How Environmental Markets Advance Net Zero
Connect with us

Sponsored

How Environmental Markets Advance Net Zero

Published

on

Environmental Markets Part 1 of 3
ESG Data Part 2 of 3
Sustainability Indices Part 3 of 3

The following content is sponsored by ICE.

How Environmental Markets are Advancing Net Zero

How Environmental Markets Advance Net Zero

In 2021, roughly 20% of global carbon emissions were covered by carbon pricing mechanisms.

Meanwhile, the global price of carbon increased 91%, bolstered by government, corporate, and investor demand. This puts traditional fuel sources at a disadvantage, instead building the investment case for renewables.

This infographic from ICE, the first in a three part series on the ESG toolkit, explores how environmental markets work and their role in the fight against climate change.

What are Environmental Markets?

First, meeting a goal of net zero carbon emissions involves limiting the use of the world’s finite carbon budget to meet a 1.5°C pathway.

Achieving net zero requires us to:

  • Change how we utilize energy and transition to less carbon-intensive fuels
  • Put a value on the conservation of nature or “natural capital” and carbon sinks, which accumulate and store carbon

Environmental markets facilitate the pathway to net zero by valuing externalities, such as placing a cost on pollution and placing a price on carbon storage. This helps balance the carbon cycle to manage the carbon budget in the most cost-effective manner.

What Is the Carbon Budget?

To keep temperatures 1.5°C above pre-industrial levels, we have just 420 gigatonnes (Gt) of CO₂ remaining in the global carbon budget. At current rates, this remaining carbon budget is projected to be consumed by 2030 if no reductions are made.

Carbon Budget1.5°C1.7°C2.0°C
Remaining GtCO₂4207701270
Consumed GtCO₂247524752475

Each scenario based on a 50% chance of success
Source: IPCC AR6 WG; Friedlingstein et al 2021; Global Carbon Budget 2021

Across three different scenarios, the above table indicates the amount of carbon emissions humanity can emit to prevent the worst effects of climate change.

What are Negative and Positive Externalities?

Second, when companies compensate for CO₂ emissions, they can fall across two categories: negative and positive externalities.

  • Negative externalities include pollution. Carbon cap and trade programs, using carbon allowances, put a cost on pollution.
  • Positive externalities include renewables, such as wind and solar power that generate carbon-free electricity. The value of renewable energy can be expressed with a renewable energy certificate.

Natural capital is another example of a positive externality, which involves the capturing and storing of carbon. The value of this type of natural capital can be expressed using a carbon credit.

Environmental Markets and the Energy Transition

Next, environmental markets can drive the transition to cleaner energy sources by ascribing a cost to pollution and putting a premium on renewables, to change how we use energy.

As one example, in 2013 the UK government introduced the Carbon Price Support mechanism to complement the emissions cap and trade program and weaken the investment case for coal. Between 2013 and 2020, Britain’s overall CO₂ emissions fell by 31%.

Here’s how coal was phased out of the UK’s energy mix, while renewable energy sources such as wind, solar, and bioenergy played a greater role.

DateCoal Gas Wind and SolarBioenergy
Q1 200031 TWh40 TWh0 TWh1 TWh
Q1 200541 TWh36 TWh1 TWh2 TWh
Q1 201031 TWh47 TWh2 TWh3 TWh
Q1 201528 TWh23 TWh13 TWh6 TWh
Q1 20203 TWh27 TWh28 TWh9 TWh

Source: Digest of UK Energy Statistics (DUKES); BP; EMBER via Our World in Data (2021)

Today, less than 5% of the UK’s electricity is coal-generated, with remaining plants expected to be decommissioned by 2024.

How Environmental Markets are Advancing Net Zero

Finally, as governments increase their commitments to net zero, carbon prices are rising towards a level that requires industries to decarbonize and meet those goals.

In fact, between 2014 and 2021, the global price of carbon has increased over sixfold.

DateGlobal Carbon Price (Year End)Annual % Change
2021$47.7891%
2020$24.9637%
2019$18.16-7%
2018$19.56102%
2017$9.6729%
2016$7.52-24%
2015$9.887%
2014$9.2432%

As indicated by the ICECRBN Global Carbon Price (CPW Weighted)
Source: ICE (Apr 2022)

As companies begin to treat their carbon footprints as liabilities, there will be increasing demand for environmental attributes, such as carbon allowances and carbon credits.

Managing Risk and Opportunity

Quoted markets like ICE Futures Exchanges and NYSE allow stakeholders to precisely value positive and negative externalities to:

  • Manage emissions cost effectively
  • Hedge climate transition risk
  • Allocate capital to facilitate the energy transition and build carbon sinks
  • Create an asset class for Natural Capital
  • Invest in assets to meet climate obligations

Everyone is exposed to climate risk which means it needs to be measured and managed.

That’s why balancing the carbon cycle will be critical to managing the world’s carbon budget. Markets are providing greater access, liquidity and opportunity in supporting net zero ambitions.

In part two of the series sponsored by ICE, we’ll look at four motivations for using ESG data.

Support the Future of Data Storytelling

Sorry to interrupt your reading, but we have a favor to ask. At Visual Capitalist we believe in a world where data can be understood by everyone. That’s why we want to build the VC App - the first app of its kind combining verifiable and transparent data with beautiful, memorable visuals. All available for free.

As a small, independent media company we don’t have the expertise in-house or the funds to build an app like this. So we’re asking our community to help us raise funds on Kickstarter.

If you believe in data-driven storytelling, join the movement and back us on Kickstarter!

Thank you.

Support the future of data storytelling, back us on Kickstarter
Click for Comments

Sponsored

ESG Data: The Four Motivations Driving Usage

ESG controversies can damage a company’s value, but ESG data may be able to help manage this risk. What are other reasons for using ESG data?

Published

on

ESG Data: The Four Motivations Driving Usage

Data is key to the environmental, social, and governance (ESG) revolution. Access to granular ESG data can help boost transparency for market participants. Unfortunately, 63% of U.S. and European asset managers say a lack of quantitative data inhibits their ESG implementation.

Being clear on the potential application of this data is equally important.

  • Investors and banks can use ESG data for risk assessment, to spot opportunities, and to push companies for change.
  • Companies can publish their own ESG data, quantify progress on their ESG goals, and use data to inform decisions.
  • Policymakers can use ESG data to inform regulatory frameworks and measure policy effectiveness.

This graphic from ICE, the second in a three part series on the ESG toolkit, explores four primary motivations of ESG data users.

1. Right Thing

The objective: Having a positive social or environmental impact.

For investors, this can involve screening out companies that conflict with their values and selecting companies that align with their ESG objectives.

As another example, it can involve comparing the social impact of municipal bonds. One way investors can measure social impact is through scores that quantify the potential socioeconomic need of an area, using metrics like poverty and education levels. Here are the social impact scores for three actual municipal bonds issued in Florida.

StateBond IssuerSocial Impact Score
(Higher = larger potential impact)
FloridaIssuer #176.5
FloridaIssuer #266.6
FloridaIssuer #343.2

Issuer #1’s bond is projected to have a community impact that is nearly twice as high/positive as Issuer #3’s bond.

For companies, doing the right thing can include assessing their progress on ESG goals and benchmarking themselves to peers. For example, gender and racial representation is a growing area of focus.

2. Risk

The objective: Managing ESG risks, such as climate and reputational risks.

For investors, this can involve back-testing or analysis around specific risk events before they materialize. Here are the risk profiles of two actual municipal bonds in California. The shown bonds are practically identical in many ways, except their wildlife score.

 Issuer #1Issuer #2
Current Coupon Rate5.0%5.0%
Maturity DateAug 01, 2048August 01, 2048
S&P RatingAAAA
Price to Date (Call Date)Aug 01, 2027Aug 01, 2027
Price122.0122.0
Yield1.0%1.0%
Wildfire Score (Higher = more risk)3.62.7

Managing ESG risk can also involve analyzing a company’s policies and governance for weaknesses. This is important as an ESG controversy can have long-lasting effects on the valuation of a company.

In one study, companies with ESG controversies dropped more than 10% in value relative to the S&P 500. They hadn’t fully recovered a year after the incident.

3. Revenue

The objective: Targeting outperformance through ESG analysis.

Selecting companies with strong ESG data can align with long-term growth trends and may help boost performance. For heavy emitting industries, research indicates that European companies with lower emissions trade at much higher valuations. The chart below shows companies’ price-to-book ratio relative to the Stoxx 600* sector median.

 UtilitiesEnergyMaterials
Above Median Emission Intensity (Bad)1.91.12.0
Below Median Emissions Intensity (Good)2.71.92.1

*The Stoxx 600 Index represents large, mid and small capitalization companies across 17 countries of the European region: Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Norway, Poland, Portugal, Spain, Sweden, Switzerland and the United Kingdom.

Energy companies with low emissions trade at a valuation nearly two times higher than energy companies with high emissions.

4. Regulation

The objective: Understanding and complying with relevant ESG regulation.

The International Sustainability Standards Board has announced a global reporting proposal aligned with the Task Force on Climate-related Financial Disclosures (TCFD). In addition, a growing number of jurisdictions will require organizational reporting that aligns with the TCFD.

  • Brazil
  • European Union
  • Hong Kong
  • Japan
  • New Zealand
  • Singapore
  • Switzerland
  • UK

Not only that, a European Union regulation known as Sustainable Finance Disclosure Regulation (SFDR) came into effect in 2021. It seeks greater transparency in disclosures from firms marketing investment products. Even firms located outside the EU could be impacted if they serve EU customers. In total, the market cap of these non-EU companies exposed to SFDR amounts to $3.2 trillion.

Matching ESG Data with Motivation

There will be growing demand for transparent data as ESG investing flourishes. To remain competitive, investors, policymakers, and companies need access to ESG data that meets their unique objectives.

In Part 3 of the ESG Toolkit series sponsored by ICE, we’ll look at key sustainability index types.

Continue Reading

Sponsored

The Hierarchy of Zero Waste

In a world that generates 2 billion tonnes of waste every year, waste management has become a global concern. Here are some strategies to help guide zero waste policies.

Published

on

How-to-achieve-zero-waste

The Hierarchy of Zero Waste

Many cities have set ambitious zero waste targets in the upcoming decades.

The idea is to have communities where waste generation is avoided, and products are shared, reused, or refurbished.

This graphic, sponsored by Northstar Clean Technologies, shows the main strategies and hierarchy to guide zero waste policies.

What is Zero Waste?

In a world that generates approximately 2 billion tons of waste every year, waste management has become a global concern. Thus, countries and cities are increasing efforts to reduce or even eliminate waste when possible.

The Zero Waste International Alliance defines zero waste as “the conservation of all resources  by means of responsible production, consumption, reuse, and recovery of products, packaging, and materials without burning and with no discharges to land, water, or air that threaten the environment or human health.”

Becoming a zero waste community, however, is a complex task.

Currently, Sweden recycles 99% of locally-produced waste and is considered the best country in the world when it comes to recycling and reusing waste. However, such results only came after almost 40 years of recycling and reuse policies.

In line with this, here are seven commonly accepted steps you can use to achieve zero waste:

1. Rethink, Redesign Products

The global population consumes 110 billion tons of materials each year, but only 8.6% is reused or recycled. In a zero waste society, single-use products are avoided and products are designed with sustainable practices and materials.

2. Reduce

Consumption must be planned carefully to reduce the unnecessary use of materials. Consumers must choose products that maximize the usable lifespan and opportunities for continuous reuse. Companies must minimize the quantity and toxicity of materials used.

3. Reuse

The value of products is maintained by reusing, repairing, or refurbishing for alternative uses.

4. Recycle

Products are diverted from waste streams and recirculated into use. Resilient local markets are developed, allowing the highest and best use of materials.

5. Material Recovery

Component materials like cement, metals, or asphalt are recovered from mixed waste and collected for other applications.

In the U.S. alone, around 12 million tons of asphalt shingle tear-off waste and installation scrap are generated from roof installation each year. Currently, more than 90% of this is discarded in landfills. This material can be repurposed to create new products like liquid asphalt, fiber, and aggregate.

6. Residuals Management

Waste is biologically stabilized and sent to responsibly managed landfills.

7. Unacceptable

The production of materials that are not recoverable and can negatively impact the environment must be avoided.

Reducing our Climate Impact

Reducing, recycling, and recovering materials can be a key part of a climate change strategy to reduce our greenhouse gas emissions.

According to the U.S. Environmental Protection Agency, about 42% of all greenhouse gas emissions are caused by the production and use of goods, including food, products, and packaging.

Even though 100% zero waste may sound difficult to achieve in the near future, a zero waste approach is essential to reduce our impact on the environment.

Northstar Clean Technologies aims to become the leading recovery and reprocessing company for asphalt shingles in North America.

Continue Reading

Subscribe

Popular