Here are a few highlights:
- To be competitive, corporates must care about ESG. Keynote speaker Michael Bloomberg warned corporate management that from a competitive point of view, when you go to your board and they ask what you are doing on ESG, "you better darn well have an answer that says: we are active, we are participating. Yes, corporates need to have the best product and service to be competitive, but they also need to build a company that participates with the society where you work and live. It has an impact on the happiness of stakeholders and shareholders. We are kidding ourselves that we can run a business virtually”. Bloomberg feels strongly that Zoom is not a substitute for the water cooler. In-person dialogue and interaction leads to innovation. For the younger generation, it helps them to learn. Many big companies aren't pushing their employees to come back. This has additional consequences for people who work in nearby stores around big buildings. Corporates need to think about the impact of maintaining work from home. People working in these shops don't have other options and are being financially devastated, Bloomberg stated.
- Customers are increasingly ESG conscious in their purchasing habits. Those who are "eco active" with their purchasing decisions will grow from being 25% of global customers to 50% by 2030. Yet, in order to capture this market, companies must refrain from jumping on the latest "hot" ESG issue. Instead, they should determine which issues align with their core competencies and brand and set goals in these relatively narrow focus areas.
- Carbon pricing is not the only cause of greenflation. Another big one is commodity prices. Even before the crisis in Ukraine, the risk of higher commodity prices was threatening to increase greenflation due to the large amount of minerals and materials needed for the green transition. Still, as voluntary and compliance markets for carbon continue to cover a greater proportion of global emissions, prices may rise as more players become involved and permits are constricted. That may add pressure to corporates, particularly in Europe, however, legislation to grow carbon markets is unlikely to be derailed, even if the conflict in Ukraine has a more serious impact on the economy.
- Impact investing and energy transition strategies growing in importance for asset managers. There were six key takeaways from our Asset Manager & ESG Growth panel: (1) Impact investing is rapidly gaining traction, (2) Active approach to ESG investing is increasingly essential, (3) ESG product launches are expanding choices, (4) ESG fund performance may be more susceptible to non-ESG factors, (5) Wealth clients are becoming increasingly interested in ESG, and (6) Energy transition is to become a large new category. Topics of increasing engagement/impact investing and a focus on energy transition opportunities were key themes throughout the conference. Fundamental strategies for energy transition should include assessment of real world impacts. Shareholders and capital allocators should encourage and reward investment in transition strategies and innovation. Investing approaches should be less exclusionary based. Instead, engagement with corporates should be prioritized. Panelists also expressed that preparing for increasing regulation is a long process. Ultimately, they must convert the text to a methodology. The process must be tested, and analysts must be trained. In some cases, asset managers are developing their own transition scores.
- 43% of corporates will deselect a supplier based on a poor CDP water score. The CDP provides a climate, forest and water score (A-F rating) based on corporate disclosure, which many companies use to assess the sustainability efforts of their suppliers. Cate Lamb, Global Director Water Security at CDP, noted that while 70% of the planet is covered in water, only 1% is fresh water we are able to use. The resource is under incredible amounts of strain and corporates are under increasing pressure to take the risk seriously. Companies in food & beverage, textile, retail, energy, oil & gas, industrial, chemicals, pharmaceuticals and mining sectors account for and wield influence over 70% of the world’s water use and pollution.
- New German government wants to significantly accelerate the expansion of renewable energies (80% target by 2030), and become climate neutral by 2045. Thus far, Germany has been relying on (mostly Russian) gas to balance the energy peaks and lows. This might move another key topic even higher up the agenda: the development of the green hydrogen economy with industrial clusters, helped by subsidies. The risks discussed during the panel have become even more pressing during recent days, i.e. rising gas and power prices, as well as the risk of overstraining the state budget by tackling too many topics simultaneously. For corporates, the key ESG risk remains to put off taking decisions – “the right time is now”.
- China's carbon neutrality plan (target of 2060) points to huge investment needs equating to 8% of GDP. China plays a critical role in the global supply chain and is one of the biggest markets for solar panels and electric vehicles. It lags behind in the area of offshore wind farms and electric grid technology. Climate related constraints will continue to be binding in the coming years, which points to higher prices. ESG investors in Asia have been largely concentrated on governance, with climate issues coming to the fore now. Rather than using an exclusion filter, there is an increasing move towards improvers instead. That said, there is difficulty in getting key metrics to assess corporates when you go past the top 100 companies, but dbResearch sees quality improve as there are new providers of carbon emissions data emerging.
- Electric Vehicle growth is impressive, the supply chain limits growth (and sustainability). The US is behind China and Europe but is starting to catch up. There is growing consumer adoption as automakers have realized the urgency in making EV capacity investments. Last year, Battery Electric Vehicles’ (BEV) share in Europe closed the year at 10%. This is up from just 1-2% penetration a few years ago. Penetration levels are below this in the US but expected to be ~15% by the middle of this decade and 40% in the early 2030s. However, a shortage of battery cells is on the horizon and an adequate charging network is lacking. Looking ahead, sustainability issues with the supply chain will cause issues with ESG compliance. In the case of Lithium, used for batteries, significant water usage from the extraction process is an issue. Deutsche Bank’s team believes an increase in recycling is one way to improve the sustainability algorithm for batteries, but given that they last for 12-15 years, we will have to wait a cycle to have scale, which the team estimates is ~10 years away.
- Packagers focus on recycling and recycled material. A number of leading plastic packagers have committed to making 100% of products from recycled, recyclable or renewable materials by 2030. There is of course interest in production from recycled resins or bio-based resins, but supply is a limiting factor. Both metal and glass producers are committed to increasing recycling rates for their packaging products as a means to improve the sustainability of the product. Deposit systems have resulted in success.
Deutsche Bank Research clients can access the full key takeaways and videos here