Clean Energy Transition - Net Zero by 2050

China has the largest carbon market in the world and Hong Kong can help connect it globally by establishing an Asia-focused carbon standard and developing a futures market. As a major carbon emitter, the power sector plays a crucial role in realizing the goal of carbon peaking and carbon neutrality. Although there has been a local expansion of wind and solar projects, this is limited due to the environment. It is possible that Hong Kong could create more opportunities for clean energy transition by buying energy from clean sources and supporting renewable energy businesses.  Over the last 7 days, the Renewable Energy industry has dropped 1.3%, driven by a pullback from China Power International Development of 3.6%. The industry has fallen 5.1% in the last year. As for the next few years, earnings are expected to grow by 18% per annum.

What are the most urgent challenges for the sector over the next three years?

1. Cost of Transition

High capital costs associated with clean energy transition are a challenge to the oil and gas industry in Asia, particularly among smaller and emerging markets. Even in developed economies such as South Korea, cost can be a challenge slowing the pace of change.

2. Ongoing demand for fossil fuels

There is an ongoing and – especially in the case of China for example – a growing demand for fossil fuels in Asia. It was unlikely that the majority of local businesses would be able to accommodate a fall in the use of oil and gas in the next few years.

3. Lack of renewables infrastructure

Infrastructure transformation poses challenges in dealing with legacy liabilities as well as significant investment in ensuring electricity grids can store and transmit electricity generated from renewable resources.

Governments around the world have set targets for reducing carbon dioxide emissions. As economies make the move towards sustainable development, small and medium-sized enterprises (SMEs), the backbone of the world economy, are adjusting their supply chain strategies to help them embark on the road to zero carbon with a measurable carbon footprint.

Burning fossil fuels to feed our energy systems accounts for 75% of the world’s total greenhouse gas emissions. The transport and processing of oil and gas alone resulted in 5.1 billion tonnes of emissions in 2022, accounting for just under 15% of the total produced by the global energy sector.

Interestingly, in the year that the US goes to the polls to elect a new president, geopolitics could be a factor that potentially slows clean energy transition in the next few years. 

Asia accounts for a large part of this, with China alone acting as the largest producer and consumer of energy in the world. Although coal accounts for the greatest share of the total energy supply in Asia (48%), oil is second with 23% and natural gas 11.6%. In terms of oil refining, Asia accounts for 38% of the global share.

However, in addition to being a big producer and consumer of fossil fuels, Asia also generates a significant amount of electricity from renewable resources. In 2021, the International Energy Agency (IEA) calculated that 23.5% of the region’s electricity was generated by hydro (13.7%), wind (5.6%) and solar (4.2%). This compares to just 11.8% of electricity generation by oil and gas combined.

China is a key player in many clean energy supply chains and both Japan and Korea have devised plans for decarbonisation.

Of course, Asia is a large continent with different needs, strengths, and drivers across markets, and different perceptions of challenges and opportunities. For example, when we asked our underwriters whether geopolitical issues might impact the transition to clean energy in the local oil and gas industries, our specialists in China said “probably, yes”, whereas in Thailand, Hong Kong, Taiwan, Japan, and Korea the response was, “not so much”.

The oil and gas industry could not shift to clean energy in the short term due to high costs and supply issues. The fact is, it is hard to build a business case for consuming more expensive electric energy from renewables if cheaper oil and gas are on tap.

More than 80% of Taiwan's electricity came from fossil fuels in 2022, making the country’s official pledge to achieve Net Zero by 2050 a big challenge. While there is still significant demand for oil, natural gas, and coal, the industry is increasingly facing pressure from the growth of renewable energy sources, as well as concerns over climate change and environmental impacts, with many companies and governments investing in carbon capture and storage technologies, as well as exploring alternative sources of energy.

Geographical issues do influence which energy sources are most commonly used by different countries in the region. For example, Japan's primary energy source is oil, amounting to about 36% of the country’s overall energy fuel mix, followed by coal (25%) and natural gas (21%). There is a local high dependency on fossil fuels, but this is partly due to the suspension of nuclear power plants since the earthquake in 2011. Domestic demand for oil is getting weaker due to a decreasing population and the growth in alternative energy sources. Meantime, the greenhouse gas emission target is 46% compared to the 2013 level, revised from 26% in April 2021.

What are the greatest opportunities for the sector over the next three years?

1. Growing demand for sustainability

Consumer demand for environmental sustainability presents a good opportunity for long-term growth for industry players who invest in diversification.  What’s more fossil fuels are a finite resource, which means diversification into renewables and other income streams is vital for business sustainability.

2. Repositioning role as energy companies

Some large oil and gas companies are set to make a switch to energy companies that supply a diverse range of energy services, particularly electricity.

3. Improved brand image

Oil and gas companies that pivot towards clean energy transition may benefit from an improved brand image and may be more likely to attract public and private capital from investors, especially those seeking to promote and support greater environmental and social responsibility.

European banks in Russia

A banker is a professional who is responsible for managing the financial transactions of clients. Bankers provide financial advice to clients and help them with investments, loans, and other financial services. Bankers should have a good understanding of financial markets, banking regulations, and accounting principles. A few short weeks from now, we will be asked to place our trust in politicians at the ballot box. Sadly, this does not reflect a sudden surge in the popularity of the political parties. It has more to do with the fact that even those with the most sensitive political antennae are struggling to predict the outcome. As a result, people will believe that their vote is more likely to make a difference and, so the logic goes, be more eager to put their cross in the box. 

Bankers, like politicians, too often lose sight of their purpose. The crash exposed some ugly truths about the way some big banks and bankers gained an overweening sense of entitlement and, over many years, systematically and cynically abused their position and customers. The covenant of trust between banks and their customers was broken. Hubris had indeed led to nemesis.

EU banks still operating in Russia are squirming to show they're abandoning their ever-more toxic client — but actions speak louder than words. Some banks pulled out of Russia a long time ago, but a lot of people didn't and now they've been caught with their pants down. Austria's top lender, Raiffeisen Bank International (RBI), made €1.8bn in pre-tax profit in Russia last year. Following earlier briefings with German lenders, the US has threatened Austria's top bank with sanctions for doing business in Russia.

RBI is one of eight leading EU banks still in Russia. The others are Dutch lender ING, Germany's Commerzbank and Deutsche Bank, Hungary's OTP Bank, Italy's Intesa Sanpaolo and UniCredit, and Sweden's SEB. The US Treasury warned Austria's Raiffeisen Bank International (RBI) that it risked "being cut off from the US financial system" if it was helping to fund Russia's military.

OTP Bank, which used to be on Ukraine's Sponsors of War list, posted a 125 percent increase in its Russia profit in 2023, pocketing €242m. It has 82 retail branches in Russia and employs 2,018 people there. The US Treasury didn't reply if Morris might come knocking on OTP Bank's door in Budapest in the future. 

But US Treasury officials have also briefed German financiers on the new sanctions threat. Commerzbank does corporate banking for mostly German companies active in Russia. It doesn't disclose its Russian profit and employs about 130 people there. ING also does corporate banking in Russia, where its Moscow office employs some 270 people and manages €1.3bn of loans. The Dutch bank said it didn't feel at risk because it "complies with all international sanctions laws including UN, EU, and OFAC".

We trust people who are clear and open with us, with nothing to hide. In a similar vein, we trust people we can rely on, who dependably do what they say they will. We trust people who show they trust and respect us, and those prepared to act against their own self- or short-term interests on our behalf. Lastly, we respond to those whose values we share, who live by those values and don’t contradict them. Some are hoping that if they can keep their head down, the whole thing will blow over and they can have good business in Russia afterwards. Some are afraid of violating any Putin decree because they don’t want personal cases opened up against them. Some are just paralyzed by fear. These are not people who ever imagined, despite all the warnings, that they would be in the middle of this murderous war where they could get killed in the crossfire.