It helps reduce the consumption of fossil resources, enable the transition to a more circular economy, and to ultimately reduce its carbon footprint.

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The surprising hurdle slowing China’s switch to green energy

The surprising hurdle slowing China’s switch to green energy

It has already set a goal of achieving net zero emissions from its own operations and from purchased energy by 2035.

Instead, this is calculated and tracked by a digitalised “bookkeeping” exercise of the mass balance approach.

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To back up its own sustainability claims and help its customers do the same, Covestro has adopted processes for tracking the movement of sustainably sourced bio-based and recycled materials through the supply chain, so that evidence of their sustainable benefits can be documented and audited.

“In the past, if manufacturers wanted to use corn or soy-based raw materials, everything needed to be physically segregated in the manufacturing and logistics processes, which is complicated in a long value chain,” said Marius Wirtz, Covestro’s head of Asia-Pacific performance materials sales and marketing.

“Mass balance does not require physical segregation.”

This is because the relevant chemical molecules – and functional quality – of both fossil and renewable origins are the same.

Since no adjustment to plant and logistics facilities is required, proliferation of this approach to sustainability can be scaled up quickly, he said.

Consumers are becoming increasingly aware of the impact greenhouse gas emissions from fossil fuels have on global warming and climate change, and they are now willing to pay more for products made entirely or partially from bio-based and recycled materials.

Covestro’s procurement of sustainable raw materials nearly tripled to 55,000 tonnes last year from its 2021 levels, Wirtz noted.

However, to earn the trust of brand owners and their consumers, and to combat suspicions of so-called “greenwashing” – the act of making unsubstantiated claims about the environmental benefits of a product or practice – manufacturing processes of products with sustainable materials need to be independently certified.

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Covestro is among many chemical, energy and agricultural companies that have had their facilities and processes certified by the International Sustainability and Carbon Certification (ISCC) system, whose auditing methodologies are accepted by various governments and trade bodies for sustainability compliance.

When greenwashing, companies cannot substantiate their claims by meeting commonly adopted measurement, reporting and verification standards on environment, social and governance (ESG) issues.

Left unchecked, this could create disincentives for society to take decarbonisation and other sustainability actions seriously.

This would pose hurdles to meeting the Paris Agreement target of achieving net zero emissions by 2050, and to limit global warming to below 1.5°C.

While regulatory challenges to corporate sustainability claims are rare in Asia, there are some precedents in the form of high profile cases in Europe.

In 2020, the UK’s Advertising Standards Authority accused low-cost carrier Ryanair of greenwashing and banned it from repeating an advertised claim that it had the lowest carbon emission among major airlines in Europe, saying it was poorly substantiated.

In response, Ryanair had told Reuters at that time the advertisement was approved and used in other European markets. Ryanair did not respond to The Post’s request for further comments.

Last May, prosecutors raided the headquarters of DWS Group, the asset management arm of Deutsche Bank, after a whistle-blower alleged it had failed to take into account ESG factors in a large number of its investments, contrary to claims made in its fund sales materials.

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In response, DWS had said in its latest annual report published in March that it is cooperating with investigating authorities.

In the global green bond market, greenwashing is fairly common, with about one-third of issuers reporting deteriorating environmental performance after their issuance debut, according to a research paper from the Hong Kong Monetary Authority published last November.

It was based on a study of 1,888 corporate green bonds issued by 643 listed firms globally between 2013 and 2021 which had raised a total US$591 billion.

Investors have been quick to punish such violators with the result that some have been unable to issue green bonds again because of market resistance, while others have had to pay higher costs to raise financing, the research paper said.

Increased regulation and scrutiny will have a significant impact on how businesses in Asia plan, operate and report this year, international law firm Linklaters said in a report in March.

More action is expected from stakeholders and regulators, judging by the pockets of “contentious activity” that have been spotted, said the law firm’s Hong Kong-based dispute resolution counsel Sarah Martin.

“Activist investors, non-government organisations and regulators are in dialogue, and so we are likely to see some of the strategies being pursued in the US and Europe employed in Asia, but perhaps on a smaller scale and within a different time frame,” she told the Post.

In February, Australian environment activist group Market Forces said it had filed a complaint to Singapore Exchange, alleging that Japan’s largest power firm JERA had failed to make sufficient disclosures about its financial and legal risk exposure to the natural gas industry in the prospectus of a Singapore-listed bond issued in 2022.

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A JERA spokesperson told the Post the company is of the view that it had “adequately disclosed the information”.

In South Korea, the Ministry of Environment has drafted legislation in February to slap fines of up to 3 million won (US$2,300) on companies that mislead the public about their environmental impact.

While the new regulation will simplify the currently complex process to determine penalty amounts, there is a risk that companies simply pay the fine while reaping the monetary and reputational benefits of its claims, said Jihyeon Ha, head of legal operations at Seoul-based climate action group Solutions for Our Climate.

Greenwashing is a complex problem that encompasses regulatory issues such as competition, disclosure, advertising, and trademarking, according to Daniel Cash, a credit rating regulation expert and senior lecturer in law of the UK’s Aston University.

A lack of clear definition and legal difficulties in making companies accountable are major challenges for regulators, he told a Hong Kong Green Finance Association (HKGFA) panel discussion in March.

“How do you know that a company is intending to greenwash, or whether they are doing it by accident, or whether it is a misunderstanding of the rules, regulations, and procedures?” he said.

“Regulators have difficulties defining the levels of motives and consciousness and in applying proportionate regulations and penalties to deter such behaviour.”

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The lack of global standards and framework for sustainability is a key contributor to greenwashing, according to Kim Schumacher, associate professor in sustainable finance and ESG at Japan’s Kyushu University.

“Persistent data gaps and sector-wide inconsistencies in terms of ESG impact measurement, reporting and verification have created numerous materiality blind spots,” he wrote in a report published by the Asian Productivity Organisation last December.

“Sustainability data, the key pillar of ESG ratings, remains largely self-assessed.”

This is worsened by the fact that people analysing ESG data and giving ratings to companies often lack the necessary background needed to ascertain accuracy of the environmental metrics calculations and soundness of climate risk assessment, he noted.

Regulators are taking action. In the European Union, since January 1, rules have been tightened for asset managers to disclose if and how sustainability risks and opportunities are assessed and integrated into their investment decisions, so that their funds can be labelled differently.

In Hong Kong, the Securities and Futures Commission (SFC) published a circular in 2021 requiring ESG funds to disclose periodic assessments of how they incorporate ESG factors into their investment decisions.

To address the data comparability issue, the commission supports efforts of the International Sustainability Standards Board to establish a global baseline of sustainability disclosures to meet capital market needs by mid this year, an SFC spokesman said.

Another way to tackle greenwashing is the implementation of so-called taxonomy, a classification system for green and sustainable activities.

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In Hong Kong, the monetary authority is leading an initiative to establish a green finance classification framework aimed at enhancing transparency and cross-market comparability while lowering costs, Grace Wong, a senior manager responsible for market development at the HKMA’s external department told the HKGFA panel discussion.

In mainland China, Beijing has implemented a green taxonomy in 2015, in the form of a project catalogue for green bond issuance published by the People’s Bank of China.

The catalogue was revised in 2021 after greenwashing concerns – especially from European investors – with improvements to align it more closely with international standards.

In particular, it removed “clean” coal usage from the list of projects that qualify for green bond issuances, a major shift for a nation heavily reliant on coal for electricity generation.

To address greenwashing concerns, Beijing also published last July a set of China green bond principles governing the use of proceeds, project evaluation and selection, management of proceeds, and information disclosure, in line with international practices. However, compliance is voluntary.

Even in the EU, which is at the forefront of global efforts on climate mitigation, greenwashing concerns prompted its 27 nations to thrash out a deal in early March to establish a green bond standard.

It mandated that issuers must demonstrate that the proceeds of their green bonds fall within the list of activities deemed to be aligned with the EU’s goals on climate change mitigation, adaptation, and the other environmental objectives.

Subjecting sustainability disclosures to external audits against international standards is also important, said Lijian Zhao, China director of international sustainability advisory and certification provider Carbon Trust.

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“We believe companies should be auditing their environmental claims with the same rigour as their financial reporting,” he said.

For Covestro, having a long term horizon is also key to navigating a challenging but potentially rewarding decarbonisation journey.

“Sustainable manufacturing starts with commitment from manufacturers and consumers,” Covestro’s Wirtz said. “It is a long journey, but once production is scaled up, you can benefit from economies of scale, which means big opportunities.”