My son and I have just returned from his college orientation. My first child, off to university. He has worked very hard to unlock a world of challenges and opportunities for himself.
We are not in a dissimilar position on our path to addressing climate change. We are at a critical juncture. The evolution over the last two years from a relatively chaotic assemblage of voluntary reporting frameworks to the current convergence on the GHG Protocol and TCFD is remarkable and vitally important. It will enable capital to flow toward companies and projects that will most productively mitigate climate risks and unlock opportunities.
With the convergence globally on the GHG Protocol and TCFD, we will see an acceleration in companies’ reporting their GHG emissions. This will create positive network effects whereby reliable, comparable reporting by one company will facilitate reporting by other companies. These effects will be clear in the context of companies’ Scope 3 emissions reporting, which will benefit from the reporting of Scopes 1 and 2 emissions by companies in their value chains. These network effects should accelerate and, with the help of technology tools, will lead to a marked expansion of available GHG emissions data and significant improvements in data modeling and analysis of climate-related risks and opportunities.
As the quantity and quality of reported data expands, capital will more efficiently flow to projects and companies poised to best address their climate-related risks and opportunities. There are huge stores of capital ready to deploy toward the transition to a lower carbon economy. This thoughtful article articulates the opportunity and the challenge: On one end, trillions of dollars to invest in climate. On the other, huge and urgent need. How do we connect the dots? The acceleration of climate reporting will create the necessary linkage between capital and climate solutions.
Companies will be challenged to innovate, to develop new products and processes to drive the transition to a lower carbon economy. Those that do well will be rewarded. This process is underway already, as we see with transition opportunities that are garnering significant capital in order to scale.
The next challenge and opportunity will be in the development of the carbon offsets and carbon avoidance markets. As the IPCC noted in its last report, Climate Change 2022: Mitigation of Climate Change, in order to avoid the most severe effects of climate change, we will need to do more than reduce the amount of greenhouse gasses we push into the atmosphere. We will need to innovate and develop cost-effective ways to remove and sequester carbon. That market will be enormous and will present great opportunities both for advancement toward our climate goals, and also for fraud and abuse if the markets are not properly developed and regulated. This will continue to be a theme and the issue of how these markets will develop is front and center in the regulatory developments of the week.
Regulatory Developments of the Week:
“Scope 4” Emissions?
In an interesting article from Bloomberg this week, journalist Zahra Hirji found that PG&E is discussing Scope 4 Emissions in its climate reporting. Before you look it up, no, Scope 4 is not a category under the GHG Protocol. A spokesperson for PG&E tells Bloomberg, ‘“we acknowledge that ‘Scope 4’ is ‘an emerging term for categorizing emission reductions enabled by a company’ and present the term in quotations to distinguish it from Scope 1, 2, and 3 greenhouse gas emissions. As a utility that provides gas and electric service to millions of Californians, we have dedicated programs and strategies to enable our customers to reduce their carbon footprint and our ‘Scope 4’ goals quantify our 2030 objectives.”
For clarification, it seems PG&E is referring to what some call “avoided emissions.” We’ve also seen the topic of Scope 4 emissions appear in Impossible Foods’ comment letter on the SEC’s proposed climate disclosure rule, in which the company urges the SEC to “incorporate guidance for defining ‘avoided emissions’ and the disclosures of the avoided emissions or negated emissions that occur through the consumption and substitution of alternative products across all the industries.”
The question of whether and how standard setters and regulators should address avoided emissions is not new. The World Resources Institute (co-founder of the GHG Protocol, along with the World Business Council for Sustainable Development) asked the question back in 2013: “Do We Need a Standard to Calculate ‘Avoided Emissions’?” In 2019, the GHG Protocol issued its framework for estimating and reporting avoided emissions highlighting the WRI’s report, Estimating and Reporting the Comparative Emissions Impacts of Products.
It is safe to say there is still work to be done in accounting for avoided emissions as well as for offset emissions. The Taskforce on Scaling the Voluntary Carbon Markets appears to hold promise in spurring the development of efficient offset markets. Like the TCFD, this taskforce has been spearheaded by Mark Carney, which is certainly cause for optimism as to its potential for broad adoption.
GFANZ Releases Guidelines for Net-Zero Alignment
The Glasgow Financial Alliance for Net Zero (GFANZ), a coalition of global financial institutions working to accelerate the low carbon transition, released recommendations and guidance for financial institutions enacting net-zero transition plans. This draft framework is meant to guide firms in demonstrating the credibility of their net-zero plans, while providing stakeholders a guidepost for analyzing such plans. As a part of the guidance, GFANZ has laid out four essential approaches for financial institutions in driving the transition to net-zero:
Finance the development and scaling of net-zero technologies or services to replace high-emitting sources
Increase support for companies that are already aligned to a 1.5 degrees C pathway
Enable real-economy companies to align business activity consistent with a 1.5 degrees C pathway for their sector
Accelerate managed phaseout of high-emitting assets through early retirement
Canada Issues Regulation to Eliminate Some Single Use Plastics
The Canadian government has announced a ban of some forms of single use plastics in sales, imports and exports. The ban will include hard-to-recycle plastics such as plastic bags and takeout boxes, straws, cutlery, six-pack rings, stirrers and other products. There are a few exemptions, for example, in medical cases. Canada’s Environment and Climate Change Ministry estimates that this ban will result in the elimination of more than 1.3 million metric tons of hard-to-recycle plastics and more than 22,000 metric tons of plastic pollution.
Biden’s Energy and Climate Forum
US President Biden’s global agenda on climate appears to have made progress this week with regulatory developments on the horizon. On June 17th, the administration held its third Major Economies Forum on Energy and Climate with the U.N. Secretary General, and leaders from countries including China, Saudi Arabia, United Arab Emirates, and the UK. During the forum, the participants discussed strategies to reduce methane emissions, increase EV deployment, commercialize clean energy technologies, and enhance food security. The White House noted itself that the countries in attendance account for 80% of global GDP and GHG emissions.
The White House announced strategies to advance these goals. To advance the Global Methane Pledge set in 2021, the administration will work with the EPA to issue a supplemental proposed rule for public comment that will aim to reduce methane and other emissions from new and existing oil & gas facilities. The U.S. will also devote $21.5B to high-priority clean technology demonstration projects under the Bipartisan Infrastructure Law. To strengthen food security while addressing the climate impacts of agricultural practices, the U.S. will launch the Global Fertilizer Challenge with the goal of raising $100M in new funding for research and training for countries by COP27. This effort is aligned with the Agriculture Innovation Mission for Climate, which consists of over 200 government and NGO partners.
1.5°C Climate Alignment Disclosure Required for UK Pension Portfolios
The UK’s Department of Works and Pensions (DWP) announced that pension fund schemes will be required to disclose the alignment of their investments with the Paris Agreement’s target of limiting warming to 1.5C. The rule will apply to pensions with assets greater than £5B. Last year, the DWP mandated the publication of TCFD-based disclosures for pensions, making this next step a significant movement toward mitigating the finance sector’s climate impacts.
The leaders of the DWP acknowledge that this will not be an easy task. When this requirement was initially proposed, the leaders at the DWP said, “We understand we are asking a lot of occupational pension schemes and wish to thank trustees for showing great leadership. We want to support trustees in their climate disclosures and hope we can count on the same constructive relationship with industry to help ensure these measures help trustees and savers.”
Other Stories I’m Following:
The EU Parliament voted to exclude nuclear and gas-based energy from the EU Taxonomy’s green investment classification. While nuclear and natural gas are often seen as transition energy sources that will help bridge the gap between fossil fuels and zero-carbon electricity, the European Commission’s sustainable finance advisory group ruled that these energy sources don’t contribute enough to carbon mitigation to be classified as green. [My take: Nuclear power will be essential to the energy transition and to EU energy independence from Russia. Disincentivizing nuclear investment at this point seems premature and takes a potentially important transition tool out of the toolbox.]
Following a consultation in November 2021, the Basel Committee on Banking Supervision last week issued a wide-ranging report, Principles for the effective management and supervision of climate-related financial risks that aims to bolster banks’ and supervisors’ practices in addressing climate-related financial risks. The report articulates 18 principles that address banks’ corporate governance, risk management, internal controls, and reporting. [My take: Climate change presents a threat to the global financial system and prudential banking regulators are absolutely focused on that threat. This is a step toward addressing the risk. More to come, including an assessment of the impact of climate-related risks on banks’ capital requirements.]
The California state government proposed a bill promoting “carbon farming,” or agricultural practices that seek to sequester carbon in the soil. The practice has its fair share of supporters and skeptics in the scientific community, with many citing the difficulty of reliably quantifying how much carbon is being put back into the ground and how long it stays there. [My take: While natural carbon removal projects will be essential to offsetting some of the vast sum of global carbon emissions, it looks like more research is needed to prove the efficacy of this method. This ties back to the broader challenges noted above with the creation of efficient carbon offset markets.]
Early Tesla executive J.B. Straubel is teaming up with Toyota to work on recycling EV batteries. Straubel’s company, Redwood Materials, is working on creating closed-loop supply chains for battery cells and other materials from early electric vehicles to reduce the waste associated with EVs and bring recycling into the EV space. [My take: Closed-loop supply chains will be essential to reducing waste and reusing some of the expensive, mined rare earth elements that go into producing electric vehicles].
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Wyatt joined Persefoni from the U.S. Securities & Exchange Commission (SEC), where she served as Senior Counsel for Climate & ESG to the Division of Corporate Finance, led the rulemaking team through drafting proposed climate disclosure regulations, and worked closely with the Office of International Affairs.