ESG Sector Review: Semiconductors and Hardware

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.

Energy consumption of semiconductor subsectors

Source: Company data, HSBC (2020)

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).

Global Corporate Renewable Power Purchase Agreements (PPAs)

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.

Aggregated estimated total water use of distinct medium to large scale fabs by country

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.

Percentage of consumers trading in old electronic devices in 2020

Source: AlphaWise, Morgan Stanley Research (March 2021) 

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.

Full life cycle annual greenhouse gas emissions of various electronic equipment

Source: Manhart et al 2016, Prakash et al 2016

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. 

Overview of “GHG” (Greenhouse Gas) Protocol scopes and emissions across the value chain 

Source: GHG Protocol, March 2004

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. 

Overview of upstream and downstream impacts of electrical and electronic equipment

Source: European Environment Agency, 2014

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).