SRI Briefings - the Blog

Post-Crisis Emerging Markets Draw Responsible Investors

By 2020, emerging market GDP will for the first time, overtake the GDP of the developed market. Eighty-five percent of the world’s population will live in emerging markets and consumer spending in China and India alone is estimated to treble to US$10 trillion. At the same time, global sustainability megatrends such as climate change, resource scarcity and human rights will have a significant impact in these markets, according to responsible investment research specialists EIRIS, in a new report, "Evolving Markets: What’s Driving ESG in Emerging Economies?"

Responsible investment allocations to emerging markets have increased by nearly 30% since 2009, according to EIRIS research, with around 25% increasing their exposure to emerging markets in the aftermath of the financial crisis.

“Lower returns and increased risk and volatility in developed markets has potentially resulted in a recalibration of risk/return ratios that make emerging markets more attractive to investors,” said Josh Brewer, report author and Head of Financials & Technology team at EIRIS, but warned that though these markets offer huge investment potential there are also significant ESG risks that must be factored in by investors.

The research revealed that Brazilian and South African stock exchanges have surged ahead of those in the developed world by creating advanced ESG listing requirements, sustainability indices and other products to drive disclosure. Brazilian and South African governments also lead on initiatives to encourage corporate ESG performance with India, China, Hong Kong, Mexico and Turkey making good progress.

There is also strong demand for ESG research on the classic ‘three pillars’ of governance, environment and international norms such as corruption and human rights.

Poor corporate ESG disclosure though remains the leading challenge to investing in emerging markets. Environmental issues, international compliance norms and corporate governance remaining core responsible investment concerns, as they are in the developed markets.

For further information visit EIRIS website.

Alderney’s Tidal Energy Projects Get Green Light from UK, French Governments

At an Anglo-French Summit held in Paris on the 17th February 2012 the UK and France pledged their commitment to energy cooperation and energy security facilitating a number of commercial deals in the nuclear energy sector. Prime Minister David Cameron said the UK’s commitment to nuclear energy was “part of a diversified energy mix.” France and the UK will continue to develop renewable energy seeing renewables as both complementing nuclear energy and helping to achieve the EU goal of a low carbon European economy.

As part of this “energy mix” Alderney Renewable Energy (ARE), the tidal energy developer, signed agreements for two major tidal energy projects. Both agreements were supported by the UK and French governments.

One of the agreements is with DCNS the French industrial group to develop tidal arrays in Alderney's waters. The UK Energy Secretary Edward Davey and the French Industry Minister Eric Besson signed the Franco-British Declaration on Energy stating that: “We are determined to promote the potential of marine energies. We welcome the plan for a tidal turbine farm off Alderney-Aurigny in the Channel Islands. The commercial agreements signed today between Alderney Renewable Energy (ARE) / DCNS and ARE / Transmission Capital / Réseau de Transport d’Electricité (RTE) are major steps towards the realisation of a significant new renewable energy project which could rank among the largest tidal stream energy deployments worldwide. We believe this project could encourage the emergence of industrial cooperation between France and the UK, while opening up new international prospects.”

The agreement with DCNS could lead to power being generated from tidal energy on Alderney within 12 to 14 months. As ARE proposed earlier, some of the power may be used for a tidal pumped storage system consisting of seabed mounted tidal turbines and a pumped storage system with a seawater reservoir in Fort Albert a large ruined cliff top fort. Working with the local electricity board, power generated from the tidal turbines will be fed into the seawater pumps so the seawater reservoir will power a hydro turbine in turn powering the generators supplying Alderney’s electricity demands.

The second agreement is between ARE and its partner Transmission Capital and RTE, the French power grid operator to develop an interconnector cable capable of exporting up to four gigawatts of tidal power from Alderney’s waters and a power trading link (FABLink) between France, Alderney and the UK. “We acknowledge the importance of developing new electricity interconnectors between our two countries in order to strengthen further the linking of our grids, improve the security of our energy supplies and facilitate the integration of intermittent energy sources. We encourage further studies to be undertaken on the interconnector projects currently under consideration, namely the IFA2 led by Réseau de Transport d’Electricité and the National Grid, FABLink (France-Alderney-Britain) led by Alderney Renewable Energy and Transmission Capital, and ElecLink led by Star Capital and Eurotunnel,” he Declaration went on to state.

Paul Clark, Chief Executive of ARE, commenting on the announcement said: “We are committed to developing tidal power in Alderney’s waters. We have already secured grid access for future power flows to the UK and France and today’s announcement marks significant progress towards creating one of the largest renewable energy projects in European coastal waters. We are delighted that the governments of Alderney, the United Kingdom and France are supporting this project.”

Hard on the heels of these agreements, the UK Government’s Energy & Climate Change Committee has said there should be increased governmental support for wave and tidal power, thereby preserving the UK’s global leadership in the sector. The Committee's report, The Future of Marine Renewables in the UK, recommends increasing funding and improving connection links between tidal energy projects.

It has been estimated that wave and tidal technologies could supply about one-fifth of the UK's current electricity demand. The Carbon Trust recently forecast that by 2050 the global market could be worth £340bn.

Such significant developments mean Alderney’s tidal resource looks to become a major contributor in assisting the UK and France to achieve their stated 2020 renewable energy targets of 15% and 23% respectively. The interconnector cable linking nuclear power stations will boost the amount of zero-carbon power available. For Alderney the strategic benefits are significant, as they will bring about independence and security of energy supply and cap escalating fuel costs. The royalties generated could produce a significant revenue stream for the States on exported electricity and encourage much needed economic development on the island.

For further information visit Alderney Renewable Energy website.

Financial Risk for the Renewable Energy Sector

Although global investments in renewable energy plants are growing and indeed in 2010 exceeded investment in new fossil fuel fired plants for the first time, risk is also increasing, according to a new report, Managing the Risk in Renewable Energy, from the Economist Intelligence Unit (EIU). Sponsored by Swiss Re, the research highlights the need for the renewable energy sector to improve risk management and access alternative sources of capital as operational risks grow and governments cut sector funding on the back of an increasingly uncertain economic environment.

Based on a survey of 284 senior executives in the renewable energy industry in North America, Australia, Denmark, Spain, Italy, Germany and the UK, the report analyses the risks in financing, constructing and operating renewable energy projects, particularly large complex projects, and the parallel risk management challenges that the industry must confront.

Cuts in government expenditure for the renewables sector pose the possibility of a lack of future support from public finance for such developments, particularly in Europe. Currently, cuts for example, in solar feed-in tariffs range from 15% in Germany to 70% in the UK and there is the worry for investors that other governments will cut this support as part of their ongoing austerity measures, according to the EIU.

Early-stage costs are a major issue as projects are often capital intensive and highly leveraged, with up to 70-80% financed through debt. As companies seek to scale up investments overcoming financial risks is one of the key challenges, according to respondents. Other concerns for owners, operators and plant investors are political and regulatory risk and weather-related volume risk particularly for offshore wind farm producers. These risks moreover increase as projects grow in scale and complexity, but only half of respondents said they were successful in transferring the risks, many retained the risks related to renewable energy assets on their balances sheets. The availability of risk management resources, such as industry data, risk expertise and insurance remain limited in the sector, potentially restricting access to development capital.

However as the demand for solutions grows new products, particularly in insurance are starting to appear on the market such as alternative risk transfer solutions and weather-based financial derivatives, for example. Respondents considered however that they would transfer more risk if suitable products became more widely available especially if there were more standardised and cost-effective products.

For further information visit EIU.

Japan, South Korea - Asia’s leading ESG performers

Companies in Japan and South Korea have the highest overall performance on ESG issues, according to a new report from global responsible investment research specialists EIRIS. Improvements in these countries have been boosted through local initiatives such as the recent introduction of the “Low Carbon, Green Growth” initiative in Seoul, which outlines a plan to reduce carbon emissions, with a similar scheme operating in Japan.

The report focused on 786 Asian companies to assess how well they were addressing ESG challenges and comparing their performance to their European and North American peers. China, Hong Kong and Singapore based companies however have failed to make significant progress on ESG factors, according to EIRIS. China, for instance, the world’s second biggest economy, has made limited improvements on environmental issues, with only 5% of the companies analysed by EIRIS having strong environmental policies in place and just 2% displaying any proof of making progress on these issues.

The report, State of Responsible Business (Asia) found that Asian companies performed well on climate change but still needed to address other ‘material’ environmental risks arising from water management and biodiversity. Social stakeholder issues remain a key challenge, the report revealing that 90% of Asian companies with operations in countries “relevant for human rights concerns have no human rights policies in place.”

When comparing Asian companies to their global peers though an uneven picture emerges; the environmental polices of over 40% of Asian companies were assessed as good or excellent, compared to two-thirds of European companies, however only a quarter of North American companies received similarly high scores.

“It’s encouraging to see that companies in Asia are making progress on ESG and are overtaking their global peers in some areas. Looking ahead, increased regulatory pressures, greater reporting requirements and the development of sustainability have the potential to be the biggest drivers of ESG,” said Mark Robertson, Head of Communications at EIRIS.

There are big opportunities for companies and investors “to exploit the first mover advantage presented by enhanced social and governance disclosure in Asia,” considers EIRIS. Increased coverage of social and governance issues will open Asian companies to a broader investment base, especially outside Asia, where responsible investment is more firmly established.

For further information visit: EIRIS website.