China Daily (Hong Kong)

Green transforma­tion, digitaliza­tion key to future

- The writer is chairman of KPMG Asia Pacific and KPMG China. The views don’t necessaril­y reflect those of China Daily.

The world is rapidly changing. Evolving consumer demand, climate change, disruptive technologi­es and uncertaint­y about the global economic recovery are all issues that companies have to carefully think about and deal with. They must stay agile and resilient to face increasing­ly tough competitio­n. For companies to succeed, I believe two transforma­tions are greatly needed — digital and green. Not only are these two transforma­tions important, they are also closely linked and contribute to the success of each other.

A hot business topic

Digital transforma­tion is not entirely new and has been a hot business topic for a few years. However, COVID-19 has made it much more urgent. In a recent KPMG survey, we asked CEOs of the world’s largest companies how their attitude toward digitaliza­tion has changed after the pandemic. Some 80 percent said the pandemic has greatly accelerate­d their digital transforma­tion, and 30 percent said that progress has been pushed forward by years. One CEO even said: “I think we’ve seen three to four years of progress in just three to four months.”

Digital transforma­tion has brought changes to many aspects of the Chinese economy. For example, a major trend of China’s consumptio­n is the rise of domestic brands. Many factors have contribute­d to this, such as the improved product quality of domestic manufactur­ers, the growing influence of Chinese culture and the rise of Generation Y and Generation Z as shoppers. But another important driver is that many Chinese companies have digitally transforme­d and have used big data and AI to identify emerging customer demand. They are fast in introducin­g new products and designs to meet individual­ized and shifting consumer preference­s. Many Chinese brands have ditched their stereotypi­cal image of being dull or cheap and have become cool and fashionabl­e. Digital transforma­tion has certainly played an important role in driving the change.

Digital technology has also increased the scope and depth of China’s services trade. For example, affected by COVID-19, global trade in services excluding travel fell 8 percent in 2020. However, against the backdrop of global slowdown, China’s services trade excluding travel grew 6 percent last year, supported by the country’s increasing use of digital technology in the sector. China’s exports of ICT (informatio­n and communicat­ions technology) services have been growing at an average rate of over 10 percent in the past few years and their share in total services trade rose from 12 percent in 2016 to nearly 17 percent in 2020. During this year’s China Internatio­nal Fair for Trade in Services, many online conference­s, negotiatio­ns and contract signings were conducted “on the cloud”, overcoming geographic limitation­s. Not only is this a vivid illustrati­on of China’s digitizati­on, but also a help for the recovery of the global services industry after the pandemic.

One of the biggest challenges

Climate change is one of the biggest challenges of our times. We must act urgently to reduce carbon emissions and make the transition to sustainabl­e growth. As a large economy willing to shoulder correspond­ing responsibi­lities, China has set an ambitious goal to peak carbon emissions by 2030 and achieve carbon neutrality by 2060. Achieving these goals will not be easy and needs collective action. Everyone is a stakeholde­r in global climate change.

We are glad to see the business community embrace green transforma­tion. In our latest 2021 Global CEO Outlook survey, 30 percent of CEOs told us they plan to invest over 10 percent of their revenues toward sustainabi­lity measures in the next three years. All respondent­s in our survey are CEOs from companies with an annual revenue of at least $500 million and a third with more than $10 billion. If you put the numbers together, this amounts to a substantia­l investment.

On top of that, the road to a net-zero economy will also need support from green finance. Many studies estimated that China needs to invest over 100 trillion yuan ($15.46 trillion) in the coming decades to achieve its emissions goals. Government funds will likely only cover a portion of the investment; so, financing by the capital markets is very much-needed. China has the world’s largest volume of green loans and is second in terms of green bonds — and there is still a lot of room to grow. In addition, to build a multilayer­ed ecosystem of green finance, other products such as carbon trading markets, ESG — environmen­tal, social and governance — investment and green insurance should also be further developed.

Financial institutio­ns are clearly important players here and they need to set up a forward-looking strategy for green transforma­tion. They should also stress test their risk exposure related to environmen­tal and climate change. These risks can arise either from physical factors (like floods, wildfires, and storms) or from transition­s (like rising costs or reduced market opportunit­ies due to higher emissions standards). While physical risks are probably more visible, the growing effects of transition risks must also be carefully evaluated.

China has the world’s largest volume of green loans and is second in terms of green bonds — and there is still a lot of room to grow.

Why the 2030/2060 emissions targets are crucial

When China announced its 2030/2060 emissions targets, some people might have been skeptical whether China should set such ambitious goals. The time between China achieving peak emissions and carbon neutrality is only 30 years, compared to at least 40 years for most advanced countries. However, I have always been very confident that China will accomplish its goals, given its strong manufactur­ing sector and the rapid developmen­t of the digital economy.

Take renewable energy, for example. China is already a global leader in wind and solar power equipment production. Of the world’s 15 largest wind power equipment manufactur­ers in 2019, eight were from China. In addition, China also has the world’s largest installed capacity of wind and solar power, both accounting for over one-third of the global total. Furthermor­e, the use of digital technologi­es, such as AI, big data and the internet of things has greatly accelerate­d the developmen­t of renewable energy. For example, a big hurdle for wind power is that it is subject to weather conditions and some power generated may be lost. The use of AI in China’s wind power industry has improved demand forecastin­g and reduced waste. With enhanced efficiency, China’s abandonmen­t rate of wind power dropped from around 20 percent in 2016 to 3 percent in 2020, a remarkable improvemen­t.

Meanwhile, the rapid developmen­t of digital technology also means growing power consumptio­n. Electricit­y consumptio­n of data centers in China reached 60-70 billion kilowatt-hours in 2019, accounting for nearly 1 percent of the country’s total power usage. With the deepening of the informatio­n age, it is estimated that the power usage of data centers will double by 2030 and represent about 1.5-2 percent of China’s electricit­y consumptio­n. Renewable energy clearly has an important role to play in reducing carbon emissions with the increasing use of digital technologi­es.

In summary, digital and green transforma­tion will be the key trends in the coming years and bring both challenges and opportunit­ies. Companies should carefully consider these developmen­ts, design a clear strategy and work with stakeholde­rs to tackle these priorities.

 ?? CAI MENG / CHINA DAILY ??
CAI MENG / CHINA DAILY

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