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Weekly ESG Express Mar 21 | EU’s new Net Zero Industry Act powers up renewable energy

MioTech Research2023-03-21

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The European Commission unveiled a package of new plans last Thursday (Mar 16), including the Net Zero Industry Act and the Critical Raw Materials, as it seeks to keep its place in the global race to scale up clean-tech industrial capacity.

As part of the previously announced Green Deal Industrial Plan, the Net Zero Industry Act introduces a series of new measures to increase the EU's clean-tech manufacturing capacity, with the goal of having at least 40% of clean technologies manufactured in the EU by 2030 including 85% of batteries and energy storage technologies.

The legislation also specifically lists eight ‘strategic net-zero technologies’ of solar power, batteries, geothermal energy, biomethane, carbon capture and storage (CCS) etc., stating its full support to stimulate investment into industrial decarbonization.

A draft of the Critical Raw Materials Act was concurrently released, proposing to secure a sustainable and competitive critical raw materials value chain in Europe, reducing the EU’s dependency on concentrated imports from other countries like China. It estimates that out of the global cumulative manufacturing investments of USD 1.2 trillion required to bring enough capacity on track with the global 2030 targets, China accounts for 90% of investments in manufacturing facilities.

The proposed regulation still needs to be agreed by EU Parliament and the Council enforcement.

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China presented its proposal to deepen multilateral exchanges on global environmental measures at the meeting of the WTO’s Committee on Trade and Environment (CTE), with a focus on the EU's Carbon Border Adjustment Mechanism (CBAM).

The EU’s CBAM plan is scheduled to enter into its transitional phase this October, at which time China's aluminum exports could be subject to an estimated US $1.16 billion of carbon tax, according to calculations by MioTech Research. Other industries likely to be most impacted include steel, plastic, and fertilizers that have the largest exports to the EU.

Norway, the Philippines, Singapore, India, Brazil and other WTO members have backed up the Chinese proposal. India also shared a document on the first meeting day, stating its concerns over the rising trend of countries using environmental processes as “protectionist non-tariff measures”.

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China’s Ministry of Ecology and Environment (MEE) released the new national carbon allowances allocation scheme for the year 2021 and 2022, marking the national emission trading scheme (ETS) to face a tightening of free allocation in its second compliance period.

Currently, the national ETS only includes the power generation sector, with a total of 2,225 companies. The new allocation scheme has lowered the overall carbon benchmark values for all types of power generation units, compared to the last period. China’s power generation corporations thus now have fewer free annual allocation, and more of them may need to purchase additional allowances for compliance.

The benchmark values reflect the average carbon emission intensity of the industry, MEE mentioned. Having a lower value is also in line with the country’s ‘dual carbon goals’ to promote the yearly reduction of the thermal power sector’s energy and emission intensity.

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The European Central Bank (ECB) and the European Supervisory Authorities (ESAs) released a joint statement recently, calling for enhanced climate-related disclosure standards for structured finance products.

Structured finance products typically include investment products in which returns are linked to underlying assets, created through a securitization process. Assets involved in securitization transactions often include real estate mortgages or auto loans, which the ECB and ESAs said could be directly exposed to physical or transition-related climate risks.

As investment in financial products meeting high ESG standards is increasingly important in the EU, it has also become a priority to promote consistent and harmonized climate reporting requirements for structured finance products, helping investors better identify and avoid climate-related risks.

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The world’s 77 largest asset managers have significantly increased the use of voting policies and engagement to target ESG-related issues in their portfolios over the past few years.

According to a new study by responsible investment NGO ShareAction, for these managers that collectively hold over $77 trillion in assets, 83% of them have reported financial incentives relating to responsible investment, a nearly 12-fold increase from only 7% in 2020.

The report also highlights that 82% of asset managers currently have voting policies on climate change, and 81% have reported voting policies on social issues. While in 2020, the numbers were only 56% and 53%, showing their rising attention for ESG management and practices.