The last couple of weeks have renewed my faith in the power of innovation. We need innovation to address the climate crisis. The climate crisis will drive innovation. As the very clever and smart CEO of a global chemicals company (a chemist) said in a recent meeting, "“Chemists need to become designers. The Yves St. Laurent of chemistry. Make chemistry sexier to get attention..”“We need constraints for innovation.” So said a Fast Company piece I read over the weekend, which brought me back to my MBA classes on innovation and modeling optimization under constraints. It isn’t a theoretical point. I see this and hear it regularly from companies, executives, and board members in the context of addressing how climate change impacts their businesses and how they create strategies to mitigate risks and take advantage of opportunities.
Climate change is driving innovation, of necessity. How is this? Companies are making concrete plans to address their physical and transition risks and opportunities. The issues are varied and include how to ensure their operations and their supply chains are resilient in the face of increasingly severe weather and chronic physical climatic changes. Can they innovate to make their products more appealing to their customers and compliant with new regulations? What opportunities lie in regulatory changes that mandate different business practices? How can we respond to our employees’ concerns about climate change in a way that drives engagement, loyalty, creativity, and productivity? The list of questions and challenges (and opportunities) goes on.
I’ve attended a number of events in the last couple of weeks that have highlighted the critical role of innovation in enabling companies to mitigate their climate-related risks and unlock climate-related opportunities. This is not just theoretical. Here are a few examples:
- At a meeting last week with a group of CEOs of global companies, the CEO of an integrated chemicals company brought to life the importance of innovation by saying “Chemists need to become designers. The Yves St. Laurent of chemistry. Make chemistry sexier to get attention.” This was cheeky to be sure but also resonated. Chemists will drive solutions through innovation. That innovation will drive value for the company.
- In that same meeting, the question was posed “How do you show value through non-financial targets?” The answer was “Innovation. Markets are changing. Organizations that can innovate sustainably will win.” There was agreement in the room, and also a recognition that this is hard. Companies must think about their short-term and long-term imperatives and devise ways to meet both. Sustainable finance is still young, yet a great deal of money is needed. These are some of the constraints that will force expansive and innovative thinking.
- In a meeting of board directors focusing on “commercially smart climate transition,” a chemical company board member described the company’s strategy to address the risk associated with bans on plastics. The company created biodegradable and compostable alternatives, which fueled tremendous growth for the company.
- A director of an energy company described how the company co-invested with business partners in renewable energy production and storage, creating a transition path, and strengthening the company’s existing partnerships.
- A U.S.-Sweden ESG, Fintech and Innovation Roundtable last week hosted by the U.S. Department of Commerce and the Government of Sweden, included a productive discussion of the role of innovation, fintech and emerging technologies in approaching our ESG challenges and opportunities. A key takeaway was that innovation in addressing ESG strategies is critical for companies to be competitive.
- The Sustainable Brands conference two weeks ago in San Diego was an innovation hub. Companies in industries including consumer products, energy, finance, real estate, technology, accounting, fashion, retail, food and beverage manufacturing, consulting, and other industries focused on different topics that all rested on innovation and value creation. Some of the innovations discussed were: how the American agriculture industry reinvents itself to navigate new consumer expectations, farmer livelihood and critical sustainability goals; developing new technologies to recycle food waste into clean energy; the opportunities and challenges of improving today’s recycling system and how molecular recycling is helping brands meet circular plastic goals; tapping into circular design, regenerative agriculture, and nature-based solutions; and many other topics. The full lineup is here and is fascinating.
ISSB includes Scope 3 GHG emissions in global baseline reporting standards
At its October meeting, the International Sustainability Standards Board (ISSB) voted unanimously to require companies to disclose their Scopes 1, 2, and 3 emissions. The Scope 3 emissions disclosure standards track closely with the SEC’s proposed disclosure requirements for Scope 3 emissions, including permitting the use of estimates and industry average emissions where it is difficult to obtain actual emissions calculations from those in a company’s value chain. The ISSB is also considering the adoption of other provisions similar to those in the SEC proposal to ease reporting burdens and issuer concerns. These include a phase-in period for Scope 3 emissions, scaled reporting that provides relief for smaller reporting companies, and providing a safe harbor from liability for Scope 3 emissions. The development of the new standards is expected to wrap up in early 2023.
As the ISSB’s global baseline tracks closely to the SEC’s proposed disclosure requirements, when the SEC finalizes its rules, assuming they are adopted substantially as proposed, the Commission can be proud of the role it has played in helping to establish the global baseline for consistent, comparable climate risk disclosures. Needless to say, if the SEC were to deviate significantly from its proposal, that would represent an enormous missed opportunity and would leave the US capital markets behind the rest of the world.
Regulatory News
Canada
Canada funds new energy project
In a step toward its emission reduction targets, Canada has committed C$970 million (USD$708 million) to an energy project that will develop a small modular reactor (SMR) that could supply a power grid. Ontario Power Generation (OPG) is responsible for developing the nuclear technology, which will receive funds from the Canada Infrastructure Bank (CIB) in the form of low-interest loans. Canada sees the investment in the SMR as a lever to decarbonization. The preparation phases will begin as early as this year, with the entire project expected to be executed no later than 2030.
EU
State-owned Norwegian companies expected to set emission reduction targets
The Norwegian Government announced that it will require its 70 state-owned companies, with a combined value of approximately NOK 1.2 trillion (USD$113 million), to set science-based targets and report on progress towards achievement of said targets. This falls in line with the state’s pension fund’s expectations for all emission-heavy companies to set net zero targets.
EU lays out new emission standards for building structures
The EU has agreed on a new set of rules that will accelerate their decarbonization efforts. According to the new rules, the EU will set zero-emission requirements for all newly constructed buildings starting in 2030 and all publicly-owned new buildings starting in 2028. They will also require pre-existing buildings to comply with a primary energy-use cap. Further they will be required to install solar energy for all newly constructed non-residential and public buildings over a certain size by 2026, and the same for residential buildings no later than 2029.
ESMA names ESG as high priority
As the demand for sustainable finance continues to grow, the European Securities and Markets Authority (ESMA), has formally added ESG to the list of Union Strategic Supervisory Priorities (USSPs). This follows the release earlier this year of its sustainable finance roadmap, a tool it uses to “ensure the coordinated implementation of the ESMA’s broad sustainable finance mandate.” It identifies greenwashing, disclosure requirements, implementation of requirements, and developing reporting standards as some of the top priorities.
EU Urges G20 to Strengthen Climate Goals for COP27
The European Council has announced that member states have come to an agreement on their negotiation points in preparation for COP27 in Sharm El-Sheikh next month. The EU member states plan to call on major economies to strengthen their interim climate goals immediately, and increase their financing to lower-and-middle-income countries (LMICs). A recent report from the UNFCCC shows that most countries’ Nationally Determined Contributions (NDCs) will not reduce emissions in line with the Paris Agreement. Anna Hubáčková, Czech minister of the environment said, “All eyes will be on us in Sharm El-Sheikh. The EU has always been at the forefront of climate action and we will continue to lead by example. Protecting our planet for future generations requires a strong common global action. I am glad the EU has proved today that it is serious in its ambitions.”
France
France’s Socially Responsible Investment label embraces double materiality
In accordance with the EU’s focus on double materiality, Responsible Investor reports that France’s Socially Responsible Investment (SRI) label committee published its latest recommendations, which include integrating climate into fund strategies and requiring double materiality disclosures. To qualify for the SRI label, funds will have to disclose their environmental and social impacts and the impact of sustainability on their portfolio. The president of the SRI committee shared that the goal for the expansion of requirements was to make the label “more demanding, comprehensible and effective.”
Germany
Volkswagen under fire for allegedly failing to disclose climate lobbying
Volkswagen is under fire from six of its institutional investors this week after they filed a lawsuit against the German carmaker alleging it failed to disclose details of its climate-related lobbying. These investors include four Swedish public pension funds, Danish AkademikerPension, and the Church of England Pensions Board. Investors voiced concerns that while VW is making public commitments to champion the green transition, behind the scenes its lobbying may run counter to these claims. This contradiction, investors argue, “would expose the company to reputational and operational damage.”Volkswagen’s stance on climate change has been a sensitive issue since its ‘Emissionsgate’ scandal in 2015.
UK
FCA proposes new rules to curb greenwashing of investment products
The UK’s Financial Conduct Authority (FCA) has proposed new rules for investment product sustainability labels, restrictions on ‘ESG’ and ‘green’ terms, and more detailed disclosures for consumers and investors. This will be a part of the UK's Sustainability Disclosure Requirements (SDR) and aims to tackle the greenwashing associated with “exaggerated, misleading or unsubstantiated claims about ESG credentials.” The FCA seeks to align with SFDR and global efforts where appropriate. On the topic of fitting in with other jurisdictions’ rules, they say, "In developing our proposals, we recognise that the firms we regulate operate in global markets and are already subject to the EU SFDR, and will in future be subject to ESG disclosure rules proposed by the SEC. So, we are working to maintain coherence between our proposals, the SFDR requirements and the SEC’s proposals."
US
SEC’s final climate rules not imminent
This past week, SEC Chairman Gary Gensler indicated at the Securities Industry and Financial Markets Association annual conference that the final rules on climate disclosures are not imminent. While he didn’t indicate when the final rules could be expected, he did say, “When you have that many comments, it’s going to take some time.”
Republican AGs investigate big banks over ESG
JP Morgan Chase, Bank of America, Citi, Wells Fargo, Goldman Sachs and Morgan Stanley are being investigated by 14 state attorneys general after allegations the banks blocked oil & gas companies from receiving credit through their ESG practices. The AGs sent civil investigative demands to the banks, requesting information about their participation in the Net Zero Banking Alliance. Missouri State AG Eric Schmitt alleged the alliance will prevent farmers and oil companies from accessing loans.
Biden signs international agreement to limit hydrofluorocarbons
President Joe Biden signed the Kigali Amendment this week, indicating to the world that the US will limit the use of hydrofluorocarbons (HFCs), the GHG commonly used in refrigeration and air conditioning that is a cause of major ozone pollution. The Kigali Amendment to the 1987 Montreal Protocol was ratified by the Senate in September, with support from both sides of the isle. The Amendment requires nations to phase down the use of HFCs 85% over the next 14 years.
New Zealand
NZ proposed first agricultural tax on GHGs
New Zealand is planning to tax agricultural emissions produced by its livestock - a proposal that would be the first of its kind in the world. The system will be implemented by 2025, and would require farmers to pay a regulated price for their methane, carbon dioxide and nitrous oxide emissions. All the revenue generated by this levy will be reinvested back into the agricultural sector to fund further research, tools, and technology as well as farmer incentives - each of which aim to reduce emissions. A consultation on the proposal will start now and run until November 18.
Agriculture is of vital importance to New Zealand’s economy, including exports–but it also accounts for nearly half of the country’s emissions. Prime Minister Jacinda Ardern says the proposal “is an important step forward in New Zealand’s transition to a low emissions future and delivers on our promise to price agriculture emissions from 2025,” and that “no other country in the world has yet developed a system for pricing and reducing agricultural emissions, so our farmers are set to benefit from being first movers.”
Singapore
Singapore on track to meet 2050 net-zero targets
In a big move, Singapore has confirmed it is on track to achieve its target of reaching net-zero emissions by 2050. As a key part of meeting this target, Deputy Prime Minister Lawrence Wong announced a strong 2030 target—to reduce 2030 emissions to 60 million tonnes of CO2 equivalent. He says that low-carbon hydrogen investment and deployment will play an essential role in their transition to net-zero. The central bank and financial regulator of Singapore, the Monetary Authority of Singapore (MAS), revealed they will be appointing Gillian Tan as their new Chief Sustainability Officer. She will facilitate tighter coordination across the organization’s sustainability initiatives, including Project Greenprint, which seeks to mobilize capital for sustainable finance and ensure transparent ESG disclosure.
Saudi Arabia
Largest-ever carbon offset auction
In Saudi Arabia this week, a total of 15 firms took part in what has been considered as the biggest-ever carbon offset auction. Over 1 million tons of carbon credits were offered – all of which are ‘CORSIA compliant,’ a program which is run by the International Civil Aviation Organization. Auctions like these may begin to play a larger role in Saudi Arabia’s journey to neutralize its greenhouse gas emissions by 2060. But of course, there is skepticism that credits like these are just greenwash, particularly if the Kingdom does not also move away from crude sales.
Indonesia
Indonesia announces new emission reduction targets
Just ahead of COP27, Indonesia announced new GHG emission reduction goals. It plans to go beyond its initial Paris Agreement targets, reducing emissions by 31.89% on its own or 43.2% with international aid by utilizing land more efficiently and developing better policies for energy use. The nation has made some notable progress towards their phase-out of coal power plants, halting new forest clearing permits, and planting trees along the coast. However, the International Renewable Agency (IRENA) states that the nation, one of the heaviest polluters in the world, would need to make significant investments, to the tune of $332 billion towards green energy technologies and $80 billion to develop the grid infrastructure by 2030 to make meaningful improvements to its renewable energy use.
Images for this newsletter were provided by JP Valery, Erik Mclean, Nareeta Martin, and Josh Wilburne.
