Market Developments
Climate change – China announces carbon neutrality by 2060
With Climate Week NYC taking place at the end of September, it was perhaps not a surprise to see announcements around the subject of climate change featured heavily during the month. The most notable was from President Xi Jinping of China, with a plan to achieve peak emissions around 2030 and carbon neutrality by 2060.As the world’s largest emitter of greenhouse gases (GHG), accounting for around 28% of the global total, this announcement is really significant.
It also clearly raises the bar for other nations – especially the US and India. Both promises will also have significant implications for China’s energy mix and the associated transition – notably the impact on fossil fuel usage; phasing out the internal combustion engine in favour of electric vehicles; and the decarbonisation of industry supported by evolution of the hydrogen economy.
China’s commitment keeps it well ahead of the US in terms of climate leadership. However, to gauge how serious it is, we’ll need to see ambitious targets in the 14th Five Year Plan (202125) next year.
An increasing number of countries are making carbon neutral pledges and the UN Race to Zero, launched in June this year, now has more than 120 countries, 450 cities and 1,100 companies participating.
More ambitious EU climate targets
The European Union (EU) has voted to update its climate targets – specifically to increase its GHG-emissions reductions target for 2030 to 60% (compared with 1990 levels), in line with the ‘do no harm’ policy. This is a substantial step up in ambition compared with the 40% reduction agreed by the head of state back in October 20141.
This new target reflects the European Green Deal which set out the ambitions to transform the EU to become carbon neutral by 2050 – effectively no net emissions of greenhouse gases in 2050 and where economic growth is decoupled from resource use. To achieve this will require a tightening of the EU Emissions Trading System (ETS) trajectory to a central case of 61% below 2005 levels and for non-ETS sectors to 47% below1.
However, to put this figure in context, the UN's emissions gap report for 2019 suggests that global emissions would need to be cut by 7.6% annually between 2020 and 2030 to meet the 1.5 degree target set by the Paris Agreement2.
Reaching a 60% carbon emission reduction target is likely to result in an increase in carbon prices, require tighter regulation on sectors such as transportation and increased discussion on a carbon border adjustment. In theory, higher carbon prices can result in carbon leakage or a relocation of industrial activity to countries with lower carbon emissions.
BP... said demand for oil may have already reached its peak and may never recover from the COVID-19 pandemic.
New Zealand becomes first country to mandate TCFD disclosure
New Zealand will be the first country in the world to require its companies to report on climate risks.
Under the proposals, announced by its Minister for Climate Change, all listed issuers, in addition to banks, asset managers and insurers with assets over NZ$1 billion (€0.57 billion) will be required to disclose their exposure to climate-related risks and their policies to address them. This could amount to over 90% of New Zealand’s assets under management reporting in line with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD)3.
CFA – Climate Change Analysis in the Investment Process
Recognising the increasing importance of climate change, the CFA has published a practitioner’s guide, aiming to improve knowledge and understanding about how climate risk can be applied to financial analysis and portfolio management. It outlines how best to incorporate these analyses into investment processes, using case studies to illustrate methods being used.
In particular, the guide emphasises the importance of:
- Putting a price on carbon (at Martin Currie, we incorporate this through our proprietary Carbon Value at Risk (VaR) modelling – for more on this see the section below);
- Engaging with issuers to increase transparency and disclosure to ensure climate data, scenario analysis, and related disclosures are sufficiently thorough to support robust climate risk analysis in the investment process;
- Continuing to learn and educate;
- Meeting policymakers to ensure the necessary tools are in place to facilitate efficient allocation of capital.
The ‘Big Four’ collaborate – Measuring Stakeholder Capitalism
In a remarkable collaboration, the ‘Big Four’ accounting firms Deloitte, EY, KPMG and PwC, presented a white paper at the World Economic Forum (WEF), setting out a pathway towards common metrics and consistent reporting of sustainable value creation. The piece looks to ‘define a core set of Stakeholder Capitalism Metrics (SCM) and disclosures that can be used by members of the WEF’s International Business Council (IBC) to align their mainstream reporting on performance against environmental, social and governance (ESG) indicators and consistently track their contributions towards the UN Sustainable Development Goals (SDGs).
The metrics are based on existing standards with the aim, according to the WEF of ‘accelerating convergence among the leading private standard-setters and bringing greater comparability and consistency to the reporting of ESG disclosures.’
This will be an interesting development to follow, although it potentially adds to the ‘alphabet soup’ of reporting standards that we are already seeing.
Corporate news
BP releases 2020 energy outlook
BP, in its annual energy outlook published this month, said demand for oil may have already reached its peak and may never recover from the COVID-19 pandemic. The company predicts a shift towards clean electricity from windfarms, solar panels and hydropower plants, as renewable energy emerges as the fastest-growing energy source on record.
BP modelled three scenarios for the world’s transition to cleaner fuels that all see oil demand falling over the next 30 years. In the ‘business as usual’ case (which assumes government policies, technologies and societal preferences evolve in a manner and speed as in the recent past), oil demand rebounds from the COVID-19 hit then plateaus in the early 2020s. In the other two scenarios, which model more aggressive policies to tackle climate change, oil demand never fully recovers, implying 2019 levels of 100 million barrels a day will be the peak for consumption.
The new report marks a dramatic change from last year when BP’s base case expected oil consumption to grow over the next decade reaching a peak in the 2030s. As part of its new strategy to increase investment in green energy, BP made its first foray into offshore wind by buying a 50% interest in two Equinor developments off the coast of New York and Massachusetts, a deal worth US$1.1 billion.
In a remarkable collaboration, the ‘Big Four’ accounting firms Deloitte, EY, KPMG and PwC, presented a white paper at the World Economic Forum (WEF).
Martin Currie
Climate change – opportunities
Following on from the climate change-related papers published earlier this summer, we have published a paper outlining some of the opportunities created by transition to a lower-carbon economy. These include: the recasting of the energy system; the increasing focus on efficiency; new products and technologies; and infrastructure and real estate.
We investigate the need for companies to build resilience, but also highlight the barriers that are standing in the way of these opportunities being embraced.
ESG Working Group
We continue to evolve our leadership in Stewardship and ESG through our ESG Working Group. This provides a forum to share innovations across investment teams, focus on emerging issues and develop best practice.
Among the most recent developments have been the Carbon Value at a Risk (VaR) work, developed by our colleagues in Melbourne, which analyses the exposure of companies to carbon risk and quantifies this through carbon pricing.
We have been sharing the work that the GEMS team has carried out on mapping the UN SDGs, with a focus on the underlying investible targets. As part of this work we analysed each of the 169 targets underlying the 17 goals to identify those which companies, through the products they provide, are able to contribute to. This work identified 32 investable targets underlying 13 of the 17 SDGs. The initial work on this has received positive feedback from clients and we will continue to build on this analysis.
We are also developing our framework looking at the analysis and reporting of modern slavery risk, an issue which is of increasing importance to our clients. We will report back on this at it evolves.
Engagement
Climate Action 100+
We signed up to this collaborative engagement focusing on climate change earlier this year. As part of this we are leading engagement with one of India’s cement companies.
The initiative aims to secure commitments from the boards and senior management of its focus companies to:
- Implement a strong governance framework which clearly articulates the board’s accountability and oversight of climate change risks and opportunities;
- Take action to reduce greenhouse gas emissions across the value chain, consistent with the Paris Agreement’s goal of limiting global average temperature increase to well below 2°C above pre-industrial levels and moving towards 1.5°C. Notably, this implies the need to move towards net-zero emissions by 2050 or soon after;
- Provide enhanced corporate disclosure in line with the final recommendations of the TCFD and sector-specific GIC Investor Expectations on Climate Change (when applicable). This allows investors to assess how robust companies’ business plans are against a range of climate scenarios and to improve investment decision making.
During the month, we held the first call with the group. There was an opportunity to both reflect on the progress the company has already made, as well as introducing the initiative and exploring areas for further work.
Other engagement
The GLTU team has continued its engagement on cybersecurity, with further calls and responses from the companies concerned. This will help set the scene in identifying best practice and any particular gaps.
Meanwhile, we were approached by the Turkey Wealth Fund (TWF) to talk about our views on the proposed amendments to Turkcell’s Articles of Association. There were a number of positives in these amendments, the separation of CEO and Chairperson, the protection of minority investors’ preemptive rights, and the inclusion of a Corporate Governance clause.
However, there were also some reservations – notably proposed dual share-class structure, which will include the right of the TWF to appoint five out of the nine board members (including the Chair), effectively ruling out a majority independent board. Ultimately, while these changes won’t all be in line with best practice, they do represent an opportunity to clean up the group’s ownership structure and provide more stability than we have seen for a number of years.
Upcoming activity
With a slight delay over the course of the next month, we will be launching a refreshed Stewardship and ESG presentation deck which aims to showcase our capabilities and credentials in this increasingly important area.
The other main area of work continues to be the focus on upcoming legislation and understanding the accompanying requirements.
1Source: Agora report – https://www.agora-energiewende.de/fileadmin2/Projekte/2020/2020_07_Raising-EU-Ambition/185_A-AW-EU_Ambition_WEB.pdf
2Source: UN emissions gap report: https://wedocs.unep.org/bitstream/handle/20.500.11822/30797/EGR2019.pdf
3Source: https://www.mfe.govt.nz/news-events/climate-related-financial-disclosures-be-made-mandatory
Martin Currie
Climate change – opportunities
Following on from the climate change-related papers published earlier this summer, we have published a paper outlining some of the opportunities created by transition to a lower-carbon economy. These include: the recasting of the energy system; the increasing focus on efficiency; new products and technologies; and infrastructure and real estate.
We investigate the need for companies to build resilience, but also highlight the barriers that are standing in the way of these opportunities being embraced.
ESG Working Group
We continue to evolve our leadership in Stewardship and ESG through our ESG Working Group. This provides a forum to share innovations across investment teams, focus on emerging issues and develop best practice.
Among the most recent developments have been the Carbon Value at a Risk (VaR) work, developed by our colleagues in Melbourne, which analyses the exposure of companies to carbon risk and quantifies this through carbon pricing.
We have been sharing the work that the GEMS team has carried out on mapping the UN SDGs, with a focus on the underlying investible targets. As part of this work we analysed each of the 169 targets underlying the 17 goals to identify those which companies, through the products they provide, are able to contribute to. This work identified 32 investable targets underlying 13 of the 17 SDGs. The initial work on this has received positive feedback from clients and we will continue to build on this analysis.
We are also developing our framework looking at the analysis and reporting of modern slavery risk, an issue which is of increasing importance to our clients. We will report back on this at it evolves.
Engagement
Climate Action 100+
We signed up to this collaborative engagement focusing on climate change earlier this year. As part of this we are leading engagement with one of India’s cement companies.
The initiative aims to secure commitments from the boards and senior management of its focus companies to:
- Implement a strong governance framework which clearly articulates the board’s accountability and oversight of climate change risks and opportunities;
- Take action to reduce greenhouse gas emissions across the value chain, consistent with the Paris Agreement’s goal of limiting global average temperature increase to well below 2°C above pre-industrial levels and moving towards 1.5°C. Notably, this implies the need to move towards net-zero emissions by 2050 or soon after;
- Provide enhanced corporate disclosure in line with the final recommendations of the TCFD and sector-specific GIC Investor Expectations on Climate Change (when applicable). This allows investors to assess how robust companies’ business plans are against a range of climate scenarios and to improve investment decision making.
During the month, we held the first call with the group. There was an opportunity to both reflect on the progress the company has already made, as well as introducing the initiative and exploring areas for further work.
Other engagement
The GLTU team has continued its engagement on cybersecurity, with further calls and responses from the companies concerned. This will help set the scene in identifying best practice and any particular gaps.
Meanwhile, we were approached by the Turkey Wealth Fund (TWF) to talk about our views on the proposed amendments to Turkcell’s Articles of Association. There were a number of positives in these amendments, the separation of CEO and Chairperson, the protection of minority investors’ preemptive rights, and the inclusion of a Corporate Governance clause.
However, there were also some reservations – notably proposed dual share-class structure, which will include the right of the TWF to appoint five out of the nine board members (including the Chair), effectively ruling out a majority independent board. Ultimately, while these changes won’t all be in line with best practice, they do represent an opportunity to clean up the group’s ownership structure and provide more stability than we have seen for a number of years.
Upcoming activity
With a slight delay over the course of the next month, we will be launching a refreshed Stewardship and ESG presentation deck which aims to showcase our capabilities and credentials in this increasingly important area.
The other main area of work continues to be the focus on upcoming legislation and understanding the accompanying requirements.
1Source: Agora report – https://www.agora-energiewende.de/fileadmin2/Projekte/2020/2020_07_Raising-EU-Ambition/185_A-AW-EU_Ambition_WEB.pdf
2Source: UN emissions gap report: https://wedocs.unep.org/bitstream/handle/20.500.11822/30797/EGR2019.pdf
3Source: https://www.mfe.govt.nz/news-events/climate-related-financial-disclosures-be-made-mandatory
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