Commentary

Take Five: Cementing Ambition

This week’s major stories impacting ESG investors, in five easy pieces. 

Climate-related policy has taken a few steps forward on the international stage, but fears of disruption remain.  

Cementing ambition – It’s been a big week for India, as its cabinet approved updated climate targets, including a 2070 net zero goal and a 45% reduction in emissions intensity by 2030, ahead of COP27 later this year. As one of the biggest future hubs of renewable energy, India’s ambition to install 450 gigawatts (GW) of renewable energy capacity by 2030 will be welcomed by investors looking to explore investment opportunities – solar energy in particular. The Indian government also introduced the Energy Conservation (Amendment) Bill in parliament this week, proposing to mandate the use of biomass, green hydrogen and green ammonia for energy and feedstock, as well as introducing carbon trading to mitigate the effects of climate change. However, realising these goals will be “conditional” on investment, the government said, calling for its “due share” from international financial resources. In the west, President Joe Biden welcomed support for his US$739 billion package, which includes measures to address the climate crisis, despite previously facing pushback from West Virginia Senator Joe Manchin. Agreement hasn’t been without cost. A new deal has been struck by US Senate Democrats which will provide faster approvals for fossil fuel projects, including the controversial Mountain Valley natural gas pipeline in Appalachia. Australia, too, managed to win support from opposing parties, with its Climate Change Bill passing through the lower house.  

Heating up – Policymakers have been vocal in their support for nuclear energy expansion across Europe as the energy crisis ramps up pressure to establish domestic and sustainable alternatives to gas. However, as climate change takes root and average summer temperatures begin to rise, can nuclear power plants handle the heat? French energy supplier EDF is temporarily reducing output at its nuclear power stations on the Rhône and Garonne rivers as temperatures rise to 40°C across France. One of the arguments for nuclear as a sustainable source of energy has been that it doesn’t suffer from intermittency issues like solar or wind. With hot summers expected to become the new normal, if nuclear power plants can’t run in the summer months, then you have to wonder whether policymakers have a Plan B.  

Supply chain hurdles – Global investment in renewable energy increased by 11% in H1 2022 compared to H1 2021, according to data published by BloombergNEF. Investment in solar projects hit US$120 billion (an increase of 33%) and US$84 billion for wind projects (an increase of 16%). However, accreditation body Bureau Veritas has warned of heightened pressure on renewables’ supply chains due to a shortage of key materials, which risks slowing down the upscaling of solar and wind projects. A large floating offshore wind farm in Norway was delayed last month for this very reason. It’s a similar story in the electric vehicle space, with Lucid Group halving its production forecast in the face of “extraordinary supply chain and logistics challenges”. Despite pressure to deliver materials, Bureau Veritas urged developers to ensure they are of a high-quality to reduce the levelised cost of energy in wind and solar power.  

Kernel of hope – There was a collective sigh of relief as the first ship carrying 26,000 metric tonnes of corn safely departed from Ukraine on Monday – the first to leave Odessa since Russia first invaded Ukraine in February. With both Russia and Ukraine collectively accounting for a quarter of the world’s wheat exports, the war has undoubtedly had a global ripple effect, with countries struggling to manage the food crisis that has ensued. Developing countries, in particular, have felt the ramifications, prompting calls from the UN and World Health Organisation for emergency funding across the Horn of Africa, particularly Sudan. We can only cross our fingers and hope that the tentative Russia-Ukraine agreement brokered by the UN will hold, despite Russia’s bombing of Odessa just 24 hours after the grain transit deal was signed. As with the energy crisis, there have been calls for increased investment in innovative, sustainable and domestic solutions to ensure countries have more autonomy over their access to food.  

Room for improvement – Investors have long been calling for standardised, transparent and comprehensive reporting from investee companies on climate-related risks and opportunities. Following the UK government’s decision to mandate the Taskforce on Climate-related Financial Disclosure (TCFD) reporting guidelines, both investors and companies have been working hard to ensure they are sourcing and publicly disclosing the required information. The UK’s Financial Conduct Authority (FCA) and Financial Reporting Council (FRC) published complementary reports this week, outlining progress made by companies that published TCFD reports last year. Their feedback was largely positive, noting that UK-based premium-listed companies have made “significant steps forward” in the quality of their climate-related reporting. They also drew attention to areas needing improvement. The FRC said companies should look to provide more granular information on climate-related impacts, risks versus opportunities, materiality, and different temperature scenarios. Companies need to also better interlink climate-related disclosure with other narrative reporting on strategy, risks and priorities, the FRC noted.  

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