Today, in the face of a complex set of Environmental, Social, and Governance (ESG) indicators and their increasingly diverse practices, ESG is no longer a marginal issue in the corporate world. How to enhance ESG competitiveness through precise policy implementation and high-efficiency management has become a burning question for enterprises. With relatively limited resources at their disposal, what ESG strategies should companies prioritize?
Optimizing cost-effectiveness with ESG ratings in mind
When mapping ESG strategies in the past, companies tended to adopt the indicators and weightings of ESG rating agencies as the basis in order to achieve higher ratings. Such an approach is rational as it aligns with the rating standards investors rely upon, thus enabling enterprises to gain the upper hand in compliance, financing, etc.
However, the burgeoning ESG rating agencies and their diversified rating standards in recent years have brought new challenges to businesses. Incomplete statistics show that there are now around 600 rating bodies worldwide, each selecting different indicators and weightings. Existing research indicates that the correlation among ratings from different agencies is weak (see Table), particularly in terms of Social and Governance themes.
Table Correlation coefficients among ESG ratings of different agencies
Note: This table compares the correlation coefficients of ESG ratings of several mainstream agencies. SA, SP, MO, RE, KL, and MS represent Sustainalytics, S&P Global, Moody’s ESG, Refinitiv, KLD, and MSCI respectively. For example, the first column in the Table indicates that the ESG correlation coefficient between KLD and Sustainalytics is 0.53; the correlation coefficient for the E theme is 0.59, the correlation coefficient for the S theme is 0.31; and the correlation coefficient for the G theme is 0.02. These research results are derived from Berg et al. (2022).
Source: Florian Berg, Julian F Kölbel, Roberto Rigobon. “Aggregate Confusion: The Divergence of ESG Ratings.” Review of Finance, Vol 26, Issue 6 (2022): 1315–1344.
The uncertainty of such a rating approach produces several problems. First, even businesses that have invested heavily in ESG can still receive low ratings from some rating agencies. Second, companies that use ESG as a means of greenwashing or window dressing can instead get high ratings from some agencies. Coupled with the fact that many agencies keep churning out all sorts of league tables and awards for profit, the credibility of ESG ratings is going south. The resulting uncertainty over decisions based on ESG ratings poses formidable challenges for a wide range of decision-makers, including enterprises and investors.
To address this problem, we believe that, on the one hand, it is necessary to regulate the ESG-rating market to promote greater transparency of rating methodologies. On the other hand, enterprises should also further assess the actual costs and benefits of each ESG action and initiative so as to facilitate more rational ESG practices.
Specifically, enterprises should identify ESG actions conducive to not only social benefits but also effective cost control. By accurately identifying and prioritizing the implementation of these ESG measures, companies can ensure better value for money for each and every input. Hence, not only can a good market image and investor confidence be secured, but both social and economic benefits can also be expanded.
Ele.me sets an example with its fine-tuned interface
For implementation, enterprises are encouraged to identify low-cost ESG measures that yield high social benefits through experimentation. At the same time, companies can seek collaboration with academia to conduct precise assessments of the costs and social benefits of specific ESG action plans. We will outline a case of collaboration between Alibaba and academia to illustrate how businesses can derive greater social benefits at lower costs.
Ele.me, Alibaba Group’s online delivery services platform, is the second largest food delivery company in China, with over 700 million users in 2022. During a collaborative project with the platform, we studied how “green nudges” impacted the use of disposable tableware. Specifically, Ele.me has started a “green nudge” experiment in Beijing, Shanghai, and Tianjin. For customers in these three cities, the default option on the ordering interface is set to “no need for tableware” and those who choose this default option are awarded “Ant Forest ‘s Green Energy” points. This is a non-cash customer incentive. Once a customer has collected enough points, Alibaba will, in the name of the customer, plant trees in a desert area or launch other environmental protection actions.
Such a change may involve minimal costs for Ele.me but what social benefits can it bring? Our analysis of users’ orders in 10 major Mainland cities between 2019 and 2020 illustrates that cities where “green nudge” measures have been introduced have seen a 648% surge in no-cutlery orders (see Figure). Nationwide implementation of such measures is expected to save over 21.75 billion sets of single-use cutlery, thus reducing 3.26 million tons of plastic waste and saving 5.44 million trees from being cut down for timber. This study was featured as the cover story of the Science magazine in 2023, gaining wide attention from global media.
Figure Share of no-cutlery orders in Ele.me’s green-nudge experiment: before and after
This case study demonstrates that it is possible for enterprises to honour their social and environmental commitments at a low cost. Just a few hours of work by a programmer is enough to generate tremendous social value. Such an innovative ESG action has not only boosted corporate ESG performance but also brought actual social benefits conducive to achieving national environmental goals.
Collaborative verification of strategy outcomes by enterprises and academia
While the collaborative study between businesses and academia mentioned above is just the tip of the iceberg, this methodology can be applied to the analysis of various problems. For instance, how can a leading company manage supply chains in terms of “E” in ESG? Given budget constraints, should enterprises invest more in reducing carbon emissions or focus more on air pollution management (in terms of “E” in ESG)? How would a wider diversity of staff and management impact the financial and ESG performance of businesses (in terms of “S” in ESG)? What assessment and evaluation mechanisms are most beneficial for enhancing business performance and staff satisfaction (in terms of “G” in ESG)? While it may be challenging for enterprises to find answers to these questions, it is a less daunting task for academia. By collaborating with academia, companies can leverage its theoretical base and data analytical capabilities to more precisely identify ESG opportunities and verify the effectiveness of their strategies. In our opinion, as far as ESG ratings are concerned, enterprises are not just “exam candidates” but should be drivers and practitioners of ESG. Undoubtedly, more collaborations between companies and academia will give a powerful impetus to ESG innovations.
Prof. Guojun He Professor in Economics Director, HKU Jockey Club Enterprise Sustainability Global Research Institute Associate Director, Institute of China Economy
Coming under the global spotlight, the recent US presidential election was so closely contested that nationwide election polls showed Donald Trump and Kamala Harris in a dead heat with each other. At the time of writing this article, neither candidate managed to hold a lead beyond the margin of error. Under the influence of various factors, the accuracy of the public polls is questionable. After all, both the prediction of a victory for Hillary Clinton in the 2016 presidential election and the forecast of a landslide victory for the Republicans in a “red wave” in the 2022 mid-term elections failed to materialize. However, regardless of who wins the election, the international political and economic landscape is bound to undergo some serious changes as a result, especially if the often-considered “maverick” Trump comes to power.
Trump’s foreign economic policy approach was made quite clear in his first term as president with the slogan “Make America Great Again”. Concrete measures include rejection of win-win cooperation, withdrawal from multilateral agreements, targeting trading partners with trade surpluses against the US, and using tariffs as a main weapon. In his comeback this time, he has reiterated multiple times that, if elected, he will impose higher tariffs on imports from all countries. The tariff rates on Chinese imports will be between 60% and 100% or even higher, while those on imports from other countries will be as high as 10% to 20%.
Protectionism from the founding of the US to WWII
Tariffs are Trump’s favourite weapon in international negotiations to threaten other countries into submission. When he initiated the trade war in 2018, he arbitrarily used national security as a pretext to impose massive tariffs on imports from European Union and China. He even bragged, “I am a tariff man”, believing that “trade wars are good, and easy to win”. While delivering a stump speech at a rally in Chicago about two weeks ago, he said, “Tariff is the most beautiful word.” On another occasion, he boasted that tariffs could serve to fight for peace. In the event of a war between two countries, he claimed he could call both sides and warn them that if their conflict continues, America will levy tariffs on them, which would naturally bring an end to the war.
Trump’s obsession with tariffs suggests that he regards the tool as a virtual panacea for all foreign economic affairs. This may be attributed to different reasons or complexes. First, on the face of it, from his perspective as a businessman, getting goods out the door is a good thing. Otherwise, it is a bad thing. Likewise, a trade deficit is a problem for the US, and since tariffs can deal a blow to the sales of the importing country, of course it is a good policy. Second, whether intentional or not, Trump erroneously insists that the increased tariffs are borne by foreign countries rather than by American consumers. Since imposing the tariffs can also serve to lighten the burden of taxes on American companies and individuals, why not proceed with it?
On a deeper level, tariffs, as an indispensable external economic tool, have a long history in America. Trump’s views and policies about tariffs apparently echo historical precedents. During the Second World War, the US took the lead in establishing the global economic order. In the name of free trade, it called on other economies to open up their markets, as if free trade had always been the national policy and philosophy of America. On the contrary, from its founding to the Second World War, the country had been highly protectionist, with tariffs as the essential tool for its policy implementation.
Since the founding of America, the government’s role in economic development has been subject to change and debate. Even so, the fundamental approach has consistently been for the government to drive economic development with a visible hand.
While the American economy was largely agriculture-based and its economic strength paled in comparison to the UK, the nation regarded the latter as its chief competitive rival. Rejecting the free trade advocacy of the UK at the time, the US relied on high tariff rates to protect and develop its own industry and allocated government subsidies to build its infrastructure in a bid to catch up with the UK. This sentiment grew much stronger when the two countries went to war again in 1812.
A boon to social harmony and economic development
The high regard the US places on levies is evident in its high tariffs over the years. Calculating only the imports subject to tariffs, the average tariff rate during the 1820s once reached a staggering 60% and still hovered between 40% and 50% in the second half of the 19th century. Even including imports unaffected by tariffs, the average tariff rate throughout the 19th century was 30%. By the early 20th century, despite having undergone a downward adjustment, the average US tariff rate rose back to approximately 60% after the Smoot-Hawley Tariff Act was passed during the Great Depression of the 1930s. Hefty tariffs led to retaliation from trading partners and such mutually destructive practices are regarded as one of the reasons for the world economy’s predicament during the Great Depression.
Apart from protecting domestic industrial development, steep tariffs were also a main source of income for the US government. While high tariffs do not necessarily lead to increased revenue, they did account for 90% or more of state coffers in various fiscal years during the 19th century.
During the decades between 1870 and 1910, the average US tariff rate was as high as 50%. Such a high share of tariffs in fiscal revenue can primarily be attributed to the absence of income taxes. While a form of income taxes existed during the Civil War, the US business income tax and personal income tax, as we know them today, were introduced by legislation later in 1909 and 1913 respectively. After that, tariffs became much less important fiscally. Nevertheless, for over 100 years before 1913, tariff income afforded the US government significant fiscal space to maintain social harmony and facilitate economic advancements. Although there is considerable controversy surrounding the extent to which tariffs and protectionism have promoted US industrial and economic development, the long-standing and prominent presence of tariffs makes it more readily acceptable to Americans.
That being said, tariffs as a type of tax have a clear problem in that they are inherently regressive rather than progressive, unlike income taxes, which are a common form of taxation nowadays. Everyone, rich or poor, pays the same levy rate when buying the same product. In contrast, the tax as a share of income is lower for the rich than for the poor. This means that the tax rate is relatively lower for higher-income earners, thus contravening the principle of fair taxation in the eyes of many.
All these considerations, though not the principal cause of the American Civil War, do reflect certain conditions in the country. Although the South had a lower income than the North, it paid the same amount of import tariffs. In fact the industrial sector protected by these tariffs was chiefly located in the North.
By the early 20th century, the importance of tariffs diminished in the US. For one thing, with its productivity already surpassing that of the UK, the US became the world’s biggest economy. Also the world leader in industrial development, the US could better afford the impact of reduced trade protection. Out of consideration for a fair tax system, the country shifted to a new system with income taxes as the major source of fiscal revenue. In addition, some regard tariffs as undesirable because they can lead to corruption. Given the myriad of commercial products, there are bound to be loopholes for tariff exemptions. The higher the tariffs, the greater the incentive for seeking tax exemptions and the more money the briber is willing to pay. In light of Trump’s proposal to impose tariffs on imports from all countries, commentators are already concerned about the considerable administrative costs involved in handling tariff exemption applications and the potential rise in corruption cases.
Trump’s views on tariffs may be influenced by Robert Lighthizer, the trade representative he appointed during his last presidency. Perhaps that is why Lighthizer was one of the few cabinet members who managed to serve out his full four-year term without being fired by Trump. Last year, Lighthizer published a new book entitled No Trade Is Free, presenting his narrative on world trade and China trade. Adopting a rather hawkish stance, the book paints a generalized picture of tit-for-tat dynamics between China and the US. It depicts China as the country firing the first shot with its policies, resulting in a trade deficit for the US and causing job losses. The US responds by retaliating, leading to a trade war, etc.―a narrative that has become all too familiar today.
President authorized by Constitution to directly revise tariffs
Just like Trump, Lighthizer is also gravely concerned about the US trade deficit. He believes that America should maintain a balanced trade and, towards this end, the government can depreciate the greenback or force other currencies to appreciate by imposing tariffs on countries unwilling to comply. Such a tactic is reminiscent of the Plaza Accord in the 1980s, under which the US pressured the Japanese yen to appreciate. With Trump’s possible return to the White House, Lighthizer may regain favour and even assume a higher position than trade representative.
Judging by Trump’s personality and behaviour during his first tenure, if re-elected, he would most likely levy tariffs on imports from all nations, dealing a severe blow to global trade. According to the US Constitution, while the power to set tariffs rests with Congress rather than the president, under certain circumstances—such as trade discrimination by a foreign country against US products or unfair trade practices against the US, Congress can authorize the president to retaliate with tariffs.
The long-standing narrative of China’s unfair trade practices, framed by the US to suppress China, is one of the few consensuses between Republicans and Democrats. Trump may be able to bypass the Constitution and directly introduce an across-the-board 60% tariff on Chinese imports. However, his proposal to impose 10% or 20% tariffs on imports from all other countries may face challenges from the Democrats. This will depend on the post-election distribution of seats in the two houses of Congress.
Dr. Y. F. LUK Honorary Associate Professor in Economics
Through the ebb and flow of its economy in the aftermath of the Second World War, Hong Kong has sealed its status as an international financial and trade centre on the world’s economic stage. However, in light of the global economic downturn, fierce regional competition, and worsening geopolitical situation in recent years, coupled with the fact that Hong Kong–as a highly externally-oriented free economy–cannot afford to be complacent simply because it has historically managed to turn crises into opportunities. Times have changed. Now beleaguered by internal problems such as an ageing population as well as external challenges, the city may no longer be as “hardy” as it once was.
To address the challenges in the new era, Hongkongers should not stick to the old rut and must find ways to enhance competitiveness so that long-standing and thorny problems can be resolved.
Formidable problems facing the economy
The first challenge facing the Hong Kong economy over the past few years is the SAR Government’s persistent fiscal deficits. After racking up a record-high surplus of $149 billion for 2017–18, the Government registered a fiscal deficit of $100.2 billion for 2023–24. Initially projected to be downsized to $48.1 billion for the current year 2024–25, the deficit is now estimated to reach $100 billion. Barring the reduction in income from Government-issued bonds, the actual deficit would be even larger. Factors underlying the deficits include fast-increasing government expenditures as well as decline in government revenues. Government expenditure soared significantly from $470.9 billion for 2017–18 to $721.3 billion for 2023–24, of which non-recurrent, social welfare, and healthcare expenditures grew the fastest. The last two items are unlikely to be cut. Meanwhile, government revenue dropped from $619.8 billion to $549.4 billion.
The Figure shows that in 2017–18, 26.6% of the Government’s main sources of revenue came from land premium while 15.4% came from stamp duties. In 2023–24, the share of land premium plummeted to 3.6% and stamp duties dramatically slumped to 8.9%. Despite seeing its share rise from 3.5% to 13.6%, investment income is, after all, not a stable source of revenue. In addition, the Inland Revenue Department annual report 2023–24 reveals that in the year of assessment 2022–23, only around 1.83 million people were required to pay salaries tax, which means that the tax base is still narrow. Given the overall economic downturn, it is unlikely that the Government will be able to sharply reduce the persistently-high fiscal deficits in the short run.
Figure Sources of the Hong Kong SAR Government revenue for 2017–18 and 2023–24
The second challenge facing the Hong Kong economy is the failure to fully leverage the economic benefits from the integrated development of the Guangdong-Hong Kong-Macao Greater Bay Area (GBA). Despite the high degree of integration of consumption activities in the GBA, Hong Kong’s professional services sector has yet to be fully integrated into the development of the GBA. While it has become a trend among Hongkongers to go north for spending, there is much less incentive for Mainlanders to spend in Hong Kong. At the same time, more and more local people prefer to shop on Mainland e-commerce platforms, inevitably impacting the sales of physical stores in Hong Kong. According to the Census and Statistics Department’s data, the Value Index of Retail Sales dropped from 144.8 points in 2018 to merely 121.3 points in 2023 while the monthly average for the first 10 months of 2024 went further down to 111.8 points.
Furthermore, the Volume Index of Retails Sales dropped from 148.9 points in 2018 to 113.9 points in 2023, and even averaged 103.3 points in the first 10 months of 2024. The decreases for both indexes are equally significant. Due to constraints in rent and labour costs, the local retail industry can hardly compete with its Mainland counterpart in terms of cost-effectiveness. It seems that the professional services industry, in which Hong Kong excels, has not been able to capitalize on the market opportunities in the GBA. This can be put down not only to the sluggish macroeconomy in recent years but also to delayed cross-boundary professional qualification certification, administrative red tape, and other factors.
The third challenge facing the Hong Kong economy is the gradual shrinking of the middle class and international talent drain. Hong Kong’s unitary economic structure is one of the primary reasons for the weakening middle class. Since middle-income jobs have always been concentrated in the financial, real estate, and professional services industries, problems will start to surface as soon as these sectors face headwinds. In addition, while there has been a mass migration of middle-class families overseas in the last few years, the highly-educated new immigrants to Hong Kong are less internationalized. The LinkedIn profile data analysed in an essay in the “Hong Kong Economic Policy Green Paper 2024” published by the HKU Business School demonstrates that the proportion of Asians among leavers is 58% and is as high as 79% among joiners, while the number of connections of leavers is 1.7 times that of joiners.
Four reform strategies to chart a new course
Cracking the above problems is no easy task. Let me outline below four policy directions to spark more valuable ideas from all sectors.
Broadening the tax base to tap new revenue sources
Hong Kong can take a leaf from Singapore’s book and consider introducing consumption tax progressively to relieve financial pressure on the Government. The goods and services tax (GST) implemented in Singapore at a rate of 3% in 1994 gradually rose to 9% in 2024. In 2023, the GST contributed to 15.7% of Singapore’s fiscal revenue. Based on private consumption expenditure in Hong Kong, and after deducting existing overlapping tax items, a 2% GST can bring the Hong Kong SAR Government an incremental income of $27 billion, roughly equivalent to 5% of the financial revenue in 2023. Referencing Singapore’s experience, retail sales fell following upward adjustments of GST in 2007 and 2023, but not after GST hikes in 1994, 2003, and 2004. An economist at RHB Bank points out in a recent study that the GST increase in January 2024 did not have a strong impact on Singaporeans’ spending habits. This suggests that a GST rise does not necessarily dampen retail sales. The key lies in a balanced measure that entails controlled tax increases, effective expectations management, and complementary welfare policies to maintain steady consumer sentiment.
As a matter of fact, the introduction of GST in Singapore did arouse controversy. For example, there were views that daily necessities should be exempted. The Singaporean government did not accept this suggestion because of the potential increase in compliance and audit costs. Instead, the authorities chose to alleviate pressure on low-income families by issuing GST vouchers, subsidizing public education and healthcare services, etc. In any case, if the GST rate is set too low, it will not be adequate to alleviate the Government’s financial problems. Conversely, if the rate is set too high, it will breed dissatisfaction among businesses and the general public and could build up excessive inflationary pressure. How to strike a balance in between is a great challenge for policy formulation. Moreover, the Government can consider selling idle assets, including unused premises and surplus equity, to ease financial pressure.
Fostering development via public-private partnerships
The SAR Government can consider strengthening public-private partnerships to promote infrastructure development. Apart from reducing the Government’s initial investment and operating costs, this approach helps to bring in technologies and management experience from leading enterprises. Many international cities have achieved remarkable results through this development mode. Examples include the Chicago Skyway and the Port of Long Beach Middle Harbour Redevelopment Project in the US, the Marina Bay Sands Integrated Resort in Singapore, the Beijing subway Line-4 project, and the Eastern Harbour Crossing in Hong Kong. There are, of course, different forms of public-private partnerships, with “Build, Operate, and Transfer”; “Build, Own, and Operate”; “Transfer, Operate, and Transfer” among the most common modes. Hong Kong can choose the suitable mode depending on its specific needs.
Leveraging unique advantages to integrate into the GBA
Hong Kong needs to optimize its integration with other cities in the GBA to give full play to the benefits of the regional economy. According to the Second Agreement Concerning Amendment to CEPA Agreement on Trade in Services recently signed by the SAR Government with Mainland authorities, the Mainland market will be further opened up to Hong Kong enterprises offering professional services. On this basis, the SAR Government can continue to maintain close liaison and cooperation with other GBA cities to ensure the successful implementation of policies. For instance, assistance can be provided for Hong Kong’s estate surveying companies to complete the filing of records to bid for consultancy services projects in joint ventures within the GBA.
Given the distinct advantage of Hong Kong’s higher education in the GBA, the SAR Government can maintain close cooperation with sister cities and continue to support higher-education institutions in building branch campuses in the GBA and achieving success in their subsequent development. Opening up the “four flows”―human flow, goods flow, capital flow, and information flow―is of vital importance in this regard. Only by doing so will it be possible for the branch campuses in the GBA to obtain invaluable resources from both the Mainland and abroad, and for Hong Kong’s higher education institutions to preserve their competitive edge in internationalization.
To maximize the removal of operating restrictions on Hong Kong’s professional service sectors, such as finance, law, and accounting, in the GBA, the SAR Government needs to continue to lift systemic barriers in the area. For example, in the First Phase Report on Survey of the Current Situation of Hong Kong Legal Practitioners under the Development of the Guangdong-Hong Kong-Macao Greater Bay Area, the Law Society of Hong Kong and the School of Law of Sun Yat-sen University point out that under Mainland laws, the associations formed by Hong Kong law firms with Mainland law firms shall not be in the form of partnership or legal entity. Therefore, cooperation between Hong Kong and Mainland law firms is mainly based on non-partnership associations. This gives rise to various problems, including differences in handling conflicts of interest, discrepancies in business acceptance and processing standards, and a lack of clarity on the legal responsibilities of non-partnership associations.
Proactively competing for talent and enticing foreign investments
Apart from talent and capital from the Mainland, Hong Kong must also focus on attracting talent and funds from abroad to maintain its relative advantages as an international metropolis. In view of the fact that the career development of ethnic Chinese technology experts in Europe and the US is thwarted by current geopolitical tensions, the SAR Government should seize this opportunity to encourage them to advance their careers in Hong Kong. Meanwhile, the authorities can also consider setting specific performance indicators for local universities, e.g. target percentages for international students, to reinforce local higher education institutions’ strengths in internationalization.
Needless to say, Hong Kong must continue to leverage the unique advantage of “one country, two systems” to draw in more direct foreign investments to the Mainland. At the same time, apart from enticing Mainland investments through the Government’s Office for Attracting Strategic Enterprises, it is also necessary to enhance the presence of leading foreign enterprises to maintain Hong Kong’s distinctive advantage as a bridge to the world. The growth of emerging sectors, e.g. artificial intelligence, biotechnology, financial technology, advanced manufacturing, and new energy sources, will determine if Hong Kong can produce more high-quality jobs in future, thereby expanding its middle class and furthering its economic prosperity.
As we mentioned in this column two years ago, priority should be given to creating a liveable environment when it comes to attracting talent. Otherwise, they will not stay after arriving. On the one hand, they need to find high-quality jobs in Hong Kong, connect with a thriving professional community, and enjoy a comfortable and vibrant living environment. On the other hand, high-quality human capital is a key consideration for companies with an eye to establishing their presence in Hong Kong. Hence, efforts to attract companies and capital, compete for talent, or even formulate cultural policies should be complementary rather than isolated from one another. Retaining talent and businesses is a systemic project that requires comprehensive policy coordination across the SAR Government to achieve success.
Nowadays, with the advancement of artificial intelligence (AI) technology in leaps and bounds, AI applications have permeated various aspects of human life—not only from smart assistants to autonomous driving technologies but also from industrial production to medical diagnosis. According to the International Data Corporation, the global AI market value is expected to rise from US$132.4 billion in 2022 to US$512.4 in 2027.
While the convenience of AI innovation is applauded by all sectors of society, does it also raise the community’s awareness that the technological revolution is subtly exerting a tremendous impact on the global environment? As a matter of fact, the problem of carbon emissions arising from the AI development process has reached such a state that it can no longer be ignored.
The invisible killer: the carbon footprint of AI training
To understand the impact of AI on the environment, it is necessary to unveil the true face of AI training models. The training process for modern AI models, particularly large language models, requires massive amounts of data and calculation resources. The latest research by the University of Massachusetts Amherst indicates that carbon emissions from training a large AI model can reach 626,000 pounds, equivalent to the total emissions from five vehicles throughout their entire life cycle, from production to disposal.
Specifically, approximately 552 tonnes of carbon dioxide are emitted during the training process of GPT-3 while the CO2 emitted from training the even larger model, GPT-4, is estimated to exceed 1,000 tonnes. Of particular concern is that these figures continue to go up. Under the sectoral consensus that “large models are the order of the day”, giant technology companies have been vying to develop even larger models, resulting in exponential surge in energy consumption. The AI sector’s carbon emissions are forecast to account for 3.5% of the world’s total carbon emissions by 2030.
Data centres: an energy-guzzling beast in the AI era
The energy consumption of large AI models has now reached an alarming level. Data of the Stanford AI Laboratory shows that one single training session of GPT-3 typically uses 1,287 megawatt-hours of electricity, equivalent to all the power consumption of 3,000 Tesla electric cars each travelling 200,000 miles, emitting a total of 552 tonnes of carbon dioxide.
In daily use, every response generated by ChatGPT requires 2.96 watt-hours of electricity, almost 10 times that (0.3 watt-hour) for a standard Google search. Each Google search powered by AI even utilizes 8.9 watt-hours. The water resource consumption level is also alarming. During its training, GPT-3 consumes close to 700 tonnes of water. For every 20 to 50 questions, 500 millilitres of water are required. For cooling of its data centres alone, Meta used over 2.6 million cubic metres of water in 2022.
Root causes of escalating energy consumption
The colossal energy consumption of large AI models can mainly be attributed to two core factors. First, the rapid iterations of AI technology have significantly stimulated the demand for chips, directly pushing up electricity consumption. The training and inference processes of modern AI models deploy enormous computational resources, which primarily rely on high-performance hardware, including graphics processing units and application-specific integrated circuits. This hardware is highly energy-intensive when running complex computations. As AI models keep expanding in size, their computational capabilities have seen exponential growth, resulting in an ever-increasing demand for high-performance chips and, consequently, mounting energy consumption.
Furthermore, substantial computational power is essential for supporting the AI model training process. The around-the-clock data centres generate excessive heat, necessitating cooling treatments. Energy consumption is an especially severe issue for data centres, which serve as the core infrastructure for AI computation. Servers and storage devices running at high loads release a vast amount of heat. If the heat is not dissipated in time, both the performance and lifespan of the devices will be seriously compromised. Hence, data centres are equipped with super-efficient cooling systems to ensure that the devices operate at optimal temperatures.
In the operating cost structure of a data centre, electricity tariffs account for 60% of the total cost, of which over 40% is spent on cooling systems. At an air-cooling data centre in particular, more than 60% of electricity is used for cooling while less than 40% is used for computation. As a result of this energy utilization imbalance, the energy consumption of data centres around the world is now almost 10 times more than it was a decade ago. Traditional air-cooling systems are less costly but also less efficient, making them incapable of meeting the requirements for high-efficiency cooling. In comparison, except for a large-scale investment at the initial stage, liquid-cooling systems are more efficient, thus sharply reducing energy consumption at data centres.
In addition, the site selection and design of data centres have a significant impact on energy consumption. Many data centres are located in areas with lower electricity costs but in hot climates, placing a heavier burden on the cooling systems. To enhance energy utilization efficiency, priority should be given to locations with cooler temperatures and a stable energy supply. Besides, a modular design should be adopted so that resource allocation can be flexibly adjusted according to needs.
Finally, the training and inference processes of AI models also involve huge amounts of data transmission and storage, which inevitably boost energy consumption. As more and more data is created, data centres need extra storage devices and greater bandwidth to cope, which further expands energy consumption. These facts demonstrate that companies should make use of data compression and transmission optimization technologies to cut down energy consumption by minimizing unnecessary procedures.
Corporate solutions and policy suggestions
In the face of the environmental challenges from AI technology, companies and policy-makers need to take a series of carbon-reduction measures. First, businesses should maximize the use of green energy and energy-saving technologies. Investments should be made in renewable energy sources such as solar energy and wind energy to minimize reliance on traditional fossil fuels. Second, enterprises should optimize AI model training algorithm to streamline computation, cutting down energy consumption at source. Third, they should enhance data centre management and upgrade technologies; use high-efficiency solutions such as liquid-cooling to promote energy utilization efficiency; and minimize waste of idle resources through smart dispatch and load balancing. Fourth, through virtualization technology, companies can integrate computational resources to lower energy consumption.
In terms of policy-making, the government should first set strict energy efficiency standards and promote green development of AI technology; and, through tax concessions and funding, encourage enterprises to adopt energy-saving technologies and renewable energy sources. Second, regulation of data centres should be strengthened and energy efficiency evaluation standards should be established to promote overall energy efficiency. Third, governments and industry should join hands to spread environmental awareness among the public and businesses. The negative impact of AI technology on the environment can be minimized through such mechanisms as carbon trading and carbon offsets. Both education and publicity are indispensable, as only when the relationship between AI advancement and environmental protection is widely known can a social consensus be reached and concerted efforts be made to address the problems.
Glimmers of hope amid crisis
The trend of AI technology may well be overwhelming, but we must ensure that the environment will not be harmed as a result. Through technological innovation, corporate self-regulation, government guidance, and social oversight, environmental impact can be minimized while the convenience of AI can be enjoyed by all. The International Renewable Energy Agency predicts that, with proactive measures, the annual growth in carbon emissions by the AI industry can be controlled within 5% by 2030.
As witnesses and participants of this era, each and every one of us should be concerned about the environmental issues brought about by advancements in AI and take concrete actions to support its green development. Only through this approach can we ensure that the AI technology benefits mankind instead of becoming another burden on the Earth. In our quest for technological breakthroughs, environmental protection should be the bottom line that must be upheld, not just a token gesture. Let all sectors of the community make concerted efforts to drive AI towards a greener and more sustainable future.
Through policy guidance, technological innovation, and public engagement, the path will be paved for Hong Kong to achieve the AI industry’s carbon-neutral goals by 2035 and contribute to the sustainable development of the world.
今天當我們戴上耳機聆聽音樂時，會否意識到超過30%的音樂已經是由AI生成的？從去年一首AI生成歌曲Heart on My Sleeve在Spotify上一舉獲得逾2000萬的點擊，到今年年初，最大唱片公司環球唱片（Universal Music）因為AI音樂泛濫，而把旗下所有音樂從最大手機短視頻平台TikTok上撤銷，再到今年年中環球唱片和TikTok達成協議，後者同意在所有AI音樂視頻上加上「AI音樂」的標籤，AI技術對音樂產業的影響來勢洶洶。
目前AI生成音樂的優勢在於速度和數量。美國初創公司Boomy聲稱，短短幾年AI生成樂曲已多達1800萬首；相比之下，Spotify上縱貫古今的曲目也只有一億首。可是，AI生成的音樂質素是否可以媲美專業音樂人的創作呢？目前AI的「創作」是基於過去的音樂，隨着數量的迅速增長，其質素會回歸平均（Regression to the mean）；而當大眾對新技術的新鮮感退潮後，對AI生成的音樂會否感到厭煩，轉而追捧音樂人的創作？又或者，AI生成音樂和音樂人的原創音樂是否可以「科學分工」，比如AI生成音樂可以作為成本較低的背景音樂，而音樂人的創作則在演唱會舞台上熠熠生輝。
以史為鑑，隨着AI音樂勢不可擋，唱片公司不再視其為洪水猛獸，而是努力尋找新的商業模式，讓音樂版權在AI時代可帶來更大收益。華納音樂集團CEO Robert Kyncl曾表示：「我們不會簡單粗暴地拒絕阻止AI。」在推動音樂版權的法律界定和保護措施的同時，積極利用AI，一方面協助專業音樂人以更低成本、更快速度創作音樂，比如運用AI將播客（Podcasts）內容轉換成不同語言，讓不同國度的聽眾一飽耳福，甚至利用機器學習模型將披頭四主唱John Lennon在1973年留下的一首模糊音樂demo提取出來，不僅在50年後的今天「復活」了這首Now and Then，還讓披頭四的經典歌曲重新火了一把；另一方面，也訓練AI模型來精準定位侵權音樂，在必要時提出法律訴訟。更有甚者，使出「蘿蔔加大棒」的策略，一邊抗議AI公司侵權，一邊推進與AI公司合作，利用其版權優勢搶佔市場先機。
In the 2024 Policy Address recently announced by the Chief Executive, mention is made of the Government’s plan to boost investment in the development of the digital economy, particularly in the digitalization of trade. Concrete measures include expediting the establishment of the Trade Single Window and forming a working group within the Hong Kong Monetary Authority to study the creation of a digital trade ecosystem with a focus on talent and infrastructure.
Soon after its release, the Policy Address sparked wide discussion in the community. Besides repeatedly writing about launching trade digitalization in Hong Kong time and again, we have also advocated for this issue publicly. Not only is digital trade an emerging trend in trade but it also presents a golden opportunity for the city’s growth. Hence, apart from the prerequisite hardware for building the Trade Single Window, it is crucial to concentrate on the transformation of trade models and to be fully prepared for the development of digital services and cross-border e-commerce.
Paperless trade
One key aspect of digital trade is paperless trade, which involves digitalizing and automating all procedures during the trade process. This entails converting paper texts into digital files and changing from manual to electronic vetting processes so as to reduce costs in labour, resources, and time. The Trade Single Window in the Policy Address is tantamount to digital customs administration. This platform streamlines the processing of imports and exports by integrating all procedures, covering customs clearances, declarations, document completion and submission, as well as fee payments into a unified digital interface.
Not a novel concept that emerged in recent years, the Trade Single Window has long been introduced in various countries and has already been widely used. According to the 2023 United Nations Global Survey on Digital and Sustainable Trade Facilitation, over 40 countries worldwide have fully implemented the Trade Single Window System, including developed nations in Europe, the US, and Japan as well as developing countries such as Peru, Thailand, and Brazil. Having launched the first two phases of the Trade Single Window, the Hong Kong SAR Government plans to complete the final phase by 2026.
In addition to customs, international trade encompasses many other aspects ranging from shipping and goods collection to loans and insurance, plenty of which still require paper documents. A 2022 report of the World Trade Organization (WTO) estimates that each cross-border trade transaction involves at least 240 copies of 36 documents. Digitalizing the submission, vetting, and handling of all these documents will not only save paper and protect the environment but also streamline processes, saving much time and manpower. While establishing the Trade Single Window, Hong Kong should hasten the digitalization of other departments associated with trade, including updating regulations on the legal status of electronic documents and enhancing the digital infrastructure for processing them, thereby enabling Hong Kong to handle a larger trade volume.
Electronic commerce
Progress in paperless trade can be regarded as pivotal to digital trade and even the broader digital economy. However, digital trade does not merely change the flow of traditional goods trade to electronic mode. The WTO and the World Bank classify digital trade into digitally ordered trade and digitally deliverable trade. The former is characterized by e-commerce while the latter comprises the bulk of financial, legal, and consultation services. Both types of digital trade have enormous potential in the Hong Kong market. Although still in its infancy, e-commerce in the SAR has ample room for growth. Given that imports and exports of services are one of Hong Kong’s strengths, the digitalization of services trade is sure to usher in greater opportunities for this thriving sector.
E-commerce has become a massive market with a global income exceeding US$4 trillion and is expected to maintain rapid expansion for at least another decade. Hong Kong’s e-commerce market has also undergone dramatic development in recent years. Government statistics show that e-commerce sales were valued at over HK$30 billion in 2023, with clear signs of continued growth momentum ahead. Readers may be aware from their daily experiences that businesses like Hong Kong’s Yoho and HKTV Mall, the Mainland’s Taobao and Jingdong, and Amazon from overseas have become an increasingly important part of our lives, whether through their online platforms or retail sales.
Yet the Hong Kong’s e-commerce market still offers tremendous opportunities for development. At present, this sector accounts for approximately 8% of the SAR’s total retail sales—a percentage that pales in comparison to developed e-commerce markets such as Mainland China, the UK, and South Korea (each standing above 25%) but is also lower compared to neighbouring countries such as Japan, Taiwan, and Singapore. This relatively low market share implies that consumption potential remains largely unexploited. Meanwhile, numerous enterprises and merchants will have the opportunity to get a slice of the e-commerce pie.
The local e-commerce market is now in urgent need of improvement in the following two areas. First, e-merchant facilities, e.g. logistics and internet platforms, are not up to par. Despite the availability of next-day delivery, same-day delivery, and even delivery by the hour in the Mainland, Japan, and South Korea, it can still take up to three days for orders to be delivered from Kowloon to Hong Kong Island. Consumers encountering problems with their purchases still have to undergo complicated procedures, ranging from after-sales service and communications to returns and refunds. These inconveniences only offset the biggest advantage of online platforms―efficient shopping. Ever in pursuit of efficiency, Hongkongers may find it more convenient to shop by going out to local stores or travelling north to Shenzhen.
Second, for businesses looking to develop e-commerce capabilities, the lack of the right skills is another problem. With an insufficient talent pool in e-commerce, hiring is difficult even for big companies, let alone small and medium enterprises (SMEs). A report released by FedEx in 2022 reveals that 60% of Hong Kong’s SMEs find it difficult to hire personnel with e-commerce skills. E-commerce differs from conventional retailing in terms of management, sales, operations, and promotion. Hence, to many merchants, e-commerce professionals are a prerequisite for developing this business. The Hong Kong SAR Government should drum up support for talent training programmes at local higher education institutions and companies so as to quickly expand the talent reserve, thereby giving a boost to the e-commerce sector.
Trade in services
Services trade delivered through digital channels largely comprises professional services, including finance, law, education, healthcare, and information technology. In 2023, the world’s digital services exports amounted to over US$4 trillion, with the US, Mainland China, Japan, and India being the largest exporters.
Hong Kong being the world’s most services-oriented economy, the city’s services sector contributes to over 90% of its GDP, 60% of which is made up of services delivered through digital channels. Last year, the sector’s total production value exceeded HK$2.5 trillion, with the financial sector alone contributing more than HK$550 billion. With competitive advantages such as diverse services, a sound legal and judicial system, and an abundance of professionals, Hong Kong is second to none among the large services exporters mentioned above. Nevertheless, the digital services export figures simply do not do justice to these obvious advantages. In 2023, Hong Kong’s total services exports were valued at HK$700 billion, with digital services exports accounting for merely HK$300 billion (approximately US$45 billion). In comparison, Singapore’s digital services exports in the same year were valued at US$180 billion, nearly five times those of Hong Kong.
In the digital trade era, the challenges facing Hong Kong in leveraging the services sector’s distinct advantages can be attributed to the following reasons. First, digital services exports have been hindered by the incomplete progress in paperless trade. So long as required procedures of customs, banks, and the Government remain to be fully digitalized, digital services exports cannot be conducted on a large scale. In addition, unlike trade in goods, trade in services is also subject to various restrictions governing internet safety, cross-border data flow, and cross-border electronic payments. Since these issues cannot be resolved unilaterally, Hong Kong must negotiate with its trading partners to reach a consensus, making digital trade-related agreements indispensable. In this year’s Policy Address, the Government pledges to insert relevant provisions on digital trade and cross-border data flow into bilateral and multilateral trade agreements.
Last but not least, all sectors rely on platforms and opportunities to break into overseas markets, and the services sector is no exception. While sizeable companies in the services sector can probably explore export prospects on their own, SMEs are bound to stumble upon formidable challenges in following suit. They need the Government to provide them with information and connections, much like those offered for trade shows and exchange activities. The Government should consider taking similar measures to facilitate overseas visits and exchanges between companies in the services sector with foreign businesses. In addition, Government offices can be set up in Hong Kong’s major trading partner countries to help local enterprises to develop overseas markets. These initiatives would benefit the thriving services sector, propelling it to new heights.
