Transcript
Speaker: This is HSBC Global Viewpoint, your window into the thinking, trends, and issues shaping global banking and markets.
Speaker: Join us as we hear from industry leaders and HSBC experts on the latest insights and opportunities for your business.
Speaker: You're listening to the ESG Brief, a roundup of the latest reports from the environmental, social, and governance analysts here at HSBC Global Research.
Speaker: Mitigation and adaptation, two words with big price tags, top the agenda of this edition.
Speaker: But what do they really mean in the climate equation and how will they stack up against one another at the upcoming global climate talks?
Speaker: Formidable challenges also lie ahead over the global supply of clean water.
Speaker: We'll be looking at some of the risks as well as opportunities in managing this crisis and how we see ESG investors responding.
Speaker: This podcast was recorded for publication on the 6th of October.
Speaker: All our disclosures and disclaimers must be viewed on the link attached to your media player.
Speaker: Hello everybody, I'm your host Jack Reed and this week we are joined by two London-based analysts from our ESG team, Tarek Solomon and Lucy Acton.
Speaker: Tarek, let's start with your report if I may.
Speaker: It looks ahead to the COP26 talks in Glasgow, Scotland and it's all about mitigation and adaptation.
Speaker: How do you define these words?
Speaker: Well, effectively, they're the two sides of the climate coin.
Speaker: Mitigation is taking actions to cut out greenhouse gases from the global economy.
Speaker: And those are the gases that, of course, cause global warming.
Speaker: Ultimately, the job is to put the world on a path towards net zero.
Speaker: Adaptation are steps taken to adjust assets, populations, even hold economies to withstand and be able to operate under the expected changes to the climates that we see already unfolding and are set to get worse.
Speaker: So the two separate terms, they're both within the umbrella of climate action.
Speaker: The less we do on one, the more we might have to do on the other.
Speaker: And that's perhaps the interesting interplay that we bring out in the report.
Speaker: So in the adaptation camp, we'd be talking about things like flood defences.
Speaker: Correct.
Speaker: But it's much more varied than just that.
Speaker: Obviously, it's protection against the physical impacts of freak weather events, but also more slow moving impacts on climate change, perhaps changes to agriculture to adapt to moving and differing precipitation or rainfall patterns.
Speaker: Water is a major part of climate adaptation, and it comes in very different forms and different avenues.
Speaker: The report carries a big table on other adaptation measures, for instance, building insulation.
Speaker: Yes, indeed, and cooling.
Speaker: The more the world gets warmer, the more difficult it is for humans to be productive or for physical assets to operate as they originally designed.
Speaker: So it can be extremely varied in its manner and nature.
Speaker: It's also...
Speaker: unfortunately quite focused towards the emerging markets part of the world and less of a DM problem today.
Speaker: But they're usually defined as either measures to protect against acute climate change, that's specific events, or chronic or slow moving climate change, which are less day to day visible changes, but ones that will over a matter of time really change how we live, work and operate our economies.
Speaker: But Tarek, in the climate talks, the focus seems to be very much on what nations are going to do to cut CO2 emissions.
Speaker: So given that, how does adaptation get a fair hearing?
Speaker: It's on the agenda, absolutely.
Speaker: Adaptation is defined as one of the goals of the Paris Agreement, but the stark reality is that it usually takes a backseat towards mitigation.
Speaker: The headlines were always dominated by how much the world, as you said, is going to cut greenhouse gas emissions, head for net zero, and pursue a warming goal to limit the amount of warming.
Speaker: There's meant to be $100 billion a year of funds flowing from more developed economies,
Speaker: to less developed economies across climate action.
Speaker: Adaptation, because it's often more localized, it's less uniform, it needs a more nuanced approach, it's quite difficult to define and agree a global goal on.
Speaker: And so it has had this challenge of being able to push itself up the agenda and really draw a global attention.
Speaker: The thing that perhaps pursued us to write this report is that the science is telling us is that the climate is changing faster than we thought.
Speaker: And as a result, we think adaptation will push itself up the agenda as the physical impacts of climate change become more visible, more quicker, increasing the need to take adaptation today and it being less of a tomorrow's problem.
Speaker: But as you said, they haven't even agreed a definition.
Speaker: No, great.
Speaker: Yes.
Speaker: So there is often perhaps concern in some areas that with a lack of a global agreement on adaptation, there might be a every man for himself approach to adaptation in the future where local governments see the best course of action is take matters in their own hands.
Speaker: And that's symptomatic of adaptation compared to mitigation.
Speaker: Mitigation needs a global concerted effort, global conviction, global coordination.
Speaker: Adaptation is a much more of a local problem, which is
Speaker: You could argue a benefit, but also a detraction, because if your local action relies on some sort of global framework or global funding or global transfer of support, then you might struggle.
Speaker: But it does imply that there is going to be some kind of a tradeoff at some point between do you mitigate or do you adapt?
Speaker: Absolutely.
Speaker: And I think that's where we phrase this as the race on two fronts, because resources to tackle climate change are finite.
Speaker: And evidence suggests to us that we should be spending more on both mitigation and adaptation.
Speaker: But the reality is, if you have a defined pot of funds, you risk taking action away from one to do more on the other.
Speaker: And different countries, different entities, different companies around the world will have different priorities as to whether they should put their resources behind
Speaker: mitigating climate change or adapting to what it will bring over the next few decades.
Speaker: And what about the costs?
Speaker: You mentioned resources are finite.
Speaker: Yes.
Speaker: How do they stack up against one another?
Speaker: Well, they're big numbers, as you would expect.
Speaker: And, you know, if I looked at what the IEA, the International Energy Agency, put out earlier this year as what the world needs to do to mitigate climate change by taking energy and industrial emissions down to net zero by 2050,
Speaker: that's a number at an annual run rate of around five trillion dollars by 2030 and for context we spend about two two and a half trillion dollars on energy today so a doubling and it's a big big number if i looked at what just the least developed economies of the world might have to spend on adaptation it's in the order of 300 billion dollars a year by that same point in 2030 multiples of where it is today so the numbers are only going to get bigger
Speaker: and they're going to get more strains to reach.
Speaker: And this is the age old mantra of early climate action is often better.
Speaker: But as we said at the beginning, resources are often finite.
Speaker: The thing I would stress, though, is that climate action is not a zero sum game.
Speaker: You can do more on both fronts.
Speaker: But if you're looking at a government budget that has a ceiling to it, it's often a one over the other rather than one instead, in addition rather to the other.
Speaker: Tarek, thank you very much.
Speaker: Lucy, let me turn to you now.
Speaker: Your most recent report looks at the water crisis.
Speaker: How do you explain the enormity of the problem here?
Speaker: I think the best way of explaining the water crisis is with a couple of statistics.
Speaker: 70% of the Earth's surface area is covered with water.
Speaker: So you'd kind of be surprised to hear that there is even a water crisis until you understand that actually much of that water is not usable for industry and for drinking and sanitation around the world.
Speaker: Also, much of that water is inaccessible.
Speaker: It's locked up in glaciers and it can't be reached by humans.
Speaker: So actually what we're dealing with is that 70% of water around the world, only 0.007% of it is usable and accessible for us today.
Speaker: Now that's just the tip of the iceberg.
Speaker: On top of that, you've got other external factors such as climate change and
Speaker: demographics and urbanization trends that are changing the availability and demand of water.
Speaker: And water isn't spread evenly around the world.
Speaker: So some regions are facing massive water scarcity, whilst others are having an abundance.
Speaker: As we heard from Tarek, trillions of dollars will need to be invested every year to reach a net zero emissions target.
Speaker: What sort of price tag gets put on the water problem?
Speaker: Yeah, I think it's such a difficult one to do because water is so embedded in every activity around the world and in societies and in economies and a number of sectors.
Speaker: But there was a statistic from the Climate Disclosure Project that over the course of last year, corporates faced risks from water amounting to 300 billion US dollars.
Speaker: It's a huge number.
Speaker: And it's even more huge when actually they estimate that only 55 billion dollars of investment would have been
Speaker: needed to mitigate those risks in the first place.
Speaker: It's definitely an area that we think is really important to focus on and invest in and consider going forwards.
Speaker: Now you devote a lot of effort in the report to identifying the main water issues by industry sector.
Speaker: Let's look at a couple of those in more detail, starting with mining.
Speaker: Yeah, sure.
Speaker: So the quality and quantity of water is really important for the mining kind of production process and therefore throughout the entire mining value chain.
Speaker: And this is presenting problems in countries that are kind of heavily reliant on mining that are also facing water scarcity.
Speaker: And Chile is a great example of this.
Speaker: They're currently facing about a 12 year drought.
Speaker: Now, water companies in Chile rely on water from glaciers and lakes and rivers.
Speaker: Currently, they use of their total water use.
Speaker: 18% of the water comes from these sources and the government have said,
Speaker: told them that this needs to be reduced to 10% of their water use by 2030, 5% by 2050, really showing that the sector as a whole and companies are going to have to rethink the source of water for their production.
Speaker: Water use in the apparel industry is something you have previously written extensively about.
Speaker: How does the retail sector face up to these challenges?
Speaker: Yeah, so water use and water pollution are two really important considerations when you're looking at the retail sector.
Speaker: Different fibre types for clothing and garments rely on different amounts of water in the production process.
Speaker: Now, cotton is the most water intensive and I think around 50% of all fibres in the UK at the moment are made up of cotton fibres.
Speaker: But
Speaker: 70% of all water use in the production of fibres goes to cotton.
Speaker: So it shows just how intensive these fibres are.
Speaker: On top of that, the production process of clothing and dyeing garments and assembling them can contribute to water pollution too.
Speaker: So this is definitely a consideration for a large number of companies and their suppliers operating around the world.
Speaker: And of course, as you know, the biggest water consuming sector is by far agriculture.
Speaker: How do you quantify the extent of the problem?
Speaker: Yeah, so I mean, just to put it into perspective, 70% of all water used in the world today goes to agriculture.
Speaker: It's massively affected by all kind of issues relating to climate change, and particularly to water pollution and water scarcity.
Speaker: There's opportunities, I think, in the agriculture sector,
Speaker: looking, say, at irrigation solutions for companies.
Speaker: Desalination is another opportunity in the sector, as well as solutions to develop crop resilience in the face of climate change and water scarcity.
Speaker: So I think the general message in our report is that where there are risks, there are also significant opportunities in this area.
Speaker: Let's talk about obstacles.
Speaker: What might ESG investors face in taking the water crisis into account in their decision making?
Speaker: Water hasn't gained as much attention as a topic as, say, climate change has.
Speaker: But I think that's beginning to change as we're understanding the link between water use and climate change, for example.
Speaker: One area that I think investors struggle with is disclosure.
Speaker: And so what we're seeing initially is more kind of disclosure requests from investors to their companies, better reporting requirements on water related risks.
Speaker: And it feels like that's kind of the first step.
Speaker: towards better integrating these risks into investment decisions.
Speaker: I guess another sort of pillar to the responsible investment strategy around water is associated with engagement.
Speaker: So taking the retail sector and companies and their suppliers along the value chain and engaging with them to help
Speaker: you know, mitigate the water risks, mitigate water pollution where possible.
Speaker: So it feels like those are the two areas that are most focused on at the moment.
Speaker: Lucy, thank you very much.
Speaker: I'm curious about feedback.
Speaker: What sort of comments have you had since this report first came out?
Speaker: It's definitely an area that investors are glad to see some content on.
Speaker: It feels like this is something that they want to get to grips with.
Speaker: Clients seem very concerned about the water crisis, but unsure sort of how to invest accordingly.
Speaker: So it's definitely started some really interesting conversations.
Speaker: Lucy, thanks again for joining us.
Speaker: Thanks, Jack.
Speaker: Two other ESG reports you need to know about from the team here at HSBC Global Research.
Speaker: Our governance analyst Yarina Kovel has done some work on the value of corporate purpose.
Speaker: Besides making profits for its shareholders, Kovel says corporate purpose is the reason why a company exists.
Speaker: Her report finds that corporate purpose not only helps encourage better social or environmental outcomes, but may also lead to better financial performance.
Speaker: One of the studies suggests that over the next 15 years, companies with purpose are expected to earn a total shareholder return that is 9% higher than those oriented only towards profit maximization.
Speaker: The report has 10 questions investors can use to engage with companies about corporate purpose.
Speaker: In the run-up to COP26, the net zero emission targets are proliferating among the airlines.
Speaker: The International Air Transport Association has just voted at its annual general meeting to commit the entire industry to meeting the net zero target by 2050.
Speaker: A global report led by transport analyst Andrew Lauenberg looks at the carbon commitments across the industry.
Speaker: Lauenberg says the precise pathway for airlines remains somewhat opaque, and pledges to data on embracing policies to offset carbon emissions may prove controversial.
Speaker: A large part of the initial moves to decarbonise rely on offsets which are open to challenge by environmental agencies and by regulators for the efficiency of the offsets.
Speaker: We think that the clear path forward for decarbonisation for aviation comes from sustainable aviation fuel.
Speaker: And we think that sustainable aviation fuel is the key way to decarbonize aviation before we come to electric and hydrogen propulsion, which will be in the 2040s, 2050s and beyond.
Speaker: So that's a look at some of the top reports on the ESG agenda here at HSBC Global Research.
Speaker: Special thanks to Tarek Solomon and Lucy Acton for joining us.
Speaker: And thanks to you for listening.
Speaker: We'll be back soon.
Speaker: Thank you for listening today.
Speaker: This has been HSBC Global Viewpoint, Banking and Markets.
Speaker: For more information about anything you heard in this podcast or to learn about HSBC's global services and offerings, please visit gbm.hsbc.com.
