Sustainability Newsletter – January 2025

As we enter 2025, marking the midpoint of this decade, global progress on climate action remains “uneven”, according to economics advisory firm, Oxford Economics. In what is arguably a pivotal time for advancing a sustainable future, collaborative climate efforts have been challenged by a fragile geopolitical landscape and shifting international priorities which could turn the tide on global climate leadership.

Quick recap: Oxford Economics has published its five key climate and sustainability trends that warrant close attention in 2025. Top on their list is whether global climate and clean industrial policies will remain resilient in the face of geopolitical uncertainties. In the U.S., President Trump’s anticipated policy shifts would likely include a withdrawal from the Paris Agreement and a rollback of Biden-era climate initiatives potentially weakening the Inflation Reduction Act. In Europe, political uncertainties in Germany, France, and other major economies could erode the bloc’s climate unity, potentially impacting critical legislative initiatives such as the Carbon Border Adjustment Mechanism (CBAM) and the Deforestation Regulation. Meanwhile, the UK’s ambitious industrial policy, particularly its focus on hydrogen for decarbonization, may face challenges due to financial constraints on public spending. In more recent news, Canada’s political upheaval from Prime Minister Trudeau’s resignation also raises concerns about the continuity of key Canadian climate policies, including the pan-Canadian carbon pricing backstop, and the proposed emissions cap for oil and gas operations. These uncertainties are lending to a turning tide on global climate leadership.

Why is this interesting? Despite this shift, Oxford Economics is urging governments to prioritize the safeguarding of existing national commitments and support forums to depoliticize climate action. This is particularly relevant as signatories to the Paris Agreement prepare to submit new emissions reduction targets for 2035 (known as NDCs 3.0) next month. Canada announced its new 2035 emissions reduction target of 45-50% below 2005 levels. In a similar move, the U.S. revised its target, aiming for a 61-66% reduction in net GHG emissions by 2035 compared to 2005 levels. However, these targets are only meaningful if backed by effective policies, with Canada already noting that carbon pricing is expected to contribute as much as one-third of its emissions reduction plan in 2030.

The Competition Bureau Canada has published proposed guidelines to help businesses assess and mitigate potential liability for “greenwashing” under Canada’s recently amended Competition Act.

Quick recap: In June 2024, amendments to Canada’s Competition Act through Bill C-59 brought changes tightening enforcement on misleading or deceptive environmental benefit claims (“greenwashing”). Among the new provisions, environmental benefit claims for the purposes of promoting a product or business interest are required to be evidence-based. Yet, many companies had initially raised concerns over the uncertainty introduced by the ambiguity of the standards that could lead to potential increased liability.

The Competition Bureau, which investigates anti-competitive practices under the Competition Act, has proposed updated guidelines aiming to address this gap. Through six high-level principles, businesses can assess their compliance with the Act’s new provisions. These include: Ensuring that environmental claims are truthful, avoid exaggeration, and are clear and specific. Comparative environmental claims should also be specific about what is being compared, while environmental benefits of a product or performance claim should be adequately, and property tested; and claims about future benefits should be substantiated. The guidance further explains key concepts. For instance, claims about the environmental benefit of a business or business activity would consider “adequate and proper” a substantiation that is scientific in nature and third party verification required in circumstances where it is called for by the internationally recognized methodology being used; while “substantiation” will require establishing proof or competent evidence but not necessarily require testing in a lab; and a methodology is deemed “internationally recognized” if it is recognized in two or more countries.

Why is this interesting? The potential for greenwashing risk has weighed heavily in corporate mindsets as a surge of global ESG-related litigation and enforcement has intensified over the past few years. This is particularly evident for members of the Net-Zero Banking Alliance (NZBA) which was formed in 2021 to leverage financial sector support for the Paris Agreement goals. According to S&P Global, the recent withdrawal of all major U.S. banks from the global climate alliance is not coincidental as Trump is expected to shift policy favouring oil and gas industries and roll back regulations favouring climate-risk disclosures for investors, creating uncertainty.

The World Economic Forum (WEF) released two new reports warning that businesses failing to adapt to climate risks could see up to 7% reduction in annual earnings by 2035. This potential impact compares to nearly half of the earnings losses experienced during the COVID-19 pandemic.

Quick recap: The reports titled “Business on the Edge: Building Industry Resilience to Climate Hazards” and “The Cost of Inaction: A CEO Guide to Navigating Climate Risk”, highlight that many economic models overlook the full implications of climate risks, including extreme heat, wildfires, and drought, on businesses. WEF’s analysis seeks to raise this awareness, revealing that companies who fail to adapt to climate risks could face a 6.6% – 7.3% drop in annual earnings for the average listed company by 2035, potentially escalating to 8.1% – 10.1% by 2045. For context, S&P 500 companies saw their profit margins decline by 15.3% during the peak of the COVID-19 pandemic, but they have since recovered due to significant government investment and policy interventions. Overall, WEF expects climate hazards may cause $560–610 billion in annual fixed asset losses for listed companies by 2035, with the telecommunications, utilities, and energy sectors most exposed to these risks.

Businesses are encouraged to take proactive measures to mitigate these risks and capitalize on opportunities. For instance, WEF found that green markets are expected to grow from US $5 trillion in 2024 to US $14 trillion by 2030, and companies investing in adaptation and resilience strategies could see returns of up to US $19 in avoided losses for every dollar spent.

Why is this interesting? WEF cautions that too many businesses still perceive climate risks solely from a compliance perspective rather than from a financial perspective to guide strategy and risk management. This is particularly critical for pension funds. New research by Ortec Finance reveals that the 30 largest pension funds (by AUM) in both Canada and the U.S. are significantly vulnerable to transition and physical climate risks. By exploring a range of climate warming scenarios, the study finds that Canadian pension funds could face a 9% drop in investment returns by 2030, escalating to 44% by 2050, under a high warming (>3.7°C) stress scenario. The climate impact on the investment returns for US pension funds under the same scenario could be 50% lower by 2040, with further declines continuing without recovery until at least 2050. Conducting detailed climate risk assessments to enhance risk management and portfolio resilience is essential.

The 2024 Long-Term Reliability Assessment (LTRA) by the North American Electric Reliability Corporation (NERC) highlights significant reliability challenges for the electricity industry over the next decade, due to escalating energy demand, generator retirements, and barriers to resource and transmission development. As a result, half of the North American grid is at high risk of blackouts over the next 5 to 10 years.

Quick recap: NERC, a regulatory authority overseen by the U.S. Federal Energy Regulatory Commission (FERC) and governmental authorities in Canada, works to assure the reliability and security of the North American bulk power system. The 2024 LTRA underscores the increasing risk of grid blackouts, with more than half of the North American continent facing elevated or high risks of energy shortfalls over the 10-year period of the forecast (2025-2034). The assessment projects a significant rise in summer peak demand, expected to increase by 122 gigawatts (GW) over this period, which is 15.7% higher than current levels, while winter peak demand is anticipated to grow nearly 14%. This surge is largely fueled by the rapid proliferation of data centers, electrification across various sectors, and substantial commercial and industrial loads. Despite advancements in transmission development, NERC warns that challenges related to siting, permitting, and construction must be addressed to mitigate blackout risks, along with careful management of generator retirements, as the pace of retirements could outstrip the capacity of new resources to meet demand – with wide-ranging implications for how the grid and resources are planned and operated.

Why is this interesting? The surge in electricity demand driven by data centers and electrification trends, is causing a scramble for new electricity generation necessitating urgent action on energy resources. The consultancy, Grid Strategies, echoes this call in its latest report on Strategic Industries Surging: Driving US Power Demand. It finds that, for over two decades, the utility industry has been in a low growth period, well below 1% per year. But annual peak demand growth could average 3% per year over the next five years according to updated nationwide forecasts. Grid Strategies highlight that a 3% growth would mean six times the planning and construction of new generation and transmission capacity.

South Pole, a leading carbon asset developer and climate consultancy, published Shaping the carbon market: What to expect in 2025. It reveals four key trends that are helping to foster carbon market maturity and what it means for carbon credit buyers.

Quick recap: According to South Pole, the carbon markets have the potential to reach a trillion-dollar valuation by 2050, contingent upon robust policy frameworks and innovative climate solutions. Key to this growth are four trends that South Pole expect will foster further carbon market maturity in the year ahead. These include:

• Increasing regulation and guidance driven by governments and international organizations promoting accountability and transparency, such through Article 6 carbon market rules, the US and UK’s principles for high-integrity carbon markets, the EU’s Green Claims Directive and more. We could expect to see enhanced quality standards for project methodologies emerge, increased disclosure requirements, and new guidelines and regulations on the responsible use of carbon credits.
• Market complexity is growing due to the expansion of diverse international, national, sub-national and voluntary carbon market frameworks. But this also presents opportunities for potential market convergence, enabling shared standards and knowledge across different market segments. 
• Carbon credits as an asset class are attracting institutional investors and financial institutions, as well as insurance providers offering new carbon insurance products. Increased participation from established industries and continued market infrastructure expansion (like carbon ratings) will continue to help enhance market maturity, transparency, liquidity, and price discovery.
• Digitalization is transforming the carbon markets by streamlining project development, sales processes and Measurement, Reporting and Verification (MRV). Technologies like blockchain are also enhancing transparency, security, and traceability of carbon credits, and improving efficiency and facilitating transactions across registries and platforms.

Why is this interesting? As the carbon markets mature, South Pole also recommends that corporate buyers should stay ahead of the curve. Buyers could focus on diversifying their carbon credit portfolios to mitigate risks, secure a reliable supply of high-quality credits such as through long-term partnerships with reputable project developers and explore innovative sourcing strategies such as project offtakes; and enhance transparency and reporting practices to align with evolving regulations.

The Canadian Sustainability Standards Board (CSSB) released its final sustainability disclosure standards, offering companies more time to implement the rules. While the standards are voluntary, they will serve as a reference for Canadian regulators contemplating mandatory climate-related disclosure rules.

Quick recap: CSSB’s inaugural standards, known as CSDS 1 General Requirements for Disclosure of Sustainability-related Financial Information, and CSDS 2 Climate-related Disclosures, supports the disclosures of sustainability-related risks and opportunities relevant to investors and creditors, covering governance, strategy, climate resilience, and more. They mark a significant advancement in promoting consistency and comparability in sustainability reporting and align closely with the International Sustainability Standards Board (ISSB)’s equivalent IFRS S1 and IFRS S2 standards issued in June 2023, but with transition relief modifications reflecting Canadian needs.

Among the notable areas of CSSB’s transition relief compared to the ISSB standards are: (1) Two additional years of relief for the start of aligned reporting, (with such reporting being required within the first six months following the second- and third-year end of each annual reporting, respectively); (2) Three years of relief to provide the quantitative (not qualitative) aspects of climate scenario analysis data reporting, and (3) Three years of relief for Scope 3 GHG emissions disclosure. Looking ahead, the federal government is considering mandatory climate-related disclosure for large companies under the Canada Business Corporations Act (CBCA), while the Canadian Securities Administrator (CSA) intends to release a climate-disclosure rule for public comment.

Why is this interesting? Standardizing the quality and interoperability of sustainability disclosures will help Canadian companies’ competitiveness in the race for climate capital – especially as more countries move to adopt similar standards. The UK Sustainability Disclosure Technical Advisory Committee (TAC) – commissioned by the UK government – recently recommended to endorse ISSB’s IFRS S1 and IFRS S2 for UK use. TAC also suggested minor amendments for domestic adoption, including extending the ‘climate first’ reporting relief to two years and developing guidance for alignment with existing UK disclosure requirements.

In our top story, we had explored just one of Oxford Economics’ five key climate and sustainability themes for 2025. Artificial intelligence (AI) is another of the key trends identified, as it holds significant potential for advancing sustainability. But as the AI industry matures, governments and business leaders must carefully balance the benefits of use against the potential environmental impacts.

Quick recap: According to Oxford Economics, AI can be a powerful tool to advance sustainability. Large language models and other rapidly developing innovations can be applied to expand our knowledge of climate systems, enhance climate modeling and weather prediction, and drive developments that could mitigate adverse impacts – such as for improving energy grid efficiency, optimizing transportation and supply chains, and supporting conservation efforts. Despite its promising applications, AI presents several challenges. Training large AI models requires vast amounts of resources such as electricity, water, and critical minerals, raising concerns about environmental sustainability. Some companies are addressing this by partnering with clean energy providers, but the growing competition in the AI industry is likely to increase resource consumption in the coming years. As the AI industry evolves, its sustainability implications will become more apparent. Governments and industry leaders will need to ensure that the benefits of AI for sustainability outweigh its environmental costs. This could involve the introduction of stricter sustainability standards, such as requiring data centers to use clean energy and investing in research for low-resource AI models.

Why is this interesting? According to Oxford Economics, effective governance and targeted policies will be crucial in ensuring AI contributes to sustainable development. This is one of the new focus areas for the International Energy Agency (IEA). Last month, it convened government and industry leaders for its inaugural high-level roundtable on energy and AI, which explored the need for inclusive policies and fit-for-purpose regulatory frameworks to support sustainable and efficient AI use for energy transitions. The Chair’s summary highlights that under Canada’s G7 Presidency in 2025, the IEA, G7 and industry partners will work to build an approach to address AI concerns and harness responsible AI for energy.

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.

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