green_china_1200x675px

#Green China

In Beijing, there’s something in the air

In Beijing, there’s something in the air

Vast quantities of coal fuel China’s growth and cause a burning issue
Following its ratification of the Paris climate accord, China could play a key part in counteracting global warming. But first, it needs to get a grip on its own overwhelming environmental problems. Florian Sommer, Head of Sustainability Research at Union Investment, travelled to China to gain a first-hand Impression.

China’s current ecological footprint is anything but positive. Over the past 20 years, China’s economy has grown in leaps and bounds, often recording doubledigit growth figures. However, this growth has largely been powered by fossil fuels. In 2015, 71 per cent of China’s power was generated from coal. This figure has been shrinking for several years as a result of a diversification of the country’s energy mix, but it is still at an immensely high level. China emits more greenhouse gases than the US and the European Union put together.

Smog – a constant companion

Florian Sommer could feel the effects as soon as he arrived in Beijing in November 2016 for a sustainability research trip. “The sky over Beijing was cloudless, but the smog was so dense that you could barely see 200 metres ahead. I was so shocked by the terrible air quality that I bought a Smog mask,” he recalls. Particulate Pollution was at a peak of 335 parts per Million (ppm) at the time of his visit. The WHO threshold for harmless exposure is set at an annual average of less than 10 ppm and a daily average of less than 25 ppm. If the highest smog alarm level is occasionally reached in Europe, for example in London or Paris, peak values just about reach 100 ppm. In China, however, Beijing is not an exception: 80 per cent of the country’s 364 cities struggle with severe pollution and 1.2 million deaths per year can be attributed to indirect consequences of smog. Another serious issue for China is water pollution. 25 per cent of the country’s rivers are deemed to be so highly contaminated – especially as a result of the discharge of industrial waste water – that mere skin contact with the water poses a health hazard. 60 per cent of China’s groundwater is not safe for drinking, with serious knock-on effects for the country’s agriculture. Every year, industrial waste water contaminates around 12 million tonnes of grain – an amount that could feed 24 million people.

Scale of environmental issues in China

Regions with the highest smog pollution
Scale of environmental issues in China

A social powder keg

The Chinese government has recognised the environmental and also the social risk. In 2014, protests against pollution accounted for around half of all mass demonstrations in China. The government has now initiated targeted countermeasures. The latest five-year plan contains ambitious goals that are intended to boost the growth of China‘s market for home-grown green technologies such as solar panels, wind turbines, LEDs and – as the most recent addition – electricpowered vehicles.

A closer look at coal mines brings further trouble to light

In addition to burning huge quantities of coal, China also extracts it en masse. Florian Sommer’s trip therefore also took in a visit to a coal mine in Datong in the north China province of Shanxi, where he found that the country’s coal mines only add further to its long list of problems. Engaging in a dialogue with several coal companies in this region (e.g. China Coal Energy, China Shenhua Energy, Huaneng Power International and CLP Holdings Limited) was one of the objectives of Sommer’s trip.

Outcome of the discussions unsatisfactory

“My discussions with company representatives were constructive, but unsatisfactory in a number of respects,” concludes Sommer. On the subjects of transparency and commitment to the CDP standard in particular, most of the companies were unable to meet Union Investment’s demands. Figures for carbon emissions are not published, and there is no intention to do so in the near future. The companies did better in other areas, particularly safety and air pollution, but their efforts are limited to complying with statutory requirements such as implementing the ‘super-low emission standards’ in coal-fired power plants to reduce emissions of nitrogen oxides (NOX), sulphur oxides (SOX) and particulate matter. A reduction of CO2 emissions, which are very harmful to the climate, is not part of this standard.

Union Investment eschews coal companies

The overall unsatisfactory outcome of the discussions in China on the subject of coal has strengthened Union Investment’s resolve to generally stop investing in coal companies. Of all the fossil fuels, coal is the most harmful to the climate and, from a sustainability perspective, we take a very negative stance on additional extraction. In December 2016, Union Investment decided to sell its shares in coal companies. This includes all companies round the world that earn more than 30 per cent of their consolidated revenue from coal extraction.

Sustainability requires Action

Environmental topics have made it to the top of the political agenda in China. The reason for this is not international pressure, but rather discontent among the population. Environmental issues such as air pollution could jeopardise social peace, which is not in the interest of the Chinese government. As a result, specific laws and action plans have been drafted in order to improve the quality of air, water and soil, and the authorities are taking measures to enforce the new rules. For example, drones and satellite pictures are being used to monitor whether farmers are burning biomass, a prohibited practice that incurs serious penalties. But there is still much work to do. I visited a coal mine in the north of China and could see that some things have changed for the better. Compliance with workplace safety standards has improved a lot in recent years, so the number of accidents at work has fallen significantly. But too many people still suffer accidents at work in the coal mines every year. In 2015, the number fell below 1,000 for the first time. With regard to all three ESG dimensions, there is still plenty of action required in many Chinese coal industry companies. For example, in Europe and the US, governance criteria are absolutely essential. In China, these take a back seat, to say the very least. What is lacking is transparency, but also a willingness to participate in initiatives such as the Carbon Disclosure Project. This eliminates a number of companies as potential investment targets for us. In the green tech sector, a key question will be whether or not companies can grow beyond their local reach in order to break into the international market. Most companies will probably remain players ‘just’ in the Chinese market. But in the field of batteries and electric cars, we definitely see potential for new global players from China, similar to that we have seen among solar panel and LED manufacturers.

Florian Sommer
Florian Sommer

Head of Sustainability Research at Union Investment

Related links and downloads