February 4, 2022 - ESG and Climate News

In ESG and climate news this week, several conflicts erupted between the institutions that drive the sustainability agenda. In Europe, nations clashed over whether nuclear and gas-powered energy sources should be considered “green”. In the US, the Wall Street Journal reported on conflicts of interest arising within ESG rating agencies who also advise companies on how to improve their scores.

Nuclear and Gas…“Green Energy?”

The European Commission has decided to classify nuclear and natural gas as “green energy”— despite an internal row with its own members. Critics claim that the new EU taxonomy directive for investors is a perfect example of the kind of greenwashing that the law was meant to reduce. EU officials shot back that there are strict limits for natural gas generation — namely, a rigid emissions cap and a requirement to switch to low-carbon gas by 2035. For nuclear power, it will only qualify as being ‘green’ if countries have clear plans and funding for dealing with nuclear waste.

The conflict is summarized well by quotes from EU officials:?

? "The EU Commission today agreed its greenwashing program for nuclear energy and [the fossil fuel] natural gas." - Austrian Environment Minister Leonore Gewessler

? "We need to use all the tools at our disposal to reach the climate-neutral target." - European Commissioner Mairead McGuinness

Although the EU’s plan could still be blocked in court, some activists acknowledge the importance of natural gas as a transition fuel, given it emits less CO2 than oil or coal. Some even broke ranks and argued that nuclear power is essential to meet the goals set out in the Paris Agreement. The hand-wringing in Europe is emblematic of how difficult the transition to a low carbon economy will be. ? ?

Psst…Want to Buy a Good Rating?

As ESG branded financial products grow, so does the potential for conflicts of interest. Market regulators on both sides of the Atlantic are taking notice.??

Echoing the 2008 financial crisis where soon to fail institutions were rated as fiscally sound, similar dynamics are taking root in the ESG ratings market. As the established ratings agencies have acquired ESG analytics firms (S&P bought ESG rating firm RobecoSAM, Moody’s assumed a controlling stake in climate risk modeling company RMS), the spectre of conflicts leading to unreliable ratings has raised its head again.??

The ESG analysts get most of their income from investment firms, which package together the top-scoring companies into green-branded indexes and other financial products sold to investors. Because these firms also sell services to help companies address the ESG issues they are rating, they have a conflict of interest. This was the same scenario in the credit-ratings industry that fueled the 2008 financial crisis.

Late last year, the International Organization of Securities Commissions (IOSCO) recommended more transparency on ESG ratings and their procedures for managing conflicts of interest— a signal that regulation is not far behind. Just this week, the European Securities and Markets Authority (ESMA), launched a call for evidence to better understand ESG rating providers operating within the EU. Similarly, the Monetary Authority of Singapore (MAS) announced new reporting requirements on ESG branded funds.

Climate’s Day in Court

Last week, a US District Court delivered a resounding climate victory when it voided the sale of offshore oil and gas leases covering 80 million acres of the Gulf of Mexico. The judge based his decision on the failure of the US Department of the Interior to accurately measure the impact these fossil fuels have on global emissions.

What Gets Measured Gets Done

In a ‘practice what you preach’ moment, Larry Fink, CEO of the world’s largest money manager - BlackRock, stepped forward to report on the firms’ ‘financed emissions’ — the amount of carbon emitted from the companies BlackRock supports with capital investment. Weighing in at 330 million tonnes of carbon dioxide — roughly the emissions of France — BlackRock has a huge job ahead to figure out how to achieve a net zero portfolio. BlackRock deserves credit for putting a stake in the ground after committing to the task only one year ago. Their assessment shines a light on the data gaps and obstacles involved in this kind of assessment.?

While the BlackRock example shows the difficulties in greenhouse gas accounting, hope springs eternal that the world is finally coalescing around a single measurement and reporting standard. In his first major interview, Emmanuel Faber - the newly appointed Chair of the International Sustainability Standards Board (ISSB), revealed his vision of success and the challenges for the ISSB in its inaugural year.?

In a hopeful sign, more companies are quantifying and reporting their progress towards their climate pledges. The second annual EcoVadis Network Impact Report found a 54% annual increase in companies implementing reuse/recycle measures and a 30% increase in companies using or producing renewable energy.

This Week in Climate Science

• The National Academy of Sciences reports how measuring temperature alone leads to inaccurate climate calculations. Factoring in humidity along with heat is a better estimate for weather extremes; and shows that climate change (since 1980) is twice as bad as previously calculated.?
• Scientists at the University of Leeds have discovered that — even under 1.5C Paris Agreement limits — 90% of coral reefs will suffer catastrophically.?
• University of Bristol researchers estimate that the annual cost of flooding in the US will increase 26.4% by 2050 ($32.1 to $40.6 billion) —?and the most disadvantaged sections of society will bear the brunt of the loss.?
• A new study predicts that by 2080, 70% of the world's oceans could suffocate from a lack of oxygen, threatening marine habitats globally.
• According to a recent study, climate change is causing UK plants to flower an entire month early, causing a huge ‘ecological mismatch’ and harming agricultural functioning.

Upcoming Events

- Greenbiz22, the premier event for sustainable business leaders, is fast approaching (February 15-17) where I hope to reconnect with many colleagues.?Join me at the 'ESG Standards: The State of Play' session with Janine Guillot (Special Advisor to the ISSB Chair and CEO of the Value Reporting Foundation) on February 16 at 4:15 pm (local Arizona time). Register here.

- Boston College is holding its International Corporate Citizenship Conference from March 15-17(online)/April 24-26(in-person). It will focus on the emerging best practices in corporate social responsibility. Register here.?

- Catch the ACCP’s webinar,? Understanding ESG: An ACCP Summit on March 30 & 31 from 1–4 pm ET. The session will clarify what ESG means, why materiality assessments matter, and identify key stakeholders. You can register here.

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