Where are we in this tumultuous year in using financial products and political pressure to bring down carbon emissions? China’s emissions are double that of the EU and, until September, the green bonds market had stalled. Maitri's ESG lead in Singapore looks at what various efforts are yielding.
To clear up any confusion about the meaning of net zero, it is this: net zero emissions (or net zero) is the scenario where the amount of greenhouse gases (GHGs) emitted, either by anthropogenic (originating from humans) or natural means, is offset by the amount of GHGs removed – also referred to as carbon neutral. The term is tied to the 2015 Paris Agreement temperature goals to limit increases well below 2°C, and to no more than 1.5°C, by 2050. It has also become synonymous with financial instruments pouring into markets to reach this goal. In a Rome is burning kind of year, Edris Boey, ESG practice lead at Maitri Asset Management in Singapore looks at the extent to which financial systems are being applied and governments and corporates are engaged in the task, including the stop-start green bond market and what else is being dealt for mainstreaming green finance, particularly given China's recent bold commitments. The editors are pleased to share this commentary, where the usual editorial disclaimers apply. Email firstname.lastname@example.org and email@example.com
In August alone, extreme weather wreaked havoc in multiple locations globally – we witnessed the longest rainy season recorded in South Korea, the worst flooding in a century in China, and record-high temperatures and unprecedented heat waves in the US. These events triggered devastating floods and fires causing fatalities and severe damage to infrastructure as well as agriculture. For instance, flooding of the China Yangtze River affected 63 million people and caused $26 billion worth of damage – 12.7 per cent and 15.5 per cent higher than the five-year average respectively.
Q3 2020 sees rise in interest for carbon neutrality
In Q3 2020, we witnessed a surge in countries and companies pledging to achieve carbon neutrality – the most noteworthy being Chinese President Xi Jinping’s monumental commitment to take the country to net zero emissions before 2060. As China is currently the world’s manufacturing powerhouse, as well as the largest emitter of GHGs, having overtaken the US in 2006, its latest announcement will have profound repercussions across the political, economic and investment spheres. It will be a herculean task requiring massive effort and investments to bring this behemoth nation to net zero.
Investors are also turning the heat on companies. In mid-September, the Climate Action 100+ (CA100+), a corporate engagement collaboration network of investors including Maitri Asset Management, announced a new Net Zero Benchmark for its members to assess the “net zero journey” progress of 161 companies, accounting for 80 per cent of the world’s GHG emissions. The CA100+ members, which collectively manage $47 trillion in assets, are sending letters to the boards of these companies detailing what is expected from the Net Zero Benchmark in terms of scope and timeline, requiring science-based mid and long-term targets to be set. This approach aims to ensure alignment on this benchmark’s definition of net zero, for example promoting the inclusion of Scope 3 emissions, commonly omitted by corporates due to the difficulty in assessment, from a company’s value chain.
Putting the current net zero movement into context, in 2016 energy demands contributed to 73.2 per cent of global GHG emissions – used in industry, buildings and heating, and transportation – and will therefore require the most significant reduction. Given that the single largest GHG emitter annually is China’s coal power sector, addressing this energy transition challenge is paramount to achieving carbon neutrality by 2060.
Growing green bond market to play vital role in achieving environmental goals
To achieve goals of carbon neutrality on a global scale, electricity generated from carbon neutral sources must outpace electricity generated from fossil-fuels, if not completely replace it. This leads to investment opportunities, in both the bonds and equities markets, in crucial sectors such as clean energy production, electric vehicles and their component makers, as well as other carbon neutral infrastructure.
The green bond market is an obvious investment vehicle which was growing exceedingly well with 2019 hitting a new record in global issuance. The pandemic halted growth in the first eight months of 2020, but September figures show that green bond issuance doubled compared with the eight-monthly average and recorded a new monthly high. Demand for green bonds has outstripped supply many times, evident in recent green bond issues, eroding gains for investors which caused concern that their interest may start to weaken.
The German government’s €6 billion foray into green bonds in late-August helped keep the interest in the market as it serves as a risk-free benchmark for the green bond market, and another €6 billion issuance is slated for before the end of the year. Likely to further rally investors is the highly anticipated removal of “clean utilisation of coal” from the People’s Bank of China’s list of eligible green bond projects as this would better align Chinese green bonds with international investors’ benchmarks. In 2019, $24 billion worth of Chinese green bonds were deemed as unaligned with international standards compared with $31 billion, which were aligned. In view of China’s 2060 carbon neutral goal, the “clean coal” exclusion will almost certainly happen.