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As we ring in the new year, Asian companies should consider better environmental disclosure, including exposure to risk from the changing climate, among their 2021 resolutions.
Companies that disclose their environmental impact tend to be better run because good measurement leads to good management. They are more prepared for the transition away from carbon-based energy sources, so they are less likely to be blindsided by regulatory initiatives that will require big cuts in CO2 emissions. Doing the right thing also helps win support from customers, politicians and the public, so it helps with the social license to operate.
For companies today, substantive environmental disclosure should report the company’s CO2 emissions—preferably its direct and indirect ones, including those of its supply chain, and its product’s emissions once sold in the market (known as Scope 3 emissions). The company should set a target for reducing emissions, report progress toward that target, and C-suite executive compensation should in some measure be tied to meeting these goals. Finally, and most important, the company should learn from the process and affect change.
This sort of disclosure is new, but gaining traction fast. In most countries in Asia it is not mandated for publicly traded companies. But the landscape is changing. Trading venues, including Hong Kong Exchanges and Clearing (HKEX), increasingly require environmental, social and governance disclosure.
Disclosure standards like those of the Task Force on Climate-related Financial Disclosures (TCFD), recently adopted by Japan, are intended to help build consideration of the effects of climate change into routine business and financial decisions. According to TCFD materials, adoption can help companies demonstrate responsibility and foresight. The hope is that such disclosure will lead to more informed and efficient allocation of capital, and help facilitate the energy transition.
Reminder, in order to meet the Paris Accord’s goal to keep at a safe warming level, global emissions must flatten by 2050 and then turn steeply negative. Countries are pitching in with stringent decarbonization targets, which are ratcheting tighter in advance of next November’s meeting of Paris Accord signatories, in Glasgow, U.K. For example, China announced it would reach net zero by 2060. Japan, South Korea and, now under Biden, the U.S. will all aim for climate neutrality by 2050.
Companies should take note. Investors care about this. So do lenders and insurance underwriters, all of which are increasingly assessing climate-related risk in their decision-making. Below are a few examples of how corporate climate disclosure informs investors and has helped drive change, manage risk, and build brand for three different companies.
TSMC, the world’s largest semiconductor foundry, is an example of strong disclosure and forward-thinking. There is board-level oversight of sustainability goals, and monetary rewards are tied to meeting emissions reduction, energy efficiency, and other green goals.
TSMC places a strong emphasis on energy efficiency throughout its business. Its latest 5 nanometer chips are over 13 times more energy-efficient than its previous low-power consumption products. And it is working with its suppliers to help them become more energy-efficient, with a goal of 1.5 billion kilowatt hours of energy use reduction by 2030.
TSMC is one of Taiwan’s biggest electricity consumers, and relies on uninterrupted power for its wafer fabs. It is an example of how large companies’ adoption of clean power goals can have a positive effect on power systems.
The Taiwanese government is transitioning away from nuclear, which has caused power shortages and outages. In its climate disclosures to CDP, a not-for-profit disclosure platform, using the TCFD methodology, TSMC outlined the risk of power interruptions and blackouts to its business. It has also committed to sourcing 25% of its power use for semiconductor fabrication from renewable energy by the end of 2030.
TSMC’s long-term goal is 100% renewable power. It joined RE100, a renewable power buyers consortium, in 2020, and was the first member from the semiconductor space. In order for Taiwan to satisfy the demand for clean power from big industrial users like TSMC, it has incorporated significant new capacity builds of offshore wind into its energy plan and is working with Orsted, the Danish wind developer in the buildout.
Not all companies are as big or influential as TSMC. CLP Holdings, the electric utility that supplies the majority of Hong Kong’s power, is an example of a company that must change its business model to meet increasingly stringent national goals. As part of greater China, Hong Kong recently announced a goal of carbon neutrality by 2050.
Though it has had ambitious decarbonization goals since 2007, in 2019 CLP adopted TCFD methodology to help tell its story. In its words, it did so hoping that TCFD will help stakeholders better understand how the group manages climate-related risks and opportunities, their impact on the business, as well as its progress in managing these risks.
CLP’s current Climate Vision 2050 commits the group to avoid investing in any additional coal-fired generation assets, and phase out coal from all operations by 2050. With non-carbon emitting energy comprising just 24.9% of its generation portfolio, however, CLP’s environmental disclosure will play a critical future role. It will be essential to show stakeholders know how the company plans to transition its generating portfolio, in-line with Hong Kong’s net zero goal.
A third and very different example comes from Schneider Electric, an example of a company with strong climate disclosure that is profiting from the energy transition. The company started re-tooling its business model some 15 years ago. Its CEO has moved its headquarters to Asia and focused on products that would help the world decarbonize, focusing on energy management and industrial automation.
By its own reckoning, 70% of its products now are “green.” Its plan to reach net zero operational emissions by 2030 has been validated by the Science-based Targets Initiative. As part of its plan, it engages with its suppliers, working toward a net-zero supply chain by 2030. And it plans to reach the Paris Accord goal of carbon neutrality in its expanded ecosystem by 2025–5 years early–by delivering more CO2 savings to customers than its carbon footprint.
Schneider Electric files on the CDP platform, using TCFD methodology and is a member of RE100, a consortium of major corporate power buyers committed to 100% renewable energy by 2030. Sustainability is a board-level governance issue, and monetary incentives are tied to meeting sustainability goals.