A sustainable advantage?

Some researchers believe the fires raging in the Amazon, the world’s largest rainforest, may have their root cause in the fraying trade relations between the US and China. The logic goes that tit-for-tat tariffs have decimated US soybean and beef exports to the Middle Kingdom, and encouraged farmers in Latin America to pick up the slack and ramp up their production for export to China. The problem? This often entails a practice termed slash-and-burn, where forested land is cleared with fire, making it usable for growing crops or grazing cattle. Brazil’s soybean exports to China jumped almost a third last year, with China buying about 80% of the country’s exports of that commodity, according to Reuters. Meanwhile the number of forest blazes across Brazil spiked 83% on the year to 72,843 incidents as of August – even in the absence of droughts.

It’s open to debate whether a direct correlation between those pieces of data can be proven. What is unquestionable, however, is China’s outsized influence on the earth’s ecological wellbeing 0ver the past four decades – as a result of its breakneck economic growth. Apart from industrial waste and pollution, the country’s rising consumer culture has put an additional strain on the world’s resources and led to more carbon emissions than ever before. Yet with President Xi Jinping saying that “green mountains and clear water are equal to mountains of gold and silver,” China has also put a tremendous effort into going green in recent years. Such was the backdrop for Fortune’s first Global Sustainability Forum in Yuxi in Yunnan – a southwestern province with ample natural resources and a rich diversity of plant life.

Top of the agenda at the US business magazine’s two-day conference was China’s attempt to shift more of its energy supplies towards low-carbon sources. That explained why the event opened with a plenary session led by Fu Chengyu, the former chairman of two of China’s oil and gas giants, CNOOC and Sinopec. Fu noted that China has been making headway in renewables technology, and as a result solar and wind power have got a lot cheaper and become competitive versus coal. This progress will help China become energy independent in 10-15 years, he predicted and also ease some of its geopolitical angst (much of Beijing’s foreign policy can be seen through the prism of protecting the country’s oil and gas imports). Fu urged business leaders to commit more investment in the area and to recognise the “urgency” of arresting the current environmental degradation.

His observation was echoed at a separate roundtable discussion the following day. According to Zhong Baoshen, chairman of LONGi Green Energy Technology, a Xi’an-based photovoltaics manufacturer, China could fully sustain itself on clean energy should 50,000 square kilometres of land – representing 3% of the country’s desert area – be set aside for installing solar power capacity. Residents in Qinghai, currently China’s largest solar power generation base, drew their energy solely from renewables for 15 consecutive days in June, which was a record. The northwestern province is looking to supply clean energy to other parts of the country. A power line linking it with Henan (China’s third most populous province) is expected to come into use next year.

China’s breakthrough in renewables, in part fuelled by state subsidies, is bringing forth a new asset class that draws significant investments from abroad, suggested Priscilla Lu, who heads the green investment division at a German asset manager. “Renewable energy is moving in a direction where it has stabilised with predictable returns, where you are able to aggregate the renewable energy assets and then use them as an investment vehicle, for not just corporations interested in offsetting their carbon footprints, but really getting returns on investment on a steady basis,” she observed, comparing the emerging asset class to real estate investment trusts (REITs) which she said only gained traction over time.

She pointed out that, for now, it is companies with “a huge presence in China” – in terms of production base, revenue sources or market opportunities – that are driving the country’s renewable investment. Behind this is the regulatory requirement for listed entities and public bond issuers in mainland China and Hong Kong to disclose their environmental, social and governance (ESG) performance, starting from next year. Lu believes the new rules will eventually be mirrored in other major markets, pressing more companies to curb their carbon footprints.

This initiative is in line with China’s pledge to limit global temperature increases to well below 1.5 degrees Celsius under the Paris Climate Agreement. To meet that target, China will have to cut its energy-linked emissions by 70% or even go carbon-neutral by 2050, said Jiang Kejun, senior researcher at the Energy Research Institute under China’s National Development and Reform Commission, during a roundtable discussion.

What might be holding the country back is the perceived need to stimulate its slowing economy between 2021 and 2025 under the 14th Five-Year Plan, opined Yuan Fuqiang, senior advisor to the New York-based Natural Resources Defense Council. Decisionmakers in the country are debating whether to add an additional 300 gigawatts (GW) of coal-fired power capacity, in addition to the current 1,000 GW so as to ensure there will be enough electricity to support production. In fact, China lifted its construction ban on coal-fired power plants last year – a move that was partly driven by trade disputes with the US and the need to support the economy with infrastructure spending.

“If China cannot get rid of coal consumption, its economic development will stop somewhere – as future proposals would lose public support,” predicted Yuan, noting that the Chinese are more concerned about their health than ever before and that coal pollution has already caused 1.5 million premature deaths.

Although there are expectations that the share of coal in the country’s total energy mix may fall to 50% by 2020, total coal consumption remains enormous. To date, China is still the world’s largest coal consumer with a 50% share. The aggregate demand from Tianjin, Beijing, Hebei and Shandong alone exceeds that of the entire US.

Another area that requires huge doses of political will is remedying water pollution, especially in the Yangtze River. In a brief presentation, Debra Tan, director of Hong Kong-based think tank China Water Risk, highlighted that the Yangtze River Economic Belt is actually the world’s third largest economy and home to five city clusters that comprise 43% of China’s population (more people than the US and Indonesia combined). It also accounts for 45% of the country’s gross domestic product (making it larger than the economies of Japan and Canada). Tan called it “the heart of the global supply chain,” where 53% of the globe’s chemical fibres, 55% of medium and heavy rare earths (a crucial component of smart devices), and other strategic materials are typically sourced.

“China is the biggest factory in the world. We are not just manufacturing for our own people, but also for the entire world. This caused much of the waste dumped in our backyards and contaminated our water, air, soil, and coastal seas,” Ma Jun, founding director of the Institute of Public and Environmental Affairs, told the forum, noting that his Beijing-based non-profit organisation has discovered over one million infringements by factories since its establishment in 2006. Many of these violators are key suppliers to global brands such as Apple, Dell, Levi’s, Nike and Walmart. Through compiling and publishing pollution data for millions of factories, Ma managed to lobby big companies (who care about their brand and reputation) to impose more stringent environmental demands on their suppliers, and bring changes to China’s production practices.

Because the Yangtze River is vital not just to industry – the waterway is critical for growing many necessities (i.e. 65% of the rice produced in China) – conservation of the river has become a government priority. About Rmb2.1 trillion ($296.22 billion) from both the public and private sectors has been earmarked for the cleaning up of the channel, which currently flows past 175 cities, 200 industrial parks, 242 coal-fired power plants, as well as 600 hydropower stations. There are also pilot schemes in Zhejiang province that aim to rein in water pollution through the issue tradable discharge permits to factories. While a dedicated exchange is planned for the carbon market (and estimated to be worth Rmb4 trillion), Alibaba’s Taobao is being used at the moment for such trading. “Trading permits carry with them value, you can take them to the banks and borrow against them so that you can actually finance your equipment upgrades,” said Tan.

But targeting manufacturers and power plants is not enough to move the needle for the Yangtze because over 53% of its water is used for agricultural production (versus 31% for industrial), according to China Water Risk. In other words, the improvement of the Yangtze’s water quality requires the introduction of more sustainable agricultural practices, especially for livestock rearing. That could possibly be achieved by regulating the use of pesticides and fertilisers, or taking a step further to popularise plant-based diets. Impossible Foods, a California-based food tech company now famous for its artificial beefburgers, has a solution.“The animal agricultural system is a major cause of water pollution in China. It’s a huge component to greenhouse gas emissions from China,” said Patrick Brown, Impossible Food’s founder and CEO, in an interview on the stage at the Yunnan forum. “Using the technology that we’ve developed with the water efficiency and the land efficiency that we have today. China could produce all the meat that all its citizens consume using half its own arable land and its own water supply.”

Impossible’s plant-made patty is known for using 75% less water, generating 87% fewer greenhouse gases, requiring 95% less land and 100% fewer cows than a real beef patty. With the aspiration to “completely remove animals from the food system by 2035,” Brown sees China as a major market to crack, considering the country is by far the world’s largest meat consumer and accounted for half of the growth in global demand for meat over the past decade.

However, the timeline for entering the Chinese market could be “unpredictable” due to regulatory uncertainty surrounding its meat-flavour ingredient heme, made via the fermentation of genetically modified yeast. Hence Brown’s cautious response to the Yunnan government’s open courtship at the Fortune event, where a local official used the American’s Q&A to offer a production partnership in the province.

As the Chinese government gets more resolute about greening its economy, more scrutiny is being directed at how manufacturers are treating their waste. “It’s done very seriously, especially in the past five years,” said Jim Fitterling, CEO of Dow, a US chemical company, noting “a definite change” in Dow’s China operations. To comply with environmental rules, the company has invested in an onsite water recycling system, for example. French beverage company Pernod Ricard, which drew 21% of its revenue from China last year, is also aiming to eliminate plastics from its promotional materials by 2025. Sportswear company Nike, likewise, has launched vegan sneakers made from upcycled sawdust, recycled foam and organic cotton. Surging corporate demand for sustainable solutions across the production chain – design, material sourcing, manufacturing, packaging and waste treatment – is giving rise to the so-called circular economy, that emphasises regeneration and waste minimisation. (The concept was first coined by Bill McDonough, author of Cradle to Cradle, who also spoke at the forum.)

A topic that ran throughout the conference – but lacked a dedicated discussion platform – was international cooperation. As Hal Harvey, CEO of Energy Innovation, a San Francisco-based environmental think tank, said: “It’s impossible to keep New York from flooding unless China does its part on climate change. And it’s impossible to keep the Greater Bay Area and Shanghai from flooding unless the US does its part. There’s no way to separate the solution here.”

Acknowledging China’s contribution to the mass-adoption of solar power, offshore wind energy and electric vehicle batteries, Tanaka Nobuo, the former head of the International Energy Agency, asked it to take the lead abrogated by the US in the climate fight.

Tony Fadell, the man who co-developed the iPod and the iPhone, viewed China’s refusal to import most foreign waste in a positive light because it encouraged Southeast Asian countries to do the same and spurred the developed world to confront their own issues in trash recycling.

The conference ended on a note of optimism with the inspiring work of Daan Roosegaarde, a Dutch designer who has lived in China for nearly nine years. His creative eco-output has included kites that generate electricity and a massive air purifier in Beijing. “I don’t believe in utopia, I believe in protopia: designing prototypes for solutions that create a better world and that can be realised,” said Roosegaarde, “Stop whining and worrying. We need to fix it.”

---

© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.