Engagement encouraged on CCS usage as Asia-based investors attempt to get to grips with corporates’ decarbonisation strategies.
Asia-Pacific institutional investors have been warned to closely scrutinise corporate net zero strategies that are over-reliant on carbon capture and storage (CCS) technologies.
The Asia Investor Group on Climate Change (AIGCC) commissioned consultancy firm Wood Mackenzie to assess the feasibility of corporate decarbonisation plans that are heavily dependent on implementing CCS-based solutions across China, India, Japan and South Korea. CCS involves the capturing carbon dioxide emissions from power generation or industrial production, transporting it and permanently storing it underground.
The resulting report highlighted current plans for large-scale deployment of CCS by corporates and governments across Asia could still fall short. Currently, there are just 27 operating CCS facilities worldwide with a capture capacity of 40 million tonnes of CO2 per year compared to the projected six gigatonnes of CO2 a year by 2050, the AIGCC report noted.
“CCS can play an important role in the future to help bridge the emissions gap to net zero emissions for some hard-to-abate industries,” said Rebecca Mikula-Wright, CEO of the AIGCC. “But even under favourable conditions this role will likely be limited.”
Wood Mackenzie’s 2021-2040 analysis across the four countries noted there are technical challenges arising around the scalability of CCS. Significant research will be needed to assess the sustainability of storage formations, such as how to reduce the risk of carbon leaks. There is also the “financing dearth” to contend with, as commercial banks are reluctant to finance CCS due to “a lack of revenue stream and high commercial failure rate”.
Further, there is likely to be societal opposition to the probable expansion of industrial sites to accommodate CCS equipment and the siting of CO2 pipelines, the report noted.
“In most instances, companies and governments in Asia will need to acknowledge that a credible decarbonisation pathway will require the phasing out of high-emissions assets and fossil fuels, and that CCS use will only be used to address residual emissions and as a bridging technology for hard-to-abate sectors like steel production,” Mikula-Wright added.
Asset owners should be asking companies relying on the deployment of large-scale CCS to, at a minimum, provide detailed disclosure of the expected contribution of the technology to their decarbonisation goals, the report said, including feasibility studies and contingency planning in the event of reduction shortfalls.
The AIGCC has called on investors to engage with companies to increase the visibility of the role CCS technologies will play in their decarbonisation strategies. Asset owners should also interact with policymakers to better understand the “infrastructure support, requirements, and prerequisites necessary” to ensure CCS can be sufficiently upscaled in line with corporate ambitions, the report noted.
Earlier this year, the UN-convened Net Zero Asset Owner Alliance (NZAOA) published a position paper in September, calling for asset owners to more rapidly invest in carbon dioxide removal and negative emissions solutions, such as CCS. Signatories also warned that investors should not “over-emphasise” the role of these technologies in supporting Paris-aligned global warming pathways compared to absolute reductions in emissions.
Addressing climate risks in Asia
A separate report has found that the region’s asset owners are focusing more on managing climate risks, but are hampered by complexities and inconsistencies in assessing data and risks across different asset classes.
Three-fifths of APAC asset owners are now tracking and measuring the carbon emissions of investee companies. Just under half plan to invest in “climate transition-related sectors”, according to the report, published by research consultancy Cerulli.
“Addressing climate risks is complex – the most sophisticated asset owners rely on managers to learn about technical details of carbon data measurements, types of assets to be assessed, and types of emissions to be included, among others,” said Leena Dagade, Associate Director at Cerulli.
As a result, surveyed asset owners are also setting out their climate-related expectations to asset managers when engagement isn’t effective, with 69% asking asset managers to divest from high-emission sectors. Asset owners are also asking asset managers to disclose portfolio-level exposure to climate risks (46%), portfolio-level exposure to other financially material ESG risks (41%), and security-level exposure to climate risks (41%).
“While some asset owners have committed to net zero emission targets, given the novelty of the topic and technical details of measuring climate risk, various segments of the industry will need to join forces to share knowledge and come up with collective actions in order to reach their climate goals,” said Dagade.