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The Macro Brief – Climate risks in the G20
24 Plays10 months ago
James Rydge, Head of ESG Research, EMEA, assesses the rise of physical climate impacts across the G20 countries and whether they are prepared for the transition. Disclaimer: https://www.research.hsbc.com/R/101/fQdgvVF. Stay connected and access free to view reports and videos from HSBC Global Research follow us on LinkedIn https://www.linkedin.com/feed/hashtag/hsbcresearch/ or click here: https://www.gbm.hsbc.com/insights/global-research.
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Transcript
Introduction and Series Overview
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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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The following podcast was recorded for publication on the 11th of July, 2024 by HSBC Global Research.
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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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And don't forget that you can follow this weekly podcast on Apple and Spotify or wherever you get your podcasts.
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Just search for the Macro Brief.
Session Introduction: Climate Barometer Discussion
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Hello and welcome to the Microbrief.
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I'm Piers Butler in London.
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Today we're focusing on the climate.
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Global temperatures are rising and climate impacts around the world are intensifying.
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Our new climate barometer presents the latest evidence on physical climate impacts and how ready G20 countries are to transition to a low carbon economy.
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To discuss the findings, I'm joined in the studio by the report's lead author, James Ridge, head of ESG research for EMEA.
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James, welcome to the podcast.
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Great to be here, Piers.
Evaluating G20's Climate Readiness
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So, James, that's quite an endeavor, assessing the G20 country's exposure and readiness to climate change.
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How have you gone about doing that?
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Well, we've actually asked two questions about each G20 country.
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The first was, how exposed is it to physical climate impacts?
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And to do this, we've looked at a range of metrics, temperature, heat stress, water scarcity, air pollution, and looked at extreme weather events, both the country and state level.
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And then we look at the transition and how prepared countries are for that transition.
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And we look at a range of indicators, again, around the power sector, transport, buildings, and in forests and land.
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And one of the things you say in the report as a common theme from all this work is that transition readiness is poor.
Positive and Lagging Metrics for 2030 Targets
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Yes, so we find that most countries are far behind the rate of change they need to be experiencing to meet their 2030 targets.
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The one bright spot is actually electric vehicle deployment.
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If countries keep improving at the rate they've
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been improving in terms of the number of electric vehicles per total vehicle sold.
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They'll be on track to meeting 2030 targets.
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But on all our other metrics, countries are a long way behind and they really need to ramp up their efforts and increase the speed of the transition.
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But, of course, we have to be careful in not making oversimplifications because when we look at a particular country's transition readiness, it's actually a mixture of different factors.
Challenges in Corporate and Investor Transition
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And so, in a way, that's how you sort of also say that there are significant differences between countries.
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Exactly.
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So no country is leading on every metric.
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Each country is unique.
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And one of the risks that you highlight is that corporates and investors are not embracing transition and are failing to shift and scale clean investments.
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Why do you think that's the case?
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Well, that's a really complex subject, and there are many reasons why investments aren't scaling clean investments.
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I mean, I guess there is an inertia, obviously.
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There is an inertia in the system.
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But is it also partly there's a lack of proper information, which this report is trying to address?
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Exactly.
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So there's been a lack of information on what actually are the physical impacts happening, where are countries actually up to in the transition?
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For example, if you're a company, say, based in KwaZulu-Natal, and...
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your key assets are located in that region.
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Now you can use this report as an investor and say, well, actually, flooding risk has increased hugely in that region and there's a growing number of extreme flooding events.
Complexities of Transition Readiness Scoring
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So we'd better look and ask that company whether they're managing that flooding risk and what investments they're making to manage that flooding risk.
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And if they're not making those investments, this data makes it pretty clear that that's where they should be focused.
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That's a risk factor, yeah.
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Importantly, one of the really key messages of the report is that trying to develop some kind of a ranking score is not the answer.
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No.
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So if you look at an individual metric, we do compare G20 countries from worse to doing the best on that single metric.
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But trying to aggregate across all the metrics, which are quite different, makes no sense really.
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And there's no scientific way to do that.
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You would have to apply arbitrary weightings and add the metrics together in some way.
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And a lot of ESG research does this.
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but we find it obscures the real benefits and value-add from this type of data.
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So we decided not to do that, and it's far better to...
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approach this type of data in a number of ways.
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So you can do a deep dive on a country like South Africa going through each metric.
Key Climate Indicators: Temperature, Heat, and Water
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Or you can do a comparative analysis.
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So you could take the US and compare where climate impacts in the US compared to other G20 countries.
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So James, earlier in the conversation you mentioned that you have these various indicators.
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In fact, there are nine in total.
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Can you highlight a couple of those indicators for us?
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Well, the obvious top line indicator is temperature, right?
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Temperatures are rising.
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We just saw May 2024 was the hottest May on record.
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And we look at temperature rises across all G20 countries.
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And actually, it's Europe that's experiencing the highest rises.
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It's not countries like India or Indonesia where you'd expect that to be the case because we're always told it's developing countries who are experiencing the highest impacts.
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Well, actually, this data shows that the impacts are actually spread across all G20 countries, rich and poor.
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But to your point, one of the indicators is heat stress.
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So you might have a situation where a country is experiencing rising temperatures, but is able to manage the heat stress and therefore is not losing as many labor hours as perhaps another country where the temperature is not going up as much, but nevertheless is having more of an impact.
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Exactly.
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So in the UK, temperatures have risen by around two degrees already.
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And the heat stress impacts are relatively low compared to other G20 countries.
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But then you look at India, which is already a really hot country and hasn't had that big a temperature rise.
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on past temperatures, but heat stress there is quite extreme compared to other G20 countries, partly because the air conditioning at workplaces isn't as good, the labor conditions aren't quite as good, so it's other factors driving this.
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What about another indicator which I certainly feel concerned about is water scarcity.
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What does that indicator show us?
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So water scarcity is quite interesting because it's showing, except for two G20 countries, it's actually declining each year.
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So water is getting more scarce.
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And even in countries which have a good, relatively good, natural renewable water resource like the UK, we're over-utilising that resource at rates of about 6% to 8% or 10% a year across most G20 countries.
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So we need to do much better on water management because in 15, 20 years we're going to run into real water scarcity problems.
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And the message here is that companies need to take stock and invest.
Importance of Current Data Over Predictions
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I mean, that's one of the key financial implications.
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That is, it's one of the key implications and companies are going to be, with this sort of data and increasing regulations around disclosure, for example, the new UK government is going to implement mandatory transition plans.
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It's going to be much harder for companies to put off these investments.
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They're really going to have to start to think hard about them.
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And some companies are leading and there's a lot actually happening out there.
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And with better disclosures, we're going to learn very quickly which companies have been planning and are making the right investments, say in water efficiency and recycling water and are therefore more resilient to any climate impacts compared to others that have sort of been putting this off and waiting for another day.
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Yes, and so from an investment perspective, that will be a differentiating factor.
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It will.
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And I think it will become something that markets start to anticipate and build into prices because in the past, there hasn't been the data to do that.
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And markets haven't been confident to do that without the evidence, but the evidence is fast coming.
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Yeah.
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Now, importantly, these indicators are not like going out to 2100.
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These are quite near term, aren't they?
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They are.
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The problem we find with a lot of this type of analysis on climate risk and transition, it's looking so far in the future and it uses models that are not very good at predicting the future.
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We thought it was far more interesting to actually look at the information we have, the real information and data we have today,
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and just work out what's going on right now.
Future Updates and Additional Resources
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Because if you're, over the last 10 years, if you've experienced a doubling of flooding risk because floods have increased, say, from five per year to 10 per year, you know, that's a really good indicator of what you might experience this year and the next couple of years.
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So it falls within the planning windows of companies, within the investment timeframes of investors.
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And so it's not something to worry about in the future.
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This is what's happening now and what we really need to be concerned about today.
00:09:52
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Yeah, and which should be really helpful in making investment decisions.
00:09:55
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You say in your report this is going to be a series.
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What do you mean by that?
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So I think we'll hope to update this every couple of years as the data improves, as the data's updated.
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For example, with water scarcity data, it only is released every five years.
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So hopefully this is going to become more frequent and we'll be able to do deeper and more interesting analysis over time.
00:10:20
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Well, there's a ton lot more information in the report, so I would encourage anybody who has access to our research to use it.
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It's meant to be a reference document.
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As I say, you've got to do the work.
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You've got to have a look at the detailed analysis and not make too many simplified conclusions.
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But very, very interesting discussion.
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James, thank you very much for joining us.
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Thanks, Piers.
00:10:42
Speaker
Hello everyone, it's Harold and Fred here from Under the Banyan Tree.
00:10:46
Speaker
If you need a fix of fun facts you didn't know about Asian markets economics, make sure you tune in to our podcast this week.
00:10:52
Speaker
Ever wondered which companies are outperforming Nvidia on returns, or maybe how long it takes to build a giant crane in China versus the rest of the world?
00:11:00
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Well, even if you haven't, we're still going to bring you the answers.
00:11:04
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Listen, like, subscribe, and we'll see you Under the Banyan Tree.
00:11:10
Speaker
Before we go, here are the details of two major reports published by Global Research recently.
00:11:15
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Our fixed income team has been looking at the interplay between demographics and bond markets.
00:11:19
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The report considers lessons from Japan's aging population, savings levels in the West, the role of China and other emerging markets, as well as household credit creation.
00:11:30
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It argues that demographics will continue to contribute to lower long-run interest rates and therefore lower bond yields.
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And we've also just published our latest economic outlook for CIMIA.
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Simon Williams, chief CIMIA economist, says policy shifts are laying the ground for rebalancing and eventual recovery in the region.
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But there is still a way to go.
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If you'd like more details on any of that research or the climate report that we talked to James about earlier, please email askresearch at hsbc.com.
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So that wraps things up for today.
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From all of us here, thanks for listening.
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We'll be back again next week.
00:12:28
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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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Make sure you're subscribed to stay up to date with new episodes.