THIS MATERIAL IS A MARKETING COMMUNICATION.
ESG Sector Review: Semiconductors and Hardware
With the rise of digitalisation and global transformation towards artificial intelligence (AI), machine learning, and innovative technologies, semiconductors and hardware companies play a key role in developing the infrastructure and products to enable this technological trend. Moreover, in the face of a green economy transformation, semiconductors and hardware companies are also enablers of decarbonisation and electrification, particularly with electric cars and solar panels.
As semiconductors and hardware companies continue to grow and ride on this momentum, what are some ESG considerations that come at play?
The ESG Context
Semiconductors and hardware companies run on a variety of business models and contribute in different parts of the semiconductors supply chain. Semiconductor manufacturers design and sell hardware devices and semiconductor chips; some outsource fabrication work whilst carry it out in-house. Consequently, a company’s ESG footprint varies based on their respective operational footprints.
Substantial but Clean Energy Consumption
The sector’s greenhouse gas emissions primarily stem from energy consumption. A typical semiconductor fabrication plant, or fab, can consume up to 30-50 megawatts of electrical capacity1. Some larger ‘megafabs’ can consume more electricity than heavy industrial sectors such as auto plants and refineries.
Cognisant of their sizable energy use, semiconductor companies are increasingly turning to renewable and clean energy sources to lower their carbon footprints. For example, SKY Hynix utilises on-site solar power generation and also issued green bonds to upgrade their facilities for better efficiency. Samsung electronics announced in 2018 to use 100% renewable energy for all sites in the U.S. and China by 2020, and managed to achieved this target one year in advance in 2019.
The purchase of renewable power purchase agreements (PPA) has increased significantly among corporates globally, with those in Asia Pacific to have almost tripled between 2019 and 2020. An example within semiconductors is TSMC who purchased 620MW of offshore wind power in 2020 (Reuters, July 2020).
Good Water Management an Indicator of Business Resilience
Semiconductor manufacturing is a very water-intense process; silicon wafer must be rinsed multiple times as additional layers are being added. Large volumes of ultra-pure water (water treated to a high level of purity for all contaminants) are also required for cleaning purposes; it takes around 1,400-1,600 gallons of municipal water to make 1,000 gallons of ultra-pure water2.
Source: Mirae Asset analysis, Frost and Hua (November 2017)
The geographies at which foundries are located are therefore key to determine the level of water stress they may be exposed to in the future. Exposure to chronic or acute climate-related risks, such as droughts or low levels of rainfall, may pose water supply issues that could constrain production capacity and affect revenues. The consideration of water stress in business planning and enterprise risk management is therefore a key factor to maintain business resilience for semiconductor companies.
Despite exposure to one of Taiwan’s worst droughts and subsequent pressure from the media voicing market concerns over impact on chip production, TSMC demonstrated business resilience with the provision of a water contingency plan and continued performance of good water management (TSMC, April 2021). The water contingency plan was activated in the first quarter of 2021 which prepared for water supply limitations and ordered back up water trucks to various production sites in Taiwan. Track records of Taiwan’s droughts in 1993, 2002, 2003 and 2015 also did not have significant impact on TSMC’s chip production (TSMC, April 2021).
Opportunities for “Circular” Product Design
We see innovative product design, for instance the introduction of “circular” concepts3 and more energy-efficient designs, gaining traction in the sector. For example, Apple is using more recycled materials for some of its products; the iPhone 12 is made with 99% recycled tungsten and 98% recycled rare earth elements4. There are now also more closed loop systems to enable consumers to trade in old electronic devices.
ritical metals are key inputs for finished products that serve essential functionalities. Hardware products on average use approximately 50-60% of global tantalum supplies, 26% of tin supplies and 9% of gold supplies5. The use of recycled materials not only reduces the strain on resources, but also lowers exposure to potential supply constraints due to resource scarcity and price volatility of raw materials.
Responsible for a Sizable and Skilled Workforce
In a highly competitive and fast changing market, highly skilled talents, such as electrical engineers and research scientists, are key assets that drive a company’s continuous innovation and value creation. Domestic and foreign recruitment promote a diverse talent pool that could improve the value of company offerings through understanding the needs of a diverse and global customer base. Typical of original equipment manufacturers (OEM), seasonal employment is common because the sector is largely demand-driven.
Labour conditions in fabs are also areas we pay attention to for this sector. Not only is semiconductor manufacturing labour intensive, but workers are also often exposed to chemical substances that are likely harmful to human health6. Product safety regulations, such as the Restriction of Hazardous Substances (RoHS) 2002/95/EC and Restriction of Chemical substances (REACH) Act, govern the use and disposal of substances to protect consumers, workers and the environment alike.
An Inherently Innovative but Competitive Sector
Intellectual property (IP) of technologies developed by integrated circuit (IC) design semiconductor companies defines the differentiation and uniqueness of their products. The term ‘patent thicket’ is often used to describe the IP landscape of semiconductors, whereby there is a group of overlapping patents owned by many different companies. As a result, companies often need to work through and obtain licenses to overlapping patent rights before they are able to commercialise new technology.
The ESG Road Ahead
“Semiconductor market leaders are setting aggressive ESG goals. We expect them to lead the way in collaborating with supply chain partners to move towards a more sustainable future for the industry.” -Edward Chan, Investment Analyst (Mirae Asset)
There is now increasing demand for extended product responsibility whereby companies are asked to take responsibility of the full life cycle of its products. Full life cycle meaning to consider impacts from design, materials sourcing, manufacturing, end-use, to end-of-life disposal. For example, studies suggest that manufacturing accounts for 62% of lifecycle energy consumption whereas end use accounts for 38% on average in laptops7.
Semiconductors operate as part of a complex and broad supply chain, and therefore ESG issues may not always be within the operational control of the semiconductor company and is what is referred to as ‘Scope 3’ in greenhouse gas emissions accounting.
Material sourcing and labour conditions are examples of a semiconductor company’s upstream issues associated with purchased goods and services, and responsibilities of these issues often rest with suppliers and subcontractors. Downstream impacts are largely driven by consumers and their behaviours, primarily from end-use energy consumption and end-of-life disposal as electrical waste.
Looking ahead, semiconductor and hardware companies will likely need to look beyond the company’s operational footprint but also consider the full life cycle of its products. Some leading examples include Taiwan Delta Electronics who announced to investors that they are measuring the ESG impacts its products, and will produce ESG grades for every product they make. In addition, Apple announced a net zero emissions target across its supply chain, applied to all three scopes of GHG emissions, by 2030 (Apple, July 2020).
Staying Ahead with Mirae Asset’s Latest Insights
Disclaimer & Information for Investors
No distribution, solicitation or advice: This document is provided for information and illustrative purposes and is intended for your use only. It is not a solicitation, offer or recommendation to buy or sell any security or other financial instrument. The information contained in this document has been provided as a general market commentary only and does not constitute any form of regulated financial advice, legal, tax or other regulated service.
The views and information discussed or referred in this document are as of the date of publication. Certain of the statements contained in this document are statements of future expectations and other forward-looking statements. Views, opinions and estimates may change without notice and are based on a number of assumptions which may or may not eventuate or prove to be accurate. Actual results, performance or events may differ materially from those in such statements. In addition, the opinions expressed may differ from those of other Mirae Asset Global Investments’ investment professionals.
Investment involves risk: Past performance is not indicative of future performance. It cannot be guaranteed that the performance of the Fund will generate a return and there may be circumstances where no return is generated or the amount invested is lost. It may not be suitable for persons unfamiliar with the underlying securities or who are unwilling or unable to bear the risk of loss and ownership of such investment. Before making any investment decision, investors should read the Prospectus for details and the risk factors. Investors should ensure they fully understand the risks associated with the Fund and should also consider their own investment objective and risk tolerance level. Investors are advised to seek independent professional advice before making any investment.
Sources: Information and opinions presented in this document have been obtained or derived from sources which in the opinion of Mirae Asset Global Investments (“MAGI”) are reliable, but we make no representation as to their accuracy or completeness. We accept no liability for a loss arising from the use of this document.
Products, services and information may not be available in your jurisdiction and may be offered by affiliates, subsidiaries and/or distributors of MAGI as stipulated by local laws and regulations. Please consult with your professional adviser for further information on the availability of products and services within your jurisdiction. This document is issued by Mirae Asset Global Investments (HK) Limited and has not been reviewed by the Securities and Futures Commission.
Information for EU investors pursuant to Regulation (EU) 2019/1156: This document is a marketing communication and is intended for Professional Investors only. A Prospectus is available for the Mirae Asset Global Discovery Fund (the “Company”) a société d'investissement à capital variable (SICAV) domiciled in Luxembourg structured as an umbrella with a number of sub-funds. Key Investor Information Documents (“KIIDs”) are available for each share class of each of the sub-funds of the Company.
The Company’s Prospectus and the KIIDs can be obtained from www.am.miraeasset.eu/fund-literature . The Prospectus is available in English, French, German, and Danish, while the KIIDs are available in one of the official languages of each of the EU Member States into which each sub-fund has been notified for marketing under the Directive 2009/65/EC (the “UCITS Directive”). Please refer to the Prospectus and the KIID before making any final investment decisions.
A summary of investor rights is available in English from www.am.miraeasset.eu/investor-rights-summary.
The sub-funds of the Company are currently notified for marketing into a number of EU Member States under the UCITS Directive. FundRock Management Company can terminate such notifications for any share class and/or sub-fund of the Company at any time using the process contained in Article 93a of the UCITS Directive.
Hong Kong: This document is intended for Hong Kong investors. Before making any investment decision to invest in the Fund, Investors should read the Fund’s Prospectus and the information for Hong Kong investors (of applicable) of the Fund for details and the risk factors. The individual and Mirae Asset Global Investments (Hong Kong) Limited may hold the individual securities mentioned. This document is issued by Mirae Asset Global Investments (HK) Limited and has not been reviewed by the Securities and Futures Commission.
Copyright 2022. All rights reserved. No part of this document may be reproduced in any form, or referred to in any other publication, without express written permission of Mirae Asset Global Investments (Hong Kong) Limited.