Weekly News | 1st to 15th August 2023

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. 

 Japan | Japan warms up to coal despite criticism

• Japan refuses to phase out coal, aiming to blend ammonia with coal for “clean coal” technology despite criticism.
• Japan’s commitment to ammonia aims to use existing coal plants and export the technology, facing supply constraints and skepticism. Critics argue that ammonia prolongs fossil fuel reliance, potentially increasing emissions and other environmental hazards.
• Critics argue that the ammonia method has limited potential, suggesting it’s a strategy to protect industrial interests rather than shift to renewables.

Read more about this story: Nikkei Asia, NY Times

Codo’s comment: The more investment that is funneled into the development of “clean coal” – a new, unproven technology with risks related to noxious gas and other pollutants – the less money is put into developing domestic renewable energy generation. Japan is a highly energy insecure nation due to a lack of natural fossil fuel resources. In addition, coal itself is a highly inefficient energy resource, where much of the readily available supply has already been mined and used. As miners have to go deeper, the costs – both economic and environmental – grow exponentially. Rather than investing in a new energy supply system that will still require significant fuel imports (both coal and ammonia will need to be imported), Japan should be investing in the more economically, environmentally, and national security sound options of proven wind and solar energy generation. Unlike coal and ammonia, Japan has significant domestic offshore wind resources for which the development is consistently being delayed.

World | Climate summit host fails clean power target

• Sky News analysis found that United Arab Emirates (UAE), host of the next UN climate summit (COP28), missed its own 2021 clean power target of 24%, reaching only 11%, with a rise to 17.5% in 2022.
• Critics question the UAE’s commitment to clean energy, citing low figures and reliance on fossil fuels, including nuclear power.
• Despite missing its target, the UAE aims to triple renewable power capacity to 20% by 2030 but lags behind the global average.

Read more about this story: Sky News,Financial Times

Codo’s comment: Goals are not action. In response to the criticisms over their failed 2021 target, the UAE set a new NDC of 40% emissions reduction by 2030. However despite these new goals, they are enacting plans to expand their oil and gas operations. The UAE is not the first to fail a climate target, nor will they be the last. But as the hosts of COP 28, they are the most controversial case to date. As such, the global response to their failure will set a president for what other countries can expect as a consequence of their own failure to meet stated goals. The expectation must not be for countries to simply set new targets and launch a marketing campaign. The expectation and international demand must be for countries to put in place robust plans to prove how they will go about achieving all of their targets – those missed and those yet to come.

World | New emissions reporting rules continue to pose challenges for investors in identifying green companies

• Current emissions reporting guidelines, including the Greenhouse Gas Protocol (GHGP) Corporate Standard, lack specificity for investors to identify climate laggards.
• Major Western firms mostly use GHGP for emissions reporting, but its broad definitions lead to variations in disclosures.
• Scope 3 emissions, related to supply chains, are particularly challenging to assess, with limited usefulness due to differences in data sources and assumptions.
• While new standards are being implemented, experts emphasize the need for more uniform and high-quality emissions disclosures to address investor concerns about greenwashing and provide clear data for sustainable investing.

Read more about this story: Reuters

Codo’s comment: Universal reporting standards are a critical tool to ensure transparency. Having disparate baselines creates confusion in the data and allows for obfuscation of negative points. That being said, scope 3 supply chain emissions reporting is still relatively new. It is to be expected that the reporting standards require revisions and updates. Overall, the more companies that report their scope 1 (direct) and scope 2 (energy derived) emissions, the easier it will be for comprehensive scope 3 (supply chain) based emissions reporting. It is important to continue improving reporting guidelines, but while that occurs, it is critical that companies begin reporting scope 3 emissions now so as to have the basic procedures in place. The reports should include detailed disclosures on assumptions, data sources, and defined scopes.

World | S&P removes ESG scores from debt ratings amid scrutiny

• S&P Global has ceased providing numerical scores (on a scale of 1 to 5) for corporate borrowers on ESG criteria, opting for text-based analysis of environmental, social, and governance risks.
• The move comes amid questions about the utility of ESG metrics and political attacks on such ratings, including an investigation by conservative state attorneys-general in the US.
• The change underscores concerns about ESG ratings’ reliability and their impact on investment decisions, with some investors suggesting the scores should not be a decisive factor.

Read more about this story: Financial Times,Bloomberg

Codo’s comment:  ESG ratings from issuing organizations such as S&P are used by investors as one criteria for determining which companies to invest in. They are intended to convey a company’s current Environmental, Social, and Governance (ESG) qualities to help inform potential investors what impact their money may contribute to. Each issuing organization has their own methodology for determining these scores, making the overall results less helpful when compared between different issuers (ex. Blackrock’s ESG score for Company A vs S&P’s score for Company A), but still completely comparable within the same issuer’s scores (ex. S&P’s score for Company A vs S&P’s score for Company B). To ensure total transparency and reassure potential investors of the credibility of their assessments, S&P is providing textual analysis rather than the distilled numerical results. This will mean that more of the analysis burden will fall on potential investors who will need to determine for themselves what weight to give to each piece of information presented in the textual analysis.

Oceana | Active Super sued for alleged greenwashing

• The Australian regulator, ASIC, is suing Active Super for misleading its members about ethical and environmentally friendly investments.
• Active Super claimed on its website to have divested from risky sectors, but ASIC alleges it held 28 investments contrary to these claims.
• The holdings included companies like Amcor Plc (tobacco packaging), Gazprom (Russian gas), and Coronado Global Resources (coal mining).
• ASIC has been addressing “greenwashing” concerns and has increased actions against firms with misleading claims about environmentally focused investments.

Read more about this story: Reuters,Bloomberg

Codo’s comment: Engendering transformative change is a game of carrots and sticks. Australia is joining the ranks of regulatory bodies using the harsh stick of legal action to require companies to “put their money where their mouth is” and back their claims with equitable actions. These regulatory restrictions are increasingly falling on the financial community as they seek to take advantage of the activist investor trend. Investing firms and issuing bodies should prepare for these regulatory challenges with clear, data-backed proof of how their funds align with their ESG/green/sustainable claims.

Europe | Germany to increase climate and transformation fund to more than €200 billion

• Germany is set to increase funding for climate protection and semiconductor production by over €20 billion, raising the total of the Climate and Transformation Fund to more than €200 billion.
• Chancellor Olaf Scholz’s cabinet will approve the additional funding, which will cover the period through 2027.
• The majority of the funds will be allocated to climate protection measures, including building renovations, replacement of fossil-fuel heating systems, and expanding the hydrogen infrastructure.The initiative is part of Europe’s efforts to accelerate emission reduction and meet ambitious climate targets.

Read more about this story: Bloomberg, ESG News

Codo’s comment: In this funding increase, Germany expands their use of the “carrot” of the carrot and stick method to incentivize further climate action. It is encouraging to see specific target actions such as building renovations detailed for the funds, as this helps to ensure the funds achieve their desired impact. Many simple building renovations, such as installing double-paned windows, can have significant positive effects on both quality of life for those within the building and improve the energy efficiency of the building overall.