In the first half of 2024, the U.S. Environmental Protection Agency (EPA) and the European Environment Agency (EEA) introduced climate risk assessments and adaptation plans for their respective continents. The EPA states that climate change has created devastating consequences, including the costs of lives, disruption of livelihoods, and billions of dollars of damages. These impacts would become more intense in the coming years. Similarly, the EEA points out that climate change creates more severe consequences in Europe. Indeed, the EU has experienced extreme precipitation, large-scale floods, extreme heat, and large wildfires, resulting in dire impacts on agriculture, health, ecosystems, infrastructure, economy, and others.  After assessing the climate risks, the two most significant environmental agencies have identified some priorities the two governments should enact to mitigate the consequences of climate change. Indeed, the U.S. EPA will implement five key initiatives. They include (1) the integration of climate adaptation into EPA programs, (2) partnership with various stakeholders, (3) the implementation of measures to protect the Agency workforce, (4) the measurement and evaluation of performance, and (5) the identification and address of climate adaption science needs.  The EEA proposes some priorities that are even more progressive than those in the U.S. First, the agency identifies five climate risk cascades, including food, health, ecosystems, infrastructure, and economy and finance. In the next step, the EEA proposes specific priorities and policies that help mitigate each type of cascade. For example, to respond to the climatic-induced risks related to food, member states in the EU should develop sustainable and transformative agricultural practices. To alleviate climate risks related to infrastructure, the Union should improve the resilience of its infrastructure, including transportation, energy, and so on.  The climate risk assessments and adaptation plans from the two most significant environmental agencies highlight the severe consequences of climate change. It also implies that the U.S. and the EU are likely to be stricter on regulations related to GHG emissions and other environmental pollution activities. In other words, foreign firms involved in doing business in these two continents should be highly alert to new environmental regulations that are expected to come soon. Author: Bao Hoang, Ph.D.

At the Conference of the Parties 21 (COP 21) in Paris on December 12th, 2015, the international community reached one of the most significant milestones in the combat against climate change and global warming. Indeed, 195 Parties entered a legally binding international treaty on climate change called the Paris Agreement. The supreme purpose of the Agreement is to keep the increase in the global average temperature below 2o C or limit the temperature increase to 1.5o C above pre-industry levels.  The Paris Agreement emphasizes several themes, including Nationally Determined Contributions (NDCs), Long-Term Strategies, Climate Change Education, Training, & Public Awareness, Market and non-Market-Based Approaches, and Financial, Technical, & Capacity Building Supports. The Agreement asks for the developed countries to provide financial and technical support for developing countries in the transition to low-carbon economies. After the Paris Agreement was adopted, the EU has been the most aggressive in pursuing net-zero objectives. Indeed, the Continent passed various measures, regulations, and frameworks to actualize this goal. These frameworks include the EU Green Deal, EU Taxonomy for Sustainable Activities, Sustainable Finance Disclosure Regulation (SFDR), Carbon Border Adjustment Mechanism (CBAM), the EU Deforestation Regulation (EUDR), the Corporate Sustainability Reporting Directive (CSRD), and others. The U.S. has also stepped up its efforts toward the net zero target by issuing various measures and frameworks, including ten key climate priorities in the Inflation Reduction Act, Climate Change Disclosure Rules from the SEC, and new guidance on the voluntary carbon market. The other developed countries have also stepped up channeling their resources toward a low-carbon economy.  However, developing countries still need to create work on developing and implementing climate-related policies due to the lack of expertise and resources, given they all are committed to the net-zero target in 2050. Developing countries contribute half of GHG emissions, and they need a little fossil fuel for a while to propel their economic engines. In addition, renewable energy is still expensive. Achieving net-zero targets in developing countries seems to rely on the rich countries’ willingness to provide green technology and financial assistance. Author: Bao Hoang, Ph.D.

In the past several years, the EU has passed the most regulations and measures to guide and promote sustainability and ESG activities among businesses. The SFDR was issued almost at the same time as other climate-related measures, including EU Taxonomy and the European Green Deal. It cements the leading efforts of the continent to mitigate the adverse impact of climate change. The finance sector will play a significant role in helping the world achieve the net-zero target in 2050. There will be an investment of around $ 5 trillion in the green economy yearly from now to 2030 worldwide, and 40 % of this amount will be invested in emerging economies.  However, investment firms in emerging economies are still waiting to adapt to the SFDR, although it was influential in the EU in early 2023, about three years ago. The regulation includes 20 articles that require financial market participants such as investment funds, portfolio management, pension funds, and others to disclose Principle-Averse Impacts (PAIs). The PAIs are a set of mandatory indicators and metrics that display some sustainability-related risks created by investing activities. However, investment firms in emerging economies have still lagged behind the SFDR’s requirements in terms of disclosing sustainability risks associated with their investing behaviors.  Current research from Morgan Stanley Capital International indicates that investment firms in emerging economies are profoundly different from their counterparts in developed countries in social indicators disclosures. Specifically, the investment firms in emerging markets fell short far more often than those in developed countries. They also trail on GHG emissions-related indicators. The underperformance of these PAI indicators raises severe issues in capital transfer from developed countries to emerging countries. As a result, the effort to combat global warming has been significantly negatively affected.  To facilitate the capital transfer from advanced countries to invest in green economies in emerging markets, investment firms here should step up the efforts of being transparent in investment activities. In addition, they should develop good practices in disclosing the PAI indicators set by the SFDR. Author: Bao Hoang, Ph.D.

According to the latest report released by Deloitte in June 2024, corporations and private equity funds have increasingly focused on their own ESG profile and that of their targets. The survey was carried out on a sample of 500 global M&A leaders. These correspondents are North America, Europe, the Middle East, and Asia Pacific (APAC). Following are the significant findings from the survey.  More than 50% of the organizations in the sample are more transparent and specific about the metrics used to assess their ESG performance. There is an 18 per cent increase compared to only two years ago. Interestingly, firms in some specific industries, including technology, media, telecommunications, financial services, and consumer, experience bigger improvements than those in others. This phenomenon may come from the fact that these industries are closer to the mass customers, so they are more concerned about their customers’ perceptions regarding sustainability-related activities.  The report shows that more than 80% of the acquirers will likely abandon the M&A deals if their targets have a poor ESG profile. Furthermore, almost 100% of the acquirers will likely buy the targeted firms at a discount if the acquired have poor ESG profiles. The private equity respondents even pay more attention to ESG and sustainable investing. Indeed, 72 % of private equity acquirers carefully consider the targets’ ESG profiles in more than 50% of the deals.  According to the report, the ESG program has become integral to the M&A strategy. In other words, a firm’s ESG profile is a reason for initiating an M&A deal in the first place. Indeed, approximately 70 % of the surveyed correspondents indicate that they evaluate their investments or portfolios from the perspective of ESG before seeking out an acquisition deal or divestiture. In addition, ESG significantly affects an M&A’s valuation. 83% of M&A leaders in the survey suggest that they are willing to pay a 3% premium for a target company with a strong ESG profile. On the contrary, they will look for a discount of at least 3% if the targets have a weak ESG profile. Author: Bao Hoang, Ph.D.

The European Union (EU) has been leading the world in the fight against climate change and global warming. The continent has recently introduced two measures that are deemed to significantly affect the firms in Southeast Asia and other developing countries. The first measure is the Carbon Border Adjustment Mechanism (CBAM), and the second one is the EU Deforestation Regulation (EUDR). The EUDR will be officially effective in 2025 and the CBAM in 2026. The application of these two measures would create the biggest challenge for global trade in recent years. The CBAM, commonly known as the carbon border tax, levies a fee on the carbon emissions associated with certain imported goods and products entering the EU market. This carbon tax applies to some imported commodities used in heavy industry. They include steel, aluminium, fertilizers, and cement. The proposal requires exporters of certain carbon-intensive commodities to document and report their carbon footprints if they want to sell them in the EU market. This new climate regulation is projected to have a significant impact on Southeast Asian firms, as many of them are major exporters of this carbon-intensive item to the EU. In addition to the CBAM, the EUDR poses hurdles for exporters who make goods on deforested land. Indeed, the EUDR prohibits the sale of products produced on deforested land since 2020 across the continent. The measure focuses on cattle, palm oil, coffee, rubber, soy, cocoa, and timber. This strategy causes problems for farmers in Southeast Asia, especially Malaysia, Indonesia, and Vietnam. Indeed, around 20% of Indonesian and Malaysian palm oil is exported to the EU market. Vietnam also ranks among the continent’s major coffee exporters. This policy also specifies how exporters can verifiably demonstrate that deforestation has not occurred on their current farms. Consequently, the EU has developed some observatory techniques, including satellite observations, to validate manufacturers’ reports. The CBAM and EUDR represent substantial hurdles for Southeast Asian enterprises since they lack ESG and decarbonization skills and expertise compared to their counterparts in industrialized countries. Indeed, creating an ESG report is a complex undertaking that typically takes years. Furthermore, decarbonization necessitates the adoption of new operating methods, such as investment in green technologies and the transfer to clean energies, both of which have historically been costly. This problem is exacerbated by the fact that businesses in underdeveloped or developing countries typically need more finance and technology. Author: Quyet Pham, Ph.D.