Sustainability Newsletter – December 2024

The UN-convened COP29, the largest global convention on climate change, recently concluded in Baku, Azerbaijan. While countries reached agreement on a new climate finance goal, talks were mired by disagreements on the speed and scale of climate ambitions, critiques of the COP structure, and geopolitical concerns. Below is a summary of our key takeaways and their implications for businesses.

Quick recap:

• Geopolitical Overshadow: Trump’s U.S. election victory came just days before COP29’s opening day. Trump has promised to pull the U.S. from the Paris Agreement, as in his first term. Countries’ nationally determined contributions (NDCs) under the Paris Agreement are important signals to the private sector on the trajectory of national economic transitions. The Alliance of CEO Climate Leaders has advocated for more ambitious, credible and investible NDCs and the need to translate these plans into stable, long-term policies to attract private sector investments – signaling continued momentum.
• Climate Finance Goal: Countries agreed a New Collective Quantified Goal (NCQG) to provide at least US $300 billion annually to assist developing nations in addressing climate change impacts. Although this figure falls short of the US $1.3 trillion requested by developing countries, it represents a tripling from the US $100 billion annual target established in 2009, which is set to expire in 2025. The NCQG is expected to catalyze additional funding from private investments.
• Global Carbon Market Framework: Agreement was reached on the remaining sections of the Paris Agreement’s Article 6 carbon markets. This includes Article 6.2, which facilitates country-to-country carbon credit trading, and Article 6.4, which establishes a new carbon crediting mechanism for public and private entities that will broaden and link carbon markets across the world. Once specific methodologies have been approved by the Article 6.4 Supervisory Body (expected in 2H 2025), project developers can begin to register eligible projects, with the potential of generating carbon credits late next year.
• Calls for COP reform: A group of former leaders and climate experts published an open letter criticizing that the current COP structure is no longer ‘fit for purpose’ to deliver on agreed commitments. Recommendations include smaller, more frequent meetings, strict criteria for host countries, and rules to ensure companies show clear climate commitments before being allowed to send lobbyists to the talks.
• Clean energy pledges: The COP29 Global Energy Storage and Grids Pledge commits signatories to a collective deployment of 1,500 GW of energy storage by 2030, a sixfold increase from 2022 levels, and to add or refurbish 25 million km of grids by 2030. Additionally, the COP29 Hydrogen Declaration focuses on scaling up renewable hydrogen production and decarbonizing existing fossil fuel-based hydrogen production. Pledges can help to foster innovative partnerships and align investment strategies, but forthcoming COPs will also need to work more closely with governments and businesses on implementation.

Alongside formal negotiations, COP29 offered a forum for governments, businesses, and civil society to collaborate and present their climate solutions. A summary is available here.

What’s next? COP29 serves as an opportunity for businesses to reassess their sustainability strategies and prepare for increased accountability from consumers, stakeholders, and regulation. At next year’s climate talks in Belem, Brazil, countries are expected to submit updated NDCs with potentially more ambitious targets to cover all greenhouse gases and all sectors to keep the 1.5°C warming limit within reach.

The International Energy Agency (IEA) released its first-ever report on Recycling of Critical Minerals: strategies to scale up recycling and urban mining. It highlights the significant benefits that recycling could achieve for countries’ energy security, diversification, and emissions reduction, and ultimately reduce the need for new mining supply by 25-40% by 2050.

Quick recap: The report emphasizes that recycling is essential for securing and sustaining critical mineral supplies vital for clean energy transitions. As demand for minerals like copper, lithium, nickel, cobalt, and rare earths increases, recycling provides a secondary supply source, reducing dependance on new mines and enhancing supply security for importing countries. If countries fulfill their national climate pledges, recycling could decrease new mine development needs by 25% for lithium and nickel, and by 40% for copper and cobalt, by 2050. While new mines are still essential to meet mid-century supply levels, recycling could lower the required US $600 billion mining investment through 2040 by 30%, as well as lessen the environmental and social impacts of mining (recycled minerals incur 80% less greenhouse gas emissions than primary materials) and prevent waste from ending up in landfills.

Despite this potential, the use of recycled materials has not kept pace with rising consumption, leading to a decline in secondary copper and nickel supplies. However, the market for recycled battery metals has surged, increasing 11-fold in less than a decade. With over 30 new recycling policies introduced globally since 2022, the market value of critical minerals recycling could reach US $200 billion by 2050. 

Why is this interesting?  Here’s a related fact: Since the U.S. Inflation Reduction Act’s implementation in 2022, companies have announced US $120 billion in domestic battery and critical minerals capacity, including 17 new U.S. battery plants, according to Reuters, based on data by Benchmark Mineral Intelligence. When it comes to investing in the minerals and metals needed to supply those gigafactories, most of the projects receiving federal funds are those looking to enhance existing recycling capacity. 

Carbon Direct released its 2024 State of the Voluntary Carbon Market (VCM) Report, underscoring the challenges of quality and investment for carbon dioxide removal (CDR) projects, and the need for a broader base of buyers to ensure a sustainable and effective market.

Quick recap: The report emphasizes the urgent need to attain the removal of 5-10 billion tonnes of CO₂ annually by 2050 to limit global warming to 1.5°C. The VCM plays an important role in channeling finance to CDR projects, which can include a variety of methods, ranging from traditional practices like afforestation to advanced technologies such as direct air capture (DAC). Despite a growing demand for CDR credits, they currently represent only 4% of the total VCM carbon credit supply vs. the majority of credit supply focused on carbon avoidance and reduction. While companies with public CDR commitments could drive demand to 30-50 million tonnes per annum (Mtpa) by 2030, this remains a small fraction (less than 5%) of what is necessary to meet climate targets. The report also highlights that credit quality is a significant concern, with fewer than 10% of projects meeting high-quality standards.

While nature-based CDR projects are positioned to deliver the majority of near-term credits at accessible prices, they remain significantly underfunded. High-durability CDR projects, which include engineered-based solutions, require mature project finance and bankable offtake agreements to scale effectively. Only a small number of companies dominate the forward purchasing of CDR, with Microsoft accounting for 80% of high-durability CDR pre-purchases in 2024. The report calls on standard setting organizations to develop coherent and actionable approaches that clarify the responsible use of high-quality carbon credits to unlock demand with a broader base of buyers.

Why is this interesting?  The findings of Carbon Direct’s report are particularly relevant in light of the subsequent release of the International Organization of Securities Commissions (IOSCO) final report on ‘Promoting Financial Integrity and Orderly Functioning of Voluntary Carbon Markets’. IOSCO outlines 21 ‘Good Practices’ to enhance financial integrity across all carbon credit markets, including establishing sound market structures, promoting transparency for fair trading, and conduct to prevent market fraud and abuse – echoing the need for robust frameworks to support the growth and credibility of carbon markets.

A new report on Global & Canadian Use of Voluntary Carbon Credits and the Related Financial Accounting and Disclosure Considerations provides insight into the corporates buying voluntary carbon credits. It reveals that Canadian companies have a ‘home bias’ for credit-generating projects in Canada, bucking the global trend.

Quick recap: The report by the Institute for Sustainable Finance, CPA Canada, and the International Federation of Accountants, analyzes the use of voluntary carbon credits by Canadian corporate buyers, focusing on Canadian practices and global comparisons. The report reveals that from 2020 to 2022, 51 of Canada’s 58 largest public companies (by revenue) have set greenhouse gas (GHG) emissions reduction targets. However, only 13 disclosed specific project-level details regarding the voluntary carbon credits they purchased to achieve targets. In Canada, the financial services and software sectors accounted for 95% of credit purchases, while globally, fossil fuels, manufacturing, services, and transportation sectors have led. The report also highlights a strong preference among Canadian corporate buyers for local projects, with half of the credits they purchased generated in North America, including 39% in Canada, while globally, most credits purchased come from developing countries. Additionally, the report points out the absence of specific International Financial Reporting Standards (IFRS) for carbon credits, leaving companies to determine the asset’s classification which can affect how these are reported in financial statements.

Why is this interesting?  While there is an absence of carbon credit financial accounting guidance, companies who have adopted the International Sustainability Standards Board (ISSB)’s sustainability disclosure standards (known as IFRS S1 and S2) can report how they use, or are planning to use, carbon credits to achieve their emissions targets. Canadian companies will soon receive similar guidance. The Canadian Sustainability Standards Board (CSSB) recently concluded an extensive public consultation on its proposed draft standards (known as CSDS 1 and CSDS 2) which is anticipated to broadly mirror ISSB’s IFRS S1 and S2. The final standards are expected to be issued in December 2024 and become effective on a voluntary basis for publicly listed enterprises from January 1, 2025. 

Sustainable Fitch released Sustainable Finance Trends Q3 2024. The report highlights the market trends and developments shaping sustainable finance issuance volumes in the third quarter of 2024, noting a growing regulatory emphasis on corporate transition planning.

Quick recap: Labelled bond issuance, which include green, social, transition and sustainability-linked bonds, showed declining momentum in Q3 2024 since the start of the year, but remained slightly higher than Q3 2023 with a 3% increase year-over-year. Among the trends and developments shaping this market, Sustainable Fitch noted that labelled bonds have continued to demonstrate a strong focus on climate impact, with avoided emissions being the most reported metric, appearing in 73% of nearly 1,450 assessed bonds. They also reveal that in 2024 global regulatory requirements are increasingly emphasizing the importance of transition planning. Major standard-setting bodies now require disclosures on climate-related risks and strategies, and a growing number of companies are beginning to report their transition plans against several key indicators, such as emissions reduction and net zero goals.

Why is this interesting?  In similar news, Climate Engagement Canada (CEC), an investor-led initiative driving engagement on business transition to net zero, released its 2024 Net Zero Benchmark assessment. The report finds that over half of the 41 companies it assessed (representing some of Canada’s top emitters listed on the Toronto Stock Exchange) now have transition plans in place with net zero commitments. Nine companies have increased their scoring since last year against CEC’s 10 benchmark indicators which include disclosure of emissions reduction and net zero targets. Furthermore, three companies have committed to aligning their capital expenditures with their stated targets, demonstrating that their plans have been costed. The report shows that incremental progress on accountability for climate action is improving, but that more work is needed.

Last month, a bipartisan bill known as the Carbon Dioxide Removal (CDR) Investment Act, was introduced in the U.S. Congress. According to the World Resources Institute (WRI), the bill (if passed) could expand the eligibility of carbon dioxide removal (CDR) technologies for federal incentives, significantly bolstering the industry.

Quick recap: Currently, the U.S. Inflation Reduction Act supports CDR technologies through the 45Q tax credit, which incentivizes the geological sequestration and utilization of CO₂ captured specifically via methods such as direct air capture (DAC) and bioenergy with carbon capture and storage (BECCS). However, many other carbon removal methods are not eligible for this credit, including enhanced rock weathering, marine carbon dioxide removal and other approaches that use biomass. The newly proposed bill aims to fill this gap by introducing a tech-neutral tax credit of US $250 per metric tonne of CO₂ (tCO₂) for various removal methods, while BECCS would receive US $110/tCO₂. In comparison, the existing 45Q levels only offer up to US $180/tCO₂ for geological sequestration and US $130/tCO₂ for utilization, but for CO₂ removed through BECCS up to US $85/tCO₂ for geological sequestration and US $60/tCO₂ for utilization.

If passed, the bill would require CDR methods to demonstrate net carbon removal through lifecycle accounting, ensure CO₂ storage for at least 1,000 years, and quantify carbon removal with a 95% confidence threshold. The bill also includes specific guidelines for biomass feedstocks to mitigate environmental impacts and mandates the establishment of environmental safety standards for marine CDR approaches. Eligible projects must be based in the U.S. and be operational by January 1, 2035. 

Why is this interesting?  While the U.S. bill’s passage is uncertain, newly enacted legislation in Europe will equally boost the CDR industry. Final legislation was approved establishing the first EU-level Carbon Removals Certification Framework (CRCF). This voluntary framework aims to promote high-quality carbon removal and soil emission reduction activities, including BECCS, carbon storage in long-lasting products, and carbon farming practices. Certified activities must demonstrate net carbon removal benefits, be additional, ensure long-term storage, and avoid environmental harm, with an EU-wide registry ensuring transparency and traceability of the units.

During COP29, the UK government launched its new Principles for Voluntary Carbon and Nature Market Integrity aimed at increasing finance from all sources – public and private – to scale a nascent international market in nature credits. 

Quick recap: Nature sustains economies and livelihoods. However, a global biodiversity finance gap exists, estimated to be US $700 billion per year. To scale nascent biodiversity finance, the UK government is promoting the development of high-integrity Voluntary Carbon and Nature Markets (VCNMs) to facilitate the generation and trade of nature credits, which are tradable securities representing a unit of improvement to biodiversity. In laying-out a vision for good practice, the UK government has drawn on U.S. principles for high-integrity voluntary carbon markets, as well building on integrity initiatives established by the Integrity Council for the Voluntary Carbon Market (ICVCM) and the Voluntary Carbon Markets Integrity Initiative (VCMI). The UK has been engaging diverse stakeholders to advance biodiversity credit markets, including co-launching the International Advisory Panel on Biodiversity Credits (IAPB) with France, and working with the British Standards Institution (BSI) to establish Nature Investment Standards. Further consultation on the Principles for VCNM Integrity will be launched next year.

Why is this interesting?  The UK government sees a clear role for the responsible use of high-integrity carbon and nature credits by companies as part of climate and nature strategies. But nature and biodiversity are not the only focus. Last month, the UK Department for Environment, Food and Rural Affairs convened a roundtable to align businesses on strategies for tackling plastic pollution ahead of UN-brokered talks on a global Plastics Treaty which has since concluded on December 1, 2024 and failed to achieve an agreement. A major sticking point in these talks was a proposed measure to limit the production of new plastic and that countries need to cap production. As we have seen through COP29 on climate, and earlier at COP16 on biodiversity in October, it’s been a tumultuous year for multilateralism, but many in government and business remain steadfast in the pursuit of a more sustainable future.

In line with our commitment to make sustainability a reality for our clients and the communities we serve, CIBC Capital Markets continues to advise and lead significant client deals as part of a focused objective to help our clients achieve their sustainability goals.

Anyone who has travelled on London’s famed Underground knows well the guidance: “Mind the Gap.” It is advice well offered for a transportation system that is perfectly imperfect as it moves Londoners around a system of trains and stations where alignment is not always what it might be between cars and platforms.

In many ways, it’s also an appropriate metaphor when cast in a climate technology context: there’s a gap that exists when it comes to scale. Indeed, there are myriad gaps of all types within the innovation and finance ecosystems. And scale matters in matters of climate – figuring out how to accelerate and scale up technologies so they positively impact climate change is among the largest challenges of our times.

That theme was the foundation for a vibrant roundtable session recently sponsored by CIBC Capital Markets and Innovate Calgary at the Energy Transition Center in Calgary, Alberta. The event brought together leaders from across a diverse spectrum of the climate-tech and climate-finance space to frame this challenge and explore practical solutions.

See the detailed article here

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