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: Thank you for listening.
Speaker: Hello and welcome to the ESG Brief, the HSBC global research podcast about environmental, social and governance issues and the latest work from our team of analysts and strategists.
Speaker: I'm your host, Jack Reed.
Speaker: Over the next 20 minutes, we'll be talking about the EU's Fit for 55 strategy and what to look out for on the climate agenda between now and the big global climate negotiations in November in Glasgow, Scotland.
Speaker: Also coming up, sustainable aviation fuel.
Speaker: What is it and what will it take to power the global aviation fleet?
Speaker: And the IPOs.
Speaker: We've seen a wave of share sales in the first half of 2021, but what were investors looking for in terms of governance?
Speaker: We also look at some new research from the team that puts Asia in the lead as the top growth market for companies engaged in climate solutions.
Speaker: This podcast was recorded for publication on the 3rd of August.
Speaker: All our disclosures and disclaimers must be viewed on the link attached to your media player.
Speaker: I'm joined now by Weixin Chan, our head of ESG research on the line from Hong Kong.
Speaker: Weixin, thanks for joining us.
Speaker: It's great to be here as always, Jack.
Speaker: So summer is upon us in the northern hemisphere, and it's been hard not to think about climate change, given some really extreme weather conditions we've seen around the world recently.
Speaker: Let's start in Europe.
Speaker: The EU announcement just a few weeks ago on its Fit for 55 strategy.
Speaker: What are the key takeaways?
Speaker: So the European Union released their Fit for 55 package in the middle of July.
Speaker: That consists of a set of interconnected proposals, which are
Speaker: are driving towards the EU's targets of reducing emissions by at least 55% by 2030 and then ultimately reaching climate neutrality by the year 2050.
Speaker: So they're fixing a lot of things in Europe.
Speaker: They are fixing the emissions trading scheme, for example, to include aviation and eventually include maritime, so emissions from shipping.
Speaker: They're extending the emissions trading scheme to include road transport and buildings.
Speaker: They're updating
Speaker: things like their energy taxation directive, as well as the way the emissions targets are broken down amongst the different member states in what's known as effort sharing.
Speaker: They're also updating, very importantly, the renewable energy directive and energy efficiency directive.
Speaker: But what I'd like to focus on is the carbon border adjustment mechanisms.
Speaker: So this is essentially the carbon border tax, which I think we've spoken about on this podcast before.
Speaker: But essentially in
Speaker: in the future, from the year 2026, importers of goods that are covered by the carbon border adjustment mechanism will have to register with national authorities and actually buy certificates according to the carbon content of the goods that they are importing.
Speaker: And they'll need to surrender these on an annual basis.
Speaker: So it's to ensure there's no carbon leakage that can occur outside of Europe because some believe that Europe's
Speaker: climate and carbon targets are stricter than the climate and carbon targets in other places in the world.
Speaker: So that's a very, very interesting development.
Speaker: Now, this month, the focus is going to be very much on the science of climate change.
Speaker: Absolutely.
Speaker: So the UN's climate science body, that's the IPCC or the Intergovernmental Panel on Climate Change, they are deliberating
Speaker: At the moment, what they call working group one, that looks at the physical science basis for climate change.
Speaker: And they'll be talking about the climate system, the drivers of climate change, how climate modeling works and the feedbacks and responses of the earth to climate variability.
Speaker: It's about confirming the urgency of action on climate change.
Speaker: I think we've all seen, as you mentioned, the extreme challenges
Speaker: weather events over the summer.
Speaker: And the science will basically say what this actually means and how much time we have left to take action.
Speaker: These deliberations will continue through till the 6th of August with a release on possibly the 9th of August.
Speaker: So that will be a very, very big event that we're all looking out for.
Speaker: And what else is on the agenda before we get to the Glasgow negotiations?
Speaker: Just before COP26,
Speaker: Actually, starting on the 11th of October, there'll also be a biodiversity conference held in Kunming in China.
Speaker: I think the linkages between climate change and biodiversity are becoming increasingly apparent.
Speaker: We essentially cannot solve one without the other.
Speaker: So again, that'll be an important milestone and stepping stone towards that all important climate negotiations in November.
Speaker: Some busy months ahead of us, Weixin.
Speaker: Thanks so much for the update.
Speaker: Thank you very much indeed, Jack.
Speaker: We turn next to sustainable aviation fuels, the development of which forms part of that EU fit for 55 strategy.
Speaker: Our head of European transport research, Andrew Lauenberg, has just published a big report on sustainable aviation fuels and the role they're going to play in helping the planet reach its 2050 climate goals.
Speaker: He spoke with our managing editor, Chris von Humes.
Speaker: Andrew, perhaps I can start with the obvious question, really.
Speaker: What is a sustainable aviation fuel?
Speaker: Well, the obvious answer is that it's sustainable and it's an aviation fuel.
Speaker: So to be sustainable, I mean, if you burn any fuel in an aircraft, it is going to create CO2.
Speaker: But if you can make that fuel from a feedstock that uses up CO2 as it grows, then you can move towards a far lower carbon emissions.
Speaker: So we can grow it from plants.
Speaker: We can create it from plants.
Speaker: or it can be made from waste, either municipal waste, forestry or agricultural waste.
Speaker: So it's also important with the crops that the crops are sustainable and that they do not compete for food stuff.
Speaker: In terms of being an aviation fuel, the fuel has to be interchangeable with regular kerosene.
Speaker: It has to be capable of being used by existing aircraft, existing engines and pumped through the existing infrastructure at airports.
Speaker: And where do these fuels fit in terms of the broader decarbonisation process that's underway?
Speaker: So to be fair, before the pandemic, the focus within aviation was very much on carbon offsets, offsetting agreements as the way of decarbonising aviation.
Speaker: But through the pandemic,
Speaker: The situation has changed and there is far greater focus on actually decarbonizing aviation.
Speaker: And obviously people look to electric flying or hydrogen powered flying.
Speaker: But in reality, electric flying will only be effective for very short range flights and small aircraft because batteries are heavy and hydrogen.
Speaker: There's a lot of work on hydrogen aviation, but it's a long way into the future.
Speaker: So, you know, for the time period of the 2030s, the 2040s, you know, SAP is going to have to carry the burden of decarbonising aviation.
Speaker: And is SAP already happening today?
Speaker: Yes, it is being used.
Speaker: It is being pumped into aircraft in California and quite a lot in the Nordics as well.
Speaker: And who's driving the process here?
Speaker: Is it governments?
Speaker: Is it the airlines themselves?
Speaker: So the aviation industry recognizes that it needs to decarbonize and there's quite a lot of pressure there.
Speaker: But as is evident, it is an incredibly complex issue and it will only work if there is complete collaboration between airlines, aircraft manufacturers, engine manufacturers.
Speaker: the fueling companies, but also critically governments and regional authorities.
Speaker: The EU recently launched their Fit for 55 decarbonisation plan, and that had quite a lot of focus on trying to encourage the take up of SAF.
Speaker: So, Andrew, how are airlines going to be incentivised here?
Speaker: Are there going to have to be higher taxes on kerosene, for example, to make that less competitive?
Speaker: Well, the issue is that at the moment, the cheapest form of SAF is twice the cost of kerosene.
Speaker: The more expensive one, ten times the cost.
Speaker: So from a policy perspective, we need to close that gap for it to happen.
Speaker: So, you know, the policy measures we're seeing include a mandate requiring airlines to use a certain percentage of SAF.
Speaker: And then we see in the EU Fit for 55 a proposal to tax kerosene and to tighten the carbon market to make carbon more expensive.
Speaker: So they're working both ways to try and encourage investment in SAF to make SAF cheaper and on the other hand, to make kerosene more expensive.
Speaker: It sounds, though, as if overall fuel costs are going to go up.
Speaker: And at the end of the day, is it the passengers who are going to end up paying for that through higher fencing?
Speaker: I mean, that's absolutely the case.
Speaker: That's undoubtedly the case that it is going to become more expensive.
Speaker: But I think it's really important to have a sense of perspective.
Speaker: If you look over the last 60 years, you know, from the 1960s, the 70s to 80s, as you go, very, very regular to see a doubling of the fuel price through that time period.
Speaker: And aviation has grown and flourished through that.
Speaker: So the idea that fuel costs might say double,
Speaker: you know, that should not break the aviation industry.
Speaker: And, you know, for perspective, seeing what that would mean for fares, you know, over a 10 year period, that would require a two to 3% annual increase in the fare, which isn't immaterial, but isn't anything to, you know, break the industry.
Speaker: And a final question, really, what are the other challenges that you foresee in making all this a reality?
Speaker: So for airlines, they are going to face higher costs related to fuel, and they're going to be facing those costs as the industry is emerging from the pandemic and the challenges associated with that.
Speaker: From a policy perspective, the real challenge is that this is a global
Speaker: global issue and for SAF to work it needs to be incentivised globally and yet you know at the moment we're seeing the lead being taken by the EU.
Speaker: Someone has to lead, there's a perfect logic there and yet it places European airlines at a disadvantage relative to their global peers which is undoubtedly a challenge and otherwise straightforwardly getting the political will to change policies is equally going to be a challenge as it is across much of the decarbonisation agenda.
Speaker: Andrew Lovenberg, our head of European transport research, on his report into the future of sustainable aviation fuels.
Speaker: Now, our governance analyst here in London, Yarina Koble, has been looking at the level of IPO activity globally, and that includes fundraising by the so-called SPACs or special purchase acquisition companies.
Speaker: In the hot IPO market, is governance an afterthought or a key consideration?
Speaker: Yarina, thank you very much for joining us.
Speaker: So what prompted you to look at this issue now?
Speaker: I have been looking at the corporate governance arrangements of IPO companies for some time.
Speaker: And what I noticed that up to date in 2021, we have a decade record in the number and amounts raised in terms of IPOs.
Speaker: So we are talking about around 2000 IPOs in the beginning of the year, as well as around 290 billion dollars in terms of raised amounts.
Speaker: Okay, a significant amount of capital that has been raised, but a lot of that involves so-called special purpose acquisition companies.
Speaker: What have you learned about the specs?
Speaker: Yes, that's correct.
Speaker: Actually, around 35% of the IPOs were not traditional, but as you said, specs IPOs.
Speaker: So those are the companies specifically created to raise equity capital through an IPO with the goal of acquiring and operating business later, so mostly within the 24 months.
Speaker: But at the same time, you know, we have seen an increase in traditional IPOs as well, because the COVID-19 pandemic slowed down in 2020.
Speaker: And how are these IPO companies dealing with the issue of governance?
Speaker: Yeah, when we looked at the different governance documents and definitely the prospectus, we found that companies follow two main approaches.
Speaker: And one is to comply with the minimum standards of the market of a market segment.
Speaker: That's mostly when it comes to independence or board composition, basically stating that
Speaker: they are compliant with those requirements.
Speaker: Or the second approach is, and those mostly for the companies who are expected to comply or explain with one of the corporate governance codes on the market, we found that those companies are likely to state that they will be developing the good governance practices in the future, basically explain the non-compliance with the code.
Speaker: The operative words there being in the future.
Speaker: Why aren't investors expecting more focus on governance before the IPO?
Speaker: Yeah, there are definitely two aspects.
Speaker: One is about companies and changing their understanding of the importance of governance arrangements.
Speaker: You know, the good they bring, the linkage to financial performance.
Speaker: But the second thing is definitely about investors.
Speaker: them asking for greater visibility from companies before an IPO.
Speaker: And that's why I suggested 24 questions, which are a good start to engage and start discovering some of those governance arrangements companies have.
Speaker: And at the top of your list are questions about board independence and board composition.
Speaker: Why?
Speaker: Yeah, we found that the board size of a typical IPO company is six members in the European Union and the UK and eight members in the US.
Speaker: This is compared to mature companies where we are talking about
Speaker: Average board size of 10 members in the European Union, 11 in the UK, and 12 in the United States.
Speaker: So we see that there is a difference in size, but...
Speaker: Recent research suggests that when we're talking about IPO companies, that those with larger boards, that they are performing financially better post-IPO.
Speaker: But not only size is important, that's independence, that's probably even more important here.
Speaker: It's also linked to financial performance.
Speaker: And what we noticed that some stock exchanges like, for example, New York Stock Exchange, they offer and kind of
Speaker: extension.
Speaker: So companies don't need to have the required number of independent director at the IPO, but they can appoint independent directors, let's say, a year after that.
Speaker: And we think, considering the linkage to financial performance, that independence of the board should not be an afterthought, but should be considered well in advance, let's say, two, three or four years before going public.
Speaker: Irina, thank you very much.
Speaker: An interesting report on governance and IPOs.
Speaker: Thank you, Jack.
Speaker: Now, a pivot toward Asia is underway for companies offering solutions to mitigate and overcome the effects of climate change.
Speaker: That's according to research from the team that manages HSBC's Climate Solutions Database, which holds data on 3,000 global stocks with either more than 10% of total revenue from climate-related activities or pure-play climate companies, for example solar or wind companies.
Speaker: Climate database lead and European equity strategist Amit Srivastav joins us to talk about his report.
Speaker: Amit, thanks for joining us.
Speaker: What have you found in terms of overall market growth for climate solutions?
Speaker: We find a very clear evidence of green getting greener.
Speaker: The companies in our database are not only growing, but they are also raising their exposure to climate change related businesses.
Speaker: So if I put some numbers, the total climate related revenue of companies in our database has risen at a healthy annual rate of 11% over the last five years.
Speaker: But if you look only at the pure play climate stocks, then the growth is even higher.
Speaker: The growth is of 16% CAGR since 2016.
Speaker: So as a result,
Speaker: The share of pure play climate companies in our database has now taken over the non-pure play climate companies.
Speaker: And collectively, they represent more than half of the database as of 2020.
Speaker: So more pure play companies as a percentage of the database.
Speaker: And you've also found a pattern in where they're picking up more business.
Speaker: Tell us about that.
Speaker: Yeah.
Speaker: So in terms of destination markets for climate products, the Asia Pacific region is emerging as a global hotspot for climate solutions.
Speaker: The share of Asia as a market for climate products has risen from 18% in 2016 to 28% last year.
Speaker: And Asia has now, in fact, taken over Europe as the second largest market for climate solutions.
Speaker: America, obviously, is the largest market for global climate products.
Speaker: Now, if we drill down to individual climate themes in our framework, and there are 21 climate themes, Asia is the largest market for almost half of them.
Speaker: So the growth that we are seeing in Asia is widespread across almost all the climate themes.
Speaker: Now, this includes solar, wind, hydro, and also bioenergy.
Speaker: Asia is also the largest market for energy efficient related climate themes, such as energy storage, efficient transport and building solutions.
Speaker: And what is the takeaway for investors?
Speaker: So we have conducted this analysis over the period of last five years, starting from 2016 to 2020.
Speaker: And we find a clear shift from developed markets to emerging markets, mainly Asia Pacific, mainly by China.
Speaker: It is a driving force.
Speaker: The number of companies that we have in our database from China has risen significantly over the last few years.
Speaker: So I would just like to add that with more and more countries and corporates coming up with their net zero emissions targets, investment in the climate change space is only going to increase from here.
Speaker: And from investors' perspective, it is important to know
Speaker: key areas of growth in the climate change universe and the markets that are driving that growth.
Speaker: Ahmed, thank you very much.
Speaker: Thanks a lot.
Speaker: So that's our latest edition of the ESG Brief.
Speaker: Special thanks to Weishen Chan, Andrew Lauenberg, Yurina Kobol and Amitri Vassar.
Speaker: Thanks very much for listening and 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.
