Addressing Scope 3: Bringing Sustainability to Supply Chains

Economic

Summary:

Addressing decarbonisation of a company’s supply chain is a key challenge in the race to net zero, requiring collaboration, incentives and engagement.

Scope 3 emissions – indirect emissions that are not produced by a company but by independent members along its value chain – are increasingly being seen as the key to achieving decarbonisation in Asia and worldwide. During the BNP Paribas Sustainable Future Forum in Hong Kong and Singapore, the Transaction Banking team shared the results of a recent ESG survey commissioned by the Bank, which interviewed over 200 C-suite and senior executives across geographies and industries in Asia Pacific and discussed strategies in addressing Scope 3 emissions.

Scope 3 emissions – an important challenge

Cynthia Tchikoltsoff, Head of Global Trade Solutions APAC at BNP Paribas, noted that Scope 3 emissions typically represent 70% to 90% of corporate greenhouse gas (GHG) emissions. “But in reality, less than 15% of the companies we have surveyed are actively working on Scope 3. It is the most difficult part of GHG emissions to tackle.”

Eric Tran, Head of Sustainability Transaction Banking at BNP Paribas, used the example of the textile industry to demonstrate the situation, where as much as 97% of the emissions for multinational corporations can be in the upstream supply chain, with GHG emissions and waste resulting from outdated manufacturing practices and reliance on non-renewable sources for energy.“The funding gap to modernise the supply chain in the textile and apparel sector has been estimated at USD1 trillion,” he explained. “Investments are fragmented, and manufacturing suppliers may prioritise other areas in light of uncertainty on return on investment.”

Change lies ahead

However, corporates are making the change, and increasing regulation will fuel this trend. Momentum starts in the European Union, where the Corporate Sustainability Reporting Directive (CSRD) requires companies to report on Scope 3 emissions. While this is an EU directive, it has considerable impacts on other countries, including those in Asia: any non-EU company that has generated a net turnover exceeding EUR150 million in the EU in each of the last two consecutive financial years, or has at least one large or listed subsidiary on regulated markets in the EU with more than EUR40 million net turnover, is expected to progressively comply. So too are non-EU SMEs with debt or equity securities listed on a regulated market in the EU.

These reporting obligations, which will gradually kick in from 2024 to 2029, cast a wide net in Asia, with similar regulations being developed in the region. Singapore, Japan and Hong Kong, among other markets, are adopting the International Sustainability Standards Board (ISSB) principles to monitor their own climate-related risk exposure.

Driving ESG progress in a supply chain

How can progress be achieved? Leading corporates offer advice based on their experience. Schneider Electric has been reporting on sustainability for 20 years, with a comprehensive set of initiatives designed to reach net zero in operations by 2030 and the value chain by 2050. In 2021, the company developed a programme focused on Scope 3, involving the top 1,000 of its suppliers, which together generate more than 80% of CO2 emissions in Schneider Electric’s chain. As of Q3 2024, the company has already reached 36% decarbonisation of the targeted Scope 3 suppliers, putting it on track for the target of 50% by end of 2025.

The Group has managed this in part through a nuanced understanding of the realities facing suppliers. “Companies in general have different challenges in different stages,” said Alexandru Popa, Associate Principal, Sustainability Business Division at Schneider Electric. For those just starting on their sustainability journey, challenges may be around compliance and primary data collection. More advanced companies will have identified targets and created roadmaps, and for them the main challenge is “actually onboarding suppliers, getting their buy-in,” stated Popa. “It’s not very easy. Partnership and clear communication are key,” he added.

“The most advanced companies” Popa said, have engaged their suppliers and are ready to act on decarbonisation, “but there is a lot of noise out there and some don’t know where to start. To help those suppliers, it is important to build a robust programme with a very knowledgeable procurement team to assist them.”

A two-pronged approach

At Singapore-based real estate company CapitaLand, Scope 3 divides into 15 underlying categories, but Vinamra Srivastava, CapitaLand’s Chief Sustainability & Sustainable Investments Officer, explained that one should be clear on priorities.

He advises a “two-layer metric” in setting these priorities. “You cannot try to address all 15 categories. You want to see impact, and you also want to consider the feasibility of execution. Sometimes you do need quick wins to get the momentum going.” He also advises moving as quickly as possible from a spend-based analysis to a product carbon analysis.

He has found good results in “a combination of incentives and penalising measures in your procurement guidelines.” This involves insisting on particular standards within those guidelines, and implementing supply chain financing incentives to support suppliers who make the correct effort in their decarbonisation initiatives.

Corporates said several aspects help them in managing their Scope 3 emissions and assisting their supply chains to decarbonise. These include standardised supply chain practices, training suppliers, simplifying data reporting for SMEs, seeking transparency in labour practices at suppliers, and developing onshore facilities that reduce the carbon footprint associated with transporting materials.

In turn, these corporates rely on financial institutions and regulators to facilitate clean energy access to SMEs in emerging markets. “Renewable energy investments in certain markets may require greater regulatory clarity and coordination to reach their full potential,” said Anne-Laure Descours, Chief Sourcing Officer at PUMA Group.

Embrace partnership

Partnership is key in addressing supply chain sustainability. Scope 3 is “a very complex matter that requires a lot of collaboration within companies and across organisations, with financial institutions and suppliers,” outlined Tchikoltsoff.

Descours at PUMA believes the key to Scope 3 sustainability is “collaboration, partnership and transparency. Nobody can do it alone: this is such a large capex investment that it has to be open.” For example, PUMA ensures that it promises long-term business and commitment to its suppliers so that they feel safe to make major investments in sustainability. “If you don’t give them the safety net, they cannot invest.” PUMA’s partnerships around sustainable working capital for suppliers go back many years: one such arrangement with the International Finance Corporation (IFC) dates from 2016.

Descours explained, “Banks can help companies to create facilities that encourage decarbonisation in the supply chain, such as financing at lower rates if certain sustainability-related KPIs are achieved. That incentivises the right kind of behaviour.”

Descours also called upon banks to support local governments “to provide funding to give suppliers access to renewable energy.” Local government support is widely mentioned by corporates. By promoting corporate disclosure by SMEs, for example, these governments can help solve the Scope 3 issue.

One initiative by BNP Paribas seeks to enable transparency in supply chains by scaling disclosure, working with ESG agencies such as CDP to engage clients and integrate incentives tied to progress. “We have more than 100 suppliers who have been disclosing for the first time because of this system,” says Tran. This could lead to lower financing costs, which can help offset some of the costs of disclosure and verification.

Companies have a further incentive to be a leader on Scope 3, with ESG-conscious funds reallocating investment towards companies meeting higher GHG emissions standards, affecting market valuations.

“ESG issues on supply chains are embedded in the whole process of our investment. Supply chain practices contribute up to 16% in the ESG scoring methodology,” said Crystal Geng, ESG Research Asia Lead at BNP Paribas Asset Management. This includes a comprehensive screening process for issues including human rights, labour standards and environmental considerations; engagement efforts to improve the upstream and downstream supply chain in certain industries; and investing more in companies with green procurement policies and supplier standards. Therefore, a climate-resilient and equitable supply chain should be not only sustainable but a driver of market performance.

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UBS

Economic

Exhibit 1: Benchmark and index provider selection

Multi-step iterative process comprising quantitative and qualitative analysis

Benchmark selection

It is estimated that more than three million indexes are calculated daily by the major index providers. With such multitude of indexes available, a methodical and objective approach to benchmark selection is helpful in selecting a suitable benchmark for an index portfolio.

The index equity investable universe could broadly be viewed alongside three dimensions: market, size, and strategy, shown in Exhibit. As a first step in selecting an index, investors would need to decide in which of these three dimensions their benchmark should fit.

Market: investable markets are organised in three geographical groups (developed, emerging, frontier) and each group comprises a number of countries.

Decision points:

Developed or emerging, and if exposure to both is required, a combined all-world index or separate developed and emerging.Regional (e.g., Europe, APAC) or country (e.g., US, UK) indexes.If initial exposure would be required to one market/region, would exposure to other markets be required in the future: this would be a determining factor for index provider selection as different index providers classify some of the markets differently (e.g., Korea is classified as emerging by MSCI and as developed by FTSE Russell).

Size: investable markets are organised in three size segments (large cap, mid cap, small cap), with large and mid-cap typically combined in what is known as ‘standard index’.

Decision points:

Large and mid or small cap exposure, and if exposure to all there is required, a combined all-cap index or separate standard and small cap index.

Strategy: relates to the stock selection and/or stock weighting methodology of an index. Some of the key strategies include: market capitalisation weighted, risk premia factors, sustainable factors, thematic, diversified (e.g., equal weighted or a more complex approach to diversification). Other strategy indexes include: currency hedged, derivative (leverage, inverse, protected), and active strategies embedded in an index.

Exhibit 2: The investable equity index universe

After a decision regarding the relevant components of the investable universe is made, investors would typically consider a number of points related to the index construction, including:

Index delivering on its objective: this might sound obvious, but there are cases of indexes being marketed by the index providers with a particular objective, yet upon analysing the data it is evident that the index does not actually meet such objective. For example, if an index claims to be ‘low volatility’, analysis of the historical volatility of returns should provide an indication of how this compares to the volatility of the underlying market cap weighted index.

Simplicity and transparency: one of the attractions of index investing is that indexes are typically constructed via clear unambiguous rules. If the construction methodology for an index is obscure, this could leave room for interpretation of the rules, and could potentially impact the tracking accuracy of the index portfolio.

Rebalancing frequency and turnover: another attraction of index investing is lower cost compared to active management. Indexes with more frequent rebalancing and/or higher turnover would lead to higher transaction costs associated with the rebalancing trades.

Capacity and liquidity: market cap weighted indexes with large- and mid-cap developed markets equity exposure tend to be highly liquid with high capacity, while some non-market cap weighted indexes and/or indexes with emerging markets and small-cap equity exposure could have lower liquidity and lower capacity. This point is particularly relevant for larger mandates.

Breadth: this point relates to the market and size dimensions of the investable universe outlined above.

Risk models (proprietary vs. industry-wide adopted): more complex indexes involving optimisation/tilts are typically constructed using a risk model. Indexes constructed with an industry-wide adopted risk model (e.g., Barra, Axioma, etc.) allow their construction methodology to be analysed/tested more accurately by investors, while indexes constructed with proprietary risk models are more akin ‘black boxes’.

Back-tests vs. live track record: this point is particularly relevant for some of the more recently launched factor and sustainable indexes where the performance and other metrics presented by the index providers are based on back-tests rather than live data. In some cases, the back-tested data might have been overfitted, and the risk-return profile of the index after launch might differ from the back-tests.

Rules-based strategy or an index: this point relates mainly to non-market cap weighted indexes, including factor and sustainable, when clients might opt either for a third party factor and/or sustainable index, or select market cap weighted index and achieve the factor exposures via screens and/or tilt on the portfolios, i.e. via a rules-based strategy.

Index provider selection

The requirements for market, size, and strategy exposure of the benchmark noted in the above section would typically influence the selection of an index provider. Index providers tend to offer their indexes in two main groups, local and global, as outlined below.

Local indexes are the so-called ‘flagship’ indexes covering a specific geographic segment. Examples include: S&P 500, Dow Jones Industrial Average, Russell 3000, FTSE 100, EUROSTOXX 50, DAX, SPI, etc. These indexes could be viewed as ‘stand-alone’ as they are not constructed with a building block approach in the context of the global investable universe – i.e., these indexes are favoured by investors aiming to gain exposure to a specific geographic segment via the flagship/blue chip local indexes associated with that segment. For example, if an investor would like to gain exposure to the US large- and mid-cap equity market, and are not interested in gaining exposure to other markets/size segments, they would likely consider S&P 500.

Global indexes aim to capture the global investable equity universe via indexes constructed by a building block approach, allowing investors to gain exposure to one, more, or all market and size segments globally without gaps or overlaps. These are suitable for investors who either want to gain exposure to the global investable universe from the onset of launching their index equity portfolio (via a global index) or gradually via combining different market and size segments (building blocks). MSCI Global Investable Market Indexes (GIMI) and FTSE Global Equity Index Series (GEIS) are some of the most popular global index series. In Exhibit we outline the typical building block approach in constructing global indexes.

Exhibit 3: Global indexes constructed via building blocks

In addition to mainstream, long established index providers such as MSCI, FTSE Russell, S&P DJI, and STOXX, there are more niche, specialist index providers such as Scientific Beta and Research Affiliates, focusing on construction of factor indexes, as well as index disruptors such as Solactive, offering high degree of customisation.

In addition to deciding on local vs. global index provider, investors should also consider index governance and commercial aspects as part of their index provider selection.

Index governance

Index provider reputation and longevity: once a benchmark is selected and applied to an index equity portfolio, it is very disruptive to have to change it for another index, especially an index from another index provider. Such change might be triggered by the index provider going out of business or having to rationalise index series due to low investor interest making these index series financially not viable. A due diligence on the index providers, including review of their ownership structure, financial position, and business plan, could provide insights on their potential longevity.

Research, data availability, and support: established index providers employ large teams of researchers conducting analysis on a variety of topics, including market structure, corporate events, risk premia factors, sustainability, etc. Availability of such research and databases is particularly relevant in the construction of custom indexes. Additionally, timely and comprehensive support from the index providers in answering investor questions is important, especially when the questions concern treatment of corporate events in the index, as these could impact the tracking accuracy and the value of the index portfolio. Data and analytics are increasingly important in light of the growth in factor and sustainable indexes, with many index providers buying specialist database, especially in the field of sustainable data. While such databases allow index provider to offer more customisation, such customisation tends to be restricted to the toolkit of the index provider.

Proven governance history: as indexes are rules-based strategies, transparent, unambiguous and robust rules related to their construction methodology, calculation policy, corporate events treatment, and rebalancing, are key for the efficient implementation and management of an index portfolio.

Commercial

Asset-based index licence fee and index data cost: with the continuing strong growth in index investing, index providers are trying to capitalise on this trend by charging asset-based index licence fees for the right to track their indexes (typically these fees are basis point-based fees applied on AUM) as well as custom index data fees for constructing tailor-made indexes (typically these fees are annual fixed monetary amount fees applied per index). These fees are payable by investors in addition to the management fee, and for larger size index portfolios index fees could dominate the overall fee. Fees vary between index providers, and could also be negotiable, hence, it is worth obtaining indicative fee quotes from different index providers.

Competing indexes: related to the above point on index fees, availability of competing similar indexes constructed by different index providers could potentially allow investors to select the most cost effective index.

Client interest: client interest in an index is important from two aspects. First, the more popular an index is, the more resources, support and maintenance an index provider would typically allocate to that index, and it would also be less likely such index to be discontinued. Second, the more assets track an index via index portfolios, the more impact there would likely be on the price formation of the basket of additions to and deletions from the index around index rebalance, and the more micro inefficiencies could potentially be exploited allowing to add incremental value to an index portfolio.

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Risk Warnings and Disclaimers

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IFS

Economic

The government’s recent ‘Get Britain Working’ white paper restated their ambitious target to get 80% of 16-64-year-olds into work. According to official statistics, around 75% of 16-64-year-olds are in work, so hitting this target would mean 5% of 16-64-year-olds moving into work, around 2.2 million people.

For the government, moving 2.2 million people into work would likely reduce current fiscal headaches by increasing tax revenue and reducing welfare spending. The extent of the savings would depend on who is brought into work. OBR estimates suggest that moving 400,000 people who are out of work due to ill health into work could save around £10 billion through higher tax revenue and lower benefit spending. For a sense of scale, raising the basic rate of income tax would raise approximately £6 billion.

Increased employment rates could also benefit many people. There are 3.3 million 16-64-year-olds who are not in work but say they would like to be. Bringing some of this group into work would make significant progress towards the government’s target. There are a further 7.4 million 16-64-year-olds who are neither working nor want to work. It is worth remembering that raising the employment rate is not an unalloyed good: many of this 7.4 million are studying full-time, or are doing unpaid care work, or simply prefer a lower income out of work than the higher income they could achieve in work. And for others work may not even be possible, particularly for those with significant disabilities. However, the government may be able to remove some of the barriers to work for some in this group of 7.4 million potential workers too.

How might the government achieve its aim? The rest of this piece explores what we can learn from history and international examples.

Lessons from recent history

Table 1 shows that employment rates increased substantially in the fifteen years before the pandemic. Employment rates initially fell from 73% in 2004 to 70% in 2009 due to the financial crisis, but then grew strongly to reach 76% in 2019. Almost all the increase in employment rates since 2004 is due to rising employment rates for women. Between 2004 and 2019, the female employment rate increased from 66% to 72%, while the male employment rate only increased slightly from 79% to 80%.

Two trends explain most of the improvement in employment rates. First, many women who previously had been out of work due to caring responsibilities in the home moved into work. Second, fewer people were out of the workforce due to retirement, partially due to the increase in state pension age for women from 60 in 2009 to 65 in 2019 (and then 66 in 2020).

Since 2019, we have seen weaker performance in employment rates. Official statistics suggest that the employment rate has fallen by around 1 percentage point since 2019, primarily due to an increase in people who are not looking for work due to long-term illness – from 5.0% to 6.6% of 16–64-year-olds. Alongside this, there has been a dramatic rise in the health-related benefits caseload from 7.5% of the working age population in 2019 to 10% in 2023. Not all health-related benefit claimants report being out of work due to ill health. Some claimants work (around 15%), and some claimants report not working for other reasons. The causes of this rise in health-related inactivity and claims to health-related benefits remain unclear.

That said, there are serious concerns about the post-pandemic Labour Force Survey, on which employment and economic inactivity statistics are based. Alternative sources suggest the employment rate has returned to its pre-pandemic peak of 76% rather than falling to 75%. Even if this is true, it represents a slowing of employment growth relative to pre-pandemic trends.

The Government’s 80% Employment Rate Target: Lessons from History and Abroad_1

Going forward, the Government cannot count on the strong employment rate growth of the 2010s returning. The fall in unemployment during the 2010s is unlikely to be replicated, as we are already at close to record low levels of unemployment. There were big changes in the state pension ages for women aged 60-64 in the 2010s which will not occur again in the next decade. The trend towards fewer people (mostly women) not working due to caring responsibilities has continued through the pandemic, so this may be one trend which continues to push employment up – though the rate of inactivity due to caring responsibilities has reached very low levels so there is a limit to how much further declines can realistically contribute. Moreover, if the rise in inactivity due to ill health continues that will put downward pressure on the employment rate; in such a scenario it would be difficult for the government to achieve its 80% employment rate target without policy intervention.

One constant over the last twenty years is significant geographic differences in employment rates. Figure 1 shows employment rates across different local authorities in Great Britain. Almost a third of local authorities already have employment rates of 80%, while one in six have employment rates below 70%. These differences are the result of both differences in population characteristics across areas and the jobs on offer across areas. Bringing employment rates in the bottom half of authorities up to the average (median) would increase the employment rate by around 3 percentage points - more than half of what is required to hit the government’s target.

The Government’s 80% Employment Rate Target: Lessons from History and Abroad_2

Lessons from abroad

One way to find a path to an 80% employment rate is to learn from the four countries who have already achieved it. Figure 2 shows that the UK currently sits towards the top of the international employment rate league table. But there remains a sizeable gap between the UK’s employment rate of 75% and the top four countries who have achieved an 80% employment rate: Iceland, Netherlands, New Zealand and Switzerland (referred to from now on as frontier countries). So, how have they achieved this?

The Government’s 80% Employment Rate Target: Lessons from History and Abroad_3

Two age groups - 15-24-year-olds and 55-64-year-olds - can explain most of the difference in employment rates between the UK and the frontier countries. Figure 3 shows employment rates in the UK and the average for the four frontier countries by age and gender. While the UK employment rate for people aged 25-54-year-olds is close to the frontier, only 53% of 15-24-year-olds are employed in the UK relative to 68% in the frontier countries, a 15 percentage point gap. Similarly, 65% of 55-64-year-olds are employed in the UK relative to 77% in the frontier countries. The employment rate gaps for 15-24-year-olds and 55-64-year-olds together explain three quarters of the difference in employment rates between the UK and the frontier countries. This suggests that the most plausible route to an 80% employment rate involves increasing employment rates for older and younger workers. I discuss employment rates for older and younger workers in more detail in the following sections.

The Government’s 80% Employment Rate Target: Lessons from History and Abroad_4

In contrast to the big differences in employment profiles by age, the gender employment gap is similar in the UK and in the frontier countries. In the UK, 71.9% of working age women are employed compared to 78.4% of working age men (a 6.6 percentage points gender employment gap). In the frontier countries, 78.3% of women are employed, compared to 85.0% of men (6.8ppts difference). Of the four frontier countries, only Iceland has a smaller gender employment gap than the UK. Closing the gender employment gap in the UK would be a big step to the 80% employment rate target but would not take the UK all the way. International examples suggest that the UK will likely need to raise employment rates for men and women, if it wants to hit the 80% target.

Why is employment lower for people near retirement ages in the UK relative to the frontier?

Table 2 shows employment rates near retirement age and normal retirement ages (the age at which you can claim a full state pension) in the different countries. In all five countries the normal retirement age is over 64, so differences in normal retirement ages are unlikely to explain the difference in employment rates. It also shows that the employment gap between the UK and the frontier countries is already wide for 55–59-year-olds, more than five years before normal retirement age.

The Government’s 80% Employment Rate Target: Lessons from History and Abroad_5

Instead, ill health and early retirement are likely to be the two key reasons for lower employment at older ages in the UK than in the frontier countries. Two-thirds of 50–64-year-olds who are not working have either taken early retirement or are not working due to ill health. Official statistics suggest that the rise in people not working due to ill health has been particularly stark for 55-64-year-olds. 11.3% of 55–64-year-olds were inactive due to ill health in 2023, up from 8.9% in 2019. If the government wants to increase employment for older people, it will likely need to take measures that reduce the number of people not working due to ill-health or encourage people not to take early retirement.

History suggests higher employment rates for older people (and particularly men) are possible. In 1975, 86% of men aged 50-64 were employed – compared to 75% now, despite significant improvements in life expectancy since 1975 (Banks, Emmerson and Tetlow, 2019).

Why is employment lower for young people in the UK relative to frontier countries?

When considering employment rates for young people, it is useful to separately consider young people in and out of education. Figure 4 shows employment rates for 15–24-year-olds for the UK and the four frontier countries in 2019 and 2023 by whether they are in education. Interestingly, the UK stands out for having low employment rates amongst young people in education. In 2023, 41% of 15-24-year-olds in education in the UK were in employment, compared to 59% on average across the frontier countries and over 70% in the Netherlands. This partly reflects differences in the education systems. In the Netherlands, 69% of students in upper secondary education (typically 15–19-year-olds) are engaged in vocational education, which typically involves 4 days in the place of education and 1 day in the workplace. The government may be able to make changes to the education system to encourage more people to work while studying, although naturally this comes with potential trade-offs with longer-term outcomes.

The Government’s 80% Employment Rate Target: Lessons from History and Abroad_6

The UK also has lower employment rates for young people not in education, but the gaps here are smaller. 74% of 15-24-year-olds who are out of education are in work in the UK, compared to 82% on average across the frontier countries. Nevertheless, this may be a particular concern to the government as young people in education are likely to transition into productive work in future, whereas spending a significant amount of time not in education, employment or training as a young person may result in lasting scarring effects on future life outcomes. A particularly worrying trend in the UK is the increase in 18-24-year olds stating that they are not working due to ill health- from 143,000 in 2019 to 193,000 in 2023, and the related increase in young people claiming health-related benefits. Finding a way to support these young people into work could improve their future life outcomes and make significant fiscal savings.

How could the government achieve its employment target?

There are many ways the government could try to increase employment. This analysis suggests the most plausible route to an 80% employment rate involves improving employment rates for those at the beginning and end of their careers, reducing the number of people not working due to ill health, and reducing geographic inequalities in employment rates.

The government’s ‘Get Britain Working’ white paper sets out a diagnosis of the barriers to higher employment that broadly matches this analysis. They include a range of policies to try tackle these barriers including health interventions aimed at reducing health-related inactivity and a youth guarantee, which sets the aim that all 18–21-year-olds should be in education or employment. However, relative to the ambitious aim to get 2.2 million more people into work, the funding was fairly modest (£240m) and much of it devolved to a selection of ‘trailblazer’ areas. While there is a case for trialling interventions to test whether they are effective, the government will likely need to scale up interventions for them to result in significant progress towards their ambition. And of course, much of this is simply outside direct policy control: macroeconomic shocks, or changing norms around parents or women in work, or changes to the labour market from AI could all make the target much easier – or harder – to meet.

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JPMorgan

Economic

To conclude the year, tariffs have once again become a focal point, with Google searches for the term spiking in November and December. The Federal Reserve is also paying close attention, as Chair Powell mentioned the potential inflationary effects of tariffs as a reason some FOMC members might have raised their inflation forecasts for the coming year and increased the perceived upside risks to prices. The lessons from the "Trade War 1.0" of 2018 and 2019 remain relevant. There is much more tariff talk than tariff action, which does not mean that markets don’t react negatively in the short-term, but does mean that investors need to separate the signal from the noise. In 2025, as tariffs fluctuate in the headlines, market opportunities may arise when tariff implementation and consequences are mispriced.

The "Trade War" of 2018 and 2019 serves as a template for a potential "Trade War 2.0," offering four key lessons:

Tariff talk noise rises but eventually subsides: We may see a repeat of escalating tariff threats, but the likelihood of most being implemented is low. In 2018-2019, many tariffs were threatened on major trading partners, with estimates suggesting the average tariff rate on all U.S. imports could rise from 1.4% to over 11% if all were implemented. Some tariffs were enacted (on washing machines, solar panels, steel, aluminum and Chinese goods), raising the average tariff rate by 2020 but only to 2.8%. Negotiations around immigration and defense spending granted many countries a reprieve. Investors should moderate their fears of significant tariff increases, currently projected to reach 17.7% by the Tax Foundation (assuming 20% universal tariffs and 60% tariffs on all Chinese goods).

Even tariff threats can rock markets – in the short-term: Likely to see a repeat of the “stronger dollar for longer” move. In 2018, the U.S. dollar index appreciated a maximum 10% around tariff announcement windows and almost 5% again in 2019. Given the forward looking nature of markets, global equities (including the U.S.) had a negative year in 2018, with multiples contracting at least 20% that year.

There is an important signal from the Trade War: Despite limited surface changes, there was a significant shift in tariffs on Chinese imports: from 2.7% in 2017 to 9.8% in 2020. Supply chains have been dramatically restructured since the first Trade War, with the percentage of total U.S. imports from China dropping from 21% in 2017 to 14% today, while imports from Mexico and Southeast Asia have surged. Despite the U.S.-China Phase I trade deal of 2020, China has shifted its imports, with U.S. imports decreasing in representation and those of agriculture-producing Emerging Markets surging. Tariffs on Chinese goods are likely to increase further, turbocharging this reorganization of supply chains.

Investment opportunities arise amidst tariff-related volatility: After a challenging 2018, global equities rebounded impressively in 2019, with the U.S. +32%, Europe +26% and emerging markets +19%, led by multiple expansion. As reality proves less harsh than feared, short-term sell-offs tend to be short-lived. This includes international markets that may face tariff threats early next year but could eventually see a reprieve. This includes Europe and Mexico, which were under fire previously but saw no tariff changes and Southeast Asia, a significant beneficiary of "friendshoring." While fears about tariffs boosting U.S. inflation may exert upward pressure on yields, the scale and scope of tariffs are unlikely to alter the U.S. inflation normalization theme.

Some tariff talk is noise, some is important signal

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FOREX.com

Economic

Central Bank

Major central banks may further adjust monetary policy in 2025 as the European Central Bank (ECB) insists that ‘the disinflation process is well on track,’ but the Federal Reserve may change gears at a slower pace as Chairman Jerome Powell and Co. forecast less rate-cuts for next year.

North America

Federal Reserve

The Federal Open Market Committee (FOMC) acknowledged that ‘our policy stance is now significantly less restrictive’ after lowering US interest rates by another 25bp at its last meeting for 2024, with the central bank going onto say that ‘we can therefore be more cautious as we consider further adjustments to our policy rate.’

It seems as though the FOMC will say on track to further unwind its restrictive policy in 2025, but the committee may continue to adjust its forward guidance as the update to the Summary of Economic Projections (SEP) shows that ‘the median participant projects that the appropriate level of the federal funds rate will be 3.9% at the end of next year’ compared to the 3.4% forecast at the September meeting.

In turn, speculation surrounding Fed policy may continue to sway foreign exchange markets as Chairman Powell and Co. insist that ‘monetary policy will adjust in order to best promote our maximum employment and price stability goals,’ and the US Dollar may outperform against its major counterparts in 2025 should the FOMC show a greater willingness to further combat inflation.

Europe

European Central Bank

The European Central Bank (ECB) lowered Euro Area interest rates by 25bp in December, and the Governing Council may continue to shift gears in 2025 as ‘most measures of underlying inflation suggest that inflation will settle at around our two per cent medium-term target on a sustained basis.’

It seems as though the ECB will stick to its rate-cutting cycle as the ‘staff now expect a slower economic recovery than in the September projections,’ and the Governing Council may unwind its restrictive policy at a faster pace as President Christine Lagarde reveals that ‘there were some discussions, with some proposals to consider possibly 50 basis points.’

As a result, the Governing Council may sound increasingly dovish in 2025 as ‘underlying inflation is overall developing in line with a sustained return of inflation to target,’ and it remains to be seen if the ECB will reach its neutral rate ahead of its US counterpart amid the upward revision in the Fed’s interest rate dot-plot.

Keep in mind, EUR/USD continues to hold below pre-US election rates after registering a fresh yearly low (1.0333) in November, and a weekly close below the 1.0370 (38.2% Fibonacci extension) to 1.0410 (50% Fibonacci retracement) region may push the exchange rate towards 1.0200 (61.8% Fibonacci retracement).

Next area of interest comes in around 0.9910 (78.6% Fibonacci retracement) to 0.9950 (50% Fibonacci extension), but EUR/USD may track the flattening slope in the 50-Week SMA (1.0824) if it continues to hold above 1.0200 (61.8% Fibonacci retracement).

Need a weekly close above 1.0610 (38.2% Fibonacci retracement) to bring the 1.0870 (23.6% Fibonacci retracement) to 1.0940 (50% Fibonacci retracement) zone on the radar, with the next region of interest coming in around 1.1070 (23.6% Fibonacci retracement) to 1.1090 (38.2% Fibonacci extension).

Asia/Pacific

Bank of Japan

Meanwhile, the Bank of Japan (BoJ) voted 8 to 1 to keep the benchmark interest rate around 0.25% in December, and the central bank may retain the current policy over the coming months as ‘underlying CPI inflation is expected to increase gradually.’

As a result, the Japanese Yen may continue to service as a funding-currency as the BoJ remains reluctant to pursue a rate-hike cycle, but Governor Kazuo Ueda and Co. may come under pressure to implement higher interest rates as ‘Japan's economy is likely to keep growing at a pace above its potential growth rate.’

With that said, the carry-trade may further unwind in 2025 should the BoJ adopt a hawkish guidance, and the Japanese Yen may face increases volatility over the coming months as major central banks continue to change gears.

USD/JPY trades back above pre-US election rates as it pushes above the November high (156.75), with a breach above 160.40 (1990 high) opening up the 2024 high (161.95).

Next region of interest comes in around the December 1986 high (163.95), but lack of momentum to close above 160.40 (1990 high) on a weekly basis may keep USD/JPY within the 2024 range.

Need a weekly close below 156.50 (78.6% Fibonacci extension) to bring 153.80 (23.6% Fibonacci retracement) on the radar, with the next area of interest coming in around 148.70 (38.2% Fibonacci retracement) to 150.30 (61.8% Fibonacci extension).

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Goldman Sachs

Economic

The pace of mergers and acquisitions around the world gained momentum this year, and there are signs that deal-making will accelerate in 2025, say Stephan Feldgoise and Mark Sorrell, the co-heads of the global mergers and acquisitions business in Goldman Sachs Global Banking & Markets.

There’s been a “gradual crescendo of factors” behind the rise in acquisitions, Feldgoise says in an episode of Goldman Sachs Exchanges. Those factors include: a decline in borrowing costs, a drive from private equity sponsors to return capital to their limited partner (LP) investors, and corporate repositioning in the form of strategic dealmaking. While the uncertainty from a rush of major elections around the world sparked market volatility, deal activity increased about 10% this year and may rise by a similar percentage in 2025, he says.

The conditions for private equity activity are becoming more solid. Historically, those deals have comprised almost 40% of the market for acquisitions, but recently it’s been closer to 20-30%, Feldgoise says. Part of the reason for the decline is that it’s been more challenging to sell and monetize business and return to the market. IPOs have been more constrained, but that may be changing.

Global Deal-making is Expected to Gain Momentum in 2025_1

“For sponsors to feel the confidence to put their assets into the market — the dual track, as we call it, which is equally pursuing an IPO at the same time as M&A — is a very powerful tool,” he says.

Interest rates have declined, but there’s been some “psychological adjustment” in markets because rates had been so low following the financial crisis, Feldgoise says. Private equity sponsors benefited from rock-bottom rates and have had to adjust their models as valuations conform to a different paradigm.

“The world got used to free money for well over a decade,” he says. “If you look at the level of absolute rates now, it's still relatively low if you look over 30 years or 40 years or 50 years.”

Will private equity deals increase in 2025?

At the same time, private equity firms are deploying capital, after a decline, at a rate closer to historical average, Sorrell says.

“There's a good number of firms saying their rate of deployment is on plan or even slightly ahead of plan versus where they were at the beginning of the year,” he says. A substantial amount of that capital is going into deals to take public companies private. Private equity exits, meanwhile, are well below historical levels.

“That is the place, I think, in 2025 where we're watching very closely as valuation gaps close,” Sorrell says. It will be important to monitor the state of the IPO market and rate of exit transactions, which he says will be key to unlocking more deal activity.

“The big difference from this time last year is how quickly the rate of deployment has improved both in traditional private equity and infrastructure,” he says. “Digital infrastructure is a great example where there's been an incredibly active deployment of capital around the world.”

Feldgoise says they spend a lot of time in boardrooms talking about how generative AI will ripple through the economy. It’s a topic that touches on everything from semiconductors to real estate and to the additional power needed for data centers. While it’s not likely to be a major part of the market for acquisitions, the environment may change as AI matures and it becomes clearer how to value these companies.

“It may evolve into more of an M&A market once the companies and the winners become clearer,” he says.

How will the US election impact M&A?

Though election uncertainty caused an increase in market volatility, corporate executives tend to take a very long perspective. “Boards think in decades,” Feldgoise says. While an administration’s policies and the economic cycle have an impact in the shorter run, they tend to have less of an impact in overall, long-term strategic activity.

“Businesses are generational, multi-decade, and people are thinking that way," he adds. "That's why we remain bullish on M&A regardless of geopolitical or regulatory or electoral situations.”

European mergers and acquisitions increased sharply in 2024 after a muted year for deals in 2023 amid slow economic growth, Sorrell says. “Within the space of a few months, we've gone to a very much more normal rate of dealmaking in Europe,” he says. He points out that there has been a wave of transactions among financial companies and an increase in deals taking public companies private.

Australian dealmaking has rebounded in a similar fashion to that of Europe, Sorrell says. “The other bright spots in Asia are India, which remains very, very strategic for many of our clients, both corporate and private equity, and Japan as well,” he says.

Transactions in China have yet to accelerate amid slower economic growth. “With that exception, my own view is that Asia is trending in the direction Europe has been trending,” he says. “It's just running a few months behind in terms of the general trajectory.”

Feldgoise says the US, meanwhile, has benefited from perceived stability, energy supply, and onshoring of manufacturing and investment from the government in certain sectors. He says there’s been an “incredible focus” from companies looking to tap into the growth in the US.

Healthcare M&A has growing momentum

Acquisitions among healthcare companies grew last year, and Feldgoise says that momentum will likely continue in 2025. Technology and consumer firms have also been among the sectors looking for growth through dealmaking. Large energy companies have been acquiring inventory in a major, multi-year wave of consolidation.

“Scale is increasingly more important,” he says. “Scale across geography for diversification of supply chains and manufacturing. Scale across products for being able to understand where growth might be and being able to capture those market opportunities. Scale for financing and balance sheet heft in stormy financing or capital markets.”

The main question now is the rate of dealmaking growth in 2025, Sorrell says. “The next 12 months will be a better environment for, particularly, large deal making activity than the previous 12 months, because of [the] risk appetite, financing environment, regulatory conditions, geopolitical conditions,” he says.

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Glendon

Economic

CRE8 Enterprise Ltd., a prominent player in the foodservice and hospitality sector, is preparing for its initial public offering (IPO) with a goal to raise $10.5 million. Known for its innovative approach to providing high-quality food and beverage services, the company’s IPO represents a strategic move to expand its operations and enhance its market position.

With plans to list on the NASDAQ under the symbol CRE, this IPO has garnered significant attention from investors eager to participate in the growth of a company that blends operational excellence with a commitment to sustainability.

A Unique Player in the Foodservice Industry

Founded in 2018 and based in Hong Kong, CRE8 Enterprise Ltd. specializes in delivering comprehensive foodservice management and operations solutions. The company serves a diverse client base across Asia, focusing on efficient service delivery, culinary innovation, and customer satisfaction.

CRE8 leverages its expertise to offer turnkey solutions, including menu development, supply chain management, and staff training. This adaptability positions the company as a leader in a competitive and ever-evolving industry.

The IPO Details

CRE8 Enterprise Ltd. aims to raise $10.5 million by offering 2.1 million ordinary shares priced at $5 each. This funding will be instrumental in fueling the company’s expansion plans, which include entering new markets and enhancing its technology-driven operations.

The proceeds from the IPO are earmarked for:

Scaling its foodservice operations across Asia and potentially North America.Investing in state-of-the-art equipment and technology to streamline operations.Strengthening its workforce and training programs to ensure service excellence.

The company has selected Network 1 Financial Securities as the bookrunner for the offering, reflecting its intent to partner with established players to ensure a successful market debut.

Market Opportunity and Growth Potential

The foodservice and hospitality industry is projected to experience sustained growth, driven by increased demand for diverse culinary experiences, the rise of delivery services, and technological advancements in food preparation and logistics.

CRE8 Enterprise Ltd. is well-positioned to capitalize on these trends with its proven track record and ability to adapt to market demands. Its focus on offering tailored solutions to clients, coupled with a commitment to sustainability and innovation, gives it a competitive edge.

The company’s strategic decision to list on the NASDAQ also signals its ambition to attract a global investor base and establish itself as a leader in the international foodservice market.

Challenges and Strategies

While the IPO presents exciting opportunities, CRE8 Enterprise Ltd. will face challenges such as:

Adapting to different regulatory environments in new markets.Navigating supply chain disruptions and rising operational costs.Maintaining service quality while scaling rapidly.

To address these, the company plans to leverage its established relationships with suppliers, invest in staff training, and adopt advanced technologies to optimize its operations.

Why Investors Should Watch CRE8

CRE8 Enterprise Ltd. offers a compelling investment opportunity for those seeking exposure to the growing foodservice and hospitality sector. The company’s innovative approach, robust growth strategy, and clear focus on sustainability position it as a promising candidate for long-term success.

With its IPO, CRE8 not only seeks to raise capital but also to build its reputation as a global foodservice leader. Investors who recognize the potential of this sector and the strength of CRE8’s business model may find this offering particularly attractive.

Conclusion

CRE8 Enterprise Ltd.’s upcoming IPO marks a significant milestone for the company and the industry. With a solid foundation, innovative practices, and a clear growth trajectory, CRE8 is well-positioned to make an impact on the global foodservice market. As the company prepares to debut on the NASDAQ, investors and industry stakeholders alike will be watching closely to see how this dynamic player evolves in the coming years.

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