Biden’s SEC pick signals change of course on ESG rules

Budget days are always exciting and a bit nerve-racking for reporters. Whose pet programmes got funded? Who was left out? Your correspondent remembers his first budget days in Washington where details were distributed to the media on compact discs (no red box pageantry here).

Later today, the UK’s effort to lead Europe on green finance will be on display when chancellor Rishi Sunak delivers the annual budget. We already know that the budget will include a new sovereign green savings bond, and our Westminster colleagues will be covering any additional details in the rollout.

But as is the case with all sustainability initiatives, success is determined by how willing citizens are to pay for them. As our colleague Peter Foster highlighted earlier this week, the cost to Britons of going green has been easy so far. “The next leg of the journey will require consumers to adapt the way they live and, for those able to pay, also get their wallets out.” (Patrick Temple-West)

How the US gets to regulate ESG disclosures

Big, influential investors will be driving the environmental, social and governance action at the US Securities and Exchange Commission, Joe Biden’s pick to lead the agency said on Tuesday.

Gary Gensler, Biden’s nominee for SEC chairman, told senators that “it is the investor community that gets to decide what is material to them. It is not a government person like myself.” And with tens of trillions of dollars of invested assets “looking for more information about climate risk” the SEC “has a role to play to help bring some consistency and comparability” to disclosures, he said.

The statement marks a shift for the SEC. For years, it has said it is studying the materiality of climate change and soliciting feedback from interested parties, but it declined to do anything more than issue guidance for companies.

Gensler’s investor-first argument for materiality underscores a likelihood that he will fight for climate change and other ESG disclosure rules.

He said he would push for new political spending disclosures for companies. “It is something that I think the commission should consider in light of the strong investor interest,” Gensler said.

The SEC’s efforts to mandate ESG disclosures will inevitably get contentious with companies. Any rules the SEC adopts could end up in court, where conservative judges often look askance at government regulations. 

But those fights are a long way off. For now, the US is poised to catch up with Europe on ESG disclosures. (Patrick Temple-West)

The problem with ‘net zero’

It seems like hardly a day goes by without another company pledging to cut its emissions to “net zero” by some faraway date.

But what exactly do these pledges entail? And how effective are they in the fight against global warming?

The basic idea is simple enough, if companies can remove as many greenhouse gases from the atmosphere as they emit, the two sides of the equation cancel each other out to reach “net zero”.

But critics warn that many “net zero” plans are flawed because they rely too heavily on so-called “offset” schemes (such as planting trees or buying credits from groups claiming to protect forests) and not enough on phasing out fossil fuels and reducing emissions.

“When the focus is only on the flows of carbon — carbon emitted and carbon removed — the cumulative nature of carbon dioxide is hidden,” a report from Friends of the Earth International states. “CO2 remains in the atmosphere for hundreds to thousands of years, so any imbalance of additions over removals adds to atmospheric concentrations which will persist.”

Banks also need to go beyond greening their own operations to reduce the so-called “financed emissions” tied to their lending portfolios.

Any true “net zero” plan should exclude financing for projects that expand use of fossil fuels, according to the Rainforest Action Network.

But recent pledges have not met this standard. This week Citigroup promised to go “net zero” by 2050, but did not provide any details on how it would do so.

Bank of America made a similar announcement in February, which went into greater detail, but did not set any targets for reducing its financed emissions.

“Net-zero commitments are becoming the new baseline . . . but simply having that long-term commitment doesn’t mean you’re actually taking the necessary steps, yet, to get there,” said Ben Cushing, senior campaign representative with the Sierra Club.

Part of the problem is that this is new ground. Most banks have not traditionally measured their financed emissions, let alone disclosed them, or worked on cutting them back.

And activists are concerned that voluntary measures, such as the disclosure standards being established by the Partnership for Carbon Accounting Financials in the US, are not enough to spur drastic enough action.

Dipti Bhatnagar, international programme co-ordinator for climate justice and energy at Friends of the Earth International, is concerned that market-based solutions and voluntary disclosure regimes will not improve things for poor and vulnerable people in the global south who are already feeling the worst effects of global warming.

Protecting a company’s profits from climate risk is not the same as battling climate change or promoting climate justice.

“We are fighting for a binding treaty on transnational corporations,” she said.

Cushing from the Sierra Club agrees. “It shouldn’t be left up to Wall Street to regulate itself . . . we need government oversight and regulation.”

This is already starting to happen in Europe. The European Banking Authority this week proposed a rule that would require banks to disclose their “green asset ratio” that would provide insight into their exposure to climate risk.

For regulation to be truly effective, it needs to look beyond risk to the financial system. “We need financial regulators to not only understand that climate change poses a risk to Wall Street and the financial sector, but that Wall Street and the financial sector pose a risk to the climate,” said Cushing. (Billy Nauman)

Gap widens between company climate pledges and plans

Company boards are definitely waking up to the fact that “net-zero commitments are becoming the new baseline” — not just because of pressure from the Sierra Club, but from investment big companies such as BlackRock.

But many European companies have only barely begun to put their emission reductions plans into action, according to a report from CDP (formerly known as the Carbon Disclosure Project) and Oliver Wyman, a consultancy.

European companies that have disclosed their targets to CDP, excluding financial services groups, are only on track to limit global warming to 2.7C by 2100. Assuming they achieve their current targets, that exceeds the maximum 1.75C rise outlined in the Paris Agreement, CDP said.

“With less than 1 in 10 companies having ambitious enough targets, our new data shows we need far more action from corporates and financial institutions to make good on our goals,” said Maxfield Weiss, CDP Europe’s executive director.

Further, only half of financial institutions said they assessed whether or not clients or invested companies had Paris-aligned strategies, CDP said. In particular, more companies need to report their indirect, or “scope 3” carbon emissions, CDP said.

“This lack of corporate Scope 3 data is a major barrier for banks, asset managers, and asset owners to set their own ambitious targets,” CDP said. 

Only 32 global banks publicly disclose their scope 3 emissions, according to CDP. Japan and the Netherlands lead the world with four domestic banks each reporting scope 3 emissions, including Mizuho Financial Group, Sumitomo Mitsui Trust Holdings, ABN Amro and ING. HSBC is the only UK bank disclosing scope 3 emissions, CDP said.

With company climate pledges becoming the norm, institutional investors and activists will be pushing companies for more specifics. (Patrick Temple-West)

Tips from Tamami

Nikkei’s Tamami Shimizuishi keeps an eye on Asia to help you stay up to date on stories you may have missed from the eastern hemisphere.

Governments and businesses have been facing more climate change lawsuits around the world — even in Asia, which is known as being less litigious than the west.

The number of climate-related legal cases in Asia almost tripled over the past two years, according to global law firm White & Case. Japan and South Korea, which recorded no such litigation in 2018, have four cases and two cases respectively as of February 2021.

Climate lawsuits have also been filed in the Philippines, Pakistan, and India. There were no such legal cases reported in China during the same period.

In South Korea, youth activists filed a complaint alleging that the county’s climate law violates their fundamental right to live in a clean environment. In Japan, a group of citizens filed a suit to stop the construction of a new coal-fired plant.

In the Asia-Pacific region, Australia is a clear leader in climate litigation with 114 cases recorded in 2020. The US had 865 cases.

Climate change litigation in Asia is still in its infancy, but the risk of facing legal challenges is on the rise. White & Case said that there was a growing consensus among climate change advocates and activists that litigation was a way to put pressure on governments and businesses to change their behaviour.

To reduce litigation risk, a partner at the firm, Tim Power, advised that companies in the region should not push forward with high emission projects without careful planning.

“Measure and quantify your emissions in accordance with internationally recognised standards and guidelines, apply best practice to reduce your emissions as much as practicable, and develop a plan to investigate and implement the staged reduction and offset of emissions,” he said.

Grit in the oyster

We write a lot about how consumers can help change the world for the better by voting with their wallets, but asking them to police modern slavery “is to pass the buck from businesses and governments, which have both the power and the responsibility to do something about it”, writes the FT’s Sarah O’Connor.

Smart reads

• Japanese trading house Mitsubishi Corporation decided last week to withdraw from the Vinh Tan 3 coal-fired power plant project in Vietnam amid growing international concern about climate change, according to Nikkei.

• Oil company ExxonMobil on Monday appointed two new board directors, including Jeff Ubben — no stranger to Moral Money readers — as the company is under fire for not moving quickly enough to transition away from fossil fuels.

Further Reading

• Japan prepares to shake up corporate code (FT)

• It is not up to consumers to police modern slavery (FT)

• Global carbon emissions rebound to pre-lockdown levels (FT)

• Wells Fargo Aims to Weed Out ‘Confusion’ and ‘Misinformation’ through ESG Research (FundFire)

• The Wrong Way to Respond to Employee Activism (HBR)

• How to design CEO pay to punish iniquity, not just reward virtue (The Economist)