Sustainability Newsletter – March 2024

The US Securities and Exchange Commission (SEC) has adopted new rules aimed at enhancing and standardizing climate-related disclosures by public companies and in public offerings.

Quick recap: Investors have been calling for more consistent, comparable and reliable information about the financial effects of climate-related risks on a company’s operations. In March 2022, the SEC issued a regulatory proposal that would mandate climate disclosure within financial reports. Over the past two years, the SEC considered a high volume of public comments causing drafting delays. The final rules will now mandate Scope 1 and 2 greenhouse gas emissions reporting for larger publicly traded companies – though Scope 3 reporting has been removed. The final rules also maintain the US’ single financial materiality standard (as opposed to a double materiality standard – comprised of impact materiality and financial materiality- used in other jurisdictions like the EU). Other provisions include the disclosure of financial effects from severe weather events and from the use of carbon offsets and renewable energy credits if material to the company’s transition plans. Compliance dates will be phased-in.

Why is this interesting? The US is crossing the threshold from voluntary to mandatory climate-related disclosures which will ultimately have ripple effects across all industries and companies in the US. For investors, the rules will provide specificity on what companies must disclose, especially on how a company mitigates or adapts to climate risks, including the use of transition plans, scenario analysis or internal carbon prices.

The International Renewable Energy Agency (IRENA) makes the case that 360 gigawatts of battery storage is needed worldwide by 2030 which would allow us to get 70% of our energy from renewable sources.

Quick recap: Renewable energy, such as solar and wind power, are critical for reducing our reliance on fossil fuels and to lower carbon emissions for a net zero future. While renewable generation has tripled globally between 2011 to 2022, it has also outstripped our ability to store it. Since renewable energy cannot always consistently produce energy at all hours of the day, a stored supply helps to smooth out this intermittency. IRENA also notes that more pumped hydropower storage, decentralized mini-grids, and electrochemical batteries are needed, along with regulatory frameworks to successfully monetize the value of new storage technologies, and building the infrastructure to scale-up.

Why is this interesting? According to IRENA energy storage technologies are the key to integrating more renewable power into our grids and for lowering energy costs, especially in developing countries. However, for investors, storage project investments can be risky due to their high cost and limited track record. The Climate Investment Fund (CIF), the world’s largest multilateral fund dedicated to energy storage, recently launched a first-of-its-kind USD $400 million Global Energy Storage Program, aiming to create 1.8 gigawatt (GW) of new storage capacity and integrate an additional 16 GW in the next three years. CIF expects that every dollar invested up to $16 in co-financing can be generated.

Global management consultancy, Bain & Company, announced a Carbon Integrity Platinum Claim through the Voluntary Carbon Market Integrity Initiative’s (VCMI) Claims Code of Practice (Claims Code).

Quick recap: The VCMI created a robust Claims Code and framework for companies to make high-integrity claims about their use of carbon credits. Companies can make three distinct Carbon Integrity Claims – Silver, Gold, and Platinum – with Platinum being the highest integrity claim. Carbon Integrity Platinum requires a company to reduce its emissions to the extent possible under the Science Based Targets initiative (or equivalent science-aligned target setting framework) and then purchase high quality carbon credits for 100% of the remaining emissions.

Why is this interesting? The market has been waiting for the development of guidance on making credible climate claims related to the use of carbon credits. Bain represents the first example of a company making the highest-level claim available under the VCMI’s Claims Code, leading the way for other corporate claims in the coming months.

Carbon Removal Canada, an independent policy initiative project of the Clean Prosperity Foundation, hosted its inaugural Carbon Removal Day on Wednesday February 28, 2024. 

Quick recap: Throughout the day, a wide range of topics were discussed, including the role of carbon removal in a net-zero future, Canada and US government’s work related to carbon removal, and collaborating with Indigenous communities on major project development. Canada is well positioned to become a leader in carbon removal due to the resources necessary to scale the industry, including natural resources, geologic storage, clean energy and a skilled workforce. However, it will take collaboration across the public and private sector to leverage Canada’s strategic advantages to grow this industry.

Why is this interesting? The carbon removal market needs to scale exponentially over the next several decades to help society reach its climate goals. Building a carbon removal industry in Canada could present tremendous opportunity. Based on recent analysis by Carbon Removal Canada, a carbon dioxide removal industry removing hundreds of millions of tonnes of CO2 from the atmosphere by 2050 could create over 300,000 jobs and add $143 billion in gross domestic product (GDP).

A new report by S&P Global Ratings forecasts green, social, sustainability and sustainability-linked bonds (GSSSB) issuance could reach USD $1 trillion in 2024 – representing a modest increase over the USD $980 billion issued in 2023. 

Quick recap: Though the issuance outlook is modest, S&P expects to see greater diversification in the GSSSB market in the year ahead. This includes: 1) by bond market type, as transition bonds (which finance environmental goals for issuers in sectors that do not generally quality for green bonds) and blue bonds (which finance sustainable use of maritime resources and blue economy) gain traction due to a wider range of projects being financed; and 2) by currency type indicating more economies could be participating in the GSSSB market. Factors underpinning this growth include expected adoption of sustainable taxonomies, and increased issuance from emerging markets to meet large unmet climate funding needs.

Why is this interesting?  According to S&P, transition bonds have struggled to find their place in the GSSSB market. Accounting for 1% (USD $15 billion) of the market in 2019, they are now set to have their strongest year on record in 2024. While transition finance has lacked a common definition for what constitutes an eligible project, new guidance is emerging. Japan published the world’s first sovereign transition bond framework in November 2023, which includes project categories such as nuclear energy, carbon capture, and alternative fuels and feedstocks for the manufacturing industry. In February 2024, Japan debut a transition bond backed by revenues from its national emissions trading system (ETS) – lighting the way for other sovereign issuers.

Last month, the EU made three big announcements which aim to advance the bloc’s climate ambitions.

Quick recap: First, an impact assessment on pathways to climate neutrality by 2050 recommends the next interim climate target of 90% emissions reduction by 2040 compared to 1990 levels. The recommended target builds on the implementation of existing policies, such as the 2030 climate and energy framework, which aims to reduce emissions by 55% by 2030.

Second, an Industrial Carbon Management strategy will support the development of CO2 supply chains and transport infrastructure critical to achieving the climate targets. The strategy will incent the commercialization of carbon capture and storage technologies, and carbon removal, with at least EUR 3.5 billion (USD $3.8 billion) among other funding. 

Third, new regulation on the horizon will establish the world’s first carbon removal crediting framework (CRCF). An EU-wide registry will be created to certify and facilitate the trading of carbon removal units, covering permanent carbon removals, carbon storage in products and in carbon farming, as well as soil emissions reduction from carbon farming.

Why is this interesting?  COP28’s first global stocktake report in December 2023 showed that much more still needs to be done to meet the Paris Agreement goals. As a result, it was expected that countries would address gaps with stronger climate action and demonstrate how they will deliver on implementation. The EU’s latest announcements are among the most ambitious to date, setting best practice for the world to follow.

A memorandum of understanding (MOU) between the UK Department of Energy Security and Net Zero, and Natural Resources Canada, aims to grow clean electricity from nascent nuclear fusion technology.

Quick recap: Nuclear fusion is generated from heating different isotopes of hydrogen. It has the potential to provide a near unlimited supply of zero emissions electricity. To commercialize and scale projects, the MOU will boost cooperation across research and development, regulatory harmonization and skills and workforce development. A related agreement between the UK Atomic Energy Agency and Canadian Nuclear Laboratories will also help to advance tritium technologies – a key fuel needed for fusion projects. The UK also recently entered into a similar fusion energy partnership with the US in November 2023.

Why is this interesting? These partnerships aim to grow a burgeoning fusion industry that has the potential to transform global efforts to reach net zero and deliver long-term energy independence. For example, the US State of Tennessee recently announced the first recipient of its Nuclear Energy Fund – fusion company, Type One Energy. They will invest USD $223 million to establish its headquarters and expand operations in the state, creating 300 new jobs and further contributing to fusion research and development.

The legal requirement that building and infrastructure developers must take steps to improve ecosystem habitat as part of their development, known as Biodiversity Net Gain (BNG), has now come into force in the UK and which mandates the use of biodiversity credits .

Quick recap: BNG requires that natural habitats for wildlife are left in a better state than before a new housing, industrial or commercial development is built. For example, if trees are cut down on a site, the developer must make up for the impact to habitat. Surveys that use statutory biodiversity metrics inform how to make up for the loss and to achieve a 10% biodiversity net gain to be maintained for a 30-year period. If developers cannot achieve BNG by enhancing on-site habitats, they must buy off-site units. If that is not enough to achieve BNG, they must buy statutory biodiversity credits.

Why is this interesting? The policy has incentivized the creation of a high integrity nature market for off-site units and biodiversity credits critical for development to continue. BNG also provides land managers (land owners, farmers etc) a new revenue stream through nature recovery projects that generate these units and credits. An analysis by the UK Department for Environment, Food and Rural Affairs in 2023 suggested this market could be worth GBP 135 – 274 million (USD $170 – 346 million) annually.

A few publications released their version of ‘ESG Trends to Watch in 2024’ with a noticeable common theme – the impact of artificial intelligence (AI) on corporate governance and risk management. 

Quick recap: Harvard Law School Forum on Corporate Governance notes that artificial intelligence is becoming more central to an organization’s ESG governance and regulators’ priorities. Around the world, regulators in the EU, US and UK are taking steps to address the ethical and social risks of AI if used inappropriately – which could lead to discrimination, bias and disinformation in the workplace. This is translating to more companies disclosing AI risk factors in Annual Reports in 2023 – a trend that is expected to increase in 2024.

Control Risks, a global risk consultancy, also sees AI integration into ESG risk management increasing in 2024. AI can optimize time-consuming data-processing tasks for environmental reporting, such as for greenhouse gas emissions, but there is a risk to business of over-reliance on such tools for ESG data. Activists can also use AI-based tools to analyze corporate sustainability reports, identify environmental degradation and social harms that could increase reputational risk for businesses.

Why is this interesting? Companies face a lot of pressure from investors and customers to improve their transparency and performance on ESG issues. According to the World Economic Forum, AI can allow data streams that were previously separate to be integrated and reconciled, informing better ESG goal-setting. But when ESG metrics and financial data are ‘divorced’, companies fail to meet ESG goals including emissions targets.

In line with our commitment to make sustainability a reality for our clients and the communities we serve, CIBC Capital Markets led significant client deals as part of a focused objective to help our clients become global leaders in environmental stewardship and sustainability.

The Evolution of ESG: Rational Sustainability

Roman Dubczak, Deputy Chair of Capital Markets, talks to Professor Alex Edmans about the recent debate on the phrase ESG – Environment, Social and Governance – namely, what it implies and what it can deliver. Alex also talks about his paper ‘Rational Sustainability’ and shares his advice on how businesses can deliver responsible, long-term value-based, outcomes for their stakeholders.

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