As 2021 comes to a close and we take stock of the year’s events in the world of ESG and climate, one thing remains unequivocally clear: climate change is here and its impacts are immense. As highlighted by this New York Times piece, “Postcards From a World on Fire”, every country is facing unique challenges in dealing with the impacts of climate change, and no country is immune from this reality.
Our hearts ache for the lives lost in the horrific tornadoes that tore through middle America this week. As reported in the Washington Post, December tornadoes are part of a ‘new normal’ caused by climate change, and according to the head of the Federal Emergency Management Agency (FEMA), “The severity and the amount of time these tornadoes spent on the ground is unprecedented.”
It’s Getting Hot in Here…
Although this was a La Niña year (which is typically colder), 2021 was hotter than any recorded since 2015. Overall, 2021 has been consistent with the 21st century’s warming trend and stands as the 6th or 7th hottest year on record. Nuwaiseeb, a city within Kuwait, recorded the highest temperature of the year at 53.2C (127.7F), which I believe is the preheat setting on my oven.
This week, a new report was released by the World Meteorological Organization (WMO) confirming the highest ever recorded temperature in the Arctic, 38C (100F). The report raises alarms about feedback loops caused by increasing permafrost melt, forest fires, and sea ice loss. In Antarctica, rising temperatures have brought equally frightening concerns, including changing wind patterns which are now pushing cold water away from the Antarctic, allowing warm water to fill the void, accelerating ice melting and releasing more carbon dioxide into the atmosphere
Funding Our Own Demise
A study from Sierra Club revealed that the 18 largest American financial institutions funded the equivalent of 1.968 billion tonnes of CO2. If the U.S. financial sector were a country, it would rank as the 5th largest greenhouse gas emitter in the world, just behind Russia.
According to Bloomberg (and to no one’s surprise), these investments are a very poor financial decision. The financial consequences of this amount of heat-trapping emissions would dwarf any financial crash seen before. If action is not taken, the global economy risks losing more than 18% in GDP by 2045. For reference, the US economy contracted by 4.3% during the recession of 2008.
Ben Cushing, manager of the Sierra Club’s Fossil Free Finance campaign, emphasizes just how serious this would be, arguing that “regulators can no longer ignore Wall Street’s staggering contribution to the climate crisis,” and how “disclosure is an essential and foundational step in mitigating market risk.”
Thankfully, disclosure took a leap forward this week when CDP and Partnership for Carbon Accounting Financials (PCAF) announced that they are joining forces to enhance the capacity of financial institutions to disclose their ‘financed emissions,’ otherwise known as the emissions associated with their investing, lending, and underwriting activities. This further cements PCAF as the gold standard for the finance sector's GHG accounting, and increases the capabilities for financed emission disclosures to be transparent and comparable across the sector.
The Red & Blue Fight Over Climate Change
Climate is emerging as a wedge issue in US politics as a fresh poll from the Chicago Council on Global Affairs revealed that it is one of the most polarizing topics with only 16 percent of Republicans considering it a critical threat, compared to 82 percent of Democrats.
The Koch-funded American Legislative Exchange Council (ALEC) is leveraging the political divide with proposals to undermine current and future climate policy as discriminatory to fossil fuel companies. ALEC’s proposals include the “Resolution Opposing Securities and Exchange Commission and White House Mandates on Climate-Related Financial Matters” and the “Energy Discrimination Elimination Act” both of which are aimed at propping up fossil fuel investments.
Hope springs eternal for the Build Back Better bill. Approved by the US House of Representatives last month, the bill includes more than $500 billion in climate investments. It is hard to overstate the importance of this legislation; if enacted and implemented, it will be the biggest investment in climate action in the nation’s history. But, in the evenly divided Senate there are still some Democrats joining Republicans in opposing the legislation that, when combined with the recently enacted Infrastructure Investment and Jobs Act, would reduce US greenhouse gas emissions 50-52 percent by 2030 (relative to 2005 levels) and reach net-zero emissions by midcentury.
The ESG Revolution will be Televised (and Accelerated!)
Notwithstanding polarized US politics, companies are calculating and reporting their emissions in response to demand from mainstream investors. A recent study from PWC showed that 76% of investors consider ESG factors when screening for potential investment opportunities and 68% believe that ESG performance should be included in executive pay arrangements. Senator Warren wrote to the SEC this week prodding them to ensure that linking executive compensation to climate risks is both verifiable and meaningful.
The PwC report and a report from the CFA institute indicate strong support for standardized ESG reporting manifested by the global ESG standards being developed by the International Sustainability Standards Board (ISSB). This week we learned that the former Chairman and CEO of Danone, a multi-national food products company, Emmanuelle Faber, has been appointed to Chair the new ISSB. These standards will be needed as more institutional investors are considering ESG than ever before. A new survey found that 84% of asset owners globally are evaluating and implementing sustainable investment considerations in their investment strategies, up from 53% in 2018.
As the US Securities and Exchange Commission (SEC) inches closer to requiring climate disclosure, optimism is rising that the rule will rely on the ISSB standard, providing the world a single standard for ESG reporting. The Center for American Progress, weighed into the climate disclosure debate, arguing that it’s crucial that companies are required to report all of their emissions, including scope 3 (i.e., emissions from the company’s value chain) for better investment decisions.
As ESG reporting enters the mainstream of investing, tech innovators see sustainability as the next area where software can play a huge role. A new study from PWC showed that investment in climate tech hit $87.5bn in the second half of 2020 and first half of 2021, with H1 2021 delivering record investment levels in excess of US$60bn. This represents a 210% increase from the US$28.4bn invested in the twelve months prior. Climate tech now accounts for 14 cents of every venture capital dollar. The average deal size has nearly quadrupled in H1 2021 from one year prior, growing from US$27m to US$96m.
GreenBiz dubbed 2021 “the year of carbon software,” due to unprecedented funding flowing into the nascent field. And late this week, another report predicted the carbon accounting software market will increase $6.38 billion by 2025 with a compound annual growth rate of 25%.
However, the rhetoric is still ahead of the reality. An analysis by Share Action revealed that the world’s largest asset managers ignore 60% of the ESG proposals at companies they hold despite being signatories of the Principles for Responsible Investment.
ESG and Climate News will take a break next week to observe the Christmas holiday. Whether you observe Christmas or other celebrations - we wish all of our readers peace, happiness, and health during this season of joy. It has been an absolute pleasure to summarize the ESG and Climate news during this dynamic time and we truly appreciate all of our subscribers.
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Here are some other newsworthy clips of the week:
Next year, China will likely see a huge boost in electric vehicle sales as the world’s largest automobile market is likely to see EVs account for 30% or higher in new car sales in 2022.
Singapore joins a growing list of countries that will require their businesses to provide climate-related disclosures.
Missed our previous editions of ESG & Climate News? Check it out now and stay in the know: