Weekly News | 15th to 31st October 2023

Codo Advisory keeps an eye for you on the latest events and trends in climate finance and corporate sustainability, in the world and in Japan. Here’s what caught our attention last week. 

World | The IEA released its updated roadmap towards Net Zero  

• In 2021, the IEA published its first roadmap towards the goal of net zero emissions by 2050 in the energy sector and has recently released an updated version of the scenario. 
• The global CO2 emissions are expected to peak this decade due to the growing adoption of clean energies, although there have been positive developments such as increased solar PV installations and electric car sales: innovation has already delivered and still delivers new tools to go much faster in tackling global warning. 
• More than just shifting to cleaner energy solutions, we need to accelerate electrification and to cut methane emissions from the energy sector by 75% by 2030. The IEA projects carbon capture, utilization and storage (CCUS), hydrogen and hydrogen-based fuels, and sustainable bioenergy will be critical to achieving net zero emissions; rapid progress is needed by 2030. 
• The world is set to invest a record USD 1.8 trillion in clean energy in 2023: this needs to climb to around USD 4.5 trillion a year by the early 2030s to be in line with our pathway. 
• Read more about this story: IEA

Codo’s comment: While combatting climate change often seems too ambitious or overwhelming, this updated report from the IEA is largely encouraging. Our investments in science and innovation have begun to largely pay off. Now we must act to utilize them. The IEA stresses the central role of finance in the fight against climate change and the possibility of achieving our objectives of Net Zero by 2050. Furthermore, transition is required, but it needs to be conscientious and fair towards developing countries who face complex implementation challenges.  

Japan | Japan and Denmark cooperate on floating wind turbine technology  

• Japan and Denmark have signed a letter of intent to collaborate on floating offshore wind power technologies to combat climate change. 
• They plan to create a framework for cooperation, inviting other countries to join and possibly establish global industry standards. 
• Japan aims to have 10 gigawatts (GW) of offshore wind power by 2030 and is working towards carbon neutrality by 2050.  
• They have also signed a memorandum of understanding to develop a sustainable supply chain for hydrogen and ammonia. 
• Read more about this story: Nikkei Asia, Reuters   

Codo’s comment: This collaboration on floating offshore wind power technology is a significant stride in the achievement of global carbon emissions reduction targets. Indeed, this technology has the potential to tap into deep-sea wind resources. By creating a cooperative framework and possibly establishing global industry standards, Japan and Denmark are not only securing their own (green) energy future but also extending an invitation to others. International partnerships would eventually foster technological advancement and allow energy providers to accumulate renewable energy credits (RECs) which are intended to reduce carbon emissions and reliance on fossil fuels through paying a premium to ensure supplied energy is from renewable (zero emission) sources. This agreement can also be seen as a good opportunity for Japan to join forces with an EU country that is several steps ahead of it. However, floating offshore turbines have always been a source of controversy for various reasons: some are simply concerned by the visual impact on coastlines while others more by the tremendous impact on the marine environment and its ecosystem, and so by extension on economic activities such as fishing or even recreation. Moreover, not unexpectedly, reducing the global dependence on fossil fuels is good, but climate change requires systemic transformation of our relationship with energy and its use, whatever its source and nature. 

World | Perfect storm sets up catastrophe bonds for record returns this year as investors price in climate costs

• Catastrophe (CAT) bonds are debt instruments sold by insurance companies at higher interest rates that only pay out (provide profit to the insurance company who sold it) in the event of a specific catastrophe (wildfire, hurricane, flood etc) occurring 
• The market for catastrophe bonds is currently one of the best-performing debt classes, with returns outperforming other debt markets. 
• The World Bank plans to increase its outstanding catastrophe bonds from $1 billion to $5 billion over the next five years, contributing to the growth of a market valued at around $40 billion. 
• Catastrophe bonds are gaining popularity due to their higher returns and serve as a way for investors to take on insurance-market risk linked to increasing extreme weather events. 
• The World Bank intends to expand the range of natural disasters covered by catastrophe bonds, including physical disasters like floods and droughts, in addition to hurricanes, pandemics, and earthquakes. The goal is to provide financial assistance to developing countries and address the lack of insurance coverage for potential losses from natural catastrophes.  
• Read more about this story: Bloomberg Green, Markets Insider

Codo’s comment: Catastrophe bonds, once a niche market, are now a financial beacon in the climate crisis. They are structured as a way for insurers to bet on a disaster happening, so as climate change makes extreme weather events more frequent and severe, more insurers are issuing these bonds to offset increasing risks. The high return, in turn, drives investors to these bonds, which outperformed traditional debt classes in 2022. Catastrophe bonds, while carrying risk, offer diversification opportunities due to their non-correlation with traditional assets. Climate conferences like COP28 are recognizing their vital role in raising capital to protect vulnerable nations from climate-induced disasters. The surge of catastrophe bonds reflects the stark reality of climate change and its urgency. As the climate crisis accelerates and converges with the financial world, these bonds are set to play a pivotal role in our response.

Europe | EU cracks down further on microplastics after glitter ban 

• The EU plans to cut microplastic pollution by 74% through a proposal targeting plastic pellets used in various products. 
• These pellets, when they break down into microplastics, pose health risks. The EU wants operators to prevent spills, contain them, and clean up if necessary. 
• The proposal includes mandatory certifications and best practices, with lighter rules for smaller businesses. 
• Global microplastic pollution could double by 2040 if left unchecked, making EU action crucial. 
• Read more about this story: The Guardian, Reuters

Codo’s comment: Microplastics, the tiny plastic remnants infiltrating our environment, disrupting ecosystems, and harming aquatic life present a complex interplay with human society and public health. Recent discoveries, such as detecting microplastics in breast milk, emphasize the need for action. Expanding awareness and understanding of the dangers related to microplastics is reminiscent of the understanding and response to hydro-fluorocarbons in the 1970s and 1980s. The EU’s robust stance against microplastic pollution is a crucial step to protect both human well-being and biodiversity, even though complete understanding of their health and environmental impacts is still not fully understood. While domestic protection is crucial, global collaboration is essential to address the wider scope of microplastic pollution. It is unclear how these unilateral measures from the EU will affect imports and economic activity. Though questions remain, the EU’s proactive approach to addressing emerging threats is to be praised, but care should be taken on implementing too many drastic regulatory changes without sufficient investment support to enable compliance.