More stories from the road

Cries from the rooftops, and quiet conversations

It’s been another couple of weeks on the road. I have come to appreciate ever more the strength of this community and our collective capacity for problem-solving. There have been necessary pronouncements from the rooftops about the urgency of the climate crisis, and calls to action. I have also heard quieter conversations about the challenges around addressing climate change, and how to balance the demands of running a business with building a climate strategy.

The road has taken me to Minneapolis for the Renewable Energy Markets 2022 Conference, a meeting with the Oklahoma Chamber in Washington, DC,? Climate Week in New York City, and an intimate dinner with the Fortune CFO Collaborative in Dallas. I am grateful for these opportunities to meet others addressing climate change, and to discuss our different approaches to the challenges we face.??

These meetings have been cast against the backdrop of multiple, compounding crises around the world - the Russian war against Ukraine, the global economic crisis, and the devastation of Hurricane Ian and Typhoon Noru. One panel during Climate Week, hosted by the Sustainable Investment Forum, posed the question whether the current global geopolitical and economic crises would divert attention from action on climate change. The implicit question was “how can we possibly focus on climate change while we are dealing with these crises?” The question in return is “how can we not do so?”?

There are issues of immediacy - what is a crisis today, versus what will become a crisis tomorrow if we don’t take action now. The SIF panel concluded that it is not a binary choice. The current crises must be addressed immediately. They are also a call to action to do what we can to reduce the probability and magnitude of future catastrophes, and to collectively act to build our resilience.?

Top ten takeaways:

1. We don’t always have to agree. Perhaps it’s more productive when we don’t agree. It is those disagreements that unleash some of the best opportunities for discussion. We had a wonderful opportunity during the OK Chamber meeting where we opened with the question whether climate is a business issue or “woke capitalism.” That woke up the crowd and started a great discussion. My friend, Jack Belcher, from Cornerstone, said (I’m paraphrasing) “I am from Texas. I’ve spent most of my career in the oil and gas business. I’m a Republican. And, I can tell you that climate change is a business issue - a financial risk.” This led to a rich discussion and great engagement around the room, and some disagreement, as you might expect.?
2. Focus on business impacts. Frequently, the discussion around climate change begins with politics or concerns over proposed reporting requirements. Some of the most interesting and useful discussions I heard focused on how climate change actually impacts businesses. These discussions addressed exposure to physical risks and building resilience and contingency plans; addressing investor pressure; potential carbon taxes and tariffs; collaboration with customers; and addressing uncertainty.
3. Talk. The conversations highlighted the usefulness of talking with others and sharing experiences and perspectives. This applies across industries and companies. It also applies within companies. Perspectives seem to differ - sometimes significantly -? among different corporate functions.??
4. We are all learning. This is hard. We are all learning. As evidence of this, in the last week, Bain announced an ESG training program for all consultants, and Deloitte launched a climate training program for all 330,000 of its people around the world.
5. Crawl. Walk. Run. This will take time and we don’t have to get it all 100% right in one fell swoop. An example is reporting on Scope 3 emissions. I have heard a lot of consternation over reporting supply chain emissions. There is a misperception that companies will have to go to each and every supplier to obtain emissions data. This is not the case. It is perfectly acceptable to start with industry averages and spend data and incorporate actual supplier data over time.??
6. Use tools. After the Enron and WordCom financial implosions and resulting Sarbanes-Oxley Act, the financial world was forced to contend with new reporting rules that required new systems of data collection, verification, and control. This was daunting but ERP tools were developed that facilitated the reporting process and moved financial reporting from spreadsheets to software systems. The parallel is not perfect but the experience after SOX is a reminder that software tools can ease the burden of carbon reporting and make the data understandable and reliable. There are many tools out there. It pays to investigate them.
7. Risks seem remote. Opportunities more immediate. In one conversation, a senior executive described how his company had built a climate strategy that led to greater business resilience, sales, employee engagement, and other quantifiable benefits. This anchored the conversation and provided a concrete view of how climate risks can lead to opportunity.
8. Human capital and climate are linked. Several conversations that initially focused on climate became discussions of human capital, with companies noting that their approach to climate change can impact employee attraction, retention, and engagement. In one conversation, an executive discussed the company’s focus on employee safety during Hurricane Ian - highlighting the human capital implications of climate change for that company.?
9. Opportunities for innovation abound. A good bit of the discussion at Climate Week and during the Renewable Energy conference focused on the need for innovation and the opportunities created by the Inflation Reduction Act, a point Bill Gates made during the Earthshot Prize Innovation Summit.?
10. Not least in the carbon markets. Much of the discussion around innovation both at Climate Week and the Renewable Energy conference was around carbon credits and the continued development of the carbon markets. As companies, financial institutions, and countries pursue their net zero commitments, they will need to decarbonize. They will also need to offset that which they cannot reduce. The carbon offsets market is already huge and growing ?(though figures as to its actual size are inconsistent). How the market grows and the structure and controls around the voluntary carbon market will continue to be a key area of discussion.?

Regulatory News

EU

ECB Plans Climate Scores to Decarbonize Corporate Bond Portfolios

Following up on their announcement in July to bring climate change factors into consideration when establishing policies, the European Central Bank (ECB) intends to mitigate some of the Eurosystem's climate-related risks and aid in the transition to a green economy by decarbonizing its corporate bond holdings. They will be introducing a new system for scoring bond issuers based on their climate performance, taking a look back at their Scope 1, 2, and 3 emission data and a forward look at their emission reduction goals. Whether or not these goals are science-based and verified by a third party will also factor into their score. These scores will help with the ECB's future purchasing decisions and maturity limits on bonds. They will release some details about their holdings' climate information in 2023, although the exact scores will not be made public.

International

Sue Lloyd Comments on ISSB & Double Materiality

In a recent interview with Financial Times, ISSB’s Vice-Chair Sue Lloyd was asked if the board would consider double materiality. Her answer, focused on investors’ needs, could shed some light on whether or not the ISSB will expand the global baseline in development to include more impact-based disclosures. She explains that the ISSB’s investor focused approach and double materiality approach needn’t be black and white, saying, “I'm trying to encourage people not to think of it as being quite so distinct, and certainly not in the terms that one is right and one is wrong [enterprise value, which focuses on ESG risks to companies, compared to double materiality, which considers also companies' impact on the environment and society and which EU regulators are adopting]. Unfortunately, it often turns into that sort of debate.”

She continued to say that, “Thinking about the EU and its European Sustainability Reporting Standards proposal [which centers around the double materiality principle], we’re trying to be pragmatic and think about which disclosures we have in common that we each think are relevant, given our different perspectives – and we're homing in on that.”

ISSB Says Global ESG Rules Should Apply to the US and China?

ISSB Chair Emmanuel Faber, speaking at the World Standard-Setters Conference in London on Monday, said that the ISSB’s sustainability disclosure rules should apply to the United States and China. The US and China do not use the general purpose financial disclosure standards set out by International Accounting Standards Board (IASB), the ISSB’s sister organization underneath the IFRS Foundation. The ISSB rules, of which exposure drafts were released in March of this year, are aimed at setting a comprehensive baseline of standards that could be adopted by or inform jurisdictions’ sustainability disclosure rules.

Korea

Korean Policy Makers Include Nuclear in Their Green Taxonomy

Coming two months after the EU’s vote to include nuclear energy and gas in their green taxonomy, South Korean policy makers have included nuclear in an amendment to their green taxonomy. The move will increase investment into nuclear energy by making it easier to get low interest loans to fund nuclear projects. Despite criticism from environmentalists, officials claim the new taxonomy rules, “will serve as an opportunity to raise the safety and environmental impact assessment of nuclear energy."?

Malaysia?

Malaysia Enhances its Sustainability Reporting Framework

This week, Bursa Malaysia, the stock exchange of Malaysia, announced enhanced sustainability reporting requirements on their largest markets in line with the TCFD. Bursa is requiring issuers to include TCFD data, provide enhanced qualitative data on sustainability targets, and receive a statement of assurance for inclusion in annual reports. Bursa’s CEO Datkuk Muhmad Umar Swift said, “The high bar that we have now set for all our listed issuers is underpinned by a multi-year, phased implementation approach to ensure a successful roll-out. More importantly, by embracing these enhancements, our listed issuers would boost their overall resilience, competitiveness, and in turn, appeal as attractive investments.”

UK?

UK Gov Launches Independent Review of 2050 Net Zero Goals?

UK Prime Minister Liz Truss has announced that the government will be undergoing a review of its net zero commitment to ensure the country’s climate goals are maximizing the economic opportunity for business while also finding the “fastest and most efficient way” to reach the target. Former minister of energy and clean growth, Chris Skidmore, now a Member of Parliament, has been tasked with undertaking this independent review. Skidmore says that, “There will be no rowing back on any of the targets that have been set out by government. Instead, there is an opportunity to reframe them not as a challenge or a burden to people but to make the positive case for change through creating new incentives to achieve that change.”

Britain to Relax Rules for Onshore Wind to Stimulate Growth

The UK government has presented plans to ease the planning rules for approving onshore wind projects. The planning system had previously been deemed “slow and too fragmented,” and with soaring energy costs, the UK sought out infrastructure reforms to tackle these issues. The eased rules are a part of the country’s Growth Plan which, amongst other things, will make it easier to approve onshore wind projects by making them similar to other infrastructure projects. The legislation will be taken forward in the coming months.?

US

SEC Chair Gensler Testifies before the Senate Banking Committee?

On Thursday, 15th of September SEC Chair Gary Gensler testified before the Senate Banking Committee. The hearing focused on a number of topics, including the pending climate disclosure proposal. Chair Gensler faced questions from both sides of the political aisle, with Republican senators challenging him on the cost of compliance, Scope 3 emissions, and the likelihood of legal challenge. Democrat Elizabeth Warren cautioned that leaving out Scope 3 emissions would allow companies to disclose only a small fraction of their emissions. Gensler responded by observing that most investors and asset managers supported the proposed disclosures. He further emphasized that many companies are already reporting emissions and the proposals will standardize those disclosures. Further, to the concerns over Scope 3 reporting, he explained that disclosures could be made based on estimates and would not require companies to obtain actual emissions data from companies throughout their supply chains.?

Federal Reserve Board and 6 Major Banks to Pilot Climate Scenario Analysis?

The Federal Reserve has enlisted six of the nation's largest banks to conduct a series of scenario analyses, to better understand and manage climate-related financial risks. Scenario analysis enables financial institutions to understand how combinations of climate-related risks may affect their financial products and services over time. The pilot scheme hopes to assess climate impacts on certain business strategies and portfolios, to build the capacity to manage and mitigate any impacts, and publish any insights gained from the pilot.??

Senate Ratifies Treaty on Climate Pollutants

By a vote of 69 to 27, the US Senate voted to join the 2016 Kigali Amendment—an amendment to the landmark 1987 Montreal Protocol—phasing down the use and production of hydrofluorocarbons (HFCs), a family of chemicals used in refrigerators and air conditioners. This is the first time in 30 years that the US has ratified an international climate treaty. The ratification will change little in practice, as the Biden Administration had already put in place policies to reduce HFCs by 85% over the next 15 years, in line with the Kigali Amendment; however, without ratification, US manufacturers would have faced trade restrictions in the 2030s.

NYC Comptroller Sends Letter to BlackRock’s Fink for Climate Backsliding?

In a letter to BlackRock, Brad Lander, New York City's Comptroller, urges the investment management firm's CEO, Larry Fink, to put his climate commitments to action. In order for the New York City pension funds to deliver on their net zero portfolio commitments, they rely on firms like BlackRock, which manages many of their assets, totalling to about $43 billion. Lander proposes three main action items for BlackRock: first, to clearly define their net zero commitments and steps to achieving them; second, to outline their plan to reduce fossil fuel reliance and move away from high-emitting assets; and last, to set climate-related lobbying disclosure requirements, stop lending to and insuring new fossil fuel projects, and encourage science-based target setting within their portfolio companies. Lander explains that simply making statements about the urgency of the climate crisis and the corporate responsibility to respond isn't enough–BlackRock must act now to align themselves with a net zero economy.

John Kerry Advocates for Reform of Global Financial Bodies for Climate?

US Climate Envoy John Kerry called for reform of international financial institutions including the World Bank and IMF, saying that they are falling short with regard to funding related to climate change. Kerry’s comments come as World Bank President David Malpass faces pressure to resign over a Climate Week interview in which he refused to acknowledge that manmade GHG emissions from oil & gas are driving climate change. The US is the World Bank’s largest shareholder.

California Gov Newsom Signs Climate Legislation into Law?

In our last edition of Full Disclosure, we reported on California’s adopting a set of ambitious climate proposals. Governor Gavin Newsome has now signed the legislation into law, putting into motion measures to codify the state’s carbon neutrality goal, protect communities from misplaced oil projects, advance the state’s clean energy future and to promote innovation in carbon removal. Reports show that the bills could save the state $23 billion in avoided damages caused by pollution and reduce fossil fuel use in buildings, transportation, and refineries by over 90%.?

Images for this newsletter were provided by: Bundo Kim, Karsten Wurth, Mike Baumeister, Markus Spiske