Commentary

Take Five: Biden’s Gear Shift

A selection of the week’s major stories impacting ESG investors, in five easy pieces. 

This week the energy transition witnessed a change of pace in Washington, if not necessarily in Houston.

Gear shift – Joe Biden famously characterises himself as a “car guy”. And if there was any doubt, this week made clear that he’s very much an electric vehicle (EV) guy. On Wednesday, the US Environment Protection Agency (EPA) unveiled new pollution standards that will require EVs to make up 35-56% of new car and truck sales by 2032, with plug-in hybrids accounting for 13-36%. The rules give manufacturers more time and flexibility than the EPA’s original proposal, which envisaged two thirds of new sales being electric by the end of this decade. Nevertheless, the agency estimates the measures could help to avoid around seven billion tons of emissions, cutting passenger car pollution to half the levels projected for 2026. With EVs having accounted for only 7.6% of new US car sales in 2023, the incoming rules imply a sixfold increase in demand over eight years. That’s a steep curve, even though last year’s total sales – 1.2 million – were 46.3% up from 2022. Biden’s main opponent in November’s presidential election, Donald Trump, is clearly not an EV guy, having painted them as a Chinese plot. With US-based manufacturers and unions largely on board with Biden, this might be another example of fake news from The Donald.

Phase-out fantasy – Meanwhile, in Houston, Saudi Aramco’s Amin Nasser shared his thoughts on the clean energy transition during the oil and gas sector’s annual CERAWeek get-together. Reflecting his own firm’s strategic positioning, the CEO went on the offensive. “We should abandon the fantasy of phasing out oil and gas,” Nasser asserted, insisting that “peak oil and gas is unlikely for some time to come, let alone 2030”. The International Energy Agency’s Fatih Birol might have taken issue with Nasser’s forecasts, but he was busy in Copenhagen, developing new tools to deliver on the Paris Agreement. Taking a leaf out of the populist playbook, Nasser portrayed big oil as being on the side of the consumer, offering them a smoother, kinder and more gradual shift to lower CO2 emissions, easing fears over cost and access to energy in an uncertain world. It is easy to spot the flaws in his argument for a transition reset predicated on emissions reduction rather than a war on hydrocarbons, and to spy the familiar delaying tactics long deployed by the sector. But some points hit home, such as the observation that, despite representing over 85% of the world’s population, the Global South currently receives less than 5% of the investments targeting renewable energy. If Nasser is right that “the energy transition narrative will increasingly be written by the Global South”, this will need to change.

Bittersweet – In our last blog before Easter, it is fitting there was evidence this week of the disruptive impact of extreme weather on the price of chocolate and the livelihoods of independent farmers who produce it. Researchers at Imperial College London predicted that climate-changed induced heatwaves similar to the one that has seen cocoa prices rocket to US$8,500 a tonne – three times more than 12 months ago – could hit core producing regions in West Africa every two years. Not only would this put Easter eggs out of reach for many on modest incomes in the Global North, but devastated crops would also decimate incomes for two million smallholders in Ghana and Ivory Coast. Reports this week from British International Investment on the impacts of climate change on businesses across the Global South and the World Meteorological Organisation on 2023’s broken temperature records only serve to drive the message home. Investors might want major food manufacturers to rely less on sweets for their profits, but this is probably not what they have in mind. A revolution is taking place in agriculture, also attracting investors’ attention, but it will need to be global and rapid.

Rising tide? – High cocoa prices and low yields in West Africa were also partly a function of flood conditions toward the end of last year. Unpredictable rainfall is now a common feature across all continents of the physical risks of climate change, impacting industries beyond agriculture. But the issue of water scarcity and quality still struggles to gain attention in boardrooms. Research released for World Water Day by environmental disclosure platform CDP found that only half of large firms globally are engaging with suppliers on water risks in their supply chain, despite predicted losses of up to US$77 billion by mid-century if these are not addressed. While investment in water resources is increasingly part of national climate resilience and adaptation plans, it is far from clear that the UN 2023 Water Conference held on this day last year succeeded in moving the needle at the governmental level.

Take the tax test – It got harder for corporates this week to avoid understanding how to follow best practice in international tax affairs. Conversely, it became easier for investors to ensure that their portfolio companies pay the right tax levels, minimising the financial and reputation damage of avoidance. Launched in Brussels, the Tax Responsibility and Transparency Index will give firms a score out of 100, allowing to benchmark their performance across policy and strategy, management and governance, stakeholder and engagement, transparency and reporting, and contribution and narrative. As well as using internationally recognised frameworks, the index is forward-looking, factoring in pending legislation, emerging civil society, and the expectations of institutional investors. A number of tax-focused resolutions have been brought to AGMs recently, particularly those of tech firms, so it’s easy to imagine investors calling for engagement with the new index.

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