Welcome to the Sustainable Money Mail! We think investing should be about trying to beat the market while providing capital to companies that make the world a better place. From hydrogen power to dairy farming, here are the stories that caught our eye this week.
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New ESG rules are needed to reboot capitalism says Bank of America CEO
Financing around the UN’s Sustainable Development Goals is only going to increase, announced Bank of America’s Chairman and CEO Brian Moynihan at the World Economic Forum in Davos, Switzerland last week.
As the panelist for “Stewarding Responsible Capitalism”, Moynhian outlined the ongoing momentum in sustainability commitments by companies around the world:
“2020, 2021, 2022 were three interesting years, right? I think in 2021 we did $200 billion of financing around the SDGs, around three-quarters of that was environmental. In 2022, we haven’t totaled it up yet – but it’s going to be bigger.”
He called for global standards for how sustainability and ESG should be defined as they are vital to “align capitalism with what society wants from it.” He believes this can avoid confusing debates and reduce cases of greenwashing.
“Without that definition, without that convergence, what you had is everybody defined it their own way. Somebody would think this issue’s important or this way to talk about it is important. An investment manager, a consumer, society, others can sit there and say, here’s a line that is acceptable and you’re either above it or below it. If you’re below it we shouldn’t do business with you.” Moynhian said.
In 2021, Bank of America set the goal of $1.5 trillion in sustainable finance mobilization and deployment by 2030, including a new goal of $1 trillion in its Environmental Business Initiative aimed at accelerating the transition to a low-carbon, sustainable economy. Last year, the company reported that its 2021 sustainable finance activity reached an all-time high of $250 billion in capital mobilized for financing UN SDG-aligned green and social projects, double its amount of $105 billion in 2020.
Moynihan believes that despite the macro challenges, demand for sustainable finance continues to grow from clients:
“Our client demand is driving this, and you see it keep going up. Obviously it hasn’t been stopped in very tough times in the world in the last couple of years: a war, a pandemic, shutting down the economy, interest rates up and down… and yet the financing going towards these things has gone up each year.”
As a blueprint for the industry, BoA’s CEO suggested that increased sustainability reporting requirements will likely push companies to abide by sustainability standards effectively and contribute to the momentum. This way, companies are compelled to showcase year-over-year progress to stakeholders:
“Scope 1, Scope 2, Scope 3… you pick the topic. By having to disclose on a periodic basis, you make it part of the official record – you can’t walk away from it.”
Rolls-Royce Tests Power Plant Engine Running on 100% Hydrogen Fuel
Rolls-Royce is best known for its luxury cars, but it's also major player in the aero-engineering sector. It recently revealed that its Power Systems business unit has completed a successful test of an mtu Series 4000 L64 engine running on 100% hydrogen. The successful test marks an important step towards meeting customer demands for more sustainable energy through the commercial introduction of hydrogen solutions.
Hydrogen is key in the transition to a cleaner energy future, particularly for sectors where emissions reduction is more difficult and in which wind and solar power is less feasible.
Rolls-Royce praised the engine's efficiency, performance, emissions and combustion in the test, and said that all the mtu engines can be operated in a carbon neutral manner in the future.
“This engine will be available to our customers as a reliable and clean power source for gensets and combined heat and power plants”, said Tobias Ostermaier, President of Stationary Power Solutions, Rolls-Royce business unit Power Systems.
Danone Commits to Reducing Methane Emissions From Dairy Supply Chain
Global food and beverage company Danone announced a new sustainability plan to tackle a major source of its greenhouse gas footprint, as it aims to to achieve a 30% absolute reduction in methane emissions from its fresh milk supply chain by 2030. Methane emissions represent 25% of Danone’s full scope emissions, with approximately 70% of these attributed to fresh milk, and the remaining 30% by indirect dairy ingredients.
Methane, emitted from activities such as agriculture, fossil fuel production and transport, coal mining and landfills, is an highly potent greenhouse gas, with as much as 80x the warming power of CO2. Rapid reduction in methane emissions is seen as one of the most effective near-term actions in the fight against global warming.
Danone plans to remove 1.2 million tons of carbon dioxide equivalent of methane emissions by 2030 “Dairy products are an affordable source of nutrition for many people," said Antoine de Saint-Affrique, CEO of Danone. "We take the challenge of both producing more [to feed a growing population] and greatly reducing emissions and impact on climate."
EU to Reform to its ETS Scheme For Regulating Greenhouse Gas Emissions
The European Union wants to become the world’s first climate neutral continent by 2050. At the core of this goal is a carbon market known as the Emissions Trading System (ETS). It sets caps on how much companies can emit and allows them to trade these emission rights.
The Council of the EU and European Parliament have recently agreed to reform this scheme, with the intention of reducing emissions in sectors covered by the EU ETS by 62% by 2030 (compared to 2005 levels). A phased reduction in emissions allowances will take place until 2030 and free allowances will be phased out by 2036. A new and distinct Emissions Trading System II, which will create a market for emissions for fuel for road transport and buildings, is proposed to be introduced in 2027. Proceeds from the sale of allowances under ETS II will support a new EU-wide Social Climate Fund intended to address social impacts arising from the introduction of ETS II. The Council and Parliament also reached a provisional agreement on the Carbon Border Adjustment Mechanism, which complements the ETS II by dis-incentivizing “carbon leakage”.
Green Buildings Attract +20% higher prices
A recent report by global real estate giant JLL shows that environmentally sustainable buildings could attract an average capital value premium of over 20%. JLL’s London Offices Investment report analyzed 600 transactions over the past 5 years which captured market rent and sales prices in the UK capital. The data overwhelmingly shows that buildings with better sustainability credentials are linked to higher returns.
Buildings with the industry recognized certification: Building Research Establishment Environmental Assessment Method (BREEAM) and Energy Performance Certificate (EPC), in particular outperformed others. Capital values were on average 20.6% higher as a result of BREEAM certification, with a single step improvement in EPC ratings producing a corresponding premium of 3.7%. Similarly, the average increase in rents associated with BREEAM certificates and a step improvement in EPC were 11.6% and 4.2% respectively.
This is largely due to higher demand by buyers and occupiers as sustainable buildings typically have lower operating and energy costs. As developers, investors and operators are increasingly competing on net zero targets, the demand is only expected to increase. Overall, investment into sustainable buildings do prove to be less risky and offer higher returns while positively contributing to the planet. We expect government regulations to continue to tighten on non-sustainable buildings particularly in Europe and the UK in response to the energy crisis.
Julian Sandbach, head of Central London office markets at JLL summarizes: “Developers and funding partners recognize that the creation of high quality, sustainable assets is likely to deliver out performance in the longer term, helping to mitigate some of the risks associated with ground up development”.
Lenovo’s 2050 Net Zero Commitment
Multinational technology company Lenovo announced its target of net zero greenhouse gas emissions by 2050 this week. This will involve all stages of its value chain and will implement plans to reduce absolute scope 1 and scope 2 GHG emissions by 50% by 2030.
This has been validated by Science Based Targets initiative (SBTi), making Lenovo one of only 139 companies to date to have its targets validated according to the Net Zero Standard, and the first among PC and smartphone makers. SBti set a stringent criteria for assessing corporate commitments after launching its Net Zero Standard in 2021.
Lenovo Chairman Yang said:
“As a global technology leader, Lenovo has been committed to reducing its emissions for more than a decade. In the fight against climate change, we believe collaboration and accountability are the two critical elements needed for collective success. We remain dedicated to following climate science, standardizing our measurements, and seeking ongoing validation for our targets and progress.”
Luiz Amaral, Chief Executive Officer of the Science Based Targets initiative, said:
“Climate science tells us that we need rapid and deep emissions cuts if we are to achieve global net-zero and prevent the most damaging effects of climate change. Lenovo’s net-zero targets match the urgency of the climate crisis and set a clear example that their peers must follow.”
Note:
All opinions are the author’s own. This is not investment advice. Please consult your financial advisor before making investment decisions.
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