral obligation for developed countries to support developing nations transition away from fossil fuels could be levelled at the UK, which until recently has given significant financial support to oil, gas and coal projects overseas – a practice it is clamping down on.
An adequate flow of climate finance from developed to developing nations organised through the UNFCCC’s COP process should also help. However, this is an issue that has constantly hit sticking points at the climate summits. Nations are lagging on a 2009 pledge to supply $100bn annually to support climate change projects in poorer nations. Some countries, such as Japan and France, have even been accused of overinflating their financial contributions to this cause. Academics have proposed one way to boost this finance could be to implement a system of taxes on international flights and shipping.
Some oil-driven states are already diversifying their economies. The United Arab Emirates has a 10-year Sustainable Finance Framework that is designed to support renewables and nuclear energy. Elsewhere, Saudi Arabia has been installing significant renewable energy capacity following an investment plan to become less dependent on oil, following a previous slump in prices.
GREENHOUSE GAS EMISSIONS
What’s happening? The production of raw materials including cement and steel is having a growing environmental impact, with greenhouse gas emissions from such production more than doubling from 5 billion to 11 billion mt between 1995 and 2015, according to research from the Norwegian University of Science and Technology. The proportion of global emissions from such production also rose from 15% to 23% over the same period, the analysis found. Iron and steel production generated the most emissions, followed by cement. Much of the emissions increase is linked to rising production in rapidly emerging economies, particularly China, the study claimed.
Why does this matter? Creating the materials most things are built from represents a growing share of the world’s emissions, and this will need to be addressed if climate change targets are to be met.
The research highlights the oversize contribution emerging economies are having on these emissions. China alone accounted for half of the total emissions related to material production in 2015, and the country accounted for three-quarters of the increase in material emissions over the 1995 to 2015 period studied. Exports from the country only increased relatively moderately over this time, indicating its investment-driven internal development is behind the CO2 rise.
To get a handle on this, reducing stocks of manufactured capital will be key. Taking a look at concrete alone, which is the world’s second-most widely used substance after water, its production accounts for up to 8% of the world’s CO2 emissions. China uses half the world’s concrete, and currently pours more cement in three years than the US did in the entire 20th century.
China has increased its efficiency and is shifting to a more service-based economy, resulting in a stabilisation of cement emissions. The Norwegian University of Science and Technology research, however, highlights that the government’s Covid-19 investment stimulus has resulted in a greater production of iron ore, with steel output post-Covid-19 disruption increasing to record levels.
To tackle the problem, the research states it’s important to reduce the world’s material stock. One way to do this, particularly in China, is to look at buildings. Separate research indicates 20% of China’s CO2 emissions in 2015 came from the construction and demolition of buildings alone. One of the factors feeding into this is the country’s building stock’s short lifetime, with many structures only standing for 30 years before they are demolished.
Moving away from reinforced concrete as a construction material can also help. Projects in China and elsewhere are looking at using cross-laminated timber (CLT) as a structural building element. Replacing concrete structures with CLT can reduce a building’s embodied emissions by around 60%. CLT is gaining traction in the industry, with Berlin recently approving a 29-storey apartment building slated to be Europe’s largest.
Elsewhere, other firms are looking at techniques to develop lower-carbon cement.
What’s happening? Heavy-duty industrial production of materials including steel, cement and aluminium accounts for around 25% of global emissions, but as many as 95 out of 111 large publicly listed industrial firms are not currently aligned with global climate targets to limit temperature increases to 2C, according to a Transition Pathway Initiative report. The firms analysed, including LaFarge Holcim, BASF and Tata Steel, are worth $856bn combined. The steel sector is responsible for around 10% of global energy emissions, so must take substantial action to align with climate targets, the report adds.
Why does this matter? To meet global climate change targets, hard-to-decarbonise industries are coming under increasing focus following the relatively easy wins of reducing emissions in the electricity sector.
The Transition Pathway Initiative’s (TPI’s) latest research – conducted by the Grantham Institute – highlights large firms in heavy industry still have quite a lot to do, particularly in the aluminium and paper sectors. In these two sectors, only Rio Tinto (for aluminium) was found to be aligned with a 2C-friendly pathway. The steel sector performed better, with six firms including Arcelor Mittal assessed as being Paris-friendly.
The research, which also covers the cement and mining sectors, finds firms are better aligned with shorter-term climate goals as the emissions reductions needed in these sectors after 2030 to meet 2C increase significantly. The firms achieving TPI’s highest rating for climate governance were Air Liquide, BHP, Vale, Anglo American, Klabin and Koninklijke Philips.
The report recommends more circular approaches are applied in these industries, for example by replacing clinker in the cement industry with blast-furnace slag or coal ash. A similar approach is being looked at by steel firm Thyssenkrupp which has developed a method to replace cement clinker with activated clay, which it says could reduce cement production emissions by 40%.
TPI’s report specifically highlights the steel sector. There are various technologies that can be employed to target emissions here, with Thyssenkrupp also developing a water electrolysis plant at its steel mill in Bruckhausen to replace the fuel used in its blast furnaces with green hydrogen. The project is open to outside investors.
Rio Tinto is investing in low-carbon steel alongside China Baowu Steel via R&D based around biomass and carbon capture, with the latter technology also being explored by the steel industry in Japan. Elsewhere, the MIT spin-off Boston Metal is developing its metal oxide electrolysis technology to produce steel through high-temperature electrolysis without water or reagents – which eliminates CO2 if the electrolysis is powered with renewables. The firm has recently received a $6m investment from Vale for a minority stake.
What’s happening? A report card from the Australian government has found that the Great Barrier Reef’s coastline is still experiencing poor health, leading conservationists to call for action ahead of a world heritage committee meeting set to take place in China in June. The report found that the health of corals and seagrass meadows in inshore areas had not improved, although water quality was slightly higher than in previous years. The monitoring period covered by the report ended prior to widespread coral bleaching in the area in early 2020.
Why does this matter? The continually poor condition of the world’s largest coral reef system is concerning, and carries implications for local marine species and the ecosystem services it provides.
Tropical coral reefs are threatened by rising sea temperatures and could see “near-annual” large-scale bleaching events as a result of accelerating climate change. The Great Barrier Reef encountered its most extensive bleaching event last year – the third such significant event over the last five years. Further mass bleaching may be seen this summer despite the La Nina climate phenomenon that is due to occur, which usually lowers ocean temperatures – and consequent widespread heat stress on corals – across this region.
Other reefs are facing similar climate-induced damage. Almost one-third of Taiwanese reefs are dying as a result of bleaching, with 62 locations around Taiwan reaching record levels of bleaching in a 2020 investigation by the Taiwan Coral Bleaching Observation Network.
Alongside climate-related impacts, poor land management and resulting run-off from fertilisers and chemicals form another environmental pressure faced by Australia’s corals. The Reef Water Quality Report Card 2019 scored the marine environment along the Great Barrier Reef’s coastline at a ‘D’ grade, with overall inshore coral conditions remaining poor and declining in some regions including Mackay Whitsunday and the Wet Tropics. Improvements in water quality, however, were recorded in some land catchment areas whose run-off affects the reef, such as Cape York and Fitzroy – a result of improved agricultural practices. Levels of dissolved inorganic nitrogen also declined by 4.3% across all catchment areas compared to 2018.
A variety of methods are being explored to enhance coral resilience against threats such as climate change. Scientists from the University of Hong Kong have created 3D-printed hexagonal “reef tiles” to protect corals by elevating them from the seabed and increasing their access to nutrients, sunlight and food. Other approaches include geoengineering – Australia’s government-backed marine brightening project aims to use condensation nuclei to increase the reflectiveness of clouds to shade corals during heatwaves.
Elsewhere, a researchers have recently discovered coral biomarkers – chemical signatures in the biology of corals – indicating resistance to bleaching. These were present in some species that survived Hawaii’s 2015 bleaching event. This insight could help to counter bleaching and aid future reef restoration, as the most resilient specimens could be selected over others for reseeding.
Natural solutions could also help to combat declining coral health. Marine species such as sea cucumbers are crucial as their faeces releases calcium carbonate, which is needed for coral skeleton growth, to aerate marine sediment and to fertilise water. Researchers are investigating their populations to help sustain the health of a reef off the coast of Queensland.
What’s happening? The sawfish, a type of ray, is now presumed extinct in over 50% of its former habitats along the coastlines of 90 countries, according to international research. The shark-like rays, which resemble hedge trimmers, are experiencing population declines due to habitat loss and entanglement in fishing nets, to which their “saws” make them particularly vulnerable, claim researchers.
Why does this matter? Alongside plastic pollution and rising temperatures, overfishing is a major threat to the world’s oceans. The above story is noteworthy in that it marks the first time a wide-ranging marine fish has been forced towards extinction from unsustainable fishing activities.
The sawfish is now one of the most endangered ocean fishes, with three out five species listed as critically endangered and two as endangered, according to the International Union for Conservation of Nature’s Red list of Threatened Species. Populations of other marine species are also under threat from overfishing – such as whales, dolphins and porpoises, of which an estimated 300,000 are killed annually by fishing nets and equipment. Reef shark populations have also been affected and are functionally extinct – when reduced populations no longer play a role in the ecosystem, or are unable to produce future generations – on up to 20% of global reefs, due to overfishing.
A lack of regulations in international waters makes it difficult to monitor excessive fishing. Regulatory gaps have led to overfishing in the Indian Ocean, for example. Elsewhere, nearly 300 Chinese vessels were discovered fishing off the Galapagos Islands’ exclusive economic zone last year – thousands of tonnes of fish including tuna and squid were caught, which are vital food sources for the island’s population of fur seals and endangered scalloped hammerhead sharks.
Aside from posing threats to marine life, overfishing and intensive fishing practices can also compromise the ocean’s ability to provide ecosystem services such as carbon sequestration. Bottom trawling is commonly used by commercial fishing fleets globally and can reduce the amount of carbon stored in the seabed, and lead to potentially irreversible sea floor erosion, according to researchers.
There have been attempts to introduce larger-scale regulations to tackle overfishing. Last year, the World Trade Organization failed to agree on a deal to reduce subsidies that lead to increased overfishing. In a more promising development, the world’s largest ocean sustainability initiative was agreed last year by leaders of the 14 member nations of the High Level Panel for a Sustainable Ocean Economy including Australia, Indonesia and Portugal, whose governments are collectively responsible for 40% of coastlines around the world. The pledges include committing to ensuring oceans within their jurisdictions are managed sustainably by 2025, in addition to improving measures to end illegal fishing and reducing bycatch and discards.
Meanwhile, another potential solution could involve aligning the interests of the fishing sector with ocean health. Blue bonds, for instance, could play a key role in eliminating overfishing by providing a financial incentive to commercial fishing companies to reduce their global catch and allow the regeneration of marine life and ecosystems.