Why ESG Matters: Brewed Awakening: The Bitter Future for Beer

Economic

Summary:

In this issue of #WhyESGMatters, we discuss the climate and environmental issues associated with beer production and what brewers and investors can do to alleviate this impact.

A sustainable future for beer

Climate change affects the taste of beer, and firms in the industry need to ensure taste quality is maintained as demand rises. Brewers are also under pressure to be more sustainable in terms of water use, raw materials and packaging emissions. We think investor scrutiny of retailer commitments could help ensure beer is more sustainably enjoyable.

Did you know?

•Beer holds a volume share of 75% in the global alcoholic beverage market.

•An additional 55% primary energy is needed for one litre of beer packaged in glass vs. in aluminum cans.

•90% of Europe’s aromatic hop field area is located in Slovenia, Germany and Czech Republic.

•Europe supplies 50-63% of hops globally.

•The average alpha acid content in hops decreased by 34.8% in Celje (Slovenia) between 1971 and 2018.

•Beer production accounts for 5% of the UK's total water demand.

Did you know?Alpha acids are chemical compounds found in the hop plant, which are the source of bitterness, aroma and flavour in beer. Bitter hops have a higher alpha acid content and are generally used to extract bitterness. Aroma or finishing hops have a lower alpha acid percentage, but they contribute to the overall flavour profile. Changes in alpha acids affect the quality of aroma hops, which has an impact on beer’s flavour.

Source: M Mozny et al., Climate-induced decline in the quality and quantity of European hops calls for immediate adaptation measures, Nature Communication, 10 October 2023; European Commission, Crop productions and plant-based products: hops and Hop report for the harvest year 2022; D Amienyo, A Azapagic, Life cycle environmental impacts and costs of beer production and consumption in the UK, The International Journal of Life Cycle Assessment, 2016, World Spirit Alliance, Spirits: Global Economic Impact study 2024.

Climate change and beer

Beer is one of the most popular drinks globally, accounting for 75% of total beverage alcohol volumes, compared to 10.4% for wine, and 9.9% for spirits. The beer industry sits just below spirits in terms of consumer spend, representing 40% of the alcoholic beverage market value.China, the US, and Brazil lead beer market share, accounting for 21.9%, 10.6%, and 7.8% of sales, respectively as of 2022, but Czechs consume the most beer per capita, over 6x China and 3x US, at 189 litres per year.

Will climate change take the taste and aroma away?

Hops: The growing consumer preference for beer flavours, which depends on high-quality hops, has led to increased focus on the impact of climate change on beer brewing. A recent study by the Czech Academy of Sciences and Cambridge University compared European aroma hops during two periods, 1971–1994 and 1995-2018, and found that rising temperatures associated with climate change delayed the start of the hop-growing season by 13 days from 1970 to 2018. This pushed back the critical ripening period towards the warmer part of the season, lowering the alpha acid content in hops and impacting the aroma and flavour of beer.

Climate change is likely to continue to impact European and other top hop-growing regions globally, such as the US (Idaho, Oregon, and Washington), China (Xinjiang and Gansu) and Australia (Tasmania and Victoria). For example a decline of 20-31% in alpha acid content is anticipated in Europe by 2050, while overall yields are expected to shrink by 4-18%. Given that all G20 countries have seen rising temperatures, we expect hop cultivation in these other markets to face similar challenges.

Beer production process

Malted barley: Climate change is also likely to affect malted barley crops, with big implications for the beer industry, given malt provides sugars responsible for alcohol concentration and proteins required for beer’s foaming properties. Indeed, one study shows that most of today’s barley harvesting areas will get warmer and dryer, resulting in sharp declines in yields, by 3-17%, depending on the environment. Research also suggests that increased temperatures and heat intensity can lead to significant rises in grain protein concentration, which reduces the starch concentration and enzymes necessary for high-quality malt and good beer production.

What does this mean for the sector?

We think investors should consider how hop and barley farmers, as well as firms in the sector, implement adaptation measures to ensure availability of high-quality crops. For example, some hop farmers are relocating their gardens to higher elevations and valley locations with higher water tables. They’re also building irrigation systems or protective shading structures and breeding more drought resistant varieties.

Some commentators suggest that, ultimately, hop growing is likely to move to cooler locations, even such as Finland or Norway, due to cost considerations; this adaptation measure is proving to be effective in wine industry. For barley, similar adaptation measures can be done; researchers are also working on new strains of barley that can be grown in different conditions while maintaining malt brewing quality, such as ‘winter ready’varietals.

The environment and beer

Throughout the lifecycle of beer, sustainability issues exist in the cultivation of raw materials, the production of beer by breweries, and in the packaging and delivering of beers to stores or other places. We discuss three key environmental impacts of beer below.

Water

Water is an essential component in farming beer’s key ingredients, barley and hops. According to the Water Footprint Network, malted barley required to produce one litre of beer needs nearly 300 litres of water. Water is also key in beer’s production processes, from the mashing of grains to washing and cleaning equipment after each batch is completed. The brewing stage itself consumes, on average, between 4-7 litres of water per litre of beer in smaller craft breweries. In the UK alone, the production of beer requires 185bn litres annually, c5% of the UK’s total water demand.

Raw materials

Malted barley encompasses a highly energy-intensive production process, so it’s unsurprising that among the raw materials used to make beer, it makes the biggest contribution to emissions. The use of pesticides and fertilisers not only releases further emissions but also raises biodiversity risks. Globally, 64% of agricultural land is at risk of pesticide pollution, and 34% of high-risk areas are high-biodiversity regions. Hops face similar challenges on top of the energy required to dry them before the boiling process.

Contribution of different materials to beer’s overall emissions from raw materials

Packaging

Emissions from packaging contribute the largest part of the beer industry’s carbon footprint, which is largely driven by the production and transportation of glass bottles. It’s estimated that one litre of beer packaged in glass requires 55% more primary energy, compared to the same volume in aluminium cans. Recycling and reducing the weight of glass packaging is key: a 10% weight reduction is estimated to save 5% of emissions. At the same time, kegs are the most sustainable option as they can have a useful life of more than 30 years and can be reused more than 150 times before being recycled.1

Emissions intensity of beer by packaging and life cycle stage

Addressing sustainability issues

Recent years have seen the rise of carbon-neutral and net-zero breweries. Carbon neutral breweries emphasise the use of carbon offsets, conversely, net-zero breweries take a more proactive approach by addressing emissions across production and supply chains, integrating renewable energy sources and efficient technologies.

Brew without the buzz

With the rise of health-conscious consumers, a rising number of consumers chooses non-alcoholic beverages. According to a 2023 UK survey, 44% of individuals aged 18-24 consider themselves either occasional or regular drinkers of non-alcohol alternatives, and 33% consider themselves non-drinkers. The industry is catching the drift: popular beer brands have started producing low and non-alcohol beers. Non-alcoholic beers require less processing and resources than alcoholic beers and are therefore more sustainable. But the environmental impact of barley and hops, which are still key to their flavour, remains significant.

Flavours fading for craft brewers

We think beer lovers should be aware that these flavoured or hop-forward beers come with a higher environmental impact; they require more aroma hops and are often more water and space intensive than other hop varietals. For example, in the US, it takes c70% more land and water to produce one kilogram of aroma hop pellets than for alpha hop pellets.

Actions towards sustainable beer production

Conclusion

As climate change continues to impact the beer sector, we think investors should also continue to scrutinise companies’ sustainability commitments in the beer industry; future improvements should focus on the raw materials stage, especially malted barley, as well as packaging and water use. An increased focus on adaptation measures is also required to meet beer demand without reducing its quality. We believe that over time, investors input could help make beer more sustainably enjoyable.

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ING

Central Bank

Economic

Bank of England treading more cautiously than the Fed

The Bank of England may have started cutting rates ahead of the Federal Reserve, but you wouldn’t know it listening to recent comments from the UK's central bank. The tone of the August meeting and subsequent speeches have made it abundantly clear that officials don’t want markets running away with the idea that this is going to be a rapid easing cycle.

Markets have taken notice. Not only are investors pricing fewer cuts before the end of this year, but they expect rate cuts to land at a higher level in the UK than the US too. That wasn’t the case before the summer.

Some of that caution can also be explained by services inflation. At 5.2%, it’s still above that of the US and eurozone, much like wage growth. Admittedly, that is a fair way below the Bank’s most recent forecast and July’s number was below consensus too. But just like the upside surprises that had come before it, this is mainly down to volatility in components the BoE isn’t so bothered about. Hotel prices are one such example.

The labour market data, though of dubious quality right now, isn’t screaming a need to ramp up the pace just yet. Vacancies are virtually back to pre-Covid levels, but officials are still wary that wage growth has consistently outpaced previous forecasts.

Services CPI has been thrown around by some volatile components

Bank of England to Keep Rates on Hold, But Faster Cuts are Coming_1

The bar to a September cut seems fairly high

The bar to a cut at September’s meeting therefore seems fairly high, with officials preferring to wait until November before lowering rates again. We don’t get any new forecasts this time either, nor a press conference, and we suspect the policy statement will be absent of any major signals on where rates need to go from here.

Governor Andrew Bailey used his speech at Jackson Hole recently to set out three scenarios for “persistent” inflation, ranging from the benign (services inflation falls of its own accord, regardless of what the BoE does), to one where it turns out price/wage setting behaviour has permanently shifted in a way that forces rates to stay high for longer. That simply reflects the increasingly visibly divided committee on where rates need to go next.

Bailey himself seems to be leaning towards a more dovish interpretation of the inflation outlook. And the Bank’s August forecasts show that, based on rates falling to 4% by the end of 2025, inflation would end up a little below target. But the fact that August’s rate cut was voted through by the narrowest of margins shows that not everyone is convinced. We suspect this month we’ll see a 7-2 vote in favour of keeping rates on hold, with Swati Dhingra and Dave Ramsden – both of whom had voted for cuts before July – sitting in the minority.

Wage growth expectations are cooling down

Bank of England to Keep Rates on Hold, But Faster Cuts are Coming_2

Faster cuts are coming beyond November

But by the time of November’s meeting, and more so by December, we think it will become clearer that rate cuts can pick up speed. Already we can see from the Bank’s Decision Maker Panel survey that both expected and realised wage/price growth have fallen materially so far this year. Assuming that continues and it starts to show through more visibly in the official data, we think back-to-back rate cuts beyond November can take Bank Rate down to 3.25% by the end of next summer.

That would mean the UK doesn’t look that different to the Fed and that markets are being too cautious about the path of rate cuts to come.

Gilt yields lower by the fall in US yields, but could go lower still

With the first Fed cut incoming, UST yields dragged global yields lower, but Gilt yields have so far shown relative resilience. The 2Y Gilt yield is now around 20bp above the 2Y UST yield, which reflects the diverging expectations about central bank cuts. Where the US economic data has been disappointing as of late, UK data was often more upbeat than consensus expectations – and in turn, the pricing of BoE cuts by markets is relatively less dovish.

Going forward, we think rate markets may be overly extrapolating the potential economic outperformance of the UK. The economic slowdown is not just a US story; the rest of Europe and China too are showing clear signs of cooling. We've written previously about the observation that the BoE landing point as priced by markets is now above that of the Fed, which deviates from our long-term view.

Gilt yields are now above USTs, which could be unsustainable

Bank of England to Keep Rates on Hold, But Faster Cuts are Coming_3

Sterling may struggle to push much further ahead

Sterling has had a good 2024, with the BoE's broad, trade-weighted sterling index currently up nearly 3.5% year-to-date. Rate differentials have certainly played a part, as discussed above. We find it hard to attribute/quantify sterling outperformance to Labour's landslide win and warmer relations with Brussels. And indeed it may be that the moderate US slowdown and the seeming stagnation in continental Europe are making the UK and sterling look good. We also think Merger & Acquisition activity could be playing a role here, with over $200bn of announced deals targeting the UK this year.

Yet, if the BoE does start to play catch-up with the Fed – and to a lesser degree, the European Central Bank – we anticipate that sterling may start to struggle. It may be too soon to expect that to happen at the September BoE meeting unless the vote split for unchanged rates is surprisingly close or there is some important change in the statement. But by year-end, we would expect the BoE to have turned more dovish and EUR/GBP and GBP/USD to be trading near the 0.85 and 1.29 levels respectively.

Source: ING

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Alex

Economic

The US Securities and Exchange Commission will vote next week on some of the biggest revisions to stock-market rules in almost two decades, including how trades are priced and processed.

The SEC’s commissioners are scheduled to decide Wednesday whether to finalize measures that would alter the way brokers, market makers and exchange businesses operate. One would change the way stock exchanges negotiate rebates with brokers to attract more volume to their exchanges. Another would tweak minimum pricing increments for stock trades, according to the agency’s agenda.

The SEC unveiled the proposals in a package in December 2022 that’s aimed at making the market more fair and transparent. The effort was largely in response to the meme-stock-trading frenzy.

A disclosure proposal was finalized in March, forcing retail brokerages to release data similar to exchanges, wholesale firms and alternative trading systems.

But the most controversial measure isn’t on Wednesday’s agenda. That proposal would require market-making firms and major stock exchanges to engage in auctions for the right to process equity orders within milliseconds. It drew criticism from the likes of market makers Virtu Financial Inc. and Citadel Securities — wholesalers that take in a significant amount of brokers’ trade orders.

Source: Theedgemarkets

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Alex

Economic

Malaysia’s goal of boosting investments in its growing technology export sector is unlikely to be affected by the results of the US election, according to Investment, Trade and Industry Minister Tengku Datuk Seri Zafrul Abdul Aziz.

“We built a strong ecosystem around the semiconductor industry, and it has been a major part of our exports,” Zafrul said in an interview with Bloomberg Television’s Haidi Stroud-Watts and Shery Ahn on Friday.

Companies based in Malaysia hadn’t seen major disruptions in the sector during the last change in US leadership, “and I don’t foresee that continuing to change when there is a new — if there is a new policy change in the US administration”, he said.

Southeast Asia, including Malaysia, has benefited from geopolitical tensions that spurred more investments in the region, the minister said, adding that the country continues to engage both US and China, he added.

Investors are flocking to Malaysia once again amid a booming artificial intelligence sector and improving political stability. After a rapid turnover of leaders, Prime Minister Datuk Seri Anwar Ibrahim has consolidated his power, enacted reforms and launched economic plans to improve the country’s outlook since coming into power in late 2022.

Tech giants including Microsoft Corp, Nvidia Corp and Amazon.com Inc have pledged to invest billions of dollars in the country’s infrastructure, as Anwar bets on the country’s non-aligned stance and resilient economy to weather it through any geopolitical storm.

The country’s semiconductor sector, in particular, is set to benefit regardless who wins in the coming US election, due to supply chain shifts and trade diversions, according to CIMB Group Holdings Bhd economist Vincent Loo in a research note on Sept 6. Such products make up the lion’s share of Malaysia’s overseas shipments, account for 53% of exports to the US and 36% to China in the first five months of the year, he said.

International funds turned net buyers of Malaysian equities in 2024, while Kuala Lumpur became the busiest location for listings in Southeast Asia. The ringgit has recovered from a 26-year low against the dollar reached in February, emerging as the top gainer across developing markets this year.

Malaysia is encouraging companies to invest as it focuses on five sectors — electrical and electronics, the digital economy, chemical and petrochemical, healthcare and aerospace — Zafrul said. The nation is seeking green and digital investments, he added.

Source: The edge markets

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Thomas

Central Bank

Korea's money supply continued to increase in July from a month earlier amid an extended tightening policy mode, central bank data showed Friday.

The country's M2, a key gauge of the money supply, stood at 4,053.9 trillion won ($2.944 trillion) in July, up 0.4 percent from the previous month, according to the preliminary data from the Bank of Korea (BOK).

The M2 is a measure of the money supply that counts cash, demand deposits and other easily convertible financial instruments.

The central bank has been implementing a restrictive mode as it delivered seven consecutive hikes in borrowing costs from April 2022 to January 2023 to tame soaring inflation in Asia's fourth-largest economy.

Last month, the BOK held its key interest rate steady at 3.5 percent for the 13th straight time amid rising household debt and moderating inflation.

Source: Koreatimes

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Kevin Du

Economic

The US federal budget deficit surged in August with one month to go until the end of the fiscal year as higher interest costs continued to weigh on the overall balance.

The US$1.9 trillion (RM8.2 trillion) gap for the 11 months through August was up 24% from the same period last year, Treasury Department data released on Thursday showed. For the month of August alone, the deficit was US$380 billion, compared with a surplus in August 2023 when adjusting for calendar differences. Much of the monthly variance was due to accounting for a rollback of student-debt forgiveness.

The interest burden on outstanding US debt remains a major drag on the budget. Interest costs in the first 11 months of the fiscal year totalled US$1.05 trillion, up 30% from 2023. Interest costs have never exceeded US$1 trillion a year before now, though Treasury officials noted that as a share of gross domestic product, the ratio was higher in the early 1990s.

The Federal Reserve’s aggressive interest-rate hiking campaign, aimed at quelling inflation, has made debt more expensive to issue for the federal government. The weighted average interest rate on outstanding US interest-bearing government debt was 3.35% at the end of August, up 43 basis points from the same month the year before and the highest since 2009.

Last year’s decision by the Supreme Court to nix the Biden administration’s student-debt forgiveness plan resulted in an accounting adjustment that meant a US$319 billion widening in the year-to-date budget deficit, Treasury officials said on Thursday.

Widening 7%

On the flip side, 2024 tax revenues have been inflated by an influx of payments that were deferred in 2023 due to natural disasters that struck in areas that included most of California. The deferred taxes amount to about US$135 billion for this year, Treasury officials said.

Adjusting for both the student debt and the deferred tax accounting, the deficit would be about 7% wider for the first 11 months of the fiscal year compared with last year, the officials said.

Source: Theedgemarkets

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UBS

Economic

Growing demand

The German residential market has a traditionally strong rental market with more than 50% tenants. Over the past two years, the tenant market has received a further boost due to increased mortgage costs and further decreasing affordability of owner-occupied property despite the fall in prices observed in 2023.

In addition, strong population growth, driven by net migration, has boosted demand. Over the past 10 years, the German population has grown by 3.5 million people to around 84.7 million at the end of 2023.

And low construction activity

However, the increasing demand meets a declining expansion of supply. The government's target of 400,000 new apartments per year has been undercut continuously with the number of newly built residential units ranging somewhere between 220,000 and 275,000 over the past 10 years. Thus, the problem of insufficient construction activity has existed for some time. It has even become significantly worse in the wake of the increase in construction and financing costs over the last two and a half years. This shows in the number of building permits, which have dropped by 42% between June 2022 and June 2024 (see Figure 1).

The combination of rising demand and declining supply expansion results, unsurprisingly, in falling vacancies. Over the period 2012 to 2022, the average German apartment vacancy rate fell from 3.3% to 2.5%.4 The low vacancy rate is particularly pronounced in key cities, which recorded a vacancy rate of only 1% in 2022.

Result in strong rental growth

As we learned in Econ 101, demand exceeding supply results in price increases. Accordingly, the shortage in the rental housing market is reflected in significant rental growth. From 2014 to 2023, median rents in Germany’s eight major population centers rose by around 60%, according to JLL (see Figure 2). Berlin stands out with particularly strong growth with its median rents doubling. Over the same time frame, the population in Berlin also grew by 9%, significantly more than in Germany as a whole (4.3%).

Which is expected to remain substantial

According to the projections of the Federal Statistical Office, the population in Germany is expected to grow by 0.7% by 2040. The number of households is, however, expected to grow more strongly due to the continued trend towards a smaller household size. This will then continue to increase the demand for housing. Furthermore, due to ongoing urbanization, household growth should be stronger in cities and their agglomerations.

In view of the projected increases in demand, while construction activity is expected to remain subdued, one can hardly expect rental growth to calm down significantly. PMA expects average rental growth of around 3.1% p.a. in the 15 largest German cities and 3.4% in the top eight between 2024 and 2028 (see Figure 3). Again, Berlin is expected to outpace the rest of the country with an expected rental growth of 4.4% p.a., followed by Stuttgart at 3.9% p.a. With a forecasted inflation rate of 1.7% p.a. over the same time frame, the segment's inflation protection should, however, be more than a given in the next years across all of the 15 largest cities. German Residential Real Estate_3