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US companies reveal how climate change is increasing costs

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Welcome back from a drizzly London, where most of us continue to be gripped by the appalling conflict raging at the other end of Europe. The crisis playing out in Ukraine has meant that this week’s new report from the UN’s Intergovernmental Panel on Climate Change garnered less attention than some previous instalments from the organisation. But there were some important points in the report for investors to bear in mind.

For one thing, it underscored the vast scale of potential losses — by 2100, up to $14tn in assets will be exposed to climate hazards on the world’s coastlines alone. It also highlighted a chronic problem with international climate finance. The majority of it has been directed towards projects aimed at reducing emissions, rather than adapting to climate threats. That might seem unsurprising; a solar power plant, for example, is a more obvious generator of investment returns than a sea wall. But the IPCC urged a serious increase in adaptation funding, with a focus on innovative financial approaches. Notably, it lent its backing to an expansion of blended finance, arguing that public-sector money can be a powerful mobiliser of private cash.

Today’s newsletter highlights two angles that could prove crucial in the global climate struggle: the push for transparency around companies’ environmental footprints, and the drive to put a price on carbon. And as the fighting in Ukraine rages on, we dig into the implications for companies’ sustainability credentials. Read on. (Simon Mundy)

Facebook and Under Armour disclose climate risks in new SEC letters

Facebook, led by Mark Zuckerberg, said the polar vortex of 2021 increased its electricity costs © REUTERS

This week’s new IPCC report painted a broad, disturbing picture of the climate crisis. Rising sea levels are now expected to be unavoidable, and the warmer world poses “terrible risks to our planet if we continue to ignore science,” said US climate envoy John Kerry.

But there was a second, similarly disturbing picture of the climate crisis that came into focus this week. It all started back in September, when the US Securities and Exchange Commission sent letters to a number of big US companies.

This week, the companies began publishing responses to the SEC about climate change risks they face, giving a glimpse into how climate change and extreme weather are gradually increasing costs.

Facebook, for example, told the SEC that the polar vortex of 2021, which knocked out electricity in a swath of the central US, increased its electricity costs. Though Facebook did not think the polar vortex’s impact was material, the company said “it would be prudent” to add to its risk disclosures that adverse weather events could increase energy costs in the future.

Clothing manufacturer Under Armour told the SEC its new insurance policies jumped 26 per cent in 2021 for flood and property coverage. The company’s insurance carriers and brokers said a rise in natural disasters was one reason why insurance premiums shot up.

Target, Discover Financial and Charles Schwab were among the other big companies that submitted responses.

The SEC’s climate inquiries have prompted companies to “show their work” and be specific about how they determined certain information was not material, said Betty Huber, a partner and global co-chair of ESG practice at Latham & Watkins. The SEC’s requests suggest that the agency’s landmark climate disclosure proposal will include elements of the disclosure framework established by the Taskforce for Climate-related Financial Disclosures (TCFD), and that “the SEC is looking for as much quantitative data and support of conclusory statements as possible”, Huber said.

The SEC is expected to vote on its climate disclosure rule as soon as March 9. We will keep you updated about the details when we know more. (Patrick Temple-West)

Fiona Hill: Do you really want to have your money invested in Russia right now?

Fiona Hill
Fiona Hill focused on how Russian investments should be framed from an ESG perspective © AP

We said on Monday that BP’s plan to dump its Rosneft stake and a similar exit from Russian assets by Norway’s sovereign wealth fund would not be the last divestments to follow Moscow’s invasion of Ukraine. Sure enough, Shell has since pulled out of its joint ventures with Kremlin-backed Gazprom.

These giant reversals of corporate strategy have grabbed the headlines, but countless other multinationals are debating their future in Russia as horror mounts over Vladimir Putin’s war. Legal considerations in the light of western sanctions will be decisive for some, the suddenly shifted balance of financial risks and rewards will weigh more heavily for others, but most are being forced to rethink simply because stakeholders are telling them that it would be immoral to continue as before.

We have written a lot in this newsletter about stakeholder capitalism and what some now call corporate political responsibility, a term which captures executives’ growing willingness to weigh in on political issues close to home, from immigration to racial equity. When the issues are geopolitical, however, the stakes are higher.

Several corporate advisers said this week that their US clients felt pressure from employees in eastern Europe to be at least as vocal in speaking up for Ukrainians, as they had been after big domestic crises such as George Floyd’s murder. By Tuesday, brands including Apple, Ford and Nike were suspending operations in Russia.

But it was left to Fiona Hill, the former US National Security Council member who gave explosive testimony at Donald Trump’s first set of impeachment hearings, to frame the question as a test of companies’ environmental, social and governance commitments.

“This is the epitome of ‘ESG’ that companies are saying is their priority right now,” the Russia expert told Politico. “Just like people didn’t want their money invested in South Africa during apartheid, do you really want to have your money invested in Russia during Russia’s brutal invasion and subjugation and carving up of Ukraine?”

Executives like BP’s Bernard Looney have certainly embraced the rhetoric of ESG, feeding the scepticism of those who see ESG as incompatible with fossil fuels. Others who have made similar pledges of social responsibility will now have to decide whether they are compatible with operating in an economy that revolves around Putin. At least in the short term, that may sharply change the debate about the substance — and costs — of ESG. (Andrew Edgecliffe-Johnson)

Singapore leads the carbon reduction race in south-east Asia

© AFP via Getty Images

Singapore, which in 2019 became first country in south-east Asia to introduce a carbon tax, has taken a step further to solidify its position as a regional leader in carbon reduction.

Last month, Singapore’s finance minister Lawrence Wong announced plans to increase the city-state’s carbon tax fivefold in the next two years to accelerate efforts to reach net zero by mid-century.

Wong’s plan will raise the country’s carbon tax from the current level of S$5 per tonne ($3.7 a tonne) to S$25 per tonne ($18.4 a tonne) in 2024 and S$50-80 per tonne ($36.8-$58.9 a tonne) by 2030.

Compared with European carbon taxes, the S$25-a-tonne carbon levy is still low. But Singapore’s new levy is much higher those set by its neighbours, where few countries have supported the idea to tax heavy polluters.

The drastic rise was a surprise even for longtime specialists in the field. Some are concerned that the plan is too aggressive and will push business costs up, especially for the country’s top industries such as petroleum refining and electronic manufacturing — and eventually for consumers.

Green financial advocates, on the other hand, believe that the action will bring positive change to Singapore, which aims to position itself as the centre of green finance in Asia.

“The new carbon tax is a great manifestation of Singapore’s commitment to sustainability,” said Bo Bai, chair of Singapore-based digital exchange Metaverse Green Exchange. The levy, coupled with the government’s progressive and rigorous regulatory framework and a booming fintech start-up scene, puts Singapore in an ideal position to be the region’s green financial hub, Bai added.

Singapore’s new scheme will also allow companies to buy international carbon credits to offset up to 5 per cent of their taxable emissions. Most existing systems in the region, such as those in Australia and China, only accept domestic carbon credits.

Mikkel Larsen, chief executive of Singapore-based carbon exchange Climate Impact X, said that the acceptance of international credits was “truly visionary” as it would provide the opportunity for the country to become the global centre for cross-border carbon trading and show a blueprint for how the international carbon market can proliferate. (Tamami Shimizuishi, Nikkei)

Chart of the Day

Bar chart of % of investors that expect to reduce exposure showing Oil and gas is the top sector where credit investors expect to reduce exposure in the next three years

As credit investors put greater emphasis on sustainability issues, which sectors are they shifting away from? Already hit by widespread divestment, the oil and gas industry looks set for plenty more over the next three years, according to research released this month by Bank of America.

Investors expect to cut their exposure to oil and gas far more than to any other sector, according to the report. That’s despite the findings of a December 2020 survey from BoA, in which global equity investors said oil and gas had “the most opportunity to improve” in the sustainability stakes.

Still, more than a fifth of respondents focused on investment-grade assets said they did not expect to cut exposure to any sector based on ESG concerns in the near future.

One smart watch

  • Check out this video from SEC chair Gary Gensler about the name games funds are playing when adding “green” or “sustainable” to a fund’s name. “It’s easy to tell if milk is fat-free,” Gensler said. “It might be time to make it easier to tell whether a fund is really what they say they are.”

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