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ESG Weekly News Update: June 24, 2022

General ESG News

Bloomberg: What Are Carbon Offsets and How Many Really Work?

  • The concept of carbon offsets centers around the idea that when a company, government, or individual emits carbon dioxide, the offset ensures that the same amount of the gas will be removed from the atmosphere by other means.

  • There are voluntary carbon markets that accounted for about $1 billion in 2021, as well as mandatory carbon markets in some jurisdictions. Offsets include projects ranging from tree planting to carbon capture to averting emissions from waste.

  • Much of the effectiveness of carbon offsets relies on the certification of the process, as well as the concept of “additionality,” which measures how much additional impact a project is achieving compared to the impact it would have in absence of the carbon payments. For example, if a project is required by law and would be carried out anyway, it is not creating an additional impact due to the carbon payments.

  • A growing number of scientists are expressing doubts about the effectiveness of carbon offsets, but the hope is that companies will move to use carbon payments to develop the industry of carbon capture technology and create a real impact.

Bloomberg: Methane-Spewing Coal Mines Are Climate Test for Australia’s New Leader

  • Australia’s coal mines cause more global warming in a typical year than emissions from all of the country’s cars. Based on satellite observations, Bowen Basin, the major coal hub in Queensland state, should be prioritized because it is “an area where scientists have estimated the methane intensity per unit of production is 47% higher than the global average.”

  • Sabrina Assan, an Ember analyst, stated, “Methane leaking from coal mines has been ignored for many years, but tackling it is the ‘low hanging fruit’ in Australia’s effort to combat climate change.” Australia’s new government confirmed an election pledge to lower carbon emissions by 43% from 2005 levels by 2030, which is stricter than a previous commitment to cut carbon emissions by 26%-28%.

  • Australia’s most recent report to the United Nations mentioned that active and abandoned coal mines released approximately 1 million tons of methane in 2020, and cars generated about 40 million tons of carbon dioxide.

New York Times: Germany will fire up coal plants again in an effort to save natural gas.

  • As Europe faces a gas supply shortage from Russia due to cutoffs, Germany plans to restart coal-fired power plants to conserve natural gas. Although Germany had previously pulled back on coal-fired power plants to lower carbon emissions, Germany made this decision to which Robert Habeck, Germany’s economy minister and vice chancellor, said “it’s simply necessary in this situation to lower gas usage it’s simply necessary in this situation to lower gas usage. The gas storage tanks must be full by winter. That is our top priority.”

  • Natural gas heats a third of Germany’s homes, and it is only used for approximately 15% of all electricity generation. Germany plans to pass a law within the next month to return the use of coal in power generation. Moreover, a model should be in place by the end of summer to allow companies to auction gas with the purpose to encourage Germany’s industrial sector to reduce its reliance on fuel.

Bloomberg: Maps Show How Climate Change Influences Today’s Temperatures Across the US

  • A new, free online tool developed by the research nonprofit Climate Central provides an automated real-time analysis of the effects of greenhouse gas emissions on US temperatures. The Climate Shift Index shows how the high and low temperatures for any US location compare to those from pre-warming.

  • The tool also rates daily temperatures based on a numeric scale of how climate change has made a given temperature more likely in a certain location on that day.

  • The work is complementary to the work that the World Weather Association is doing to analyze extreme weather for climate signals within days or weeks of its occurrence.

Forbes: Data That Matters For The Planet: Making Sustainability Sustainable

  • Innovation, specifically data-driven innovation is integral to the fight against climate change.

  • AI has many different applications including helping detect early signs of deforestation in the Amazon rainforest.

  • Running an AI algorithm itself doesn’t necessarily consume that much energy, and it can be run on renewable energy sources like solar.

  • AI can be reused and recycled, and ready-to-use AI solutions from specialized suppliers utilize algorithms that have already been trained and developed.

  • In 2019, researchers at MIT found that training one AI language transformer model “can emit as much carbon as five cars in their lifetimes.”

New York Times: The Rush to E.S.G., With or Without Elon Musk

  • The investment industry has increased the share of assets in so-called E.S.G funds tremendously in the past year, to $2.7 trillion by the end of March. Professionals overlay all manners of rules and screens for the investment they pick, using climate, diversity or other data to construct what are now over 6,000 funds worldwide. However, there is confusion about what the term "ESG” actually means in practice.

  • A recent episode gained attention with Elon Musk who called ESG a “scam” after S&P Global had the temerity to remove Tesla from an ESG index. S&P did this, according to their own views, in part because of accusations of racial discrimination and other alleged worker mistreatment.

ESG Today: Sustainable Investment Group IIGC Releases Net Zero Alignment Guidance for Infrastructure Investors

  • A sustainable investing-focused group called Institutional Investors Group on Climate Change (IIGCC) announced today the publication of proposed guidance for infrastructure investors to align portfolios with net-zero goals.

  • The guidance covers issues specific to the infrastructure asset class, given their physical nature and direct real-world impact, as well as the breadth of investors' engagement with the asset class.

ESG Today: UK Launches "Green Nudge" Initiative to Encourage Sustainable Investment Choices

  • The UK Government’s Department for Works and Pensions (DWP) announced today the launch of “Green Nudge”, a new three-week trial aimed at encouraging pension savers to make green investment choices and increase engagement on the sustainability of pension investments.

  • The new initiative marks a continuation of the DWP’s efforts to promote sustainable investing and transparency for pension schemes. Earlier this week, DWP introduced new measures which would require UK pension fund schemes to report on the alignment of their investments with the global climate goal to limit warming to 1.5°C.

Diversity, Equity, and Inclusion

ESG News: H&R Block Announces New Benefits to Advance Inclusivity for LGBTQ+ Community

  • H&R Block has added to its associate health and wellbeing offerings to expand support to LGBTQ+ associates with a program connecting associates searching for culturally competent providers and a medical plan covering transition procedures.

  • The goal of the new benefits is to make associates feel affirmed and supported, which is especially salient during Pride Month in the US.

  • Earlier in the year, H&R Block enacted a $30,000 lifetime maximum benefit to cover infertility, surrogacy, and adoption, to support associated with any path of parenthood and from any type of family.

ESG News: Promote Diversity with More Women and People of Color in Management Roles

  • According to a survey of HR leaders by Equilar and the HR Policy Association, most companies have set internal diversity goals.

  • These companies have set goals to hire or promote underrepresented employees and engage in affirmative action practices in order to improve overall and leadership diversity.

  • This survey collected 93 responses and revealed:

  • 71.9% of respondents reported performing pay gap analyses periodically

  • 41.6% of survey participants tie ESG to pay in a quantitative way

  • 90% of participants reported conducting a periodic employee engagement survey.

ESG Disclosures, Standards, Rankings, and Reporting

Bloomberg: BlackRock Urges SEC to Change Climate-Risk Disclosure Plan

  • BlackRock, while supportive of climate disclosure for public companies, warns that new SEC disclosure rules would increase compliance costs for firms and may actually make it more difficult for investors to discern material information.

  • The SEC has received pushback from Republican lawmakers and business owners, but the feedback from BlackRock is notable due to the size and influence of the asset manager. So far, the SEC has declined to comment on BlackRock’s feedback.

  • BlackRock is also urging the SEC to adjust its proposal to provide companies with more flexibility in reporting and to better align with global efforts. It is also asking that the SEC remove the requirement for large companies to disclose their Scope 3 emissions and instead allow companies the option to either disclose or explain why they are not.

ESG Today: UK Pensions Required to Disclose 1.5°C Climate Alignment of Portfolios

  • The UK Department for Works and Pensions (DWP) established new measures that require UK pension fund schemes to report on their investments’ alignment with the global climate goal to limit warming to 1.5°C. This requirement advances climate transparency from UK pension schemes as recent legislation mandates the publication of Task Force on Climate-related Financial Disclosures (TCFD)-based disclosure.

  • DWP’s initial TCFD requirements became effective last year. The requirement initially applied to pension schemes with assets greater than £5 billion but expanded to £1 billion schemes later this year. The new rules will apply to funds representing over 80% of UK pension scheme members as of October this year.

ESG Today: EU to Require Auditing of Sustainability Reporting, Disclosure by Large non-European Companies

  • The EU Council and European Parliament reached an agreement on the Corporate Sustainability Reporting Directive (CSRD) rules. This will require more companies to provide detailed reporting and independently audit their reported sustainability information, which will also apply to large non-EU companies that generate over €150 million in the EU.

  • The CSRD is to significantly update the 2014 Non-Financial Reporting Directive (NFRD) that currently exists as the EU sustainability reporting framework. The disclosure rules fall under a common framework that the European Financial Reporting Advisory Group (EFRAG) is currently developing called the European Sustainability Reporting Standards (ESRS). The new system will require companies to report on issues ranging from environmental rights and social rights to human rights and governance factors.

ESG Today: Australian Securities Regulator Warns it’s on the Lookout for Greenwashing

  • The Australian Securities and investments commission (ASIC) is increasing its focus on greenwashing. The ASIC Chair, Joseph Longo, notes “We will be looking for funds and products that make misleading claims related to sustainability. Where we find wrongdoing, we will not hesitate to use our range of regulatory tools, including enforcement action.”

  • This announcement is just one in a recent string of anti-greenwashing efforts, including the SEC charging BNY Mellon for omissions and misstatements, as well as the SEC investigations of certain Goldman Sachs ESG funds.

  • According to Longo, “Climate change is a systemic risk. Investors need listed companies to disclose meaningful and useful information, so that the physical and transitional risks of climate change can be priced and capital allocated efficiently.”

Reuters: Analysis: Overlapping rules to curve greenwashing may only add to company frustration.

  • More than $3 trillion has gone into investments based on their ESG credentials from mandatory disclosures, causing concerns about increased greenwashing practices.

  • Three draft sets of mandatory ESG disclosures by the EU, the U.S. SEC, and the International Sustainability Standards Board are out for public comment.

  • The We Mean Business coalition is requesting a convergence of ESG definitions, terminology, and concepts before finalization, as the variance between each draft can cause issues for companies with dual listings.

Investment Trends

Financial Times: Asset managers told to clean up greenwashing and net zero claims

  • The head of DWS, Germany’s largest asset manager, stepped down after a police raid over claims that the firm had misled investors on its ESG claims and performance. This demonstrates the risks of integrating ESG and financial returns, as well as the fact that accountability extends to the very top of asset management firms.

  • Financial regulators are cracking down on greenwashing by asset managers and fund advisors, but this is complicated by the evolution of rules governing ESG products that are different in the U.S., Europe, and elsewhere.

  • The Net Zero Asset Managers (NZAM) initiative involves 273 asset managers, many of which have agreed to set interim emissions reduction targets, but critics note that these commitments are mostly aspirational and lack detailed implementation plans. Additionally, major institutional investors BlackRock, Vanguard, and State Street have refused to commit to ending new investments in fossil fuel projects.

  • Asset managers currently face the challenge of balancing their ESG pledges and associated actions to satisfy environmentalists, politicians, investors, and regulators.

Reuters: Green investors need to get their hands dirty

  • The International Energy Agency noted that the world needs to be spending $5 trillion annually on new power sources and infrastructure by 2030 in order to progress in limiting global warming to 1.5 degrees Celsius above pre-industrial levels.

  • A third of the signatories of the United Nations’ Principles for Responsible Investment, which try to integrate ESG factors into their investment decisions, have publicly committed to removing fossil fuels from their portfolios. Investors are encouraging climate activists to press companies to “ditch their dirtiest businesses.” However, the author notes that this may be a bad strategy for business and climate change and provides an example of mining giant Anglo American’s thermal coal assets. Its market capitalization for those assets rose 10-fold to almost $2 billion because the energy security crisis due to Russia’s invasion of Ukraine prompted governments to reassess coal-fired power.

  • ESG academic Alex Edmans notes that “an investor who forces a sale also forgoes the share price boost that can be unlocked by persuading a company to change direction.” Some investors may receive cash flows from fossil fuels without changing business models, but an increasing number of shareholders are requiring companies to align their assets with decarbonization plans. The author states, “It remains to be seen whether transition funds can generate good returns from helping dirty companies get cleaner.”

Bloomberg: Big Oil Bets That Green Hydrogen Is the Future of Energy

  • According to major oil companies, the funding of multibillion-dollar developments that create vast amounts of renewable electricity and convert it into chemicals or clean fuels that can be used to power trucks, ships, or even airplanes are the future of energy.

  • Oil companies like BP Plc, TotalEnergies SE, and Chevron Corp have already begun to invest billions in major green hydrogen projects around the world.

  • Tom Ellacott, SVP at Wood Mackenzie Ltd, notes that “one of the key attributes [of green hydrogen] is having very competitive renewable energy resources. BP has gone to Australia because “you've got a lot of sun,” while TotalEnergies is in India because “low-cost ammonia is potentially a very big market.”

Bloomberg: ESG Funds Resist Worst of Downturn But Investors Are Spooked

  • In three major categories – Europe-focused, US-focused, and global – ESG equity funds have done better this year, on average, than their non-ESG counterparts. They’re all negative, in line with the broad market selloff, but ESG funds are down less than the others, in spite of typically tech-heavy, energy-light portfolios.

  • ESG proponents insist that using environmental, social, and governance metrics in investing decisions can drive returns – or at least won’t drag them down. Other professionals are not so sure. The rapid growth in ESG funds coincided with a bull market that ended in 2022, making this lull a test for portfolio managers and investors alike.

Companies and Industries

Wall Street Journal: One Grocer Wanted to Give Up Plastic. It Got Rotting Bananas.

  • Iceland Foods, a large supermarket chain in the UK, removed plastic from its products and saw some unforeseen consequences. It started selling steaks in recyclable paper trays, which led to a spike in shoplifting as some customers took advantage of the pliable packaging to conceal the products in their clothing.

  • Additionally, the chain began wrapping bananas in paper bands instead of plastic bags, and the fruit rotted quickly. Customers refused to buy bread packaged in opaque paper bags.

  • The grocer, among many other companies, is realizing that the shift away from plastic is not simple or an instant solution, and plastic has played a critical role in food storage and safety for decades.

  • Iceland Foods has a long history of trying new, innovative, and sustainable approaches, and has been taking steps to reduce its environmental and plastic footprint.

  • Paper is typically regarded as the sustainable alternative to plastic, but it can also have its own environmental drawbacks. Experts argue that when it comes to food products like beef that generate high emissions, the first priority should be to use packaging that preserves the food, even if it must be non-recyclable plastic for now.

ESG Today: Volvo Testing Next-Generation Zero Emissions Hydrogen-Powered Truck

  • Volvo has announced plans to add new fuel cell electric trucks powered by hydrogen to its product portfolio in the second half of this decade, and it has already begun testing vehicles using this technology.

  • The new fuel cell trucks will have a range of about 1,000 kilometers and a refueling time of less than 15 minutes, as well as a total weight of around 65 tons or higher. The company does face some challenges, such as the large-scale supply of green hydrogen and the fact that refueling infrastructure for heavy vehicles has not yet been developed.

ESG Today: MetaVerse Green Exchange Launches Card Enabling Companies to Offset Travel Emissions

  • MetaVerse Green Exchange (MVGX) announced a Net Zero Card, a tool businesses can use to offset carbon emissions, making offsets easier and affordable for a broader range of companies.

  • The card allows users to calculate travel-related emissions and then MVGX will retire the corresponding amount of Carbon Neutrality Tokens.

Reuters: Talent is top concern on law firm leaders’ minds, says new report

  • Thomson Reuters Institute’s latest report discussed its finding that law firm leaders identify talent and ESG concerns as top leadership challenges.

  • Regarding talent, law firms are evaluating how to retain and recruit top talent, build an inclusive culture, and maintain competitive compensation. While law firms in Asia are nearly completely back in-office, two to three days in the office has become normal for American law firms as associates expressed growing desires for more flexibility.

  • ESG is becoming closely interrelated with law firms’ structures. ESG is also becoming a practice area or service that law firms are offering to clients.

CNBC: Renewable Energy Certificates may overstate corporate environmental efforts

  • According to new research, the private sector could use renewable energy credits (REC), which many environmental experts consider to be ineffective, to overstate their environmental commitments.

  • The research found that many companies would have much larger carbon footprints without the RECs.

  • When companies buy RECs, they cancel out a percentage of their carbon emissions, this way they are able to significantly reduce the carbon emissions they report without making significant operations changes.

  • According to REC researcher, Michael Gillenwater, “All the research has pretty unambiguously shown that [the REC market] does nothing, it’s basically ineffective in terms of influencing renewable energy investment or generation.”

ESG Today: Sony and Honda Join Forces to Launch New EV Company, Targets Sales by 2025

  • Sony and Honda created the new EV company Sony Honda Mobility Inc. The company is working to sell their EVs and services by 2025.

  • This company comes after Honda’s recent environmental safety goals of being carbon neutral by 2050, solely selling battery or fuel-cell electric cars by 2040 and reducing all motor vehicle fatalities to zero by 2050.

ESG Today: Climate Startup EH2 Raises Nearly $200 Million to Scale Green Hydrogen Tech

  • EH2 has announced that it has raised $198 million in financing, led by Fifth Wall Climate Tech, to scale its electrolyzer technology and further its efforts to produce high-volume, low-cost green hydrogen.

  • For sectors with difficult-to-abate emissions, hydrogen is viewed as a key component of the clean energy transition and is more practical than wind and solar for these sectors.

Government Policy

ESG News: Biden to Announce New Initiatives on Curbing Methane, Zero-Emissions Vehicles at Major Economies Forum

  • Biden will host the Major Economies Forum on Energy and Climate which will be the largest meeting of global leaders on climate before the UN’s Climate Change Conference (COP27) in November.

  • The U.S. and EU will begin the next steps to meet their global methane pledge of a 30% reduction by 2030, focusing on eliminating flaring from fossil fuel operations and cutting back on methane pollution in the oil and gas industries.

  • Biden will announce a $90 billion fundraising global initiative devoted to developing and scaling up new clean technologies, kicked off with a $21.5 billion contribution by the U.S.

ESG News: SEC Proposes Regulations to Address ESG Label

  • The SEC has proposed new regulations that would require extra disclosures regarding ESG investment practices by RIAs.

  • Other proposals also include extending the 80% investment policy requirement in Rule 35d-1 under the Investment Company Act to any registered fund with a name that suggests it focuses on ESG factors.

  • There is currently no tailored rule for ESG investing and the proposed rules would require consistent ESG-related disclosures about ESG products and services.

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