The Tarnished Taxonomy: Who will decide the fate of EU green investments?
Welcome to The Executive Perspective.
The?EU Taxonomy was passed in 2020 and initial definitions of what qualifies as a sustainable investment which includes renewables like solar panels, wind farms, bioenergy and hydroelectric dams was smoothly approved.
However, those definitions excluded nuclear and gas which are stalled in intense political disagreement by more than a year now.
The political divide on EU Taxonomy includes pro-nuclear countries like France and much of Central Europe as well as anti-nuclear but pro-gas countries like Germany. Berlin insists it needs gas as a transition fuel to power the country while it scraps coal and doesn't yet have enough renewables to cover the gap.
Spain, Denmark, Austria, and Luxembourg, on the other hand, published a letter to the EU Commission last week urging it not to label gas and nuclear power as green.
To solve the political stand-off, the Commission proposed additional definitions on New Year's Eve, including both technologies, although with some emissions and safety requirements.
The Commission's proposals would grant gas plants a green label until 2030 if they meet criteria including an emissions limit of 270g of CO2 equivalent per kWh, or if their annual emissions average 550kg CO2e per kW or less over 20 years, while experts advising the European Union on its green investment rules?said that only gas plants with emissions of 100g CO2e per kWh or lower should be deemed climate friendly.
Not surprisingly, Commission’s proposals have come under fire from?NGOs?and?climate think tanks. They note that the need to permanently store radioactive nuclear waste could potentially create conflictions with recyclability requirements in the taxonomy. They also worry that encouraging countries to replace coal plants with gas ones would allow a huge number of CO2-emitting power stations to be declared green over the next decade.
From political perspective, it's very difficult to block the nuclear and gas additions because the Commission presented the updated definition as a single act. That means, countries and the European Parliament can't opt for the bits they like; the whole proposal passes or fails as a single unit.
The political math tells us that at least 353 MEPs would need to vote against the act, which is unlikely as the issue of gas cuts across all political groups. Just last week, 80 lawmakers pushed the Commission to further loosen its proposed requirements in a?joint letter.
Countries and the EU Parliament will have four months to examine the finalized document, which can be extended by two months. Then, it becomes EU law if it's not blocked.
The real concern here, in my opinion, is on the investor side of the coin that adding nuclear and gas to the list of acceptable technologies might compromise the Sustainable Finance Taxonomy and undermine its goal of combating greenwashing by allowing investors to identify sustainable assets.
The aim of Sustainable Finance Taxonomy is to help funnel the vast amounts of cash that will be needed to hit the EU's climate goals, cutting emissions by %55 by the end of the decade and becoming climate neutral by mid-century.
The Commission now?estimates?that some €520 billion each year on top of EU funds will need to be poured into the green transition with most of that expected to come from private capital.
But passing the latest taxonomy criteria with politics in mind doesn't mean the definitions will be accepted by investors. It is now up to financial institutions to exclude fossil gas and nuclear from any product labelled sustainable or green.
Just a reminder; China has developed a taxonomy that excludes fossil gas, while the South Korean taxonomy excludes nuclear power...Even Russia is proposing a taxonomy that could go without gas.
In this sense, should you need any support or additional information on this, please do not hesitate to contact me on my e-mail:?[email protected]
Let's now carry on with putting global events in perspective.
Here are the latest developments on 8 global trends that I believe will shape the way we do business in 2022.
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1. Management Strategy
Reputational Trap: What is the fine line between green marketing and greenwashing?
We can safely call it a Greenwashing activity when a company or organization spends more time and money on marketing themselves as environmentally friendly than on minimizing their environmental impact.
It is a deceitful advertising trick intended to mislead consumers who prefer to buy goods and services from environmentally conscious brands.
And yes, greenwashing harms a brand's reputation in an irreversible way.
Greenwashing has changed over the last years, but it's certainly still around. As the world increasingly embraces the pursuit of greener practices, corporate actors face an influx of criticism for misleading environmental claims.
As you may have noticed, there are many examples around us who tries to overrepresent its greenness. How many plastic bottles have you seen with colorful images of rugged mountains, pristine lakes and flourishing wildlife printed on their labels?
However, there is a fine line between greenwashing and green marketing.
Unlike greenwashing, green marketing is an activity where companies sell products or services based on legitimate positive environmental impacts. Green marketing is generally practical, honest and transparent, and it means that a product or service meets following criteria:
However, it's easy for green marketing to translate to greenwashing in practice, when an organization doesn't live up to the standards of sustainable business practices. Consequently, greenwashing has become the hottest issue to tackle as sustainability statements are now seen as unreliable.
To solve this problem, I always advise boards to use following five-point approach to avoid greenwashing at all costs:
As John D. Rockefeller put it "Don't blame the marketing department. The buck stops with the chief executive."
2. Geopolitics
The Ukraine Effect: How might a Russian miscalculation impact global markets?
Geopolitics on the Ukraine-Russian border presents substantial uncertainties to global markets from wheat and energy prices and the region's sovereign dollar bonds to safe have assets.
First of all, a major risk event like a Russian invasion of Ukraine will most likely to push investors rushing back to bonds as safe havens although, inflation at multi-decade highs and impending interest rate rises have made for a bad month for bond markets.
Two-year U.S. Treasury yields have seen the biggest monthly jump since 2016 and 10-year rates appeared headed for the key 2% level. In Germany, 10-year yields rose above 0% for the first time since 2019.
On import/export side, any interruption to the flow of grain out of the Black Sea region is likely to have a major impact on prices and add further fuel to food inflation?at a time when its affordability is a major concern across the globe following the economic damage caused by the COVID-19 pandemic.
Four major exporters; Ukraine, Russia, Kazakhstan, and Romania ship grain from ports in the Black Sea which could face disruptions from any military action or sanctions.
Ukraine is projected?to be the world's third largest exporter of corn in the 2021/22 season and fourth largest exporter of wheat while Russia is the world's top wheat exporter.
When it comes to energy markets, they too are likely to be hit if tensions turn into conflict. Europe relies on Russia for around 35% of its natural gas, mostly coming through pipelines which cross Belarus and Poland to Germany, Nord Stream-I going directly to Germany, and others through Ukraine.
As part of possible sanctions in the case Russia invaded Ukraine, Germany has said it?could halt the new Nord Stream 2 gas pipeline from Russia that was expected to increase gas imports to the bloc but also underlines Europe's energy dependence on Moscow.?In addition to gas, oil markets could also be affected potentially pushing the prices even higher.
3. Manufacturing and supply chains
Silicon Nationalism: Will Intel's mammoth factory truly end U.S. dependency on semiconductors?
Not exactly. Let me explain why.
The announcement comes amidst a push to increase domestic manufacturing of semiconductors. Partly because of enormous incentives offered by other countries to jumpstart semiconductor manufacturing on their shores, the share of chips made in the U.S. has fallen to 12%, from 37% in 1990, according to the?Semiconductor Industry Association(SIA).
To create a more reliable supply of chips, the federal government is weighing providing incentives for chip makers in the U.S. The CHIPS for America Act, passed last year, authorized federal investments in chip manufacturing, but it did not provide funding. The Senate passed $52 billion in funding in June 2021, but the House has not passed the legislation.
And, unable to get the chips used in manufacturing cars, U.S. automakers such as General Motors?idled some North American plants?last year and resorted to manufacturing some cars without features that require chips. That’s made it more difficult for U.S. consumers to buy cars,?driving the price of used?cars up 24% over the course of a year, and slowing national economic growth.
Supply chain bottlenecks have motivated big companies to start increasing capacity in the U.S.; Intel itself said last year it would spend $20 billion to build two major factories in Arizona, and in 2020, the global leader in chip manufacturing Taiwan Semiconductor Manufacturing Co. (TSMC),?said it would spend $12 billion?to build a semiconductor factory, also in Arizona. Samsung is investing $17 billion in a chip plant in Texas.
Of course, some of the urgency of having more chip manufacturers in the U.S. is purely political.
Locating a chip factory in the United States doesn’t necessarily insure against further supply chain disruptions; Intel’s chips will still be sent to Asia for assembly, packaging, and testing. The silicon manufacturing industry is hyper-optimized. CPUs from Intel and AMD already circle the globe multiple times, plural, before you buy them off the store shelf at Newegg or Amazon.
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The chip shortage, and the ongoing US-China trade war, have kicked off a flurry of silicon nationalism. Suddenly, the EU wants %20 of silicon manufacturing by 2030, too!
But in order to truly be independent, such production capability would have to be incorporated into every stage of manufacturing, from initial mining of raw materials or growth of the silicon boule, right down to when the hardware hits the store shelf.
4. Energy Security
Options on the Table: Can Europe substitute Russian gas in case of a conflict?
The possibility of an armed conflict between Russia and Ukraine continues to threaten Europe, which gets 35% of its natural gas from Russia.
U.S. President Joe Biden and other Western leaders have warned Russia of economic sanctions if it invades Ukraine.
Europe has already been dealing with lower than usual gas supplies from Russia. Some European politicians argue that Russia is intentionally cutting or reversing gas flows to Europe in order to force Germany and the EU to accelerate the regulatory approval process for the Nord Stream 2. Russia has been claiming there is no political motive behind the supply issues and Gazprom says it has met its contractual obligations.
Russia delivers natural gas to Europe via pipelines like the Yamal, Nord Stream 1, and routes through Ukraine. But Russia has lowered flows through Ukraine by 70% since 1998.
If Russia attacks Ukraine and gets sanctioned, flows through non-Ukraine pipelines will also be affected. Those include the Yamal-Europe, Nord Stream 1 and TurkStream, as well as Nord Stream 2, which still awaits regulatory approval to become operational.
Although there are some other options, it is uncertain if they can replace Russian supply. Germany, the biggest consumer of Russian gas may also import from Norway, the Netherlands, Britain and Denmark via pipelines. However, Norway, the second biggest supplier of European gas after Russia, says it already delivers gas to Europe at maximum capacity and it can’t replace missing supply from Russia.
For southern Europe, the Trans Adriatic Pipeline can transport Azeri gas into Italy, and the Trans-Anatolian Natural Gas Pipeline (TANAP) can carry Azeri supplies in via Turkey.
European gas storage levels are still very low for the time of year, in one of the coldest months when demand is highest.
At the same time, U.S. officials have been in talks with Qatar over supplying European countries with liquefied natural gas in case a Russian invasion of Ukraine leads to shortages on the continent.
President Joe Biden is planning to ask the Gulf state’s emir, Sheikh Tamim bin Hamad Al Thani, to visit the White House, possibly as soon as later this month.
5. Legislation
Regulatory Crackdown in Progress: Chinese Communist Party is piling up the pressure on tech industry
The Cyberspace Administration of China (CAC), China’s internet regulator, has drafted a new rulebook that will require large internet companies to obtain its approval before undertaking any investment or fundraising.
The rules will apply to all platform companies with more than 100 million users or with more than 10 billion yuan ($1.58 billion) in revenue.
The rules will also apply to the firms involved in sectors that were put on the negative list of China’s National Development and Reform Commission (NDRC). NDRC’s negative list includes compulsory education institutions, rare earth minerals industry and news organizations among others. Last year, NDRC required companies in these sectors to obtain approval from regulators before they can list shares outside mainland China.
The CAC guidelines are still subject to change. Some companies have already been briefed on the matter.
Beijing has been piling on the pressure for China’s tech industry over the past year, and the new guidelines will intensify the oversight. Regulators’ control over the country’s tech giants continues to tighten in areas from dealmaking to handling of user data.
While it is still not clear what types of investments would be affected, some industry experts fear that it could be applied to private market investments such as pre-IPO private funding rounds.
6. Sustainability Strategy and Decarbonization
The Green Steel Alliance: Germany is leading the way on industrial transformation
German energy company STEAG and industrial giant thyssenkrupp are working on a feasibility study to build a water electrolysis plant in STEAG’s Duisburg-Walsum site. thyssenkrupp Uhde Chlorine Engineers, which specializes in electrolysis technology, will deal with the construction, and STEAG will see the operations of the plant. The produced green hydrogen will be delivered to thyssenkrupp’s steel mill in Bruckhausen.
Project development will follow the feasibility study. All three companies involved in the project will also participate as investors and will seek further private and public funding.
Green hydrogen is considered a key energy source for the fight against climate change, particularly for the energy intensive industrial sectors like steelmaking. Both the German Federal government and the government of North Rhein-Westphalia, as well as the European Union, include green hydrogen in their energy transition agenda.
In its statement, STEAG said it believed North Rhein-Westphalia could play a key role in the governments’ hydrogen strategy. The company believes the region is at the center of hydrogen demand and has the technological expertise for the construction of electrolysis plants. The three company collaboration underlines this fact, the statement adds.
thyssenkrupp Steel’s climate strategy in the coming years will cause a constant demand of green hydrogen. With the new project, the industrial giant aims to replace part of the carbon in the existing blast furnaces. The company expects the conversion of one furnace will need 20,000 tonnes of green hydrogen annually for the next few years. As conversion of the plants continue, thyssenkrupp projects that demand will reach 720,000 tonnes/year by 2050.
The planned electrolysis project will have up to 500 megawatts (MW) of capacity, and could produce as much as 75,000 tonnes of green hydrogen per annum, which will be enough for the first direct reduction plant of thyssenkrupp.
7. Rare Earth Minerals and Mining
Rising Rhodium Demand: Yet another bottleneck for automakers
Rhodium prices have started to climb again amid demand from original equipment manufacturers (OEMs) has surged. The metal is commonly used in vehicles’ catalytic converters.
The prices have risen since the start of 2022. Between January 4 and 11 they have spiked from $14,250/ozt to $17,500/ozt the highest since September 2021.
Some automakers have noted that global chip shortage has started to ease and they are hopeful for a recovery this year after 2021’s production cuts. The demand push for catalytic converters has also increased rhodium demand and with it, the prices.
Last year’s production cuts weighed heavily on price of rhodium, peaking at $29,800/ozt in March before falling by 54% to $13,700/ozt by November.
The fact that rhodium supply is tighter than expected could push the prices further up.
Global production is estimated to be flat this year.
Annual world rhodium production is only about 30 tonnes or?1,000,000 troy ounces per year. The world's main rhodium mining industry is in South Africa which provides 80% of rhodium supply globally. The Russian Federation produces the next largest percentage of the world's rhodium supply which is about 12% annually.
8. Defense and Armament
Abrams on the Rush: U.S. is scrambling to provide Poland with M1A2 Abrams tanks
Three Republican lawmakers argue that the proposed sale of 250 Abrams tanks to Poland should be accelerated to bolster the country’s defensive capabilities against Russia. The sale has been pending since last summer.
Republican Representatives Mike Rogers, Mike Turner and Lisa McClain, ranking members of the House Armed Services Committee, state that the sale would send an important message to both NATO and Moscow at a time when Russia has been building up forces near the Ukrainian border.
The lawmakers further argue that the sale would help Poland get rid of Soviet era equipment and achieve interoperability with NATO and U.S. forces.
Polish Defence Minister Mariusz B?aszczak and executives from General Dynamics, producer of Abrams tanks, met in October, saying they expect the first delivery of tanks to be made in 2022. B?aszczak said after the meeting he was given the impression that Abrams tanks would be used by Poland in 2022.
Poland’s tanks currently include Leopard 2A4s and 2A5s as well as Soviet made T-72 and PT-91s, which the country looks to replace to counter the modern Russian T-14 Armata tanks.?
That's all from this edition of The Executive Perspective.
Hope to see you again on Wednesday Feb 2nd, 2022.
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Cheers.