Weekly News | 19th to 25th July 2022

Codo Advisory keeps an eye for you on the latest events and trends in climate finance and corporate sustainability, in the world and in Japan. Here’s what caught our attention last week.

World | ESG: do ‘S’ and ‘G’ get in the way of ‘E’?   

• In this week’s cover story, “Although ESG is often well-meaning, it is deeply flawed.”, The Economist reports, claiming that the abbreviation gets in the way of accountable action. 
• The three fundamental problems identified are a lack of coherent guidance for investors and firms, confusing statements about incentives, and inconsistent measurement methods open to manipulation. 
• The proposed solutions are leaving the ‘S’ and ‘G’ -social and governance, respectively- to each firm to figure out on its own and customize according to its needs and narrowing the focus of ‘E’ from the broad subject of environmental to just greenhouse gases emissions, as it is the most urgent issue at hand.  
• Read more about this story: The Economist 

Comment from Codo: As we move into a more concrete phase of the sustainable transformation of, a greater level of precision is needed in ESG indexes. Companies will have to use increasingly specific metrics to design their plans and report about them to regulators and investors, especially on the “E” part of ESG, as indicated by The Economist. However, we can expect that following the path of climate change, the issue of biodiversity collapse is to become the next major challenge for firms. Indicators, methodologies, and metrics will be required on biodiversity impact of companies. The E of ESG cannot be limited to climate. 

World | Extreme weather conditions urge for standardization of net-zero methods 

• The recent extreme weather waves showcase the need for immediate action, leaving the finance industry with limited time to experiment with new models for measuring their carbon impact. 
• According to JPMorgan analysts, the net-zero commitments of the world’s largest investment firms such as Vanguard Group and State Street Corp. are inconsistent, and their impacts are hard to measure. 
• The Net Zero Asset Managers initiative, representing organizations with $61 trillion in assets, allows members to pick among three ways to measure how much of their portfolios are aligned with a net-zero target. Although the intention is to provide managers with the necessary flexibility, the end effect is a collection of random outcomes. 

• Read more about this story: Bloomberg 

Comment from Codo: The summer of 2021 was already breaking records, commented in the media as signs that action against climate change is urgently needed. One year later, the story repeats itself. The challenge with standardization of net-zero indexes and methods for the finance industry is that time is running out. Even though shared standards are technically best as they would help better identify greenwashing, one can wonder whether it is better to keep waiting for the perfect approach or start acting now using imperfect but available solutions. 

World | Energy crisis urges reconsideration of oil and gas  

• The Ukraine war has stirred debate over the role of oil and gas producers in investors’ portfolios. Following months of heated discussion, the European Parliament passed a new regulation this month classifying gas and nuclear energy as sustainable. 
• Schroders’ $3 billion ISF Global Energy and Energy Transition strategies say that investors are beginning to favor energy companies due to their critical role in the transition to a low-carbon economy. 
• According to Bank of America, 6% of European ESG funds now own Shell, up from 0% at the end of last year. Other energy firms, such as Galp Energy, Repsol, Aker BP, and Neste, have also seen minor increases in holdings this year. 
• Read more about this story: Financial Times, Bloomberg 

The U.S. | Biden refrains from declaring a climate emergency 

• US President Joe Biden called climate change an emergency on Wednesday, but stopped short of issuing a formal declaration, instead releasing a small package of executive steps and vowing more vigorous efforts. New funding for cooling centers was announced, as well as a drive for new offshore wind projects in the oil-rich Gulf of Mexico. 
• Those efforts, however, fall short of the demands of Democratic legislators and environmental activists who want Biden to formally declare a climate emergency, allowing the Defense Production Act to be used to scale up production of a wide range of renewable energy goods and systems. 

• Read more about this story: Reuters, The Guardian 

Canada | Canada proposes to cap oil and gas emissions 

• Canada has begun discussions on a proposal to limit and reduce greenhouse gas emissions from the oil and gas sector, the country’s largest and fastest-growing source of emissions, presenting two alternatives to assist Prime Minister Justin Trudeau to meet his climate commitments. 
• The idea was met with instant opposition from Alberta, Canada’s largest oil-producing province, which stated that the federal government cannot act unilaterally to achieve emissions goals. 
• The Liberal government of Canada intends to reduce emissions by 40 to 45% below 2005 levels by 2030, with the goal of reaching net-zero emissions by 2050. To do this, politicians must impose a significant decrease in pollution from the oil and gas sector, which accounts for 27% of total emissions in the country. 

• Read more about this story: Reuters, CBC 

China | China still falls short on CO2 cuts after a year 

• More than 2,000 power stations have participated in China’s year-old carbon market, but design flaws and data theft have resulted in limited greenhouse gas reductions and environmental improvements, Reuter reports. 
• China’s Emissions Trading Scheme (ETS) is already the world’s largest, controlling over 4.5 billion tons of CO2 emissions from the power industry annually. In the first year of operation, about 200 million tons of carbon changed hands for a total value of $1.26 billion. 
• The European ETS, now the world’s second-largest, also took time to get established, although trade volumes have steadily climbed since its launch in 2005 and helped cut the continent’s coal power emissions by 43% from 2013 to 2019. 

• Read more about this story: Reuters, Aljazeera 

Japan | Japan steelmakers set forth roadmap for a hydrogen-electric future 

• Leading Japanese steelmakers have set a roadmap for technologies that can produce low-carbon steel. CO2 emissions from the steel sector account for 40% of total industrial emissions in Japan.  
• Although significant funds are required for decarbonization, the Green Innovation Fund initiative will provide just 193.5 billion yen until fiscal 2030. The cost of decarbonizing Japan’s steelmaking is estimated to be 10 trillion yen ($72 billion). The government is expected to expand financial support amidst heated technology competition with China.  
• Read more about this story: Nikkei Asia 

Comment from Codo: Though technologies are required, decarbonization cannot be achieved only by them. To reach their goal of a low-carbon steel, Japanese steelmakers will need to establish transition plans including governance measures, engagement with suppliers and clients, business model adaptation, etc.