Sustainability & ESG insights March'23: The S in ESG and Canada’s new ESG regulations

💡Via this monthly newsletter, we'll share more knowledge and content about what's arguably the most important domain of our generation: Sustainability and ESG. The goal is to inspire and share insights so each and everyone of us can make a difference in the Environmental, Social and Governance domain we call Sustainability.

Valuable ESG and Sustainability news of March '23

🌲In this months’ newsletter: 

• IPPC Sixth assessment Report with 10 key findings
• WBCSD Advancing the S in ESG: A primer for CFOs
• Climate Change Estimated to cost Germany 900 Billion Euros
• Canada to require suppliers to disclose emissions
• Private Equity investors lead the way in ESG in M&A
• Investments of $35 trillion needed by 2030 for Energy Transition
• Canada announces climate reporting for Banks and Insurers beginning 2024
• And more…

Latest IPCC Report Approved and the Message is Clear: Time is Running Out

ℹ March 20th the #ippc Sixth Assessment Report (#ar6 ) was released, an eight-year long undertaking from the world’s most authoritative scientific body on climate change.

World Resources Institute shared 10 key findings you need to know:

1️⃣ Human-induced global warming of 1.1 degrees C has spurred changes to the Earth’s climate that are unprecedented in recent human history.

2️⃣ Climate impacts on people and ecosystems are more widespread and severe than expected, and future risks will escalate rapidly with every fraction of a degree of warming.

3️⃣ Adaptation measures can effectively build resilience, but more finance is needed to scale solutions.

4️⃣ Some climate impacts are already so severe they cannot be adapted to, leading to losses and damages.

5️⃣ Global GHG emissions peak before 2025 in 1.5 degrees C-aligned pathways.

6️⃣ The world must rapidly shift away from burning fossil fuels — the number one cause of the climate crisis.

7️⃣ We also need urgent, systemwide transformations to secure a net-zero, climate-resilient future.

8️⃣ Carbon removal is now essential to limit global temperature rise to 1.5 degrees C.

9️⃣ Climate finance for both mitigation and adaptation must increase dramatically this decade.

🔟 Climate change — as well as our collective efforts to adapt to and mitigate it — will exacerbate inequity should we fail to ensure a just transition.

Advancing the S in ESG: A primer for CFOs

The WBCSD – World Business Council for Sustainable Development together with Shift has released a primer for CFOs on advancing the “S” in ESG.  

Social issues are becoming a higher priority on the business agenda. This is, in part, due to increasing evidence of companies facing operational, reputational and financial losses as a result of failing to address the externalization of costs and risks to workers, communities and consumers. Moreover, there is growing recognition of inequality as a systemic risk to the resilience of business operations, value chains and business models. Key stakeholders including regulators, investors, customers and civil society are demanding transparency around how corporate strategy and practices are impacting people and profit. 

This primer is designed to help CFOs in starting to understand and communicate social performance as essential to their roles and responsibilities, particularly as reporting and disclosure standards develop regionally and globally. 

Moving forward, CFOs and their teams will be called upon to: 

• Understand interrelated links between a company’s impacts on people across its operations and value chain, and its financial performance. 
• Ensure that ESG considerations are meaningfully integrated into enterprise risk management, statutory compliance, reporting requirements and the CFO’s own strategic guidance to the CEO and board. 
• Engage with investors, regulators and standard setters to guide how “S” performance and progress is evaluated internally and by external stakeholders. 
• Catalyze the integration of the company’s financial and non-financial data, analysis, decision-making and reporting in ways that meet international and regional standards, including those related to social disclosures such as the European Sustainability Reporting Standards. 

To read more and download the primer, see links below

Climate Change Estimated to cost Germany 900 Billion Euros

⚡ Due to extreme weather caused by climate change, Germany could be looking at a bill of about 900 billion Euros in total damages by mid-century.

💰 Climate change has already cost Germany at least 145 Billion Euros in between 2000 and 2021. 80 billion of that 145 grand total occurred in the last five years alone.

🔴 It is estimated that looking at extreme heat, drought, and floods, costs for Germany could be between 280 billion Euros and 900 billion Euros between 2022 and 2050 depending on how we progress with global warming.

ℹ The costs are made up of loss of agricultural yields, damage of buildings and infrastructure, impairment of the transportation of goods as well as the impact on Germany’s health system.

In March, Reuters reported this study that says that due to extreme weather caused by climate change, Germany could be looking at a bill of about 900 billion Euros in total damages by mid-century. This is a direct example of how sustainability and ESG are affecting the bottom line. The study, originally from economic research companies Prognos and GWS and Germany's Institute for Ecological Economic Research comes as Berlin works on a climate strategy that is supposed to be presented by the environment ministry.

Department of Energy Announces $2.5 Billion to Cut Pollution and Deliver Economic Benefits to Communities Across the Nation

The Biden-Harris Administration, through the U.S. Department of Energy (DOE), announced $2.52 billion in funding for two carbon management programs to catalyze investments in transformative carbon capture systems and carbon transport and storage technologies. Funded by President Biden’s Bipartisan Infrastructure Law, the two programs—Carbon Capture Large-Scale Pilots and Carbon Capture Demonstration Projects Program—aim to significantly reduce carbon dioxide emissions from electricity generation and hard-to-abate industrial operations, an effort critical to addressing the climate crisis and meeting the President’s goal of a net-zero emissions economy by 2050.  

• Scaling carbon capture technologies to boost job creation, create healthier communities and strengthen American energy and economic security
• Programs funded by President Biden’s Bipartisan Infrastructure Law
• “Drastically cutting emissions across our economy through next-generation carbon management technologies is a critical component of President Biden’s strategy to combat the climate crisis and achieve our ambitious clean energy goals.”

Government of Canada to Require Suppliers to Disclose Emissions, Set GHG Reduction Targets

As shared by ESGToday.com, large suppliers to the Government of Canada will be compelled to disclose their greenhouse gas (GHG) emissions and set targets to reduce them, starting April 1, 2023, according to new standards released.

According to Canada’s new “Standard on the Disclosure of Greenhouse Gas Emissions and the Setting of Reduction Targets,” federal procurements greater than $25 million will induce suppliers to measure and disclose their and adopt a science-based target to reduce GHG emissions in line with the Paris Agreement.

The supplier requirement can be fulfilled by participating in Canada’s Net-Zero Challenge or another approved internationally recognized and functionally equivalent standard or initiative. Launched in August 2022, the Net-Zero Challenge was established as a voluntary initiative to encourage businesses to develop and implement credible and effective plans to transition their facilities and operations to net-zero emissions by 2050.

“More and more businesses are aiming to make their operations net-zero, not just to fight climate change, but also to stimulate innovation and ensure long-term sustainability. By baking these requirements into the Government of Canada’s contracting, we will help bring more businesses on board the target of net-zero.” - Steven Guilbeault, Canada’s Minister of Environment and Climate Change

Private Equity Investors Lead the way in ESG in M&A

In March, Deloitte released a new poll that shows that private equity investors (PEI) could be paving the way when it comes to ESG diligence procedures and considering ESG provisions in M&A. According to the poll, PEIs are leading by factors of two or three compared to their corporate peers when it comes to the use of ESG clauses in deal contracts and routine ESG due diligence.

“Across the board, there is growing recognition that ESG due diligence can provide investors with meaningful insights prior to a transaction… Pre-deal ESG diligence can span many categories, ranging from a target company’s ability to comply with current and proposed regulations to existing voluntary green efforts around climate, sustainable supply chain, workforce conditions and energy usage. So, it’s easy to see a future where ESG considerations can have a meaningful impact on many M&A transactions.” - Brian Lightle, Deloitte Risk & Financial Advisory partner specializing in M&A, Deloitte & Touche LLP.

This poll of over 330 PEIs and in-house corporate M&A professionals were asked a series of questions during a Deloitte webcast in December of 2022. The result of this pole showed the following highlights:

• 49.6% of PEIs and 43.2% of corporates conduct some form of ESG pre-deal diligence.
• PEIs are nearly 3 times as likely as corporates to approach ESG due diligence consistently and formally.  PEIs coming in at 26.8% versus corporate M&A Professionals at 9.3%
• PEIs are almost twice as likely as corporations to include ESG Clauses in M&A Contracts. According to this poll about a quarter of PEIs included clauses compared to the 14.1% of their corporate counterparts.

EU Strikes Deal on E-Fuels Requiring Zero Emissions from New Cars by 2035

The European Union countries gave their final approval  to adopt a new regulation that will require a 100% reduction in emission from new cars and vans. The EU policy will require all new cars sold to have zero CO2 emissions from 2035 and 55% lower CO2 emissions from 2030, versus 2021 levels. This is in line with the European Commission’s “Fit for 55” roadmap to cut GHG emissions. However, Germany won an exemption for cars running on e-fuels, leading to concerns that traditional combustion engine cars could still be sold beyond 2035.

"The direction of travel is clear: in 2035, new cars and vans must have zero emissions,"

- EU climate policy chief Frans Timmermans

This regulation had been agreed to by the council and the European Parliament in October 2022 but during its final adoption there were roadblocks with Germany demanding an exemption. To meet this exemption, the European Commission has pledged to create a legal route for sales of new cars that only run on e-fuels to continue after 2035. Such cars will have to use technology to prevent them from starting when filled with petrol or diesel. 

As defined by Reuters, E-fuels are considered carbon neutral because they are made using captured CO2 emissions - which proponents say balances out the CO2 released when the fuel is combusted in an engine. Currently, e-fuels are not yet produced at scale.

Currently, transport accounts for nearly a quarter of the EU’s total emissions, meaning that this climate policy for cars can now be implemented. The Council has also agreed on a related Fit for 55 law mandating an increase in EV recharging and hydrogen refueling stations across Europe's main transport networks.

IRENA: Investments of $35 trillion needed by 2030 for Energy Transition

IRENA’s Director-General Francesco La Camera shared the World Energy Transitions Outlook 2023 Preview and warned that our world needs a dramatic shift in the energy transition to avoid surpassing our 1.5 C climate target. What this translates to is a total of $35 trillion is needed by 2030 to expedite this energy transition. 

Currently when looking at Gross electricity generation (PWh) we are at about 27.0PWh annually. With 28% of that being renewables, 10% being nuclear, and 62% being fossil fuels and other non-renewables. By 2050, to sustain our 1.5 C warming, power generation needs to more than triple and the ratio of renewables vs nuclear vs fossil fuels needs to drastically change. By 2050 we should have 89.8PWh of electricity annually, with 91% being renewables, 4% being nuclear and 5% being fossil fuels.

Canada Announces Climate Reporting Requirements for Banks, Insurers, Beginning 2024

Canada’s financial regulator, the Office of the Superintendent of Financial Institutions (OSFI), announced the release of its new guidelines on climate risk management, setting out requirements for banks and insurance companies to manage and disclose climate-related risks.

The guidelines include expectations for Canada’s major banks and insurance companies to begin climate-related reporting for fiscal year 2024, followed by smaller institutions the following year.

The new climate-related reporting requirements for Canadian financial institutions cover disclosure categories including governance, strategy, risk management, and metrics & targets. Key governance and strategy disclosure requirements include reporting on identified climate-related risks and opportunities, as well as how management assesses and the board oversees them, the impact of the risks and opportunities on the institution’s business and strategy, and a description of the institution’s climate transition plan.

The climate-related disclosure requirements also include reporting of Scope 1, 2 and 3 greenhouse gas emissions, including financed, facilitated and insured emissions, as well as the targets used to manage climate-related risks and opportunities, and public commitments made as part of a Net Zero alliance, such as the Net-Zero Banking Alliance (NZBA), or the Net-Zero Insurance Alliance (NZIA).

The banks and insurers are also directed to maintain sufficient capital and liquidity buffers for its climate-related risks, incorporating climate factors into capital adequacy and liquidity risk profile assessment processes.

EU Lawmakers Announce Deal to Decarbonize Maritime Shipping

Shared by ESGToday.com, Lawmakers at the European Parliament and members of the EU Council announced today that they have reached an agreement on “FuelEU Maritime,” a new regulation mandating reductions in emissions in the maritime transport sector, with targets beginning as soon as 2025.

The agreement marks another step towards the completion of negotiations for the European Commission’s “Fit for 55” roadmap – the EU’s proposed strategy to cut greenhouse gas (GHG) emissions by 55% by 2030, compared to 1990 levels, following decarbonization deals for other sectors such as automotive, road transport, buildings and agriculture, as well as an agreement to strengthen the EU’s internal cap and trade carbon pricing mechanism, EU ETS.

💡Of course there are many more insightful articles, so please share your thoughts and recommendations in the comments below.

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