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The ESG Brief -- COP27 and climate stocks
21 Plays2 years ago
Wai-Shin Chan previews the UN climate talks in Egypt in November amid economic and geopolitical tensions; Amit Shrivastava tracks the market performance of climate-related stocks. Disclosures and Disclaimers can be found here. To stay connected and to access free to view reports and videos from HSBC Global Research click here.
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Transcript
Introduction to ESG Insights
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Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
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Make sure you're subscribed to stay up to date with new episodes.
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Thanks for listening.
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And now onto today's show.
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You're listening to the ESG Brief from HSBC Global Research.
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This podcast was recorded for publication on the 31st of October.
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All the disclosures and disclaimers associated with it must be viewed on the link attached to your media player.
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Welcome everybody to the ESG Brief, your window on the views of the HSBC research team on the day's environmental, social and governance issues.
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I'm your host Jack Reed and in this edition we're going to preview the UN climate talks taking place in Sharm el-Sheikh, Egypt in November.
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Plus we're tracking the performance of stocks in two sub-sectors of the climate theme, bioenergy and energy storage at a time of underperformance on global stock markets.
Impact of Geopolitical Issues on Climate Agenda
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We start in Hong Kong with our head of ESG research and climate change, Wei-Shin Chan, to focus on the COP27 climate negotiations.
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Wei-Shin, thank you as always for joining us.
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Pleasure to be here, Jack, especially talking about climate change and COP27.
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It does seem that the climate agenda is competing for attention with some pretty severe economic and geopolitical disruptions.
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How do you measure the impact that this may have at the talks in Egypt?
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There was a lot of optimism after COP26 in Glasgow last year, with countries being asked to sort of revisit and strengthen their plans, and a lot of public-private partnerships.
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Absolutely, in 2022, there's been a lot of distractions, as you mentioned, the Russia-Ukraine war, energy and food price inflation, geopolitical tensions between the world's two superpowers.
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That has served to...
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move climate change slightly into the background, if I can say that, in terms of the focus with which governments are aiming to put on it.
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However, the adaptation events, those extreme events that we've seen in 2022, has really maintained that public media attention on climate change.
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So the floods in Pakistan, the droughts in China, the heat waves that you saw in Europe, and also the most recent hurricanes, Fiona and Ian, in the North American areas,
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That's really shown that we cannot take our eyes off of the importance of dealing with climate change.
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At the same time this year, an additional focus point will be COP15 on biodiversity and the linkages between climate change and biodiversity are very, very important for all of those things that we mentioned, especially on energy and for food.
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One of the takeaways from your report is that the focus in Sharm El Sheikh will be on adaptation to climate change rather than measures to cut CO2 emissions.
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What do you base that on?
Adaptation Focus at COP27
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The traditional focus at many of these climate negotiations is on mitigation.
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So how to reduce emissions from countries, sectors and companies.
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Given that Egypt represents the African continent in hosting these climate negotiations, adaptation will be a big focus as we've already discussed with the major events that have happened this year.
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In particularly, the financing aspect of adaptation will come into focus.
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now when it comes to the african continent itself they are responsible for a minuscule amount of emissions so it only makes sense for them to put increased attention on adaptation many people around the world tend to think that the sole goal of the paris agreement is to limit temperature rises to within two degrees
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or even better, one and a half degrees.
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But adaptation is in there and also financing and allowing vulnerable economies to prepare for the effects of climate change.
Climate Financing Challenges
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So a big focus there on adaptation, but also on the financing side.
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On the financing side, one of the other points you raise in your outlook for the talks is the missing $100 billion pledged to emerging markets for adaptation purposes.
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What did happen to that money?
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If we take our minds back to 2009 in the days of Gordon Brown and Barack Obama in his first term, the developed world promised 100 billion annually to the developing world in climate finance by the year 2020.
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That was missed, certainly at COP26.
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It's also been missed for COP27 in terms of 2022.
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And so the developing world will be asking for where are the finances that will help us both mitigate our emissions, but also adapt to these impacts that we've all seen around the world this year.
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However, one focus point of COP27 will be this work program.
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to bring about a new collective quantified goal on climate finance now there the negotiations will look at who should be delivering into this goal who should be providing the financing who has access to it how will they decide the balance between mitigation and adaptation the base there for this new collective quantified goal will be a hundred billion and that will be in place for the 2025-2026 period so
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Lots of focus on climate finance, however.
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You have to wonder whether $100 billion is actually enough now to support these adaptation measures.
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It's probably quite low, to be honest, given the needs that are required by not just developing economies, but the entire world in terms of transitioning from high carbon to low carbon infrastructure.
IPCC Report Analysis
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But at the same time, rebuilding or making their economies more resilient to the impacts of climate change is going to cost an awful lot more.
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No numbers have been floating around at this stage for these goals.
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But for sure it's going to be a sticking point at COP27.
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And from the world's climate scientists since the last COP get-together, what pronouncements have you seen?
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The UN's climate science body, the IPCC, has put out two reports since COP26.
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Working Group 2 was talking about adaptation and the impacts of climate change, and Working Group 3 about the mitigation options.
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Their conclusion was that there's a big adaptation gap in terms of financing, and we also need the political will, the institutional quality to put that in place.
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The scientists believe that if all climate pledges globally were implemented to their fullest, we'd be heading for 3.2 degree temperature rise by the end of this century.
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And we've already seen the impacts at 1.17 degrees at the extreme events of this year.
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So we need to continue to focus our minds on how we bring that temperature increase much, much lower.
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And the political distractions that we discussed earlier have not helped that.
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Weishin, thank you very much.
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Thank you very much, Jack.
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Wei Xin, by the way, will be our guest on HSBC's Live Insights program on LinkedIn, hosted by Piers Butler on the 23rd of November at 9.30 a.m.
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UK time, that's 5.30 p.m.
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Hong Kong time.
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Wei Xin will be taking your questions live on LinkedIn about the outcome of the COP27 meeting.
Macroeconomic Impact on Climate Stocks
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Now, climate-related stocks also have not been immune from global developments.
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During the global sell-off in equity markets that we've seen year-to-date, the FTSE World Index is down almost 20%.
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Climate stocks in our proprietary climate solutions database have broadly tracked the index lower.
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Amit Srivastava is one of our ESG analysts based in Dubai.
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He joins us to talk about his latest report on the HSBC Climate Radar, which tracks which climate stocks have momentum with investors and which stocks don't.
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Amit, welcome.
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Thanks, Jack.
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Overall, not a particularly positive performance from climate-related stocks, aside from some pockets of outperformance.
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What do you put this down to?
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Okay, so the one thing that I would like to highlight about climate stocks is that they generally tend to be more growth oriented.
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This includes companies that operate in sectors such as wind, solar, and also in carbon efficient modes of transport such as electric vehicles, fuel cells, and also in associated sectors such as energy storage systems.
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And what we have seen is that compared to traditional equities and sectors, which have been in existence for many decades now, most of these clean tech sectors are fairly new.
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But since they're growing at a very fast pace, they are more growth inclined and they are more cyclical in nature.
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Now, in the current environment, when there's a volatility on the higher side, inflation is also at a significantly higher level compared to long-term averages.
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Interest rates have been at elevated levels and bond yields are also rising.
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This kind of environment is not suitable for growth stocks in general, and they tend to come under pressure.
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And this is something which we are also witnessing for a few climate-related themes, which have been under pressure this year.
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So what you seem to be saying is that despite the potential contribution these companies are making to the energy transition, the stock performance also hinges on a stable macro environment.
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That's true.
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I mean, see, there is, as I mentioned, that climate stocks being growth oriented as well as more cyclical in nature, you know, downturn in global equities tend to also adversely impact them.
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But on the other hand, one thing that we highlighted in our note is that when there's an upswing, then the investors usually flock into climate stocks, something that we saw immediately after the first wave of COVID-19 in 2020 when the climate stocks significantly outperformed.
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And that's the reason if we look at the last three years performance, you know, for climate stocks compared to global equities, they have actually outperformed the global benchmark by a big margin, you know, almost close to 40%.
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So the point which I'm trying to make here is that in the upcycle, climate stocks tend to do much better.
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So let's talk about the two standouts among climate-related themes identified in your recent report, the first of which is bioenergy.
Bioenergy and Oil Prices
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And that one is a familiar face on your climate radar.
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Okay, sure.
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So putting simply, bioenergy companies in our framework are those that are engaged in development, production, and distribution of fuels that are derived from biomass and that are mainly used for transport and production of heat and electricity.
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Although climate stocks may have underperformed, but what we have seen is that, you know, there are some pockets of outperformance and bioenergy is in fact one of them over the last four to five quarters.
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And if you look at the performance, it has indeed outperformed the global equity benchmark by more than 10% this year.
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One thing that I would like to mention is that since part of bioenergy theme includes companies which produce biofuels, the bioenergy theme overall also tend to have a very high positive correlation with global oil price.
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Now, given that the oil price has been at elevated level for last few quarters, it's not too surprising to see that bioenergy as a sector has also been doing good over the same period.
Energy Storage and Renewables
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And also you highlight energy storage is one of the best place themes.
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Yeah, definitely.
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So in our framework, energy storage companies are those that offer battery solutions with end applications in renewable energy sectors as well as hybrid electric vehicles.
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It is one of the few sectors that was doing good even before the COVID-19 hit.
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And what we are seeing lately is that the theme is gaining a lot of positive momentum.
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When I say positive momentum, you know, it is gaining a lot of traction from sales and analysts as well as from investors.
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And growing application of energy storage, integrating it with the grids that operate on renewable power, apart from the traditional utilities, as well as, you know, the increasing penetration of electric vehicles.
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Both of them are very supportive for energy storage sector overall.
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So we are seeing that, you know, it is also one of the two most attractive themes on our climate data framework.
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And finally, Emmett, let's talk about our climate solutions database.
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How does it support the work you are doing to track climate stocks in the radar?
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Yeah, sure.
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So there are two different things.
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First of all, I will talk about database.
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So putting simply the HSBC climate solutions database is a database of green companies.
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Now, green means different to different people.
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The way we define green is that any company with top line revenue exposure to products and services, which helps in transitioning towards a low carbon world or economy, will be a part of our database.
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So it's a database of more than 3,000 global companies with varying exposure to climate change related business activities.
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Now, that's one part.
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Climate radar is an extension of the radar methodology that we have been using for our equity strategy work for many years now.
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There we use it for traditional equities, but here the climate data, it uses the same methodology for the universe of stocks, which are relevant from the climate change perspective.
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So for that, we use our database and that's how we bring these two things together.
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Now to explain climate radar, I mean, it's a very objective framework.
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It simply combines, you know, long-term investor sentiment with short-term price and earnings dynamics.
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And we combine these two things together to identify value opportunities, you know, where growth dynamics are also beginning to look attractive.
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So in a way, you know, climate radar, it helps you in identifying value opportunities where growth dynamics are also supportive.
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Amit, thank you very much.
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Thanks, Jack.
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It was very helpful.
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Thanks.
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That's all the time we have for this edition.
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Thanks to Weishin Chan and Amitra Vastava.
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Remember, all the reports we've addressed are available to clients of HSBC Global Research on research.hsbc.com.
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Thanks very much for listening.
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We'll be back soon.
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Thank you for joining us at HSBC Global Viewpoint.
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We hope you enjoyed the discussion.
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