SEC’s Climate Rule in Limbo, EU’s Growing Pains

SEC Chair Gary Gensler was forced once again to come to the defense of the Commission’s long-awaited climate disclosure rule. This time, it was in front of a US Chamber of Commerce forum, where he argued that the rule would “benefit capital markets.”

Despite recently hinting that SEC would drop Scope 3 (value chain emissions) from the final rule in testimony last month, this time, Chair Gensler leaped to the defense of Scope 3 and indicated that it could be included in the final version. Saying, “What investors have told us in the comments is that understanding the emissions of the supply chain helps understand what’s called transition risk.”?

He conceded that there are a multitude of small and agricultural businesses that sent comment letters worried about being caught up in the climate reporting rule because they are in the supply chains of larger companies. Gensler said the SEC staff has worked to protect private firms from reporting burdens, and this is one of the reasons the regulation is taking so long.?

Although he did not give a solid timeline for when the rule will be finalized, all indications now point to 2024, with a 2026 implementation.?

The hand-wringing at the SEC comes as California officials move to fast-track implementation of the state’s new climate laws. Governor Gavin Newsom had some cautions about cost and aggressive timelines in his signing statements. Addressing these concerns, California State Senator Henry Stern (D-Sherman Oaks) said that he will be “asking the governor to budget in his January budget with CARB to put a line item in ... to help get this process moving.”

CARB (California Air Resource Board) has a pivotal role to play in implementing the bill. It is meant to adopt regulations by Jan. 1, 2025, giving them one year to implement it, and they will need to find cash in their budget before they start collecting filing fees in 2026.

EU’s Sustainability Rules Growing Pains

Further along in its sustainability disclosure journey than the US, the European Union (EU) is beginning to feel some growing pains. The European Financial Reporting Action Group (EFRAG) is forging ahead with the new European Sustainability Reporting Standards (ESRS), releasing a massive list of 1,178 sustainability metrics for disclosure under the Corporate Sustainability Reporting Directive (CSRD).

However, two other prominent sustainability rules - the Corporate Sustainability Due Diligence Directive (CSDDD) and the Sustainable Finance Disclosure Regulation (SFDR) - are suffering some growing pains.?

For the CSDDD, a new report from WWF highlights why the directive should ensure that all financial activities, including lending, insuring, and investing, should be covered to prevent and mitigate human rights violations and environmental harm. The World Wildlife Fund’s Uku Lillev?li said, “robust due diligence requirements for financial activities are a necessity to ensure sustainable financial practices and effective risk management.”?

The Institutional Investors Groups on Climate Change (IIGC) believe they should be included in certain conditions, and some politicians think they should not be considered at all. The debate is heating up ahead of the next trilogue (legislative meetings between the EU Commission, Council, and Parliament) in mid-November before the CSDDD is finalized at the end of the year.?

The SFDR is facing huge issues with the future of the investment disclosure regulation’s future being questioned. The regulation has been in force since March 2021. Since then, many investors have downgraded funds from Article 9 (a fund that has a Sustainable Investment Objective) to Article 8 (a fund that promotes ESG factors) and from Article 8 down to Article 6 (a fund that must integrate sustainability risks into investment decisions) because of the less strict disclosure requirements. One Irish investor on a recent panel claimed that the “SFDR has been a disaster.”?

Republican Climate Policy??

After breaking their weeks-long deadlock, House Republicans unanimously elected Mike Johnson (R-LA) as Speaker. The New York Times reported that his tenure may widen the political gap on climate change. He has questioned climate science, opposed clean energy, and received more campaign contributions from oil and gas companies than from any other industry last year.

Ben Jealous of the Sierra Club said, “It should concern us all that someone with such extreme views and so beholden to the fossil fuel industry has such power and influence during a time when bold action is more critical than ever.”?

The new speaker's election comes at a time when a recent Pew Research study found that views on climate change are linked to political ties. 86% of Democrat-leaning respondents expect harms from climate change in the U.S. to worsen during their lifetime, while only 37% of Republicans think they will.

Meanwhile, in the Senate, a trio of Republicans led by Louisiana Sen. Bill Cassidy introduced legislation that would impose a fee on products imported from high greenhouse gas-emitting countries, a move aimed at protecting U.S. manufacturers from competition from China and other countries with lax environmental standards.

“With the foreign pollution fee, we’re attempting to level the playing field to say, ‘OK, China, if you choose not to enforce environmental regulations, we’re going to levy a fee to compensate our country,’” said Cassidy - characterizing the proposal as a “Republican climate policy.”

Voluntary Carbon Market In Chaos

The Voluntary Carbon Market (VCM) seems to always be in the news, rarely for good reason. This week, the beleaguered market took another huge hit with the withdrawal of the world’s largest carbon credit provider, South Pole, from their largest offsetting project.

The project, in Kariba, Zimbabwe, has come under scrutiny for years now with questionable methods of carbon accounting for the credits and the majority of the cash going to South Pole and their partner Carbon Green Investments instead of the rural people fighting deforestation.?

But a recent expose from the New Yorker was the final nail in the coffin for the project, which has made over $100 million selling credits of more than 23 million tonnes of carbon. This will have ripple effects through the whole market but will hopefully lead to much needed reforms.

And reform is already here in California, which enacted AB 1305 - a new law to require more disclosure on voluntary carbon offsets (VCOs) as well as net zero claims.??

The new law will require that VCO sellers disclose details regarding accountability measures if a project is not completed or does not meet the projected emissions reductions or removal benefits and that entities using VCOs to make climate-related claims disclose a host of information relating to each carbon offset project. Even entities that do not participate in the VCO markets will be required to disclose certain information regarding how they have determined the accuracy of certain climate-related claims they make in California.

Peak Emissions Now?

While a new report predicts breaching the 1.5°C limit for warming in 2029 - much sooner than expected, the good news is that 2023 could be the year we reach peak emissions. A Carbon Brief analysis of the data from last month’s International Energy Agency’s (IEA) World Energy Outlook 2023 found that peak emissions could happen this year, two years ahead of the 2025 prediction of the IEA.?

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Other Notable News:

• Deep red states are benefiting from the Inflation Reduction Act (IRA) despite their opposition to it. First Solar is leveraging a 30% IRA tax credit with plans to build a $1.1B solar panel factory in Northern Alabama, bringing over 700 jobs to the region.?
• Climate Tech Investments Rise to $16.6 Billion in Third Quarter Climate tech companies just had their best quarter for fundraising in almost two years, drawing $16.6 billion in investment for a wide range of decarbonization and low-carbon startups, according to a new analysis by BloombergNEF.
• Europe's $13 Billion Climate Tech Sector Remains Resilient in Downturn Green policies, climate tech grants, and second-time founders building in the space have proved a successful lure to investors.
• New York state this week announced the largest state investments in renewable energy in US history. The huge project will consist of three offshore wind and 22 land-based renewable energy projects expected to power 2.6 Million New York homes, 12% of the state's energy needs by 2030.
• Wind power is key to US climate goals but is in crisis. The sector is experiencing setbacks, such as project cancellations in New York, New Jersey, and Connecticut, potentially delaying the Northeastern states' aspirations to utilize Atlantic Ocean winds.
• The annual ESG Attitudes Survey from the Association of Investment Companies has revealed that 53% of investors consider ESG when making investment decisions, down from two-thirds in 2021. At the same time, skepticism toward ESG-labelled funds doing what they are labeled to do is on the up.?
• A joint report from the International Renewable Energy Agency (IRENA) and the Global Renewables Alliance (GRA) details strategies to triple global renewable power capacity to 11,000 GW and double yearly energy efficiency improvements by 2030, a key goal of COP 28.?
• Despite the increasing need for climate adaptation aid, wealthy nations have reduced their financial commitments to assist developing countries with climate change impacts. The aid for climate adaptation dropped by 15% in 2021, with factors such as the Covid-19 pressuring the budgets of affluent countries.
• This new report from BCG shows how raw materials significantly impact fashion and apparel brands, especially concerning sustainability and climate challenges. The industry faces intensified regulations targeting environmental impacts. How they deal with raw materials will be critical to meeting these new regulations.?
• Climate-related disasters, like last week’s Hurricane Otis, which could cost insurers up to $6.5 billion, show the extent of the problem insurers face with climate change. The US Government is now requesting climate data from insurers to investigate the impact of climate-related disasters on home insurance affordability. Due to escalating climate events, major insurers are increasing premiums, with some regions seeing double-digit increases.

Notable Podcasts:?

• I was a guest on a live version of the ESG Insider, a podcast from S&P Global with host Lindsey Hall . The theme of the podcast was “What to expect from the evolving climate disclosure landscape.” We discussed the multitude of challenges companies face in getting to grips with this new disclosure landscape
• In this week’s episode of Outrage and Optimism, hosts Christiana Figueres , Tom Rivett-Carnac, and Paul Dickinson answer some difficult questions sent in by listeners and are joined by Elizabeth Maruma Mrema , a Tanzanian biodiversity leader and Co-Chair of The Taskforce on Nature-related Financial Disclosures (TNFD) to discuss what the TNFD will mean for biodiversity disclosures.?