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Commentary

Take Five: Coal in the Whole

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

This week’s G7 commitment on coal will have insufficient impact without a global response.

Coal in the whole – The Group of Seven (G7) committed to phasing out unabated coal by 2035, but was criticised for allowing continued use of the fuel in power plants that deploy carbon capture technology, as well as for the flexible deadlines it gave to Japan and Germany. The announcement came in response to the COP28 pledge for all parties to transition away from fossil fuel usage. G7 countries said they would submit nationally determined contributions (NDCs) that “demonstrate progression and the highest possible ambition”, including 2030 targets and demonstrating alignment with net zero by 2050 goals. But the Turin communiqué offered precious little detail on the elimination of oil and gas from the energy systems of G7 countries. There has been some action at the individual country level, admittedly, with the US Environmental Protection Agency last week outlining requirements for coal and gas-fuelled plants to capture 90% of emissions, among other measures. While the G7 stressed its adherence to the International Energy Agency’s Net Zero by 2050 scenario, members are not fully aligned with its ban on new oil and gas exploration or development. G7 environment ministers also encouraged other countries to follow their lead on NDCs, and stressed their continued support for Just Energy Transition Partnerships. Given the latter are focused on effecting the clean energy transition of intensive coal users such as South Africa and Indonesia, it is likely that getting these stalled decommissioning initiatives back on track will have more impact on the decarbonisation trajectory than the domestic actions of leading economies. China, it should be noted, added the most coal capacity last year, followed by Indonesia and India.

Plastic progress? – The fourth round of UN-sponsored negotiations on the Global Plastics Treaty were hampered by an inability to agree on all-important production cuts. As a result, “intersessional work” will be needed if a final draft text is to be ready ahead of the last planned round of discussions in Busan in November. Most progress was made on developing a global approach to extended producer responsibility, but reports suggested developed countries fought shy of committing to binding targets for lower production levels. Prior to the talks, 160 financial institutions called for binding rules and obligations to address plastics’ full lifecycle. Inger Andersen, Executive Director of the UN Environment Programme, put a brave face on the state of negotiations, admitting “the work is far from over”. Others were more critical – including Graham Forbes, Global Plastics Campaign Lead at Greenpeace USA, who warned country negotiators that “the treaty they are likely to get is one that could have been written by ExxonMobil and their acolytes” if they didn’t buck up their ideas. With 200 fossil fuel and chemical sector lobbyists among the 2,400 delegates who attended the talks in Ottawa, some might argue the hand of the plastic producers is already on the pen.

Investors united – Voting patterns in the 2024 proxy season will inevitably be scrutinised for further evidence of disparities between European and US investors over their support for sustainability-focused resolutions. Sharply reduced backing for shareholder proposals on ESG themes at the AGMs of American firms was a key feature in 2023, leading some to fear Europe might begin to follow the US’s lead in 2024. But a new study of asset owners and managers, conducted by the Stanford School of Business, the Hoover Institution and the Rock Center for Corporate Governance, found high levels of attention to ESG and climate themes on both sides of the Atlantic. While 95% of European survey respondents said they analysed the carbon emissions of their investments, almost as many (85%) of their North American peers concurred. The study also found that North American institutional investors were “no less likely” than Europeans to believe that ESG factors reduced portfolio risk, with both holding similar views on their impact on short- and long-term performance. One difference, however, could be seen in the extent to which ESG was embedded into investment processes. Almost three quarters of European investors said they operated under an ESG-influenced investment mandate, versus just a quarter of North American respondents.

Pay up, votes down – The continued reluctance of many shareholders to hold corporates to account on executive pay levels, as witnessed in AGM voting this week, could be explained by the above-mentioned institutional investor survey. Shareholder advocacy group ShareAction has led a campaign against the £14.8 million pay deal offered to Tim Steiner, CEO of Ocado, partly based on the UK-based online grocer’s failure to pay a real living wage to employees. But less than one in five shareholders joined the revolt – a slump from the 30% who voted against director pay awards last year. This is less than surprising when one considers that just 20% of investors responding to the Stanford survey said they explicitly considered in their investment analysis the ratio of CEO pay to that of the median worker.

Waiting for take-off – The greenwashing spotlight fell on the airline sector this week as the European Commission sent letters to 20 airlines for a catalogue of potentially misleading green claims, demanding adherence with its consumer laws within 30 days. Among the airlines’ frequent failures was their use of the term sustainable aviation fuel (SAF) without sufficiently justifying its environmental impact. Despite being past masters at listing myriad terms and conditions in small print, it is still perhaps understandable that airlines should struggle – or simply not bother – to explain the green credentials of SAFs, such are their complex, varied and questionable environmental footprints. The commission’s letter followed revelations that the International Air Transport Association had written to the EU in the hope of weakening proposed rules for disclosing the climate impact of non-carbon dioxide emissions – specifically vapour trails from airline exhausts. The airline sector’s green revolution remains on standby.

 

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