Sustainability Newsletter – October 2024

Generation Investment Management released its eight annual Sustainability Trends Report 2024, which examines global progress towards a low-carbon economy. This year, the report observes a weakening of global climate commitments and a rise in trade tensions that could set transition progress back.

Quick recap: The 2024 report finds that global climate commitments have ‘backslided’. In the year since COP28’s agreement to ‘transition away’ from fossil fuels, no detailed plans to achieve that goal have been reached. Meanwhile, the climate finance shortage has widened, and some private sector institutions have pulled back from commitments. Transition progress in key global sectors, such as power, transportation, buildings, and industry, has also been mixed. For instance, renewable energy is growing rapidly, but power demand from new data centers is exhausting clean supply; electric vehicles are now the economical choice in China, but automakers in other jurisdictions have scaled-back EV production plans; and while more prolific use of heat pumps is helping to transition the built environment, the sector is not on track to meet emissions reduction goals due to soaring urbanization trends. For the industrial sector, marketplace demand for cleaner production methods, such as green steel or cement, has yet to emerge in a significant way. The report also warns that rising international trade tensions, including the prospect of new tariffs, trade barriers, protectionism or tearing-up international treaties altogether, could further delay transition.

Why is this interesting? The report also attributes transition delay to a growing backlash over climate policy. In last year’s report, Generation had highlighted a ‘political tipping point’, as the climate crisis was finally moving to the center of global politics. But the politics of climate change have grown more difficult. For instance, last month, it was reported that the U.S. Securities and Exchange Commission (SEC) quietly disbanded its climate and ESG enforcement taskforce, which was originally established to address corporate ESG-related misconduct, such as greenwashing. The taskforce’s dissolution comes as the SEC’s climate and ESG rulemaking agenda faces increasing industry resistance and legal challenge, as well as partisan voter scrutiny on climate policy in advance of November’s U.S. elections.

The International Energy Agency (IEA) published Integrating Solar and Wind: Global Experience and Emerging Challenges, which identifies best practices for how governments can integrate variable renewable energy (VRE) sources into power systems, or risk losing out on the benefits.

Quick recap: Solar photovoltaics (PV) and wind power growth have more than doubled, both in installed capacity and in their share of global electricity generation, from 2018 to 2023. But to meet decarbonization goals, timely integration of VRE sources into power systems is key. The report features a first-of-its-kind global stocktake of integration measures across 50 power systems, which together account for nearly 90% of global solar PV and wind generation today. The analysis suggests that, in countries with low shares of VRE, two-thirds of generation growth by 2030 can be achieved without major system changes. Well-known and tested measures such as enhancing the flexibility of existing assets, improved forecasting, and the adoption of storage and advanced grid technologies are sufficient to manage solar PV and wind variability, maximizing renewables capacity. According to the report, delaying the implementation of measures to support integration could result in electricity generation from solar PV and wind being 15% lower in 2030 and shave five percentage points off their share of the global electricity mix.

Why is this interesting? The report suggests that incorporating higher levels of variable renewables into power systems requires ‘rethinking the ways in which they have traditionally been planned and operated’. The UK Government is doing just that. It recently announced the launch of a new independent National Energy System Operator (NESO), resulting from a GBP 630 million deal with National Grid to transfer the Electricity System Operator to public ownership. Effective from October 1, 2024, NESO will bring electricity and gas network planning under one roof in a bid to deliver on the UK’s clean power commitments. The move will also enable investors to build out new energy infrastructure with confidence in how their project will fit into the country’s wider clean energy plan.

Climate Impact Partners, in partnership with Imperial College Business School, published Quiet Climate Action. In its sixth year of research, the report finds that 42% of Fortune Global 500 companies are planning to use carbon credits to meet a carbon neutral or net zero target – up 2 percentage points from last year.

Quick recap: The report, based on publicly available climate commitments of the Fortune Global 500 list of companies, shows that more companies are setting targets, with 45% planning to be net zero by 2050, up from 39% last year and dramatically up from 8% back in 2020. Furthermore, 42% of companies have stated plans to use carbon credits to reach their climate targets, up from 40% last year. The research also shows that companies committed to using carbon credits are twice as likely to have a near term Science Based Target (SBT) by 2030, and three times more likely to have a net zero target by 2050 for their entire value chain – thus debunking a myth that corporate strategies involving carbon credits comes at the cost of rigorous reduction targets. While putting an internal price on carbon is helping companies to work towards carbon neutrality, there are regional variations. In the EU, carbon neutrality and similar terms will be subject to a ban on consumer facing products from 2026 under the Green Claims Directive.

Why is this interesting? The research underscores the critical role carbon credits play in a comprehensive and credible decarbonization strategy. But it also highlights a gap in how companies define carbon neutrality achievements. The Science Based Target Initiative (SBTi) recently announced it has expanded the scope of the revision of its Corporate Net-Zero Standard, to refine the approach to neutralization and other adjustments. Neutralization pathways were not previously included in the scope of the work, and there is potential to explore how carbon credits could be used in the revised Standard.

The Climate Bonds Initiative (CBI) released its Sustainable Debt Market Summary 1H 2024. Notably, it finds that the market passed US$5 trillion in cumulative volume as at June 30, 2024, setting a half-year milestone and en-route to becoming a record year.

Quick recap: According to CBI, global volume of newly issued green, social, sustainability, and sustainability-linked bonds (collectively GSS+ bonds) reached US$554 billion in the first half of 2024, a 7% year-over-year increase to 1H 2023. Of this, green bonds accounted for 70% of CBI-aligned GSS+ volume, reaching US$385.1 billion in the period, up 14% compared to H1 2023. Overall, activity was bolstered by new issuers entering the market. For instance, non-financial corporate issuers made the largest GSS+ volume contribution, reaching US$145.1 billion, a 47% increase compared to H1 2023. This included 35 aligned deals of at least US$1 billion in size. Sovereign GSS+ issuance had a record first half in 2024 with 33 countries pricing a total volume of US$104 billion, a 12% increase compared to the US$93 billion in H1 2023. Overall, the spike in issuance pushed the recorded cumulative GSS+ volume (all time issuance by notional outstanding) to US$5.1 trillion as at June 30, 2024, passing a market milestone and en-route towards potentially becoming a record year.

Why is this interesting? According to CBI, the U.S. in particular has seen a 57% increase in green bond issuance in H1 2024 compared to the same period from the prior year. A separate analysis of U.S. corporate and municipal green bonds published last month by Massachusetts-based non-profit National Bureau of Economic Research, examines how issuers use the proceeds of their first green bonds relative to how they usually invest based on other sources of finance. It finds that only 2% of U.S. corporate and municipal green bond proceeds initiate projects with clearly novel green features, meaning there is a lack of ‘additionality’ or distinct environmental benefits beyond standard practice. According to NBER, future research is needed to define more precise notions of additionality as investors and market participants do not currently distinguish among levels of additionality, as offering yields, announcement effects, green bond index inclusion and green bond fund holdings are currently uncorrelated with additionality.

The U.S. Department of Energy (DOE) announced one of the biggest efforts to seed a domestic supply chain for materials used in electric vehicles (EVs) and energy storage. Of the US$16 billion in total investment announced, US$3 billion has already been allocated to selected projects.

Quick recap: As part of the Battery Materials Processing and Battery Manufacturing and Recycling Program, DOE is enabling $16 billion in total investment for battery manufacturing, processing, and recycling. These projects are integral to the U.S’ clean energy industrial strategy to bolster a domestic supply chain that enhances America’s energy security and economic competitiveness. The DOE also announced over $3 billion in investments for 25 selected projects across 14 states to boost domestic production of advanced batteries and battery materials nationwide. This round of investment builds off a previous round of program funding in which DOE awarded a total of $1.82 billion to 14 projects.

Why is this interesting? Across the pond, the EU released its own new competitiveness strategy for inclusive economic growth. The report states that growth in the EU has been slowing, driven by weakening productivity growth, and calling into question Europe’s ability to meet its climate ambitions. The report proposes a new industrial strategy for Europe around three main areas of action: close the innovation gap with the US and China on advanced technologies, set a plan for decarbonization and competitiveness to help EU companies, and increase energy security and reduce dependencies.

A new Taskforce on Inequality and Social-related Financial Disclosures (TISFD) has officially launched, aiming to support institutional investors with a social mandate and following in the footsteps of its climate- and nature-related Taskforce predecessors.

Quick recap: TISFD intends to develop a set of recommendations that enable companies and investors to identify, assess and report on their inequality and social-related impacts, dependencies, risks and opportunities. As a multi-stakeholder initiative, TISFD is supported by more than 100 initial members, and 20 founding partners across public, private and social sectors. A steering committee, led by 4 Co-Chairs with backgrounds in finance, business, human rights and social inclusion, will be supported by a secretariat, and working groups are expected to convene in 2025. A scoping document outlining the Taskforce’s vision and indicative work plan was informed by engagement with more than 1,000 stakeholders. As inequality is a systemic financial risk just like climate change, TISFD will leverage learning from the Task Force on Climate-related Financial Disclosures (TCFD) and the Taskforce on Nature-related Financial Disclosures (TNFD), as well as engage with other standard-setters to ensure interoperability with global disclosure frameworks.

Why is this interesting? In related news, TNFD marked its one-year anniversary since the launch of the nature-related financial disclosures recommendations in September 2023. To mark the anniversary, TNFD announced further resources aimed at supporting continued momentum around their adoption. These will include: developing new nature-transition planning guidance expected in Q1 2025, supporting the use of cross-reference tables for corporate reporting, deepening interoperability with CDP’s disclosure platform, and developing a Nature-related Data Public Facility (NDPF) to address data gaps. TNFD disclosure recommendations have been voluntarily adopted by over 440 organizations from 49 jurisdictions, across 62 sectors, representing over US$6 trillion in market capitalization among publicly-listed companies, and over $16 trillion in AUM among asset owners and managers.

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.

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