Sustainability Newsletter – August 2024

LSEG (The London Stock Exchange Group) released Investing in the Green Economy 2024. It finds that the global green economy has expanded considerably, reaching a market capitalization of US$7.2 trillion in Q1 2024 with a long-term growth rate that is outpacing the broader equity markets.

Quick recap: The global green economy, a market encompassing climate and environmental solutions, has expanded in terms of its size, growth trajectory and financial performance as represented by the FTSE Environmental Opportunities All Share Index (EOAS). According to LSEG, the green economy reached a market capitalization of US$7.2 trillion in Q1 2024, with a 10-year CAGR of 13.8% compared to 8.3% for global equity markets. If viewed as a standalone sector, the listed part of the green economy would have an annual revenue pool of almost US$5 trillion in 2023 – growing at a 7.6% CAGR over the past decade compared to a 5.3% CAGR for the combined revenues from all companies. As represented by EOAS, it would also be the second best-performing industry over the last 10 years, surpassed only by the tech sector. However, following a downsizing at certain large US green companies earlier this year, the share of the green economy in the market (represented by the green revenue weighted market capitalization versus the total market capitalization of all companies) dropped slightly from 8.9% at the end of 2023 to 8.6% in Q1 2024.

Why is this interesting?  As the global climate and energy solutions market grows, it begs the question whether the energy transition is happening at equal pace? According to the latest edition of the International Energy Agency (IEA)’s annual World Energy Investment report, global energy investments are expected to exceed $3 trillion in 2024 for the first time, with some $2 trillion set to go toward clean technologies. While the combined investment in renewable power and grids has overtaken the amount spent on fossil fuels for the first time in 2023, the report warns that major imbalances and shortfalls still exist in many parts of the world.

The Rocky Mountain Institute (RMI) published X-Change: The Race to the Top which examines clean tech competition between China, Europe, and the US. In the report’s view, despite China’s current competitive lead, the US and Europe are set to close the gap by 2025.

Quick recap: The report divides its focus on four key races: clean technology supply chains, solar and wind deployment, electric vehicle (EV) sales, and electrification. It highlights China’s significant lead in clean energy supply chains, having out-spent the US and Europe 10-fold in the past five years to achieve a market share in manufacturing of over 90% in solar and 70% in batteries. In solar and wind deployment, the race is tighter with all three regions accelerating up S-curves. In EVs, one-third of Chinese cars sales are already electric, and likely to increase to 90% by the end of the decade. Lastly, China has rapidly advanced electrification to become the first major electrostate, with an electricity share in total energy use surpassing the US and Europe by over 5 percentage points. Despite China’s competitive lead, the race is still in its early stages. The US and Europe are catching-up, having recently passed policies like the Inflation Reduction Act and the RePoweEU plan. Both regions are expected to increase clean tech supply chain investments to over US$60 billion in 2025, from US$4 billion in 2022.

Why is this interesting?  On a similar note, according to the latest insights by CTVC by Sightline Climate, a market data intelligence provider, funding for climate tech in the first six months of 2024 totaled US$11.3bn, down 20% from 1H’23 and down 41% from 2H’23. CTVC noted that the market constriction is due to investors playing “wait-and-see” for most of last year, but the trend has persisted into 2024 due to the macroeconomic climate and political uncertainty. CTVC stated that it is seeing signs that many companies and projects aren’t solely relying on venture capital funding anymore but starting to graduate from equity to project finance and debt in the race to deploy. 

The Science-Based Targets Initiative (SBTi) published a Scope 3 discussion paper which posits an alternative approach to Scope 3 target-setting that could help companies to more effectively address the environmental impact of their value chains.

Quick recap: The Scope 3 discussion paper is part of a broader package of research that aims to inform a revision of SBTi’s Corporate Net-Zero Standard first launched in 2021. According to SBTi, the practice of Scope 3 target-setting has evolved with new understanding around the challenges and opportunities associated with decarbonizing corporate value chains. The paper, which incorporates findings from a user survey, identifies five key challenges that many businesses face with the current approach to Scope 3 target-setting, including: 1) use of aggregated scope 3 emissions (across 15 categories) which is limited by the variability in GHG accounting methods and reliance on secondary data, 2) limitations in target-setting methods that project a linear change in emissions or emissions intensity and does not account for variances; 3) limitations in target-setting boundaries, which could lead to potentially misleading target formulation; 4) limited nuance around levels of influence and potential levers to address value chain emissions sources; and 5) difficulty in assessing and communicating progress over time.

The paper explores options under consideration that could enhance Scope 3 target-setting, such as expanding beyond traditional metrics of aggregated Scope 3 (measured in tCO2e) to include outcome-based metrics that assess the alignment of an organization’s procurement and revenue generation activities with global climate goals; revising the target-setting boundary approach to prioritize action on the most climate-relevant activities in the value chain; and consideration of influence in the target-setting framework to acknowledge the degree of influence companies may have over relevant emissions sources in their value chain. The paper is open to stakeholder feedback.

Why is this interesting? In addition to the options being considered for Scope 3 target-setting, the paper also explores five scenarios in which environmental attribute certificates (EACs) could be used in the new Corporate Net-Zero Standard. In April, SBTi was criticized for announcing the use of EACs, including voluntary carbon credits, for scope 3 abatement purposes, and then retracting the statement.

Carbon Direct and Microsoft released the 2024 edition of the Criteria for High-Quality Carbon Dioxide Removal (CDR). The Criteria offers best practices to advance common standards for quality across CDR solutions, and aims to help market participants to develop, procure and scale high-quality projects.

Quick recap: The Criteria, which is updated annually to reflect evolving science and its impact on CDR methodologies, includes new guidance on environmental harms and benefits highlighting the importance of protecting and enhancing nature while equitably scaling up the carbon removal industry. The Criteria also reflects the impact of recent policy announcements, including the White House’ new Principles for Responsible Participation in the Voluntary Carbon Markets, and the EU’s Carbon Removal Certification Framework, that press the need for evidence-based CDR.

The Criteria builds on a set of common principles first introduced in 2021, including: removals are additional if they would not have occurred without carbon finance (additionality); a project’s baseline is a conservative estimate of the carbon and other GHG impacts that would have occurred without carbon finance (baseline); stored carbon has the capacity to withstand reversal or re-emission to the atmosphere (durability); all GHG emissions associated with a CDR project must use repeatable and verifiable GHG quantification methods (measurement); and projects require a plan for long-term monitoring, reporting and verification (MRV).

Why is this interesting? Aside from releasing the Criteria, Microsoft has been putting words into action having procured 5.015 million metric tons of carbon removals in 2023. In July 2024, it entered into a landmark offtake agreement with 1PointFive, a carbon capture, utilization and sequestration company, to purchase 500,000 metric tons of CDR credits over six years, enabled by STRATOS, 1PointFive’s first industrial-scale direct air capture (DAC) facility under construction in Texas. The agreement is the largest single purchase of CDR DAC credits to date and demonstrates how one of the world’s largest corporations is integrating scalable DAC into its net zero strategy.

Environment and Climate Change Canada (ECCC) released its first annual report on the Canada Clean Fuels Regulations (CFR) credit market, which illustrates a nascent-but-growing market.

Quick recap:  From July 1, 2023, CFR requires producers and importers of gasoline and diesel to reduce the carbon intensity (CI) of fossil fuels used in Canada by 15% below 2016 levels, by 2030. The regulation established a compliance credit market whereby annual CI reduction requirements can be met by creating or purchasing CFR credits. The report, which covers the compliance period of June 21, 2022, to December 31, 2023, found that a total 11.3 million CFR credits were generated. This includes roughly 2.8 million credits grandfathered from the rollover of the Renewable Fuels Regulation (RFR). Of the total volume of credits, fuel types such as ethanol generated over 50% of credits, mostly attributed to Ontario and Quebec blend mandates, while renewable diesel generated just 15%. The report also revealed that credit prices were quite varied, with just over 3 million compliance credits transferred at an average price of $133.20 over the period. It noted that since the CFR credit market is in an early development phase, credit pricing information will not be economically robust until the market matures. Overall, the report was highly anticipated given the nascency of the CFR program, and the lack of publicly available market information to date.

Why is this interesting?  Canada seeks to scale-up the production and use of clean fuels through incentives announced in Budget 2024, including a biofuels production fund to support production capacity for renewable diesel and sustainable aviation fuel (SAF) among others. Canada is not alone. In last month’s King’s Speech to the UK House of Commons under a newly-elected Labour Government, it was announced that a Bill will be introduced to support SAF production through a Revenue Support Mechanism – paving the way for UK biofuel producers to unlock finance for their projects.

The Institute for Sustainable Finance (ISF) published a paper on The Wealth of Wetlands. It attributes the economic value of the natural services provided by Canada’s wetlands at approx. $225 billion per year – or roughly 10% of GDP – and highlights the benefits to businesses in investing in their conservation and restoration.

Quick recap: Wetlands are a valuable biosphere, providing natural services that include flood and erosion prevention, wildfire suppression, irrigation for crops and more. The paper focuses on valuing two natural services from Canada’s vast wetlands: 1) water filtration (valued at $201.8 billion per year, calculated by using an average estimate of water filtration rates per hectare per year, against satellite land mapping for an estimate of wetlands coverage), and 2) carbon sequestration (valued at $21.8 billion per year, calculated by using accepted measures of the social cost of carbon and the net carbon sequestration capacity of Canadian wetlands).

The paper finds that wetlands are disappearing quickly due to urban development and agricultural conversion and warns that billions of dollars in value could be wiped out from balance sheets without properly accounting for it. While data points to value nature have limitations and challenges, the paper takes a step towards placing nature in economic terms and into a language familiar to decision-makers. It highlights that investing in conservation and restoration presents many benefits for individuals and firms, including improved asset quality, portfolio diversification, long-term returns from asset value appreciation, alleviated future resource scarcity and regulatory change risks, access to tax benefits, and lower artificial processing costs from natural assets providing services.

Why is this interesting? The paper advocates for better land-use decisions, which can be supported by Nature-based Solutions (NbS). To bridge the NbS gap, the World Business Council for Sustainable Development (WBCSD) recently published new resources to help companies build their business case for NbS. A companion report offers eight case studies that highlight how companies can select, resource and implement NbS in place of traditional approaches, and a Nature-based Solutions Map can help companies to identify the types of NbS that best address their priority challenges and opportunities.

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 volume of sustainable finance debt in the second quarter of 2024 stood at $338 billion, compared to $305 billion in the second quarter of 2023.

Below is a breakdown of volumes by product type.

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