With the world becoming increasingly virtual by the day and almost 84% of the world’s population using a smartphone, it has become increasingly difficult to ignore the facts and figures regarding the detrimental effects of smartphones on nature and the environment. Smartphones are making a substantial contribution to the problem of climate change with significant figures being highlighted in various studies and research. Extensive research has been conducted in recent years to identify and draw attention to the negative impact of smartphones on the environment, but the topic is still insufficiently appreciated and addressed, by users and manufacturers, respectively. While advocating for the environment and promoting recycling and sustainability on social media via our smartphones, we often neglect the impact on the environment imposed by the smartphone itself. From the extraction of raw materials to assembly, distribution, transport, use, and end-of-life treatment, smartphones contributed to the creation of a staggering 580 million tons of CO2 emissions in 2020. The ICT sector — including personal computers, laptops, smartphones, tablets — as well as its digital infrastructures such as data centers and communication networks, is expected to contribute to the global carbon footprint by 14% in 2040, representing more than half of the contribution made by the transportation sector worldwide. While the role of technology in promoting environmental awareness and fighting climate change is indeed significant, the business of smartphones is one that is very much focused on profit, with minimal attention paid to the environmental impact of their production and disposal. Device Statistics In the past five years, global smartphone usage has almost doubled. In 2016, the number of smartphone users amounted to just over 3.6 billion users, while by 2021 that figure had reached an estimated 6.3 billion users worldwide, with the number expected to reach over 7.5 billion by 2026. While this demonstrates an expected increase at a decreasing rate compared to the past 5 years, that figure would constitute almost 90% of the world’s population, according to world population projections. [caption id="attachment_7964" align="aligncenter" width="600"] Note(s): Worldwide, Africa, North America, Europe, China, Central and South America, MENA; 2018 to 2021 Further information regarding this statistic can be found on page 8. Source(s): Gartner; ID 755388 [/caption] Impact Breakdown A smartphone contributes to global warming and climate change throughout the entirety of its life cycle, from production to disposal. The raw materials needed to produce a smartphone, including gold, cobalt, lithium, and other heavy metals, require energy-intensive mining, and their extraction often causes significant environmental pollution. [caption id="attachment_7949" align="aligncenter" width="615"] Bruno Martin, OpenMind BVA[/caption] The mass production of smartphones in mega factories, of course, also greatly contributes to climate change with 85%-95% of a smartphone’s overall carbon footprint produced during the production process. The batteries, integrated circuits, speakers, and screens used to manufacture smartphones — along with every other single component that goes into their manufacture — are themselves mass-produced, creating carbon footprints, heat emissions, and environmental pollution of their own. The environmental impact associated with smartphones, however, does not end with their hardware production and the smartphone’s physical components. The networking and data centers needed for the software development of the operating systems used in smartphones, such as IOS and Android among others, can also be energy-intensive, with significant carbon and heat emissions. According to the International Energy Agency, for instance, data centers consume approximately 200 terawatt-hours (TWh) of electricity, or nearly 1% of global electricity demand, contributing to 0.3% of all global CO2 emissions The actual usage of smartphones also produces an environmental impact. Research on the annual carbon emissions from smartphone usage provides an estimate of an average of 63 kilograms of CO2 emissions produced, from only one hour of smartphone usage per day, for a year, and up to 90 kilograms of CO2 emissions produced for 10 hours of usage per day, for a year. Although this demonstrates that the impact of the production process is much higher than that of the smartphone’s use, CO2 emissions from usage continue to increase as more people are becoming smartphone-dependent. The practice of frequently upgrading our smartphones when new versions are released creates an enormous amount of physical e-waste. In 2019 that figure was estimated to weigh more than 50 million tonnes, constituting approximately 10% of global e-waste. Finally, the telecom sector on which our phones rely produces its own carbon footprint, heat emissions, and e-waste. [caption id="attachment_7950" align="aligncenter" width="701"] Ericsson Mobility Report 2021[/caption] Smartphone Manufacturers Launching new smartphone models every 2-3 years is a profit mechanism used by market players who rely on brand loyal customers with a hunger for new features, better quality, and brand image. This strategy encourages the discarding of smartphones more quickly, a situation made worse by the lack of transparency on the part of most market players regarding the recyclability of disposed smartphones. Another strategy used to elicit more profit is the creation of components that are difficult or costly to replace, such as batteries or screens, essentially incentivizing consumers who suffer broken phones to simply replace the phone entirely. Some efforts, however, have been made by various manufacturers to operate more efficiently. A case in point is that of Apple, who announced in 2018, that its global facilities - including retail stores, data centers, and other facilities in 43 countries - had completed a transition to 100% clean energy. Not all market players have made similar commitments to transition to renewable energy for their operations and manufacturing, and the majority continue to lack transparency as to the sustainability of their production processes and the recyclability of their products. Indeed, the same players have made sustainability-minded investments in other areas, while refraining from doing the same with their smartphone production process. [caption id="attachment_7951" align="aligncenter" width="618"] Apple Datacenters in Denmark, PV Magazine, https://www.pv-magazine.com/2020/09/04/apple-data-center-in-denmark-powered-by-50-mw-of-solar/[/caption] Does the problem end with smartphones? The path of digital transformation of communications, manufacturing, and banking, among others, of which we believe ourselves to be in dire need, does not come at no cost to the environment, labor market, and societal well-being Many of the other technologies that are currently trending have been found to have a significant impact on the environment. Digital currencies are one such example, with Bitcoin and Ethereum, in particular, being so damaging to the environment that they threaten to reverse any gains achieved through the transition to electric vehicles and the reduction in fossil fuels use. Much of this impact resides in the energy and processing intensive mining of these digital currencies, and the proofs of work that underpin their production. According to the Cambridge Bitcoin Electricity Consumption Index, for instance, Bitcoin already consumes more energy than the whole of Argentina, and the total carbon footprint left by Bitcoin currently exceeds the total reduction in emissions made by electric vehicles. Training models and deep machine learning for Artificial Intelligence systems are also energy and data processing intensive, with their own significant power consumption levels and, accordingly, their own emissions. As we continue to transition to a more digitalized world, careful consideration will be needed to determine what trade-offs we will find acceptable, and exactly how we can collectively manage the costs and benefits of such a transition. Mariam AbdEl-Aziz References: https://www.ericsson.com/4ad7e9/assets/local/reports-papers/mobility-report/documents/2021/ericsson-mobility-report-november-2021.pdf https://www.dw.com/en/fairphone-shiftphone-cell-phone-smartphone-environment-climate-co2/a-59356342 https://www.ericsson.com/en/reports-and-papers/research-papers/life-cycle-assessment-of-a-smartphone https://www.anthropocenemagazine.org/2018/04/the-energy-hogging-dark-side-of-smartphones/ https://reboxed.co/blogs/outsidethebox/the-carbon-footprint-of-your-phone-and-how-you-can-reduce-it https://www.un.org/en/global-issues/population https://inform.tmforum.org/insights/2021/08/can-the-telecoms-industry-power-down-its-impact-on-the-environment/ https://www.earth.com/news/smartphone-harmful-environment/ https://www.compareandrecycle.co.uk/blog/this-is-why-mobile-phone-recycling-matters James Mckinven, https://unsplash.com/photos/Ohu89iIorIc
The world is currently shifting its energy system away from hydrocarbons and towards low-carbon energy sources, with a view to eventually transitioning to a net-zero energy system. As a result, governments and energy companies alike are placing large wagers on hydrogen, in an effort to lower emissions. The GCC countries have long been concerned about the sustainability of their hydrocarbon revenues and have taken early steps to develop national hydrogen strategies. Saudi Arabia and the United Arab Emirates lead the way in this regard and have positioned themselves to become major hydrogen exporters. Japan, China, and South Korea, on the other hand, currently some of the top destinations for Saudi and Emirati crude oil, are set to emerge as major importers of hydrogen. The recent export by the Emirates’ state-owned oil company ADNOC, of its first blue hydrogen cargo to Japan, marks the first step toward solidifying this emerging relationship. Hydrogen Steadily Gaining Ground in the GCC The UAE joined the Global Hydrogen Council in July 2021, and developed its National Clean Energy Strategy 2050, under which ADNOC will produce 300,000 metric tonnes of hydrogen annually. In Saudi Arabia, a green hydrogen project is scheduled for completion by 2025, with a capacity of 650 metric tonnes of hydrogen, and 1.2 million tonnes of green ammonia, making it one of the largest such projects in the world. In Kuwait, meanwhile, the National Petroleum Company (KNPC) has completed work on a hydrocracker unit at a cost of $16 billion, that can produce 454,000 tonnes of clean fuel. Oman Oil Company, for its part, is implementing a project to produce 1.8 million tonnes of green hydrogen at a cost of $30 billion, using solar and wind energy. Factors favoring the production of Blue Hydrogen* in the GCC (*Hydrogen produced using carbon capture and storage technology to store the CO2 created as a byproduct of the process) The GCC is one of the largest and lowest-cost producers of natural gas globally, accounting for 20% of the world’s gas reserves. Qatar is the third-largest worldwide, with 24.7 trillion cubic meters (TCM) of proven natural gas reserves, while Saudi Arabia (6 TCM) and the UAE (5.9 TCM) hold the ninth and tenth spots, respectively. The availability of existing facilities in the GCC involved in the production of ammonia, fertilizers, methanol, steel, and hydrogen. These facilities are often already concentrated in clusters along with power and desalination plants, making ideal centers to expand the use of the carbon capture, use, and storage (CCUS) needed to create blue hydrogen. Examples include the facilities of SABIC in Saudi Arabia, FERTIL in the UAE, QAFCO in Qatar, PIC16 in Kuwait, OMIFCO in Oman, and Bahrain’s SULB. GCC hydrocarbon producers have significant CO2 storage capacity. Carbon capture, utilization, and storage (CCUS) enable the production of low-carbon hydrogen, and the voided spaces in oil and gas fields alone, within the GCC, accounting for a storage capacity of 33.4 GtCO2e, allowing for ample reservoirs for hydrogen producers. GCC producers have well-developed existing infrastructure, such as their natural gas grids, which could be modified for transporting hydrogen inland for domestic purposes. Factors favoring the production of Green Hydrogen* in the GCC: (*Hydrogen produced using electricity generated from renewables, such as wind or solar) The GCC is a high-potential region for renewables benefitting from some of the highest solar radiation levels in the world, as well as strong and regular winds in some areas. This makes the GCC region potentially one of the most cost-competitive for hydrogen production, with long-term costs potentially reaching USD 1.5 - 2 per kg, compared to USD 3.0 - 4+ per kg in Europe and parts of Asia. GCC countries enjoy sufficient funding availability for investment in hydrogen, having created significant financial reserves from their oil & gas economies. These reserves allow them to cover the cost of producing green hydrogen, which is high compared to that of producing blue hydrogen. The GCC already has a highly qualified workforce in the oil & gas sector. This represents a major opportunity for the development of the hydrogen economy in the region, due to the high transferability of their skills. GCC countries have advanced export infrastructure. The UAE’s Jebel Ali and Saudi Arabia's Jeddah ports, for instance, were among the top 40 ports in the world in 2019, according to the World Shipping Council. GCC countries are centrally located relative to energy demand markets, situated as they are between the potentially large European and East Asian markets. Potential Hydrogen Imports from High Demand Regions EU hydrogen imports from the GCC could reach 100 mMT by 2050, according to a recent report published by Dii & Roland Berger. In East Asia, meanwhile, imports from the GCC could reach approximately 85 mMT of ammonia by the same year, leaving GCC countries in a prime position to become major players in the hydrogen industry. Source: Vision Port of Rotterdam, Germany's National Hydrogen Strategy, EU Hydrogen Strategy, METI, Hydrogen Korea Team, Roland Berger, Dii Desert Energy. Potential Revenues from Hydrogen Exports Global hydrogen demand is expected to reach approximately 580 mMT by 2050. All indicators point to the potential for the GCC to replace its position as a global oil giant, with that of a global hydrogen hub, with potential green hydrogen revenues alone expected to reach USD 70-200 billion by 2050. Looking Forward The GCC is in an excellent position to become a leading green and blue hydrogen producer, which would allow the region to occupy an important place in the nascent hydrogen industry. By seizing this opportunity, GCC countries can ensure their continued prominence in the global energy market, all the while moving towards a decarbonized world. This shift is emblematic of the rising non-oil economy in oil countries, symbolizing a strategic pivot towards sustainable and diversified energy sources that promise economic resilience and environmental responsibility for future generations. Author: Dina Amer References: MEI@75, Warming to a Multi-Colored Hydrogen Future? The GCC and Asia Pacific, 2021 https://www.mei.edu/publications/warming-multi-colored-hydrogen-future-gcc-and-asia-pacific Gulf News, Gulf economies are ready to take on clean energy and hydrogen projects, 2021 https://gulfnews.com/business/analysis/gulf-economies-are-ready-to-take-on-clean-energy-and-hydrogen-projects-1.1628060444446 Qamar Energy, Hydrogen in the GCC, a report for the regional business development team Gulf Region, 2020 https://www.rvo.nl/sites/default/files/2020/12/Hydrogen%20in%20the%20GCC.pdf Dii Desert Energy & Roland Berger, The Potential for Green Hydrogen in the GCC region, 2021 https://www.menaenergymeet.com/wp-content/uploads/the-potential-for-green-hydrogen-in-the-gcc-region.pdf Brookings, Economic diversification in the Gulf: Time to redouble efforts, 2021 https://www.brookings.edu/research/economic-diversification-in-the-gulf-time-to-redouble-efforts/ The IEA, The Future of Hydrogen; Seizing today’s opportunities, 2019 https://www.iea.org/reports/the-future-of-hydrogen The IEA, The Role of CO2 Storage, 2019 https://www.iea.org/reports/the-role-of-co2-storage KAPSARC, Opportunities for Natural Gas Trade and Infrastructure in the GCC, 2020 https://www.kapsarc.org/research/publications/opportunities-for-natural-gas-trade-and-infrastructure-in-the-gcc/
Over the past two years, global supply chain disruptions have become a pervasive challenge, with the COVID-19 pandemic exacerbating issues like volatile demand, factory shutdowns, and logistical nightmares But which industries were most affected by these stresses to their supply chains? How were companies able to adapt their supply chain management? And what are countries doing to make sure that future shutdowns don't affect their supply chains so drastically? [caption id="attachment_7875" align="aligncenter" width="621"] Click the image to access the report![/caption] Industries Hit Hardest by Global Supply Chain Disruptions The COVID-19 pandemic brought to light long-standing vulnerabilities in global supply chains. Lockdowns slowed or stopped the flow of raw materials and disrupted manufacturing in several industries, putting supply chains under significant stress. Factory shutdowns caused a shortage of semiconductors, already in short supply amid sustained demand from a growing EV market, and the increased demand for electronic goods from consumers confined to homes by lockdowns. Major automakers bore the brunt of this shortage, made worse by the concentration of the world’s semiconductors manufacturing among just a handful of producers—Taiwan’s Semiconductor Manufacturing Co.(TSMC), for instance, along with South Korea’s Samsung, manufacture a combined 70% of the world’s semiconductor supply. The automotive industry was also hit hard by the supply chain issues affecting both battery manufacturers, and the mining industry that extracts the rare-earth elements needed for those batteries. Automakers’ over-reliance on the Asia-Pacific region for these critical components was made clear when major battery manufacturers such as BYD and CATL announced extended production delays, forcing automakers to slash production. The textile and fashion industries are two more to have been extremely hard hit by the global supply chain crisis. With China being a critical global supplier of textile inputs, pandemic-related production disruptions there reverberated throughout the rest of the textile and fashion industries. These industries were further affected when the global transportation system came to a halt, preventing or delaying the transport of components to manufacturers, and finished products to consumers. Innovative Responses to Supply Chain Challenges With COVID-19 related shortages exposing vulnerabilities in the global supply chain, companies across different industries have taken action to determine how best to deal with the disruption and mitigate the effects of future supply chain shocks. China plus one strategy One way to address the risks associated with over-reliance on a single supply source, is to use sources in locations not vulnerable to the same risks. This is the core idea behind the ‘China plus one’ strategy currently in use by several major companies. It emphasizes diversification by establishing a factory in one other developing Southeast Asian country – such as Thailand or Vietnam – in addition to existing facilities in China, to minimize the risks of geographic concentration. Strengthening local supply networks Some companies are strengthening their supply networks by investing in local suppliers. Samsung, for instance, has invested a combined $238 million in nine midsize companies since the summer of 2020, to develop a network of chip equipment and materials suppliers inside South Korea and reduce its reliance on overseas suppliers. Similarly, Tesla is creating a domestic US lithium supply chain by sourcing the lithium ore necessary for lithium-battery fabrication within the US, thereby reducing its reliance on traditional lithium-producing countries. Innovative workarounds Major companies have been forced to find innovative solutions to their supply chain problems. Tesla, for instance, has dealt with the chip shortage by rewriting vehicles’ software to support alternative chips. Cardinal Health, a leading US healthcare services company, has turned to the use of tracking software to track shipments of their products between manufacturing plants and Cardinal's distribution centers. This allows for the making of predictive decisions to adjust supply plans and production schedules. How are countries making sure that future shutdowns don't affect their supply chain? Global supply chain problems have made clear to governments the need to take action to strengthen and support their domestic supply chains, and many have taken important first steps towards doing just that, in preparation for future crises. USA President Biden signed an executive order in February 2021, for a comprehensive review of critical US supply chains, with the associated White House report being released in June. Among other recommendations, the review determined that a solid supply chain must include a small and medium-sized business manufacturing base and highlighted the US’s need to diversify its international suppliers to reduce the risks associated with geographic concentration. Japan The Japanese government has focused its efforts on subsidizing local businesses to strengthen domestic supply chains. It has distributed 146 subsidies totaling 247.8 billion yen ($2.4 billion) with the goal of encouraging an increase in domestic manufacturing, to reduce the country’s dependence on Chinese supply. Japan is also investing in overseas rare earth minerals projects, particularly in Australia and India to reduce its reliance on China’s supply from 58% registered in 2019, down to 50% by 2025. Outlook: The Global Supply Chain Looking Forward As lockdowns have lifted and a global economic recovery has gathered pace, consumer demand has increased sharply. Supply chains that were disrupted during the crisis continue to face significant challenges and are struggling to bounce back, much less meet increased demand. While companies and governments alike have taken substantial action in response to the supply chain crises, these will not be sufficient to solve supply chain woes in the near term. Months of shipping backlogs and continuing labor shortages have caused bottlenecks that are proving difficult to resolve, and most analysts agree that supply chain problems will only get worse before they get better, with some estimates warning that the crisis could last another two years. Author: Mohamed SAIDI Sources https://www.ey.com/en_gl/supply-chain/how-covid-19-impacted-supply-chains-and-what-comes-next https://www.pwc.com/ng/en/assets/pdf/impact-of-covid19-the-supply-chain-industry.pdf https://hbr.org/2020/09/global-supply-chains-in-a-post-pandemic-world https://www.nytimes.com/2021/10/02/business/tesla-electric-q3-sales.html https://www.cambridge.org/core/journals/mrs-bulletin/article/covid19-disrupts-battery-materials-and-manufacture-supply-chains-but-outlook-remains-strong/158FE30E4868EE8D2952216B6CCB8B4F https://asia.nikkei.com/Business/Tech/Semiconductors/US-China-tension-brings-both-a-risk-of-chip-dependency-on-Taiwan https://asia.nikkei.com/Business/Electronics/Samsung-builds-chip-supply-chain-on-home-turf-to-cut-overseas-risk https://www.nsenergybusiness.com/news/piedmont-lithium-agrees-to-supply-spodumene-concentrate-to-tesla/ https://www.theverge.com/2021/7/26/22595060/tesla-chip-shortage-software-rewriting-ev-processor https://www.theguardian.com/environment/2021/apr/17/the-race-for-rare-earth-minerals-can-australia-fuel-the-electric-vehicle-revolution https://asia.nikkei.com/Politics/International-relations/Japan-to-pour-investment-into-non-China-rare-earth-projects https://techwireasia.com/2021/10/heres-what-the-2021-global-semiconductor-shortage-is-all-about/ https://www.metalbulletin.com/Article/4002802/OUTLOOK-Securing-lithium-biggest-challenge-to-battery-supply-chain-in-H2-2021.html https://www.argusmedia.com/en/news/2191594-qa-chip-shortage-shows-need-to-diversify-supply-chain https://www.bloomberg.com/news/articles/2021-07-22/tight-battery-market-is-next-test-for-evs-caught-in-chip-crisis https://www.bloombergquint.com/global-economics/japan-allocates-2-4-billion-for-better-supply-chain-resilience https://www.japantimes.co.jp/news/2020/03/06/business/japan-aims-break-supply-chain-dependence-china/ https://www.eenewsanalog.com/news/reports-tsmc-lost-market-share-2q20 https://www.e3s-conferences.org/articles/e3sconf/pdf/2021/21/e3sconf_aeecs2021_03044.pdf https://www.financialexpress.com/investing-abroad/stockal-specials/semiconductor-industry-key-growth-drivers-and-the-changing-trends-an-overview/2287214/ https://www.ifc.org/wps/wcm/connect/1d32e536-76cc-4023-9430-1333d6b92cc6/210402_FCDO_GlobalPPE_Final+report_v14updated_gja.pdf?MOD=AJPERES&CVID=nyiUnTU https://www.theguardian.com/business/2021/dec/18/global-supply-chain-crisis-could-last-another-two-years-warn-experts
Between October 31 and November 12, more than 130 heads of state along with many more business and industry leaders, gathered in Glasgow for the United Nations Climate Change Conference, or COP26, with the aim of accelerating action towards the goals of the 2015 Paris Agreement and the 1992 UN Framework Convention on Climate Change. Going into the conference, scientists and experts had warned that nations must make an immediate and decisive turn away from fossil fuel energy, with many describing it as the last chance for countries to reach consensus on two goals: reaching net zero emissions by 2050 and limiting global warming to 1.5C above preindustrial levels. The commitment to aim for 1.5C is important because every fraction of a degree above that figure is expected to result in the loss of many more lives and livelihoods, due to the resultant climate-related consequences. The talks ultimately led to various important and significant pledges from nations and companies to commit to new targets for cutting emissions, and otherwise act to avert severe climate change. In this article, we examine some of the more significant such agreements reached at the conference, as well as the implications they are likely to hold for businesses. Agreements Reached at COP26 The agreements reached at the conference can be divided into five broad categories of change: Phasing out Coal More than 40 countries agreed to phase out their use of coal-generated power while 23 countries signed the Coal to Clean Power Transition Agreement, committing themselves for the first time to halt the issuance of new permits for unabated coal-fired power generation projects. Notable hold-outs to the agreement include Australia, India, Russia, and the US. China, which was responsible for 54% of global coal consumption last year, was also absent from the agreement Major international banks and lenders like HSBC, Fidelity International and Ethos, also made landmark coal-related commitments at COP26. HSBC, for instance, has pledged to phase out financing of coal-fired power and thermal coal mining by 2030 in the EU & OECD, and worldwide by 2040. Cutting Methane The Global Methane Pledge was signed by more than 100 countries, representing 70% of the global economy and nearly half of its methane emissions. These signatories committed to a collective goal of reducing global methane emissions by at least 30% from 2020 levels, by 2030. The top three emitters of methane globally – China, Russia, and India – did not sign up to this pledge. Ending Deforestation The Glasgow Leaders’ Declaration on Forests and Land Use was signed by more than 140 leaders, representing over 90% of the world’s forests. Signatories committed to halting and reversing deforestation and land degradation by 2030, with $19.2bn already committed to the facilitation of these goals. New Net-Zero Pledges One of the main objectives of COP26 was to secure governmental and company commitments to reach net-zero emissions by 2050. Countries answered the call in Glasgow, with 29 making such commitments at the conference, bringing the total count to 74. India’s Prime Minister Narendra Modi added his country to the list, to the surprise of many, albeit with a deadline of 2070. His pledge included a promise to secure 50% of India’s energy from renewable resources by 2030. More than 450 banks, insurers, and other firms with more than 130$ trillion under collective management acted similarly, committing to the use of their funds to reach net-zero emissions by 2050. China-US Climate Cooperation The US and China – the two largest emitters of CO2 – signed an unexpected joint declaration promising to boost climate cooperation over the next decade, with the specific aims of reducing methane emissions, tackling deforestation, and regulating decarbonization. As outlined in the text of the declaration, the two powers are slated to share policy and technology development, announce new national targets for 2035 by the year 2025 and revive a working group to ‘meet regularly to address the climate crisis and advance the multilateral process’. Although the commitment has been welcomed by many, it lacks concrete steps to meet the 1.5C Paris Agreement goal. U.S. special climate envoy John Kerry has acknowledged as much but nevertheless defended the agreement, pointing to its expected contribution to enabling mutual accountability and action. How will COP26 Impact Companies and businesses? Implications for companies and businesses can be divided into 4 main categories: Carbon Offset Market The Paris Agreement laid down a framework for a carbon offset market, wherein states and private entities could generate and trade carbon offset credits. After five years of unsuccessful deliberations, negotiations at COP26 reached a breakthrough on the rulebook for this market. For businesses, this agreement provides an opportunity to strengthen their green credentials, ensures offsets, and gives them the opportunity to reduce the cost of reaching their emissions targets. Heightened ESG Standards and Expectations The set of deals made and agreements reached, at COP26, mean that businesses will have to reconsider their carbon footprints and business strategies if they hope to continue generating profits. This is due mainly to the imperative of these agreements on investors and industry leaders to bring in check the emissions associated with their businesses. Of the many deals announced, one includes plans to establish a standards organization that will inspect corporate climate disclosures and challenge boardrooms on the basis of its findings. Companies that do not align their strategies with COP26’s carbon level targets’ regulations are likely to suffer in terms of ESG-based credit ratings, attracting investment, and their ability to attract and retain talent. A Turning Point for Companies’ Sustainable Business Practices According to a March 2021 global survey conducted by IBM on the topic of sustainability, 73% of respondents said that addressing climate change was very or extremely important to them. In the wake of COP26, this consumer pressure will only continue to mount. Sustainability will also be increasingly important from an investment perspective, owing to the agreements reached and the resultant pressure on investors. According to a study at the Chicago Booth University, causal evidence suggests that investors, market-wide, already strongly value sustainability, to the extent that sustainability is viewed as positively predicting future performance. With the ratcheting up of pressure brought on by COP26 agreements, companies can expect investors to be even more reluctant to invest in companies that don’t make net zero an organizing principle of their business. Finally, by focusing on reducing their carbon footprint, businesses may be able to take advantage of opportunities arising from the regulatory changes governments are expected to make in accordance with their new COP26 commitments. There will be Winners and Losers Countries’ climate goals and their road maps for achieving those goals will pave the way for public spending plans that will boost green stocks. Given the domestic nature of these goals, many of the changes felt by companies will vary on a country-by-country basis. Companies’ fortunes will also vary by sector, as a result of agreements reached at COP26. Many stocks are set to benefit from decarbonization trends, including those of sectors such as renewables, hydrogen power, green mobility, and carbon capture, utilization and storage (CCUS). High-carbon sectors, on the other hand, like power generation, steel, cement, mining, airlines and shipping, can expect to face significant challenges. Looking Beyond COP26 The COP26 pledges announced on methane, coal, transport, and deforestation are expected to nudge the world only 9% closer to a pathway that keeps heating to 1.5C, according to Climate Action Tracker, one of the world’s most respected climate analysis coalitions. As such, the achievements of the conference, taken alone, appear to be insufficient with respect to the goal of limiting global warming to the extent needed to avert severe climate consequences. The conference was, nevertheless, an unprecedented step in the fight against global climate change and has ushered in agreements that will have broad-ranging effects, and be widely felt by consumers companies, and governments alike. Companies, in particular, will be forced to make significant changes to the way they do business and would be well advised to keep ESG-related consumer and investor sentiment at the forefront of all strategy considerations. Moreover, they can expect to face serious challenges if they fail to adjust their strategies in accordance with the new reality emerging in the wake of COP26. As the U.N. High-level Climate Action Champion, Nigel Topping, puts it "If you haven't got a net-zero target now, you're looking like you don't care about the next generation, and you're not paying attention to regulations coming down the pipe." Author: Ayoub Rahmouni Sources: Carbon Relief UNFCCC IPCC Independent The Guardian Climate Action Tracker Al Jazeera Statista Energy & Climate Intelligence Unit Bloomberg Reuters SSE Energy Solutions Barron’s UNFCCC NPR Clean Energy Wire Chicago Booth study IBM study Food & Land Use Coalition Gov.UK HSBC World Resource Institute
The Growing Demand for Sustainable Products The demand for sustainable products has, over the last decade, become a pivotal concern among consumers globally, reshaping the landscape of production and consumption. Companies have had to make changes to meet these new expectations and can expect to do more of the same, in the future, in line with the continuation of this trend. According to a 2015 study by NielsenIQ, 66% of global consumers surveyed responded they would be willing to pay more for sustainable brands, up from the 50% who said they would do so in 2013. Almost half responded they would pay more to environmentally friendly companies and those demonstrating a strong commitment to social values. In recent years, pressure on companies to pay attention to issues of sustainability has only continued to mount. In a 2018 survey conducted across 5,000 consumers in Europe, for instance, nearly 40% of respondents said their top priority was that food and drink be produced in a way that doesn’t harm the environment, while almost a third prioritized paying workers a fair wage and ensuring that animals were not harmed during production. Almost three-quarters of all respondents wanted to know how their food is produced and a similar number wanted food companies to say where the ingredients in their products come from. Further, 61% reported looking for information about how food companies protect workers’ human rights. Respondents placed even greater emphasis on the need for companies to act on global challenges. Protection of the environment was cited as important by 88 % of those surveyed, with 85% and 84%, respectively, responding similarly with regards to tackling climate change and global poverty. Sustainability: The Global Nature of the Change in Consumer Preference The European findings are echoed in a 2018 Accenture study of 35,000 people in 35 countries, which revealed that two-thirds of consumers make decisions about what to buy based on a company’s transparency, while 62% wanted companies to have ethical values and demonstrate authenticity. A BCG survey conducted in July 2020 found that in the six-member states of the Gulf Cooperation Council, more than 80% of consumers said they were willing to live more sustainability. Moreover, 56% of respondents said they felt strongly about the need to adopt a sustainable lifestyle The 2021 Voice of the Consumer: Lifestyles Survey, published by Euromonitor International, further demonstrates the extent to which changing consumer preferences are global, and not restricted to Western or developed markets. It found, for instance, that almost 35% of those polled in emerging or developing markets reported that they buy sustainably produced goods. (Figure 1.) [caption id="attachment_7865" align="aligncenter" width="450"] Figure 1. Euromonitor International, 20-Aug-21, Ethical Claim Potential Index Identifies Top Market. Source: Voice of the Consumer: Lifestyles Survey, 2020 n=26,321; 2021 n=26,222[/caption] The Sustainable Market Share Index report, published by the NYU Stern School of Business in 2021, showed that the same shift in consumer preferences could also be seen among US consumers. The annual share of sustainability-marketed products there, for example, grew from 13.7% in 2015, to 16.8% in 2020. (Figure 2.) [caption id="attachment_7862" align="aligncenter" width="450"] Figure 2. NYU Stern, 1-Mar-21, Sustainable Market Share Index 2021[/caption] Covid-19’s Impact on the Shift Towards Sustainability Several surveys conducted in the wake of the pandemic have found that people are more concerned about environmental challenges because of the pandemic and are more committed to changing their own behavior to contribute to sustainability. Consumers are, as a result, reducing their household energy consumption, increasing recycling and composting, and buying more local goods. In a recent BCG survey, 90% of consumers said they were equally or more concerned about environmental issues after the COVID-19 outbreak, while 87% of respondents felt companies should better integrate environmental concerns into their products, services, and operations. In May 2020, research firm Kantar found that COVID-19 had led to a global surge in localism, with 65% of consumers responding that they preferred to buy goods locally (local products do not have to be shipped over long distances and therefore require fewer resources to bring to market, producing fewer carbon emissions in the process). November 2020 Data collected by data analytics firm GlobalData shows similarly that consumer perceptions have changed during the pandemic, with over 50% of respondents interviewed during lockdown claiming they found locally sourced ingredients more important than before the outbreak Perhaps most interestingly, the COVID-19 pandemic has changed consumer perceptions and priorities with regard to sustainability. Prior to the outbreak, the term was used as a synonym for environmentalism. Now, however, consumers report expanding their definition of sustainability to include how companies treat employees and interact with their local community. Company Reactions Companies have had to make changes in line with changing consumer sentiments and have done so in ways that can be broadly categorized into four areas of action. 1- Addition of Sustainable/Ethical Labels Leading food companies and retailers are growing their share of assortment with sustainable claims. Nestlé, for instance, has been purchasing more local and healthier food labels to offset declines in some of its mass-market brands. Another example is Dutch supermarket Coop’s switch entirely to Fairtrade bananas. German retailer Lidl’s has done the same across several European countries, and Nespresso has also expanded its sourcing of Fairtrade goods. 2-ESG Commitments Companies are increasing or shoring up their commitments to ESG policies and plans. Unilever, for instance, had already established sustainability goals that included net-zero emissions from its products by 2039, and investments of $1.1 billion in ESG-friendly initiatives over the next ten years. It recently added to these goals by announcing plans to label all its products with information on how much greenhouse gases they generate throughout the entire value chain of their production. Further examples include Zara’s 2020 pledge to use 100% sustainable fabrics by 2025, H&M’s recently stated commitment to achieving the same goal by 2030, and Adidas’ commitment to phasing out virgin polyester by 2024. Finnish grocer Kesko serves as another example, with its aim to become carbon neutral by 2025 and achieve net zero by 2030. 3-Sustainable Packaging Other companies are increasing their focus on sustainable packaging, to reduce their use of plastics. Giro Pack, for instance, has developed compostable bags that are produced using plant-based or organic materials. In April of 2021, P&G announced that Old Spice and Secret deodorants would appear in plastic-free packaging in certain stores, as part of a 2030 goal to reach 100% recyclable or reusable. Nestlé has also reported strong progress on its commitment to make 100% of its packaging recyclable or reusable by 2025, and to reduce its use of virgin plastics by one-third, by that year. 4-Social Impact Initiatives Other companies have chosen to prioritize initiatives that aim to produce positive social impact. Germany’s REWE, for instance, along with Portugal’s Jerónimo Martins, launched initiatives to better integrate migrants into the labor market and promote intercultural cooperation. Similarly, Swedish furniture giant IKEA recently broadened its social impact by committing to employ refugees at production centers in Jordan — part of the company’s stated long-term goal to employ some 200,000 disadvantaged people around the world. Outlook Going forward, increased, and rising awareness, the influence of social media, and regulatory initiatives with regards to sustainability are expected to drive the market. While no company can expect to be immune from these influences, the pressure to act will be felt most keenly by companies operating in certain consumer goods sectors, such as food and beverage, and fashion. According to the Ethical Food Global Market Report 2021, the global ethical food market is expected to grow from $542 billion in 2020 to $574.42 billion in 2021, before reaching a projected $727 billion in 2025. The global ethical fashion market is expected to show even greater rates of growth, going from $6,345.3 million in 2019 to $8,246 million in 2023, before growing further to $9,808 million in 2025 and $15,173 million in 2030. Smaller though significant increases in market size should also be expected across almost all categories of sustainably produced consumer goods, and if the shifts that have taken place over the past decade are any indication of the decade to come, the importance to consumers of sustainability will only continue to grow. Consumers have shown that they have become far more attuned to how brands speak and more importantly, how they behave. With consumers focusing more on sustainable, socially, and environmentally responsible consumption, companies will need to demonstrate that they’ve changed with the times. Only companies that can prove they meet the new, more ethical consumer standards will be able to thrive in a more sustainability-conscious world. 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