Altius Quarterly Sustainability Report March 2024

Big Oil Falls Short on Climate Disclosures: A new assessment by Climate Action 100+ reveals major gaps in climate disclosures from the world's 10 largest oil and gas companies. These companies scored poorly on metrics related to emissions reductions and future production plans, raising concerns about their commitment to net-zero goals. European companies performed better overall compared to North American peers, highlighting a regional divide in the industry's climate approach and underlines ongoing risks for investors in traditional fossil fuel companies.

Climate Action 100+ (CA100+) found that the 10 largest oil and gas companies met just 19% of the sector-specific metrics under its Net Zero Standard for Oil & Gas tool, such as carbon capture or upstream production. The weak results highlight that current transition plans within the oil and gas sector are insufficient for investors to accurately gauge transition risk.?

The analysis found that substantial differences existed in the levels of disclosure between companies and regions. The best performing company met 52% of applicable metrics, while the worst performing scored on none. Companies mostly failed to score on metrics related to the quantification of emissions reductions and future oil and gas production.

It also found that European companies provided substantially better disclosures, set more aligned targets, and are investing more in climate solutions. North American companies are still not planning to meaningfully diversify into low carbon energy production and only met 3% of the metrics.

EU Takes Aim at Biodiversity Risks: The European Commission has released a framework to help financial institutions assess and manage biodiversity risks. This framework aligns with existing environmental risk management standards and encourages institutions to quantify the financial impacts of these risks. As biodiversity loss becomes a growing concern, sustainable debt investors should look for institutions that are proactively addressing this issue.

The European Commission biodiversity risk assessment framework which sets out various stages of risk assessment, including first identifying potential risks and then carrying out more detailed analysis to work out sources of these risks, impacts and dependencies, the materiality and how financial institutions might respond to the risks.

The framework aligns with the TNFD and NGFS. Financial institutions are urged to carry out modelling to quantify what the financial impacts of risk management could be, before finally integrating mitigation measures into their risk management strategy. The framework is also designed to be modular and can cater to those at the beginning stages of understanding nature-related financial risks and those who are further down the line.

ECB Cracks Down on Banks' Climate Inaction: The European Central Bank (ECB) is preparing to fine 18 banks for failing to meet expectations on climate risk management. These banks haven't properly assessed their exposure to climate-related risks, highlighting potential vulnerabilities in the financial system. Investors in sustainable debt may see this as a positive step towards a more climate-conscious financial sector.

Canada Mandates Climate Reporting for Banks and Insurers:? Canadian financial institutions will be required to report climate-related financial information in line with international standards. This includes disclosing scope 3 emissions, which are those generated throughout a company's value chain. This move by Canada strengthens transparency and accountability for financial institutions, potentially making it easier for investors to identify sustainable debt opportunities.

The Office of the Superintendent of Financial Institutions (OSFI) published updates to its Guideline B-15 on Climate risk management to mandate Canada’s largest banks and insurers to disclose climate-related financial matters under ISSB’s IFRS S2 standard i.e., including the disclosure of scope 3 emissions.

Banks and insurers must conduct climate scenario analysis and report the results to OSFI on a periodic basis. They must also implement a Climate Transition Plan in line with its business plan and strategy, that guides the organisations’ actions to manage increasing physical risks from climate change, and the risks associated with the transition towards a low GHG economy.

The OSFI guidelines also emphasized that banks and insurers must maintain sufficient capital and liquidity buffers for its climate-related risks but did not indicate whether higher capital requirements will be introduced in the future.

The largest banks Bank of Montreal, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, National Bank of Canada, Royal Bank of Canada, and Toronto-Dominion Bank must report these from the fiscal year ending in October. Smaller banks and insurers must report from 2025.

Concerns Raised Over Nature-Based Carbon Credits:? A new study by the Environmental Defence Fund questions the carbon reduction benefits of many nature-based carbon credit projects. The research suggests that some project types lack a strong scientific basis for their claimed emissions reductions. Investors in nature-based solutions should prioritize projects with robust methodologies and proven benefits.

The Environmental Defence Fund have raised “serious questions” over the carbon reduction benefits of most nature-based carbon project types and warned that credits may have “proliferated faster than science”. The research was carried out by 11 different institutions including the Nature Conservancy and Columbia University and studied the carbon mitigation potential of 43 different types of nature-based climate solutions.

The study found that it could only have the “highest scientific confidence” in the mitigation potential of four carbon projects: tropical forest conservation, temperate forest conservation, temperate forest reforestation and tropical forest reforestation. These account for 70% of the nature-based credits on the main carbon registries.

The group was less confident or highly uncertain on the “co-benefits” of other types of projects such as agroforestry, avoided seabed disturbance, cropland microbial amendments and coral reef restoration. Some of the reasons for this was concerns around durability and the inability to accurately measure the baseline of these projects.?

The organisation suggested a precautionary approach to scaling lower confidence projects until the scientific foundations are strengthened, or else it creates a false impression they can balance ongoing fossil emissions. The Environmental Defence Fund will now prioritise research on low confidence projects and its carbon benefits.

Renewable Energy Investment Slumps in Australia:? Australia's renewable energy investment has dropped significantly, jeopardizing the country's ability to meet its 2030 climate targets. This news underscores the need for urgent action to streamline approvals, expand the transmission grid, and attract investment in clean energy projects.

Investment in new large-scale renewable energy capacity fell by nearly 80% last year because of slow planning and environmental approvals, grid bottlenecks, higher costs and tight labour markets. This impedes Australia’s chance to reach its 2030 climate targets.

In 2023 new financial commitments to replace the closure of coal power stations dropped to $1.5bn from $6.5bn in 2022 – the lowest level since 2017. Investment in large-scale batteries and rooftop solar installations was 2.8GW, but this was less than half of the 6-7GW required to meet the national target for 82% renewable energy by 2030. Whilst renewable energy’s share of total energy generation in Australia increased around 10% to 39.4% in 2023, this is still substantially below the Federal Government’s 82% target in 7 years.

At the same time, it is uncertain if the Federal Government’s expanded Capacity Investment Scheme (CIS) will be sufficient by itself to meet the 2030 target. The CIS aims to fill expected reliability gaps as ageing coal power stations exit, with plans to underwrite 23GW of new wind and solar generation over the next 3 years and have these delivered by 2030. A further 9GW of dispatchable capacity described as four hours of storage is also being planned. The CIS however does not address the issue of the build-out of the transmission grid, which is a major hurdle in getting new renewable generation projects connected to the grid.

As the AEMO flagged in its 2024 Integrated System Plan (ISP), urgent investment in expanding and upgrading the transmission grid, grid-scale variable renewable generation, firming capacity from dispatchable storage and rooftop solar capacity is critical in ensuring power supply remains reliable and to meet Australia’s climate targets.

US Securities and Exchange Commission (SEC) Releases Scaled-Back Climate Disclosure Rules:? The SEC has finalized its long-awaited climate disclosure rules for publicly traded companies. However, the final version is less stringent than the initial proposal. Notably, only large companies will be required to disclose certain climate-related information, and scope 3 emissions reporting is not mandated. While this might be seen as a setback for comprehensive climate transparency, it could still provide valuable insights for sustainable debt investors.

The US Securities and Exchange Commission’s (SEC) new rules require registrants to provide climate-related disclosures in their annual reports and registration statements, in response to investors’ demand for comparable and reliable information around the financial effects of climate-related risks.

The final rules scale back in some areas such as:

-?????????? Only applies to large publicly traded businesses with more than $1.2bn in annual revenues, rather than all public companies meaning around 60% of all US public companies are exempt.

-?????????? Large companies only need to disclose direct and indirect (scope 1 and 2) GHG emissions only if it is “material” or of significant importance to their investors.

-?????????? No requirement to provide Scope 3 GHG emissions disclosures

-?????????? Removal of the requirement to evaluate financial statement impacts on a line-item-by-line-item basis and instead requiring disclosure when such aggregate amounts exceed 1% of pretax income or total shareholders’ equity.

-?????????? Lengthening the adoption timeline

And disappointingly, the Climate expertise of board members need not be disclosed.?

Specific disclosures will be required regarding a registrant’s activities, including the use, if any, of transition plans, scenario analysis, or internal carbon prices as well as oversight by the board of directors of climate-related risks and any role by management in assessing and managing the registrant’s material climate-related risks. This includes the costs, and losses incurred because of severe weather events and other natural conditions, such as hurricanes, tornadoes, flooding, drought, wildfires, extreme temperatures, and sea level rise, subject to applicable 1% and de minimis disclosure threshold. Disclosure of expenditures related to carbon offsets and renewable energy credits or certificates will also be required if used as a material component of a registrant’s plans to achieve its disclosed climate-related targets or goals.

January 2024 was the warmest January in the ERA5 data record, going back to 1940. The global surface air temperature was 13.14°C, which is 0.70°C above the 1991-2020 average for January and 0.12°C above the previous warmest January, in 2020. Considering the average of the last twelve months, the global mean temperature was the highest on record at 0.64°C above the 1991-2020 average and 1.52°C above the 1850-1900 pre-industrial average.

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Samantha Burgess, Deputy Director of the Copernicus Climate Change Service (C3S) noted: "2024 starts with another record-breaking month – not only is it the warmest January on record but we have also just experienced a 12-month period [with a mean global average temperature] more than 1.5°C above the pre-industrial reference period. Rapid reductions in greenhouse gas emissions are the only way to stop global temperatures increasing.”

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The average global sea surface temperature (SST) for January outside the polar regions reached 20.97°C, the highest recorded for January and the second highest monthly temperature in the ERA5 dataset for any month, only 0.01°C below the highest, reached in August 2023.

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The International Capital Market Association (ICMA) is exploring the possibility of developing market guidance for ‘avoided emissions’ (estimated savings from low-carbon projects or products), to include in principles for sustainability bonds and loans. These are separate to an entity’s scope 1, 2 and 3 GHG emissions, and not usually counted towards decarbonization targets.

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A key impediment to growing the use of ‘avoided emissions’ as an impact measure is the lack of a standardized accounting method for calculating ‘avoided emissions’, to ensure there is no overstatement of climate impact claims. The development of a guidance together with standardized calculations will help improve the credibility around this concept and orientate financial flows to activities to enable the decarbonization of the economy.?

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Despite global macroeconomic uncertainty in some key regions, S&P anticipate that GSSSB (Green, social, sustainability, and sustainability-linked bonds) issuance will increase modestly in 2024, building on the near US 1 trillion seen in 2023. Green bonds will continue their dominance, buoyed by increased demand for environmental projects across all geographies, while transition and blue bonds may also gain traction in the GSSSB market in 2024. S&P also see the spread of issuers growing as middle- and low-income countries strive to increase their share of GSSSB issuance given their large unmet funding needs.

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The Australian Federal Government’s new draft legislation on mandatory climate-related financial disclosures come as a welcome development in the corporate reporting space. The proposed law, which will require companies to report on material climate-related risks and opportunities, metrics, and targets around scope 1, 2 and 3 emissions, as part of their general financial reporting, is an important step in addressing the need for high quality, transparent and comparable climate-related data. This will allow companies to better consider the financial implications of climate risks and opportunities, facilitate investment decisions and actionable strategies that can drive deeper decarbonization.

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The draft legislation applies to all public and proprietary companies and start dates will be staggered. Reporting for those with revenues over $500 million or assets over $1billion, with over 500 employees and asset owners with more than $5 billion in assets is expected to commence from 1 July 2024. Medium-sized companies (>$200 million revenue, with over 250 employees) and asset owners with >$500 million assets will be required to commence reporting from July 2026. Smaller companies (revenues >$50 million, over 100 employees or assets over $25 million) will commence reporting in July 2027.

A report by the ECB and the European Systemic Risk Board (ESRB), has found that EU banks’ lending to high-emitting sectors is around 75% higher than its equivalent share in economic activity. At the same time, around 60-80% of all mortgage lending in the euro area is to high-emitting households.

The report also found that 75% of EU financial institutions loans and more than 30% of insurer investments in corporate bonds and equity are in sectors heavily reliant on at least one ecosystem service. These include services relating to surface & ground water, mass stabilisation & erosion control, and flood & storm protection.

Furthermore, climate risk is not distributed evenly but concentrated in a subset of banks, which could lead to a 60% increase in lending portfolio losses in the event of a disorderly transition.

Climate shocks can lead to abrupt financial market repricing and the insurance protection gap across euro area countries is noteworthy, with only 25% of average climate losses currently insured (and up to 95% of climate losses remaining uninsured in some countries). This is likely to worsen if climate shocks continue and can leave financial institutions and governments heavily exposed to climate losses.

The report proposes an additional capital requirement to strengthen the macroprudential framework, increase loss absorption capacity of banks and influence the appeal of loans more exposed to climate risk. Specifically, it proposes to apply multiple rates to different risk buckets or different sectoral segmentations. It estimates that a one percentage increase in capital requirements could reduce credit growth by up to six percentage points.

The Global Reporting Initiative (GRI) has launched “GRI 101: Biodiversity 2024”, a major update to its Biodiversity Standard aimed to help companies disclose on most significant biodiversity impacts. The GRI collaborated with the TNFD, EFRAG, SBTN and WBA Nature Benchmark to support alignment between the reporting standards and systems.

The new reporting standard will set a new bar for transparency on biodiversity impacts. It will support detailed, location-specific reporting, both within an organisation’s operations and throughout its supply chain, to help stakeholders identify, assess and manage the impacts on biodiversity.

GRI will pilot the use of the standard over the next 2 years with formal effect for reporting on 1 Jan 2026.

The EU has adopted new legislation to phase out fluorinated gases and ozone depleting substances. The rules are expected to eliminate 500 million tonnes of CO2-e emissions by 2050, in line with the Paris agreement and roughly the combined annual emissions of France and Belgium.

The legislation targets fluorinated gases (F-gases) and ozone depleting substances (OSDs) which are used in a range of industrial applications and found in appliances. An export ban will also ensure obsolete equipment containing such gases are not sold to countries outside the EU and incentives will be provided for climate-friendly alternatives.

Specific dates have been set out for the complete phase-out of the use of F-gases with at worst a 2035 target across all appliances. Strictly limited exemptions such as the use of OSDs as feedstock to produce other substances combined with a requirement to recover OSDs for destruction, recycling, or reclamation to cover sectors such as building materials (insulation foams), refrigeration, air conditioning and heat pump equipment, fire protection systems and fire extinguishers, where technically and economically feasible.