Sustainability Newsletter Edition 30

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The information you need to make your sustainability ambitions a reality

In this edition

EU’s first carbon removals certification framework – upside for timber construction

The European Commission has proposed a first EU-wide voluntary framework which sets requirements for third party verification and certification of carbon removals.

The proposed framework will set requirements for third-party verification and certification of carbon removals; the management of certification schemes, and the functioning of registries. It aims to address greenwashing risks by increasing transparency and credibility of the certification process for stakeholders and industry. It also helps to accelerate deployment of high-quality carbon removals, clean technologies, and enables private and public financing.

Of note, the framework considers the carbon storage capacity of wood-based and energy-efficient building materials. Wood-based construction may therefore result in high-quality carbon credits – an upside for timber construction. The proposed framework will pass to the European Parliament and Council for legislative discussions

Chart: Types of Carbon Removals

There are several ways to remove and store carbon. All can be certified under the EU’s framework.

Source: Factsheet: Certification of Carbon Removals, European Commission, November 30, 2022.

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Could biodiversity credits take on similar prominence to carbon credits someday?

Biodiversity credits are emerging as a tradeable unit of biodiversity restored or preserved.

According to a new report by the International Institute for Environment and Development (IIED), biodiversity credits are being developed to be bought and sold as their own asset class, with demand growing among private investors, individuals and government. The report reviews three existing biodiversity credit methodologies and applies lessons learned from the carbon credit market to support their growth.

A Biodiversity Credit Alliance (BCA) –formed by 26 members and partners- launched in December with a focus on establishing Global Biodiversity Credit Principles. It too leverages lessons from the development of voluntary carbon markets (VCM). It notes that VCM principles did not plan for scalability, including design and deployment of technology like distributed ledger technology (DLT) in its architecture. BCA aims to have verification integrated within Web3/DLT policy engines to help shape a new market for voluntary biodiversity credits.

Chart: Comparison of applications of biodiversity credits

Source: Ducros, A., Steele, P. (2022). Biocredits to finance nature and people: emerging lessons, IIED, London

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Finance discussions dominate biodiversity conference – ‘30×30’ is the outcome

For the first time at the UN Convention on Biological Diversity (COP15), a dedicated Finance and Biodiversity Day discusses the linkages between the Post-2020 Global Biodiversity Framework (GBF), the economy and financial system.

Keynote Mark Carney, co-chair of the Glasgow Financial Alliance for Net Zero (GFANZ), urged private finance to include clear priorities for nature and biodiversity in their net-zero transition plans. He also called on supervisors to develop expectations on how financial institutions should manage these risks. A group of 150 global financial institutions with more than $24 trillion in assets under management, supported the call for a clear mandate.

COP15 sets a plan for the implementation of broad-based actions. A key goal includes protecting 30% of land and oceans by 2030 (‘30×30’ target). Canada signaled its willingness to commit to the 30×30 target in an address by the Hon. Steven Guilbeault. He announced additional funding for biodiversity action in developing countries, adding to the $1 billion already committed for projects supporting nature and climate together.

Listen to the CIBC podcast on the key takeaways from the COP15 Finance and Biodiversity Day for more insights.

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Innovative pilot will increase speed and accessibility of carbon market trading

Carbonplace announced a partnership with Climate Impact X (CIX) on a pilot that will increase the speed, security and accessibility of trading high-quality voluntary carbon credits.

The pilot focuses on the technical, legal and operations framework for executing carbon credit transactions, and connects CIX’s global marketplace and exchange platform for environmental credits to Carbonplace’s blockchain-enabled settlements platform.

Demand for voluntary carbon credits is expected to increase. New customers – including companies of all sizes – can progress their climate strategies through the purchase and trading of carbon credits to fund large-scale emissions removals or reductions.

Carbonplace was founded by a group of group of nine banks, including CIBC, committed to driving climate action at scale.

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Agri-food causes a third of global GHG; Need for urgent transition finance

Climate Bonds Initiative (CBI) released a new discussion paper on finance for sustainable agriculture. The paper highlights the urgent transition finance needs in the agri-food sector to meet resilient, sustainable and net-zero agri-food production.

Agri-food systems are responsible for 31% of global greenhouse gas emissions, driving nearly 90% of global deforestation annually. Agriculture also uses on average 70% of freshwater withdrawals, creating challenges in water-stressed areas.

The paper examines the CBI’s Principles and Hallmarks for transition pathways – a framework previously developed for all sectors – and how it can be applied to agri-food transition, decarbonization and other food system goals. The framework aims to facilitate engagement, promote principles and build consensus that can benefit issuers and investors.

Chart: Transition categories for economic activities

Source: Agri-food Transition Principles, Climate Bonds Initiative, December 7, 2022 (based on ‘Financing Credible Transitions’, Climate Bonds Initiative and Credit Suisse, September 2020).

How equipped are boards of directors to meet rising challenges?

Charting the Future of Canadian Governance is a new report by the Institute of Corporate Directors (ICD) and TMX Group, that outlines recommendations to help Canadian boards meet new challenges and rising expectations.

The guidance applies to directors of companies and organizations of all sizes across all sectors, reflecting their diverse needs and resources. Recommendations include principles for board oversight of climate change initiatives, including assessing the effectiveness of action plans and relevant climate change developments such as net zero and related transition activities; to principles for ensuring environmental, social and governance matters remain aligned with company strategy.

Of note, ICD and TMX are hosting a series of accompanying virtual panel events to discuss the key principles in the report beginning in mid-January 2023.

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Banks and insurers: Global GHG Accounting and Reporting Standard expanded

The Partnership for Carbon Accounting Financials (PCAF) has expanded the Global GHG Accounting and Reporting Standard for the financial industry in a 3-part approach.

Financed Emissions Standard, first published in 2020, was updated this month to include a new methodology for sovereign debt, and guidance on how to measure financed emission removals. This expands the original methodology on covered asset classes for banks.

Facilitated Emissions Standard will support measuring and reporting GHG emissions in capital markets transactions which aims to increase transparency and accountability. A consultation was completed in October and guidance is expected in early 2023.

Insurance-Associated Emissions Standard was released in November, providing a new standard for measuring and reporting GHG emissions in (re)insurance underwriting. Deeper insights into the risk profile of underwriting portfolios will help to foster innovative approaches to decarbonization and comparability for stakeholders.

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Canada requires all new light-duty cars sold to be zero-emission vehicles by 2035

In December 2022, Environment and Climate Change Canada proposed regulation that would require all new light-duty vehicles sold to be zero-emission vehicles (ZEVs) by 2035. Canada also introduced interim targets requiring ZEVs to make up 20% of new vehicle sales by 2026, and 60% by 2030. The proposed regulations would apply to all companies that manufacture, or import, light-duty vehicles in Canada. Light-duty vehicles (passenger cars, SUVs, and light trucks) account for about half of Canada’s emissions from the transportation sector.

Canada is also increasing financial support for purchasing ZEVs, investing in charging infrastructure, and helping to build a Canadian battery supply chain that includes critical minerals and manufacturing. The Government of Canada has committed to install 85,000 electric vehicle chargers by 2027.

With the announcement of the new sales mandates, Canada joins several other jurisdictions that have introduced their own ZEV requirements, such as the EU, UK, and US. Of note, 4 out of 5 cars sold today in Norway are ZEVs – they are well on their way to 100% ZEVs by 2025 target.

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Canadian watchdog calls out corporate issuers for greenwashing

The Canadian Securities Administrators (CSA) has released the results of its Continuous Disclosure Review Program, which checks for completeness, quality and timeliness in Canadian issuer disclosures.

The CSA found an increase in issuers making potentially misleading, unsubstantiated or incomplete claims about the sustainability of their products or services. The concern is that deficiencies convey a false impression to investors, amounting to greenwashing. Examples include misrepresentations in corporate financial statements, forward-looking information and compliance with regulations relating to Environmental, Social and Governance (ESG) matters.

Could the CSA be positioning for future enforcement measures? Improving transparency and credibility of corporate disclosures to reduce greenwashing is a growing theme among supervisory and regulatory bodies worldwide.

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ESG ratings regulations on the horizon

The UK’s Financial Conduct Authority (FCA) announced the formation of a group that will develop an interim voluntary code of conduct for Environmental, Social and Governance (ESG) ratings and data providers. The move will support greater transparency and trust in the market, which will benefit investors and rated entities.

The FCA’s interim standard is expected to complement a UK government consultation in the first quarter of 2023 that will eventually seek to regulate ESG ratings.

In 2021, the International Organization of Securities Commissions (IOSCO) published a set of recommendations calling on regulators to consider oversight of ESG ratings and data products in their jurisdictions. Last month, the Japanese Financial Services Authority published the world’s first-ever code of conduct for ESG evaluation and data providers. The EU is also working to propose ESG ratings regulation.

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UK regulatory reforms could turbocharge infrastructure investments

The UK’s ‘Edinburgh Reforms’ will repeal and replace over 30 EU-era legacy laws. Financial rules, such as Solvency II that govern insurers’ balance sheets, could see over £100 billion of private investment unlocked for UK infrastructure – good news for project developers.

The UK is working to become the world’s first net-zero-aligned financial center. The reforms include a commitment to publish a new green finance strategy in early 2023. This is expected to drive more investment into sustainable energy, such as nuclear, hydrogen and offshore wind.

Further announcements on the reform of EU legacy laws in other UK high growth industries could follow by the end of next year, including in digital technology, life sciences, green industries and advanced manufacturing.

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Does your investment fund have ‘sustainable’ in the title? Read on…

European investments funds marketed as ‘sustainable’ could see new rules that aim to reduce the risk of greenwashing. The European Securities and Markets Authority (ESMA) launched a consultation on draft guidelines for funds with Environmental, Social and Governance (ESG) or sustainability-related terms in the title.

Among the proposed requirements, funds would have to invest at least 80% of their assets towards the “environmental or social characteristics or sustainable investment objectives” defined in their strategy. The consultation, open until February 2023, is seeking feedback from alternative investment fund managers, UCITs management companies, institutional and retail investors (and investor associations), as well as many others.

Fund ‘names rules’ are also being modernized in the U.S. by the Securities and Exchange Commission (SEC), which aims to align the branding of funds with investor expectations.

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Banking supervisor clarifies climate-related financial risks framework

Basel Committee on Banking Supervision (BCBS) recently clarified how climate-related financial risks should be considered in the context of existing Pillar 1 standards for credit risk, operational risk, market risk and the Liquidity Coverage Ratio.

BCBS’ FAQ document recognizes current data limitations and that banks’ practices will evolve iteratively over time. While these are not new standards or requirements, it is a new interpretation of the existing Basel standards in order to reflect climate-related risk drivers.

In pursuing this work, the Basel Committee aims to identify potential gaps in the current framework and consider potential measures to address them. Financial institutions and their clients should watch this space.

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Podcasts

The Sustainability Agenda

CIBC Capital Markets’ podcast series focusing on the evolving complexities of the sustainability landscape – with a view to addressing current issues in a concise format to help you navigate and take action.

Charts of the day

Source: Ritchie, Hannah., Roser, Max., (2022). Environmental Impacts of Food, Ourworldindata.org.

Source: Ritchie, Hannah., Roser, Max., (2022). Environmental Impacts of Food, Ourworldindata.org.

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Roman Dubczak
Deputy Chair
Susan Rimmer
Managing Director And Head, Global Corporate & Investment Banking
Giorgia Anton
Managing Director and Head, Research
Dominique Barker
Managing Director and Head, Sustainability Advisory
Amber Choudhry
Managing Director, Debt Capital Markets
Gayatri Desai
Managing Director, Global Corporate Banking
Jacqueline Green
Managing Director and Head, Financial Markets & Senior Client Coverage
Siddharth Samarth
Managing Director, Sustainable Finance
Robert Todd
Managing Director, Energy, Infrastructure & Transition

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