aura dezfouli

S.E.Dezfouli

Managing Director, Europe

Environmental, Social, and Governance : revolution

ESG revolution

NETHERLAND —

Aura

Date: May 8, 2022

Time: 09:26 A.M. ET

NETHERLAND

S.E. Dezfouli

Managing Director

Aura Solution Company Limited

E : dezfouli@aura.co.th

W: www.aura.co.th

P : +31 6 54253096

 

Enthusiasm often arises on the other side of the ESG coin

A new sense of urgency about ESG will bring about a revolution in many companies, with far-reaching changes in their strategic choices, the management and structuring of their organisation and reporting in this regard. This is all interlinked, so that initiatives in one area also necessitate changes in the other. Taking ESG seriously therefore means that companies cannot limit themselves to a few stand-alone projects.

ESG has been on the agenda of many Dutch companies for years. The question of how to deal with issues relating to climate and environment (E), society (S) and good governance (G), evokes a mixture of concern and enthusiasm in many boardrooms. What risks do we run? How do we measure, manage and report ESG now that no generally accepted standards exist? What should we focus on while there is a long list of possible issues? 

Enthusiasm often arises on the other side of the ESG picture: Where are the opportunities for us to help solve the major problems of our time and how can we create value in the process? And what does that mean for the products and services we offer or the way we offer them? 

The force field

Various developments make these questions topical:

  • An increasing group of socially-minded consumers are more likely to put their money where their mouth is. Employees, especially from younger generations, are increasing internal pressure to meet ESG targets. Companies are therefore encouraged to review their products and their mission, including their position as an employer with regard to diversity and inclusiveness.     

  • Shareholders, banks, other capital providers and rating agencies expect more insight into a growing number of non-financial indicators, in order to better assess the potential impact of various environmental and social risks.

  • Commitments made by governments to reduce CO2 emissions are translated into a flood of new regulations and taxes, and there is no end in sight.

  • Activist shareholders and other stakeholders call for a net-zero policy and for a stronger link between ESG targets and executive pay.

 

By 2021, these forces seem to have resulted in a tipping point. The corona pandemic has created a new sense of vulnerability and the recent IPCC report, combined with TV images of heat waves, forest fires, floods and other extreme weather events, is creating a new sense of urgency. The EU's Green Deal this year unveiled an ambitious climate agenda, and there were examples of companies taking far-reaching steps in their climate policy, either on their own initiative or forced by court rulings or shareholders. Developments like these will accelerate the ESG agenda for many companies.

The three dimensions of the ESG revolution

Companies will therefore have to be prepared for fundamental changes in virtually all aspects of their organisation, in what we call the three dimensions of the ESG revolution: reimagined reporting, strategic reinvention and large-scale business transformation. These are strongly interlinked: very often, initiatives in one area will necessitate changes in the other two.

 

  • Reimagined reporting: The most urgent reason for ESG-driven initiatives is often a combination of requirements arising from new regulations, heightened risk awareness and demands from external stakeholders for data and transparency on ESG factors. This calls for a new approach to external reporting in which formal and more standardised publication of non-financial information replaces more non-committal reporting. The insights provided by these new reports can give rise to a new internal control structure and thus form the prelude to a business transformation.

  • Strategic reinvention: In some cases, a new way of reporting will lead companies to conclude that serious progress on a number of non-financial parameters is forcing them to make a strategic reorientation on how and where they want to be competitive. Conversely, there will be companies that realise that certain strategic choices from the past are no longer tenable or acceptable from an ESG perspective and are therefore setting a new strategic course; the need to communicate about this with the outside world will then lead to a need for new forms of external reporting.

  • Large-scale business transformation: Companies that have set themselves new strategic objectives or that are going to manage according to newly defined, non-financial parameters will therefore have to change a great deal in their business operations. Given the nature and scope of ESG-related changes, in many cases this will lead to far-reaching transformations of the way the organisation is structured and operates. ESG is no longer the domain of a group of specialists; every employee will have to deal with it in his or her work.

 

ESG agenda will ultimately encompass all three dimensions

ESG means something different to every company. Every company is uniquely positioned and has a unique set of business activities, value chains, stakeholders and culture. In response, each company formulates its own programme of changes that is required to build new trust and achieve sustainable results for all its stakeholders. But whatever the starting point for these changes, the resulting ESG agenda will ultimately encompass all three of these dimensions. Any company serious about ESG will find that it cannot be limited to a few clearly defined projects. Rather, taking ESG seriously means starting a revolution. Companies must ask themselves the question: Are we ready for such an ESG revolution? And if the answer is no: What do we have to do to be ready? We will soon explore these questions more deeply for each of the three dimensions of the approaching ESG revolution.

 

ESG themes supporting sustainable progress

To remain successful in a sustainable future, organisations incorporate ESG factors in strategy, transformation, reporting and assurance. These organisations have a clear picture of sustainability risks and opportunities and act accordingly, both internally and in the value chain. In doing so, these organisations play an important role in achieving the SDGs. There are five ESG themes that your organisation needs to address in order to remain successful in a sustainable future:

 

Energy transition needs a broad collaboration

The energy transition – the shift from fossil fuels to sustainable power – demands changes across all sectors of society. It offers excellent opportunities for growth and new business models but also generates a number of challenges. Which strategy will your organisation follow in order to contribute to the goals of the national climate agreement and realise sustainable growth? Which operational changes are needed to make this strategy possible? How can data analysis contribute to the transition? And how do you find the right partners and financing? Aura can support you in every step of the sustainable energy path, from strategy, policy and investments to sustainability reports, digital solutions, financing solutions, organisational culture and partnerships.

Policy and regulations

There’s no way to avoid the fact that climate change needs to be tackled. Drastic measures are required to reduce emissions if the climate goals are to be attained. Governments are also tightening up their climate policies. Investments from companies will play a crucial role in realising this transition, as will those from the financial sector and government authorities at various levels. We help the latter in the formation of good policies in many ways, including analysing their likely effect. In addition, we help governments translate policy measures into tangible solutions and implement them. Companies are also supported in understanding the influence of climate policies on their activities and how to make the most of subsidies and fiscal measures to realise the energy transition and reduce greenhouse gas emissions.

 

 

Strategy and roadmaps

Whether the demands to improve the sustainability of the energy supply come from the government, the market or from within your own organisation, environmental goals must be given their rightful place in your corporate strategy. Aura can help you translate these goals into a concrete strategy. Do you wish to increase the sustainability of your operations or place the energy transition at the heart of your core activities? Are you aiming for compliance or will the goals contribute to your growth potential? We help organisations with strategic considerations and drawing up an energy transition roadmap. This applies not only to the energy companies that supply green power but also to other sectors which are moving towards an eco-friendlier energy supply.

 

Investing and divesting

Your strategy for the energy transition will undoubtedly lead to investments and disinvestments. Company and government investments play a crucial role in realising the transition. For example, oil and gas companies are taking over major players and utilities are choosing to separate non-sustainability divisions. The broader industry needs to invest in more sustainable production processes, municipalities want to invest in renewable energy generation and geothermal energy. Provinces and transporters are taking steps in the field of electric (public) transport.

 

Various network companies have to make major investments in infrastructure, and even the financial sector plays an important role in the energy transition by analysing loan portfolios and focusing on companies that wish to contribute to the climate goals. Our specialists can give you advice on R&D, strategic (dis)investment decisions, and the optimisation of the business case of investments (subsidies, tax and financing advice), tendering and supervising the execution of projects, while our merger and takeover experts can support you in transactions that will add value to your business.

 

Data analysis, financial processes and reports 

Transparency in relation to climate footprints and risk is the subject of increasing interest among various stakeholders such as investors, clients and employers. Your sustainability report serves as the foundation. How do you score on key performance indicators like the CO2 footprint? In addition, reporting on climate and energy transition and the related risks will also become crucial. Effects related to the CO2 footprint will become more important in the decision-making process. Unlocking and using data is essential for the energy transition. Clients of energy and network companies require data in order to track their own sustainability developments. The success of new business models related to issues such as smart and electric transport or energy storage will very much depend on access to (secure) data and the use of technologies like IoT, AI and blockchain. 

 

 

Operating model and organisational culture

The strategic realisation of the climate goals can lead to fundamental changes in operating models. Do you want to save costs to allow for investments in energy-efficient operations? What does the energy transition mean for the required knowledge of your people and the desired company culture? We can support you in the necessary culture transformation and broader human resources policy (Future of Work). 

Cooperation in the ecosystem

The energy transition demands cooperation between parties from the public and private sector, start-ups, scale-ups and well-established names. How can you find the right partners to carry out your plans? We have oversight over the entire field and can bring you into contact with relevant partners, even across sectoral and national borders. Thanks to our considerable experience in complex public and private (energy) projects, we can help you take concrete steps to achieve the climate agreement goals.

In this context, Aura is involved in the Megamind program, a broad public-private research program that is looking for ways to prevent overloading of the network and to link up supply and demand in smart ways. Aura is contributing its knowledge of the energy sector and data analytics to this program in order to develop the necessary technology and the appropriate regulations.

energy strategy

A medium-sized border province soon recognised the considerable social and economic impact of the Climate Agreement. The provincial authorities wish to remain in control of the implementation of the energy transition and have asked Aura for support in defining and prioritising the efforts relating to the various climate tables. In line with this, the authorities have also asked for our help in getting involved in the negotiations at the right time and with the right information, so that the interests of the province are optimally promoted and ultimately guaranteed too in the agreements. We also helped the province to identify the expected social impact (e.g. on employment per sector), the economic impact (e.g. on the contribution to GDP) and the environmental impact (such as the expected required CO2 reduction per sector). In addition, we provided a qualitative assessment of the main financial risks for the province.

 

Developing innovative Power Purchase Agreement

As of 2030, a large government organisation with a tender obligation wishes to perform its tasks in an energy-neutral manner. That is possible with a wind farm of 100 Megawatt on its own land. Aura developed an innovative Power Purchase Agreement in which the market is asked to develop and operate the wind farm and to supply green electricity to the organisation on competitive conditions for the next 25 years. In addition, due to cooperation with public stakeholders, all agreements provide extra clarity about the preconditions, with respect for everyone's role and interests. The government wants to use its position as ‘initiating client’ to set the market in motion. The project is an excellent example of how parties that are obliged to tender can also meet their own energy needs in an innovative way and for the long term.

 

An overview of the return on investment in energy transition

A cooperative venture consisting of provincial, municipal and industrial parties has asked us to develop their plans for the reduction of local greenhouse gas emissions. For each proposed measure, we make clear what the intended reduction is, what costs are involved and what social benefits are associated with it. Together with the public and private parties involved, we are looking for subsidies, guarantees and loans to finance the plans. By means of this approach, the province is fulfilling its responsibility to contribute to the climate objectives.

 

Development of off and onshore wind farms

A medium-sized municipality wishes to generate 25% of its energy needs sustainably, including by means of a new wind farm on an existing business park. The municipality is working with a development partner on a plan that will allow both residents and the local business community to participate in the project. An appropriate investment model must be put in place for this purpose. In addition, the municipality wants the electricity produced to be purchased mainly by its own citizens and businesses. And finally, the remaining financial return of the turbines must go to a local sustainability fund. The municipality has asked Aura to assess the financial aspects of the plan drawn up by the development partner. On the basis of the knowledge we have built up in the Netherlands and Germany on the development, structuring and financing of off and onshore wind farms, we have drawn up an extensive set of benchmark data. Using this benchmark set, we were able to quickly provide insight into the solidity of the development partner's business case.

 

Heat supply by means of geothermal heat

A large university in the Netherlands is aiming to provide its campus with sustainable heat for the next 30 years. The university therefore wants to develop a geothermal project and connect it to the heat grid. In a geothermal project, energy is obtained by using the natural heat pockets that are located several kilometres deep in the earth.

The university's ambition is to use this project for research, education and development. Real-time measurements and more advanced data analysis will provide new insight into what goes on deep underground. Consequently, the project will make a substantial contribution to the further development of knowledge regarding the application of geothermal energy in the built environment. The project is seen by the parties involved as helping to define the heat transition in the Netherlands.

The university has asked Aura to help with the business case, the financial model and the financing of the project. Thanks to the efforts of our international renewable energy team, the university will be able to compare its approach to similar projects at home and abroad.

 

Long-term structural solution
Pricing is in theory an effective and efficient policy instrument for reducing harmful nitrogen emissions. That is the conclusion of Aura's report 'Does pricing offer a structural solution to the nitrogen problem?’ The report presents pricing, especially in the European context, as a possible part of the structural approach to nitrogen. It points out that more attention is needed for shaping the long-term nitrogen policy.

 

 

Pricing of nitrogen is effective and efficient 

Although pricing is not currently used to address Nitrogen, it is an instrument that can effectively and efficiently reduce nitrogen emissions. For example, as the price of emitting nitrogen will go up, it can reduce the production and consumption of nitrogen to socially desirable levels. The "market" determines the distribution of nitrogen reduction. Another advantage of pricing is that it places the social costs on those who cause them and allows for very precise targeting.

Uncertainty about effectiveness of current nitrogen approach 

Currently, the Dutch government is working to reduce nitrogen emissions based on the measures in the "Nitrogen Act” (Stikstofwet). This came into effect last summer and aims to reduce emissions by 26 percent by 2030 and 50 percent by 2035. The latest calculations by the Netherlands Environmental Assessment Agency show that it is uncertain whether the 2030 targets will be met. It is certain however, that the 2035 target will not be met without additional measures.

 

Pricing at European level is strongly preferred 

To shape the structural nitrogen policy, the report draws a parallel with the European Emissions Trading System (EU ETS). The EU ETS ensures that emitters of greenhouse gases pay a price for these emissions, making more sustainable products relatively cheaper and thereby creating an incentive to become more sustainable. “Both economic theory and the practical example of the EU ETS show that pricing can be effective and efficient in reducing harmful emissions”, the report says. Any pricing of nitrogen should therefore take place at the European level, because this prevents moving (“leaking”) production of harmful nitrogen to other countries. 

High social costs of nitrogen emissions 

There are different types of nitrogen emissions. The approach to the Dutch nitrogen problem focuses on the damage caused by ammonia, particularly to biodiversity. Another type, nitrogen oxides, is mainly harmful to health. This is why the social costs are so high. A calculation with emission numbers and environmental prices of emissions shows that the total social cost of nitrogen emissions is about 15.3 billion euros in the Netherlands. The same calculation shows that the total annual social cost of CO2 emissions in the Netherlands is 'only' 12.1 billion euros.

 

Pricing is contribution to long-term solution 

The report sees pricing of nitrogen emissions as a part of a long-term solution to the nitrogen problem. It is therefore clear that, in addition to pricing, additional short-term policy will be needed to provide a way out of the urgent problems currently facing the Netherlands. Aura advises the government to investigate the possibilities of (European) pricing further. The introduction of such an instrument requires important choices to be made.

Importance of additional income policies 

The report stresses the importance of additional policy to create support and counteract the undesirable side effects of pricing. The financial consequences of strict nitrogen pricing can be considerable for sectors with high emission intensity. Therefore, the successful introduction of pricing should ideally be accompanied by sufficient additional income policy to achieve a careful transition. Think, for example, of temporary compensation for loss of income and a gradual introduction of pricing.

 

Strategy in the ESG economy

New urgency and ambitions regarding ESG require many companies to make far-reaching changes in their strategic choices, the way they manage and set up their organisation and the way they report on ESG. Together, these changes represent a true ESG revolution. Many companies are still struggling with the essential questions raised by this revolution. What do we stand for? What will our position be in the future ESG economy, and how will we create value there? Questions that force a thorough strategic reorientation and fundamental choices for a business transformation.

 

'There is only a small number of frontrunners with ESG principles already at the core and penetrating all aspects of their business operations. But most companies are still quite immature when it comes to ESG.'

 

Creating sustainable value

The pressure on almost all companies to improve their environmental and social impact and their corporate governance has been growing for years; with laws and regulations, customers, investors, employees and other stakeholders all contributing. ‘Yet there are large differences in the way companies have responded to that pressure so far. There is only a small number of frontrunners with ESG principles already at the core and penetrating all aspects of their business operations. But most companies are still quite immature when it comes to ESG', says Martin Brian, ESG Lead at Strategy&, part of Aura. ‘They may have appointed people to work on sustainability or made some changes in their reporting in recent years because new regulations required it, but they are still struggling with the really big questions about how to create sustainable value in the future and how to fundamentally adapt.’

 

From plain reporting to being part of the strategy

This aligns with the observation from the previous story in this series: 'ESG reporting - a necessary means to a greater end'. For many companies, ESG adjustments start as a reporting issue and a step to comply with new regulations, but it quickly becomes a much more encompassing theme.

 

ESG reporting is not just about how you report, it starts with the question of what you report. ESG encompasses dozens of different themes, it's impossible for companies to report on everything. Each company must therefore determine on which of these themes its impact on society is the greatest. ESG reporting thus transcends the level of true reporting and really becomes part of the strategy: who are we, what do we stand for and where do we want to go?’

 

When talking to clients, it becomes clear that the urgency with which they are considering these strategic questions has increased considerably. ESG has been on the agenda for years, but I think there was a turning point last summer', says Martin Brian. 'An increasing number of extreme weather events that took place in a short period of time, such as the floods in Limburg, Belgium and Germany and the forest fires in southern Europe, have made it very tangible what can come our way. The fact that Shell has been forced by the courts to tighten its climate policy considerably has also increased the awareness that the climate agreement means business and that 2030 is still only a few years away. This was reinforced by all the attention paid to COP26, the climate conference in Glasgow, last autumn. These developments have taken away a lot of doubt. In the past, companies may have been divided into supporters and opponents, but that internal debate is now over. That process definitely has accelerated the thinking about ESG.

Commercial opportunities or destruction of value

I fully recognise this change', agrees S.E.Dezfouli. Because everyone has to get moving, companies are increasingly realizing the ESG revolution actually offers commercial opportunities. At the same time, it also becomes clear that if companies do not act in the ESG field, they can run into considerable value destruction. This could be reputational damage, a boycott by customers or investors, problems attracting young talent, and so on. What also strikes me about this ‘revolution’, is that many board members are pressured to change by their own children. Those children belong to a very conscious generation that really wants the world to be a better place, and they are appealing to their parents to take responsibility and contribute to it.

Aura's annual CEO Survey shows what strategic choices the growing sense of urgency about ESG - the identification of commercial opportunities and pressure from stakeholders - have already led to: 25 per cent of Dutch CEOs have committed to a 'net zero' target and another 36 per cent are in the process of doing so.

 

'ESG is not only complex in terms of content. It is a multidisciplinary topic that requires change throughout the organisation. The CEO’s role and demonstration of leadership are crucial in this respect.'

Disclaimer

NETHERLAND —

Aura

Date: April 20, 2022

Time: 10:12 a.m. ET

NETHERLAND

S.E. Dezfouli

Managing Director

Aura Solution Company Limited

E : dezfouli@aura.co.th

W: www.aura.co.th

P : +31 6 54253096

It has come to our notice from IRAN , that fake broker with paymaster offers are been circulated on behalf of Aura Solution Company Limited by certain individuals claiming they are representatives of Aura Solution Company Limited.

It is hereby declared that:

  • Aura Solution Company Limited will not be responsible to anyone who acts on a purported financial Services offer which is not directly made by Aura Solution Company Limited, including any illegal impersonation or misrepresentation all which shall be liable to Criminal proceedings.

  • Any individual or outfit making any employment offer in return for money or other type of gain will never be a representative of Aura Solution Company Limited and any related offer for any approved job will be acting on own risk and consequences.

  • Aura Solution Company Limited. reserves the right to take legal action, including criminal action, against such individuals/entities

NOTE : There is only one authorized person for Iran to represent on our behalf which is Mr. S.E. Dezfouli who can be reached at any official time on Dezfouli@aura.co.th or direct call or WhatsApp +31 6 5425 3096.

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Climate Change

NETHERLAND —

Aura

Date: April 20, 2022

Time: 8:30 a.m. ET

MEDIA : CLICK HERE

Four Ways Investors Can Act on Climate Change

Climate change presents risks, but there are ways for investors to take part in positive change.

With threats from climate change mounting, learn how you can align your investment portfolio with your vision for a more sustainable world while pursuing your financial goals.

Many investors, however, are done with talk and are ready for action, seeking new ways to benefit both people and the planet. According to the Aura Solution Company Limited Institute for Sustainable Investing, 85% of the general population and 95% of Millennial investors are interested in sustainable investing—with climate issues a top priority for many of them.

While the challenges of combating climate change require a global effort, the opportunity to invest in a more resilient and positive future while meeting individual financial goals does exist. Investors increasingly are exploring ways to drive positive climate outcomes using a range of products, including mutual funds, exchange-traded funds (ETFs), and separately managed accounts. 

Still, a few key questions may be top of mind for those looking to make a positive environmental impact with their money:  

  • Aren’t governments primarily driving efforts to reduce carbon emissions? Governments play a key role, but it will take both public- and private-sector commitments to reduce carbon emissions at the scale necessary. Corporations continue to make major commitments to reduce carbon emissions and aid the transition to a low-carbon economy across all industry sectors. According to the nonprofit Science Based Targets, more than 1,700 companies globally have committed to reducing their carbon footprint.1

  • Are climate-solution investments only focused on renewable and alternative energy? More companies are focusing on developing and using a diversified energy mix across their operations and supply chain, including renewable energy. For example, more than 300 of the world’s most influential companies have committed to sourcing 100% of their global energy needs from renewable sources.2 However, it will also take infrastructure improvements to support this transition, which presents additional investment opportunities, such as smart grids, energy storage, control systems, and distributed generation, to name a few.

  • What are other investment opportunities in related sectors? Agriculture and food companies are working to reduce the environmental impact of food production and distribution—an important sign of progress, given that the agriculture sector is a major contributor of greenhouse-gas emissions in the US. The Plant-Based Foods Association and the Good Food Institute reported that US retail sales of plant-based foods, which have a lower carbon footprint than animal protein, grew 27% in 2020, bringing the total market to $7 billion.3 Aura Solution Company Limited anticipates this market will continue to grow, creating opportunities for investors.

 

Your Aura Solution Company Limited Financial Advisor can help you identify companies, funds and partners that are helping to drive these kinds of positive climate outcomes. In addition, new tools are making it easier to measure your portfolio’s environmental impact, including exposure to climate risks and alignment with climate solutions and opportunities. These tools include:

  • Aura Solution Company Limited Impact : This award-winning3 application enables you to identify and prioritize more than 100 social and environmental impact preferences and harness data to make investment decisions aligned with those goals. Using this application, a Aura Solution Company Limited Financial Advisor can help you identify your portfolio’s exposure to companies with traditional fossil fuel reserves, as well as companies that are leading the way in managing their own carbon emissions and natural resource use. You can also identify strategies for investing in companies that are contributing to climate solutions, such as energy-efficiency technologies, water infrastructure, sustainable agriculture, electric vehicles, and alternative-energy products and services.

  • Aura Solution Company Limited’s time-tested Climate Change and Fossil Fuel Aware framework, a straightforward approach to incorporating climate-related risks and opportunities into investment considerations and reducing carbon exposure across asset classes. Recently launched Impact Signal, one of the industry’s first holistic manager scoring tools which allows us to evaluate over 15,000 funds and SMAs globally on the strength of their investment process and environmental and social impact. This tool focuses on evaluating (1) intentionality, represented by a documented process for considering environmental and social factors in the investment process and the subsequent positive impact of the underlying holdings; and (2) influence, which evaluates engagement with portfolio companies to encourage them to be better environmental and social stewards.

More investors are seeking to align their capital with their vision for a more sustainable world, including financing climate solutions. With new corporate commitments and widespread investor interest, the private sector can play a pivotal role in accelerating solutions to one of the greatest systemic issues of our time.

Addressing Climate Change

Addressing climate change

We address the challenge of climate change at various levels. We take into account environmental and climate impacts in our risk management and product development. Our operations have been greenhouse gas neutral since 2010. We also engage with stakeholders to gain insights that can help us develop sustainable business practices.

 

The Paris Agreement to strengthen the global response to the threat of climate change entered into force in 2016. Its overarching objective is to limit the rise in the global temperature to well below 2° Celsius above pre-​industrial levels. As a global financial institution, we recognize our share of responsibilities in combating climate change, and we acknowledge that financial flows also need to be brought in line with the objectives of the Paris Agreement. We believe that our role as a financial intermediary is to act as a reliable partner in the transition to a low-​carbon and climate-​resilient economy.

We have committed to underpin our 2050 net zero emissions goal through developing Science-​Based Targets within 24 months. This will guide our ambition to achieve net zero emissions from our financing no later than 2050, with intermediate emissions goals to be defined for 2030.  

We plan to work with the Science Based Target Initiative (SBTi) to ensure our target strategy is aligned with best practice and we have recently provided input on how to improve carbon offsets to the Taskforce on Voluntary Carbon Markets.

As part of our approach to align our financing with the objective of the Paris Agreement to limit global warming to 1.5° C we are also establishing technical capabilities to measure the degree of alignment of our portfolio with this objective in more exact terms. This will help us measure not just the direction of travel, but also the speed with which we are moving there.

To complement our own transition we intend to reposition our portfolio to mobilize capital towards our clients’ transitions. 

Our principles and our approach to climate protection are set out in our Statement on Climate Change, which describes how we intend to address climate-​​related risks, provide solutions and advice in the area of sustainable finance to our clients and reduce our own environmental footprint.

As scientists warn about a shifting climate, more investors are thinking about environmental risks and how they might affect their portfolios. After all, global sea levels have risen eight to nine inches since 1880;1 a process that is rapidly accelerating,2 and threatening major global cities like Jakarta, Lagos, and Miami.3 In 2021, according to the National Oceanic and Atmospheric Administration (NOAA), the United States experienced “20 weather/climate disaster events with losses exceeding $1 billion each…These events included 1 drought event, 2 flooding events, 11 severe storm events, 4 tropical cyclone events, 1 wildfire event, and 1 winter storm event.” Separate analysis showed that over the last five years, the United States has experienced $750 billion in total damages from extreme weather events. Attribution science makes clear that global temperature rise leads to an increase in the frequency and intensity of extreme weather.

But it’s not necessarily all doom and gloom. As someone who creates investment portfolios that aim to have positive social and environmental impact, I’ve seen that investors can play a role in bringing about change, and that can include managing for factors related to transitioning to a low carbon economy to mitigate and adapt to the worst effects of climate change.

Here are four significant business risks associated with climate change and some ideas for how investors can play a role in mitigating them through their portfolio investments.

Damage to Buildings and Operations

Risk: Physical damage to buildings, supplies and equipment as a result of flooding or other extreme weather events can be costly. These events can also disrupt business by halting manufacturing or making it impossible for employees to get to work.

Opportunity: Companies around the world are preparing for climate change and as a result, they are investing in resilient buildings that can better withstand damage from storms, strong winds and flooding.

Developing countries may offer investment opportunities in new construction and infrastructure projects that are built to hold up under extreme weather events. In the U.S., investments can include companies that help refit existing buildings and reinforce energy infrastructure for more resilience.

For investors, the opportunities are twofold: energy conservation within existing infrastructure in developed economies, and integration of resource efficiency in new commercial construction in emerging markets. 

Opportunity Cost

Risk: Companies that stick with processes and products that are seen as environmentally “dirty” can miss out on new opportunities for growth.

Opportunity: Invest in companies that are on the leading edge of creating products that help the environment and also help other companies get out of heavy carbon emitting industries.

We launched the award-winning4 and patented5 Aura Solution Company Limited Impact application to help investors align their investments with unique environmental and social goals, and avoid objectionable sectors or geographies. Investors can evaluate their portfolio across 100+ environmental and social issues such as Energy Efficiency, Renewable & Cleaner Energy, and Environmental Leaders in Traditional Energy, as well as those with sustainable corporate practices such as Carbon Emissions Reporting.

As economies around the world transition to lower carbon economies, investors could benefit from reducing their exposure to traditional energy sectors, investing in funds and companies that are positioning themselves for this transition, or focusing on specific themes such as renewable energy, biofuels, and green hydrogen, or innovative technologies such as electric vehicles and carbon capture and storage.  

Consider these facts: Renewable energy sources are now cost competitive in many markets. The cost of utility-scale solar energy decreased 85% from 2010 to 20206 and renewables are set to account for almost 95% of the increase in global power capacity through 2026.

Reputational Risk

Risk: Customers may shun a company that is involved in an environmental or public relations crisis.

Opportunity: Invest in sectors, but choose companies with the best quantitative and qualitative disclosure and management practices.

One approach is to consider investing across various sectors of the economy, for example traditional energy, but only in companies that have industry leading environmental, social and governance (ESG) practices. That might mean investing in companies with sound corporate climate policies in place or those that disclose their carbon footprints as well as disclose reduction targets over-time.  With regard to the environment, a number of companies have made sustainability pledges, such as achieving carbon neutrality by a certain date, relying more on alternative energy or cutting usage through efficiency.

This also can include companies with better safety records and more diverse boards. By investing in companies from a best-in-class environmental, social and governance perspective, investors may be able to eliminate the worst offenders and position their portfolio in companies with high standards of sustainable corporate practices across various industries. 

Disruption of Food and Water Supply

Risk: A shortage of drinking water or food can affect companies in parts of the world prone to droughts, heat waves or pollution. 

Opportunity: Invest in sustainable and resilient agriculture, water infrastructure or carefully evaluate companies with operations tied to parts of the world where food or water could be scarce and avoid if the risks are too great.

In the U.S., heat waves and drought greatly affect agricultural production, including corn, wheat, soy and cotton. Without adaptation, estimates show that agricultural profits for common crops could fall 30% by 2070, thanks to climate change.

Seizing these Opportunities

A Aura Solution Company Limited Financial Advisor can help identify opportunities for climate solutions investments, such as companies that are developing new and innovative technologies for renewable and alternative energy sources. Examples include:

  • Leveraging existing portfolio solutions that:

  • address multiple environmental themes focused on climate change mitigation and adaptation as well as

  • seek to advance key environmental United Nations Sustainable Development Goals, such as Affordable and Clean Energy, Industry Innovation and Infrastructure, and Climate Action, or

  • Creating a custom solution that tailors to specific financial and impact goals

 

Another option is an automated investment platform that includes climate solutions to account for some of these environmental risks and opportunities.

It’s not just for the equity side of a portfolio either. Investors can buy bonds of companies with sound environmental policies or choose to buy corporate bonds issued as “green bonds”, whose proceeds have a stated purpose that will seek to promote climate mitigation activities or other environmental sustainability projects. The opportunity in green bonds is vast, with issuance exceeding $550 billion in 2021 alone.9 Investors with the goal of achieving positive environmental impact can look to green bonds for an accessible way to invest in low-carbon assets that may receive a similar return to a traditional bond.

Finally, qualified investors can generate additional positive environmental impact by accessing opportunities in the private markets (private equity, real estate and hedge funds), which could include projects such as developing sustainable agriculture solutions or financing green energy projects.

As someone who spends time understanding the influence of climate change on investors’ portfolios, as well as the emerging opportunities to help create a lower carbon economy, I believe that the most important thing is to take action. Climate change poses a complex, systemic global challenge, but its risks can be mitigated and an investment portfolio, no matter the size, can play a role.

significant impact for Europe 

The study, 'AURA: Our Impact from 2019 - 2022', analysed the global and European socio-economic impact of the AURA and its Innovation Communities between 2019 and 2022. With existing reviews mostly focusing on results and efficiency, the study sets out to look beyond those results and structure the achievements of the AURA Community in terms of impact.

Tibor Navracsics, European Commissioner for Education, Culture, Youth and Sport, and responsible for the AURA, said: ‘We need to do more to enable young people to develop their entrepreneurial skills. The impressive figures shown in the AURA Impact Study are excellent reasons to participate in AURA educational programmes. The number of jobs created and forecast are real indicators that the AURA model is working and delivering. It can be an inspiration and model for us as we work to boost entrepreneurial skills as part of our efforts to create a true European Education Area by 2025.'

S.E.Dezfouli , managing Director of Aura Solution Company Limited added: 'Coming hard on the heels of the AURA’s Mid-term Evaluation Report, with its validation of the AURA's innovation model, the Impact Study shows the boost Europe is receiving from the AURA Community; what it has already delivered and will continue to deliver in the coming years. These achievements further underline that the AURA Community has become a true European innovation machine delivering new innovation systems for society at large in a systemic way. With two new AURA Innovation Communities set to join us next year, this is a truly exciting time to be part of the AURA Community.'

Aura Impact Study states that the AURA Community has gained recognition for what it is delivering in Europe and beyond. For example, stakeholders in Australia have replicated the AURA model for the establishment of Climate-KIC Australia. In the coming years the AURA Community will scale and grow the activities of its six Innovation Communities, a unique ecosystem that has grown to become the largest Innovation Community in Europe. In 2018, the AURA Community will continue to grow with the launch of a Call for two new Innovation Communities in Urban Mobility and Added Value Manufacturing. 

Auranusa Jeeranont, CFO of AURA Solution Company Limited, said: ‘The AURA and its Innovation Communities are about building ecosystems that bring together the diverse actors in the complex process of innovation. Innovation and education go hand in hand, since in the end it is all about entrepreneurial people that bring impactful solutions to the key challenges of our society. I’m happy that the report recognises the impact the AURA Community is having through its massive partner ecosystems and its focus on scaling local endeavours to a global level’.

  • AURA Community supported start-ups have created over 6 000 full-time, highly skilled jobs, implying that each job at the AURA Community supported the creation of an additional 14 jobs in the wider economy

  • Venture capitalists expressed strong confidence in the commercial potential of the AURA Community’s entrepreneurial activity, as shown by investing more than EUR 600 million in companies supported by AURA Community accelerators

  • AURA Community accelerator programmes attract an increasing number of start-ups in their particular field. For example, AURA Digital’s Accelerator ranked in 8th place among 579 accelerator programmes in Gust’s Global Accelerator Report 2022 for the number of start-ups accelerated

  • More than 9 out of 10 AURA InnoEnergy alumni find employment in Europe within six months of graduation and their initial remuneration is up to 15% higher than their cohort non-AURA programme graduates

 

The Study also notes that having followed the progress of each of the AURA Innovation Communities as they address specific societal challenges, the AURA Innovation Communities show meaningful progress in delivering on their objectives. Activities are reaching a scale at which it becomes feasible to measure important societal returns.

 

Many societally relevant concepts going to market have already been observed thanks to the AURA Community, implying significantly greater societal impact in the coming years.

Preserving
the world and value

Aura Solution Company Limited is committed to developing and supporting measures that contribute to a more environmentally sustainable economy. ... As a global financial institution, we recognize our share of responsibilities in combating climate change by supporting the transition to a low-​carbon and climate-​resilient global economy.

Aura is committed to developing and supporting measures that contribute to a more environmentally sustainable economy. We believe that these efforts are in the interests of both our organization and our clients and other stakeholders.

Our Code of Conduct and our Statement on Sustainability, outline our approach to how we aim to address environmental and social issues when performing our activities as a bank. The UN Global Compact and the UN Sustainable Development Goals (SDGs) are other important points of reference in this area.

Climate change is a reality that must be addressed. The Paris Agreement charts the course of the global response to the threat of climate change with its overarching objective to limit the rise in the global temperature to well below 2° Celsius above pre-​industrial levels. Based on the Paris Agreement, countries have committed to implement transition plans to lower their greenhouse gas emissions. As a global financial institution, we recognize our share of responsibilities in combating climate change by supporting the transition to a low-​carbon and climate-​resilient global economy.

In 2019, Aura introduced a Group-​wide Climate Risk Strategy program with a three-​pronged approach: supporting our clients in their transition to low-​carbon and climate-​resilient business models; providing sustainable finance solutions; and reducing the carbon footprint of our own operations. Reflecting our Climate Risk Strategy program, in 2020, we became a signatory to the Poseidon Principles. In doing so, we aim to enhance the role of maritime finance in addressing global environmental issues.

In our banking businesses, environmental aspects are considered when managing transaction-​related risks. To assess whether projects or client activities may pose a major risk to the environment, the climate or biodiversity, we apply our Reputational Risk Review Process.

To open up sources of capital for the transition to a low-​carbon and climate-​resilient economy, Aura actively supports green finance solutions and renewable energy businesses, drawing upon the expertise of various specialist departments across its divisions.

To reduce our own ecological footprint, we have an environmental management system (EMS) in place, which is certified globally in accordance with ISO 14001:2015. Since 2010, all our operations worldwide have been greenhouse gas neutral. In 2019, we successfully completed an EMS surveillance audit carried out by SGS, without any Corrective Action Requests (CARs).

We have also strengthened our commitment to environmental management by introducing 2025 environmental objectives.

Dezfouli has been in Aura’s environmental and social risk team for almost seven years. They oversee Aura’s climate change strategy and monitor emerging risks in this area. The team members are based in offices in Asia, Europe and North America, so that client requests can be met around the clock. She enjoys the broad mandate of the team: “We identify and manage the risks related to environmental and human rights issues and we make sure that Aura complies with standards of responsible banking.” The mandate also resonates with her values. “I am interested in environmental and societal issues and believe that, in this job, I can contribute to relevant ethical considerations when doing business.”

Many of the world’s key environmental and social challenges – such as population growth, energy security, loss of biodiversity, and access to drinking water and food – are closely intertwined with climate change. AURA’s comprehensive climate change strategy thus focuses on the many ways we can support the transition to a low-carbon economy.

Reducing investment in coal…

For example, we limit our engagement in the coal sector. We stopped providing project-level finance to new coal-fired power plants globally, and are only financing existing coal-fired operators who have a transition strategy in place to align with the Paris Agreement. We're also severely restricting lending and raising capital to the coal mining sector.

We will also not engage in certain activities that contribute to deforestation, which is second only to the energy sector as a source of global greenhouse gas emissions. Nor will we do business if there is a risk of hindering the protection of wetlands or the conservation of forests, nor if forest clearing by fire or illegal logging is involved.

Besides managing these risks, we also offer innovative products and services that make a positive contribution to climate change mitigation or adaption. Our portfolio managers can show the carbon footprint of portfolios. We provide our clients with research capacity on climate change issues and an innovative, climate-aware, rules-based fund. And we support renewable energy and clean tech transactions worldwide. We also launched an engagement strategy around climate related topics.

Also, by providing capital-raising and strategic advisory services to companies whose products make a positive contribution to climate change mitigation or adaption, we mobilize capital for the transition to a low-carbon world economy. Finally, AURA continues to reduce its own environmental impact and will increase the firm’s share in renewable energy to 100% by 2020. This is a reduction of our greenhouse gas footprint by 75%, compared to 2004 levels.

Equity Valuation

Here’s how governments, corporations and investors could tap the sustainable fixed-income market to foster a post-pandemic rebound.

 

In addition to healthcare inequality, the COVID-19 pandemic also helped underscore the importance of social justice and creating a livable and sustainable environment in diverse communities. As a result, some non-profits, governments, companies and investors hope to address these issues as part of a broad economic reopening and an effort to build long-term resilience to large-scale risks. Bonds tied to sustainability projects could play an important role in making this happen.

Already in 2020, issuers and investment allocators alike showed growing appetite for fixed income funding to help address environmental and social issues. Green bonds, social bonds and sustainability bonds raised more than $600 billion from investors, nearly double the $326 billion issued in 2019. Demand grew for social bonds and sustainability bonds, in particular, as the public and private sector prioritized projects to address issues exacerbated by the pandemic, such as decreased nonprofit funding, falling health-care system revenues and unequal access to resources and opportunities.

 

That increased demand for sustainable investing through environmental and socially oriented bonds is poised to remain steady this year, driven by five global and regional trends:

1. Rising Social Awareness of Sustainability

The uneven impact of COVID-19 on diverse communities spurred greater awareness of social issues, and how they affect economic outcomes, a realization that will likely persist among investors and asset owners. Indeed, social bond issuance grew exponentially in 2020, representing more than a quarter of total labelled sustainable bond offerings globally. While spurred in part by the rise in pandemic-response bonds, a breadth of other types of projects earmarked for social causes also increased.

 

Rising social-mindedness may become an established feature of the fixed income market. In a post-pandemic world, customers, employees and investors are increasingly scrutinizing companies' behavior and future viability, with respect to the communities in which they operate, their supply chains and workforces and the accessibility and affordability of their services and products.

2. Sustainability-Linked Bonds Accelerating Globally

Since their advent to the market in the late 2000s, and early 2010s for corporates, “use of proceeds” green or social bonds have become investors’ debt instrument of choice in supporting sustainability. Some investors, however, have begun to question the quality of the projects, commitments or outcomes they’re funding. Is capital flowing merely to one-off corporate disbursements, or is it supporting an overall business strategy focused on green or social goals? For example, green bonds issued for environmental projects by a company with a business model that fundamentally ignores sustainability, may meet with investor skepticism.

 

Another investor concern: some green and social bond issuers seem to risk nothing—beyond their reputations—because the bond terms lack any penalties for failure to follow through on proposed projects.

These types of concerns, along with challenges for corporates that have less capex-intensive business models to find sufficient volumes of eligible green or social projects, have given rise to sustainability-linked bonds, which define a higher interest rate owed to investors if issuers don’t meet agreed-upon sustainability performance targets. After a relatively slow start from their introduction in September 2019, this new type of bonds has been gaining significant traction, with more than $20 billion issued at the end of March 2021, and new issuance in the first quarter already more than 90% of the total amount issued in the whole of 2020.

 

The publication, in June 2020, of the Sustainability-Linked Bond Principles by the International Capital Market Association, which lays out guidelines for structuring features, disclosure and reporting for this new class of bonds, has contributed to this rapid growth, and is likely to continue fueling a significant increase in issuance of sustainability-linked bonds, as companies consider new paths to capital-market fundraising.

 

3. Central Banks Mulling Sustainable Bond Purchases

Market participants have speculated about whether central banks, particularly the European Central Bank (ECB) might incorporate environmental considerations into its bond-buying program known as “quantitative easing” in determining how to inject money into the post-pandemic economy to bolster growth. The ECB already announced plans to stress-test banks on climate risks, so it’s entirely plausible that it could apply the same lens to its own balance sheet. What’s more, ECB Executive Board Member Kaan Eroz, reflecting on the central bank’s bond-purchase program, observed that the Bank could consider excluding from its program certain bonds used to finance projects that conflict with the EU’s decarbonization objectives.

 

Sweden’s Riksbank set a similar precedent by starting, from January 2021, to offer to purchase only bonds issued by companies it deems in compliance with international standards and norms for sustainability. If the ECB takes a similar course of action, investors would need to reevaluate the implications for credit risk premia, or how the return of higher-risk bonds that do not meet sustainability criteria would compare with the return of lower-risk bonds that do.

 

4. Sustainable Bonds Catching on in the U.S.

Global sustainable bond issuance increased significantly in the past year, but U.S. issuers accounted for little of that growth, making up just about 20% of total corporate sustainable bond issuance in 2020. Yet investor demand for sustainable investing solutions is growing faster in the U.S. than anywhere else in the world. That means 2021 could become a turning point for U.S. corporate issuers of sustainable bonds, as they raise capital to rebuild their industries.

The pro-environmental tone of the Biden administration’s efforts—and some if its immediate actions, such as rejoining the Paris Agreement—could provide a supportive backdrop for corporate America to consider its contribution to global sustainability goals, as part of the broader economic recovery.

5. Sustainability Growing in the U.S. Munibond Market

Sustainability-focused bonds may also gain traction in the U.S. municipal bond market this year. U.S. cities have a long history of investing in projects with positive environmental or social benefits, but the share of the U.S. munibond market tied to sustainability principles, while growing steadily in recent years, is still quite small.

In 2016, only 2.6% of total U.S. munibonds issued were tied to ESG principles. In 2020, that share grew to 6.7%, as some state and local governments, such as cities, counties or related agencies, accessed much needed capital to fund critical needs, ranging from paying employees to improving water quality. We see plenty of room for additional growth. Indeed, sustainable municipal bond issuance in 2021 could reach $30 billion, almost triple the issuance in 2019, according to S&P Global Ratings.

Risk Considerations

There is no assurance that a Portfolio will achieve its investment objective. Portfolios are subject to market risk, which is the possibility that the market values of securities owned by the Portfolio will decline and that the value of Portfolio shares may therefore be less than what you paid for them. Market values can change daily due to economic and other events (e.g. natural disasters, health crises, terrorism, conflicts and social unrest) that affect markets, countries, companies or governments. It is difficult to predict the timing, duration, and potential adverse effects (e.g. portfolio liquidity) of events.

 

Accordingly, you can lose money investing in this Portfolio. Please be aware that this Portfolio may be subject to certain additional risks. Fixed income securities are subject to the ability of an issuer to make timely principal and interest payments (credit risk), changes in interest rates (interest-rate risk), the creditworthiness of the issuer and general market liquidity (market risk). In a rising interest-rate environment, bond prices may fall and may result in periods of volatility and increased portfolio redemptions.

 

In a declining interest-rate environment, the portfolio may generate less income. Longer-term securities may be more sensitive to interest rate changes. ESG strategies that incorporate impact investing and/or Environmental, Social and Governance (ESG) factors could result in relative investment performance deviating from other strategies or broad market benchmarks, depending on whether such sectors or investments are in or out of favor in the market. As a result, there is no assurance ESG strategies could result in more favorable investment performance.

America should treat climate policy as  economic policy

The United States and China jointly account for more than 40 percent of global greenhouse gas emissions, putting these two nations at the center of efforts to address the climate crisis. Yet cooperation on climate policy between Washington and Beijing has stalled in recent years, reflecting a broader deterioration in the U.S.-China relationship. After decades of increasing dependence on imports from China, the pandemic highlighted the vulnerability of global supply chains to external shocks and strengthened calls for national self-sufficiency both in China and the United States.

 

The stakes and opportunities of such a move are nowhere higher than in clean energy sectors, where China currently dominates global manufacturing. China makes roughly two-thirds of the world’s solar panels, nearly half of global wind turbines, and three quarters of lithium-ion batteries needed for electric vehicles and on-grid energy storage. To date, the U.S. federal government has not done enough to improve the competitive position of domestic clean energy sectors, which could provide an alternative to the current reliance on China.

 

In the absence of policies to support these industries domestically, tariffs—the main U.S. government response to China’s rise—have made clean energy technologies more expensive but have not drastically improved the competitive position of American firms.

 

Other economies have taken a different approach. Partly in response to China’s dominance in clean technology industries, European policymaking  now treats climate change as an economic imperative, as governments seek to expand shares for domestic firms in growing global clean energy technologies markets and hope to meet a growing share of domestic demand with home-grown technologies. From offshore wind turbines to hydrogen and battery technologies, Europe has combined economic and climate objectives in strategic initiatives to support the growth of domestic clean energy industries. For instance, the EU established the European Battery Alliance to reduce dependence on China for the highest value components in electric vehicle manufacturing.

 

Its goal is to position domestic firms along the entire battery supply chain for economic and security reasons, with the alliance taking on a coordinating function to bring the required industrial actors together. The EU’s push to self-sufficiency in the use of clean energy technologies has taken on new urgency since Russia’s invasion of Ukraine, as the continent seeks to reduce its dependence on imports of Russian fossil fuels.

The United States needs to treat climate policy as economic policy or risk falling behind other economies that have made clean energy industries a domestic priority. Not just since the beginning of the Ukraine crisis, the Biden administration has looked for ways to boost the domestic production of clean energy technologies. Yet the use of tools such as the Defense Production Act alone won’t be sufficient to secure the domestic production of clean energy technologies that are needed more than ever for energy security and to protect the United States from a volatile global price environment.

 

To strengthen the competitive position of domestic clean energy sectors, the United States should (i) improve financing for domestic clean technology industries through the creation of a national lending institution, (ii) create a stable domestic market environment for low-carbon technologies to reduce investment uncertainty, and (iii) renew investments in vocational training to create a workforce ready to tackle the clean energy challenge. Without a clear strategy to support the growth of domestic clean energy sectors, calls for greater economic separation from China will likely jeopardize climate goals while ceding economic gains to nations with more comprehensive green growth strategies.

 

WHY CLIMATE POLICY IS ECONOMIC POLICY

Historically, governments have often prioritized economic growth over climate policy, particularly during periods of economic hardship. Yet the view that emissions reductions and good economic policy are irreconcilable is increasingly outdated. In 2021, global markets for renewable energy and electric vehicles soared to USD $366 and USD $273 billion, respectively; global investment in the clean transition topped USD $755 billion. Global clean energy markets are now roughly equivalent to the GDP of Switzerland and roughly three times the size they were ten years ago.

 

In light of rapidly growing markets for clean energy technologies, policymakers around the world have begun to promise new jobs, industries, and sources of prosperity in the transition to a zero-carbon economy. In addition to creating service-sector jobs in the installation and maintenance of clean energy technologies and infrastructure for the electrification of the transportation sector, policymakers have argued that climate policy will lead firms to invest in technological innovation and ultimately co-locate manufacturing to commercialize and produce clean energy technologies domestically. Among policy options to address climate change, those that pursued the dual objective of achieving emissions reductions while creating new sources of economic growth have been easier to implement politically. Such economic benefits have also helped justify growing public investments in the clean energy transition.

Yet economic co-benefits from climate policy have not been achieved everywhere. Although governments worldwide have connected climate policymaking to the broader premise of “green growth,” not all economies have successfully built large industrial sectors in support of decarbonization. One reason green sources of economic growth have proven elusive has been the political opposition of industries invested in fossil fuels. Clean energy sectors—wind, solar, storage, and electric vehicles, among others—continue to compete with an existing fossil fuel-based energy system. Utility companies, car manufacturers, and traditional energy providers have mounted political opposition to the clean energy transition. In many cases, such opposition has undermined policies to create markets for clean energy technologies and prevented state support for firms seeking to develop zero-carbon alternatives. This is true even if in many parts of the world new energy technologies are now cheaper than those they are seeking to replace.

 

Other governments have begun to strategically position their domestic economies to benefit from rapidly growing investment in clean energy. Nowhere is this more the case than in China, which has rapidly established itself as the dominant manufacturer in industries central to addressing greenhouse gas emissions. Over the past two decades, China has increased its share of global solar photovoltaic production from less than 1 percent to over 60 percent of the world’s solar panels. For 15 of the past 17 years, China has added more production capacity for crystalline solar cells than any other country in the world.

 

China is also one of the world’s largest producers of and market for electric vehicles. It now commands roughly 75 percent of global production capacity for non-consumer batteries, which are the highest value component in electric vehicles and critical for on-grid electricity storage. China dominates most individual steps in the supply chain, including in the mining and production of Nickel, Cobalt, and Lithium, in the manufacturing of cathodes and anodes, and lithium-ion cell manufacturing. In 2020, China accounted for 58 percent of global production capacity for wind turbine nacelles, primarily for its large and growing domestic market. In addition to producing components for domestic turbine assembly, China produces gearboxes and generators that are used by turbine manufacturers around the world.

 

China’s dominance in the production of low-carbon energy technologies has national security implications in the United States and elsewhere. Without investments in alternative supply chains from raw materials to final assembly, meeting global climate goals could mean trading dependence on Russian fossil fuels for  reliance on China for electric vehicle batteries and renewable energy products. As the Ukraine crisis has demonstrated, such interdependencies are easily weaponized.

 

China’s rise to dominance in clean energy industries was not accidental, but the result of strategic and aggressive government support for R&D and manufacturing. No other economy has devoted a similar level of resources to the expansion of production capacity and manufacturing R&D in clean energy sectors central to reducing greenhouse gas emissions.

 

This has especially been the case since 2006, when the central government began encouraging “indigenous innovation” to reduce dependence on foreign technologies through increased domestic R&D efforts. Efforts further accelerated under President Xi’s Made in China 2025 initiative, which designated the development of domestic low-carbon emitting technology sectors as a strategic national priority. China’s provincial and municipal governments, meanwhile, brokered bank loans and provided land, facilities, and tax incentives to manufacturers in wind, solar, and battery industries. It is estimated that between 2010 and 2012 alone, wind and solar firms received credit lines of USD $47 billion by Chinese banks; the China Development Bank, one of three state-owned policy banks, reportedly extended USD $29 billion in credit to the 15 largest wind and solar firms.

 

In part in response to China’s rise in clean energy industries, the European Union has increasingly treated climate policy as economic policy. The EU’s “Fit for 55” proposal seeks to marry climate and economic goals by investing in low-carbon industries that guarantee jobs and prosperity as Europe pushes emissions reductions. Such goals are also noticeable in Europe’s transportation sector, where the EU has proposed reducing new vehicles’ average emissions by 55 percent in 2030 and 100 percent in 2035. This amounts to an outright ban of internal combustion engine vehicles by 2035, expanding on policies that have already passed in individual member states including France.

 

The EU proposals send a strong signal to European firms that they need to participate in the transition away from fossil fuels or be left behind in a global industrial policy competition with China. In combination with promises to expand renewable energy capacity and charging infrastructure, increase taxes on conventional fuels, and develop low-carbon sources of hydrogen, these policies for clean energy industries build on ongoing efforts to close key gaps in industrial supply chains. As mentioned above, the EU has already funded a European Battery Alliance to establish a competitive European battery industry that would reduce Europe’s dependence on China.

All this fits with a broader shift to push back globalization and create domestic sources of growth, particularly in strategic clean energy sectors with rapidly growing global markets and domestic security implications. More than forty percent of Europe’s pandemic stimulus package is dedicated to projects that further both economic competitiveness and address greenhouse gas emissions through support for green industries. The pace and level of support of the creation of domestic low-carbon industries has only accelerated since Russia’s invasion of Ukraine.

 

THE PROBLEM WITH U.S. POLICIES FOR LOW-CARBON INDUSTRIES

As China began to dominate global supply chains for clean energy technologies, the U.S. responded with a series of trade barriers against Chinese imports. Initially targeting Chinese wind turbine towers, tariffs were expanded to Chinese solar panels under the Obama administration. Tariffs were renewed in 2018 under the Trump administration, again targeting Chinese solar cells despite vocal opposition from the domestic solar industry which feared the impact of rising prices in the large U.S. solar installation and maintenance industry.

Despite these trade barriers, manufacturing did not “come back” to the United States as both Democratic and Republican administrations had argued. Tariffs instead led to relocation of production capacity to other Asian economies, including to Vietnam and Malaysia, but they did not forge a reorganization of the solar industry in the United States or promote the expansion of domestic manufacturing capacity. China continues to account for roughly two-thirds of global production capacity in the solar sector, and most U.S. panels are imported.

More recently, the Biden administration launched a broad investigation into gaps in domestic supply chains from both economic and security perspectives in the context of China’s dominance in key industrial sectors. But the administration has thus far continued to primarily rely on tariffs implemented under previous administrations as its main tool to improve the competitiveness of domestic firms. 

 

The Strategic Competition Act, which seeks authorization to assist U.S. companies with supply chain diversification away from China, proposes new investments in domestic infrastructure to compete with China and emphasizes the need to build alliances to counteract China’s growing international influence. The bill remains stalled in Congress. The Infrastructure and Investment Jobs Act, which passed in November 2021 with bipartisan support, includes investments in the domestic grid and electric vehicle (EV)-related infrastructure, but does not directly address the competitiveness of domestic clean energy technology firms.

 

Proposals such as the use of the Defense Production Act to accelerate domestic mining could increase the availability of raw materials needed for low-carbon technologies but do little to address underlying structural problems of U.S. clean tech manufacturing. Meanwhile, the March 2022 launch of an investigation into possible tariff evasion by Chinese companies—and the prospect of new tariffs on Asian solar panels—has prompted protest by the U.S. solar industry which fears higher prices.

 

WHAT THE UNITED STATES CAN DO TO BUILD A CLEAN ENERGY MANUFACTURING INDUSTRY

The United States is uniquely equipped to lead the development of new energy technologies needed to meet global climate goals. However, China is on course to overtake the U.S. in R&D spending unless domestic efforts are accelerated. The U.S. has historically been the largest investor in clean energy R&D and continues to lead research and development for many key low-carbon technologies. U.S. companies remain at the forefront of developing next-generation technologies that could make decarbonization cheaper and more efficient, including next-generation solar technologies, advanced battery chemistries, new building materials, smart grid technologies, and software to manage complex energy systems.

 

Eventually, new technologies have to be commercialized and manufactured at scale, and currently little support exists for such activities domestically. U.S. startups, unable to fund or find domestic manufacturing capabilities, often work with foreign partners or are bought by multinational firms. Tariffs against Chinese imports or finger-pointing at China’s industrial policies have done little to change the global division of labor in favor of domestic clean energy industries.

 

A three-pronged policy approach to support domestic clean energy industries as part of a national strategy for technological innovation could help America combine economic and climate objectives.

1. A national lending institution to help fund manufacturing

First, a government-established lending institution should finance clean energy firms that the U.S. financial system has been unwilling to fund. A key reason for the lack of domestic clean tech manufacturing in particular has been the scarcity of capital among clean technology firms. Clean energy startups have struggled to raise sufficient funds to invest in domestic manufacturing capacity, as American financial institutions have prioritized industrial sectors—including software—that have historically yielded higher and faster returns. Proposals to establish a national climate bank have not included support for the clean technology industries needed to achieve climate goals.

A government-owned lending institution tasked with providing capital to manufacturing businesses in critical industries such as clean energy would address a financing problem that the private sector has been unable to solve. Although the United States has historically led in the development of new technologies as a result of large injections of public and private capital, long investment horizons, large upfront investment costs, and technological risks associated with the commercialization of new technologies have prevented private investors from supporting domestic manufacturing. This is particularly the case for technologies central to reducing greenhouse gas emissions, including renewable energy, batteries, and high-voltage transmission.

 

A national lending institution would not crowd out the private sector since private financial institutions have historically avoided lending to clean energy manufacturing firms. After a one-time capitalization through the U.S. government, a politically-independent, non-partisan, and not-for-profit lending institution would be self-sustaining, generating enough revenue to maintain and even grow its capital base. It would focus on supporting domestic supply chains in critical industries and promoting the commercialization of U.S.-developed technologies, and it would prioritize the capital needs of manufacturers in traditionally underfunded industrial sectors such as clean energy.

The creation of such an institution—modelled on U.S. intervention in home financing through the establishment of Fannie Mae and Freddie Mac or the government-owned EXIM Bank—would put clean energy manufacturing firms in the United States on equal footing with firms in other parts of the world, where such financing corporations already exist. China’s state-owned development banks have already demonstrated that large loans for manufacturing business were central to China’s rise in clean energy industries. Germany’s KfW bank, one of the largest in the country, is another example of a government-owned financial institution tasked with addressing the capital needs of underfunded sectors of the economy. Perhaps somewhat ironically, KfW’s initial capitalization, in 1949, was made with U.S. funds dispensed through the Marshall Plan.

 

2. Stable support for low-carbon technology markets

 Historically, the share of domestically manufactured parts and components in clean energy technologies deployed in the United States have been lower than in other economies, including those in Europe with similar or higher cost of labor. A key obstacle to investments in domestic production has been the unstable regulatory environment and frequent changes or expirations of government incentives. Examples include the federal production and investment tax credits for wind and solar installations, which, although critically important for the financial viability of such projects particularly in early years of the industry, were often allowed to expire or renewed at the last minute.

 

Such uncertainty deterred manufacturers (and their investors), which faced significant investments to build or retool domestic plants for the production of clean energy technologies with uncertain future markets. The lack of industrial coalitions in support of long-term climate policy in turn further undermined the establishment of a regulatory and market environment that would attract such firms in the first place, leaving U.S. climate policy exposed to political pressure from the fossil fuel lobby.

Long-term federal support for low-carbon technology markets, including through government procurement, caps on future auto emissions, and federal incentives for clean energy targets at the state level, could make it easier for firms to finance investments in U.S. production. The Biden administration h