Sustainability Newsletter – July 2023

The International Sustainability Standards Board (ISSB) released their inaugural global sustainability disclosure standards. The new standards set a ‘global baseline’ to ensure companies provide sustainability-related information alongside financial statements in the same reporting package.

Comprising two parts, IFRS S1 will enable companies to communicate to investors about the sustainability-related risks and opportunities they face over the short, medium and long term; while IFRS S2 sets out specific climate-related disclosures. Both fully incorporate the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).

The ISSB will move to establish a Transition Implementation Group to support adoption with companies. The new standards, which take effect from January 1, 2024, aim to improve trust and confidence in company disclosures about sustainability in order to inform investment decisions.

The Integrity Council for the Voluntary Carbon Market (ICVCM) and the Voluntary Carbon Markets Integrity Initiative (VCMI) announced a joint commitment to operationalize a high integrity market. The two leading bodies, representing credit supply and demand-side respectively, are coordinating their initiatives to enhance transparency and accountability across the voluntary carbon market (VCM) value chain – a key to scaling-up private sector investment in this space.

The collaboration establishes an integrated market integrity framework, with key elements being jointly reinforced – such as companies must first prioritize decarbonization in their value chains through credible, science-based climate strategies; and the use of high quality credits can be a supplemental complement to accelerate those efforts. The collaboration also includes plans to coordinate the launch of new standards throughout 2023.

For instance, VCMI released a new Claims Code of Practice which is a ‘go-to’ rulebook on how organizations can use and make credible claims involving high quality carbon credits as part of their climate commitments. With three tiers of claims – Platinum, Gold and Silver – it makes clear that a company’s investment in emissions reductions and removals will be above and beyond corporate action to meet their science-based targets. The Code fills a critical gap that will ensure the credibility of demand-side VCMI claims by companies and ultimately help them to mobilize credible climate finance at speed and scale. In November 2023, additional guidance on a VCMI Measurement, Reporting and Assurance (MRA) framework will be available, offering additional claim tiers.

In the coming weeks, ICVCM is also expected to announce the Core Carbon Principles (CCP)’s first category-level assessment framework which sets a global benchmark on the types of carbon credits and methodologies that will be considered ‘CCP-compliant’. Further announcements on labels for CCP-approved carbon credits is expected later in 2023.

The Science-Based Target Initiative (SBTi) launched a consultation on Beyond Value Chain Mitigation (BVCM) as a complementary mechanism for delivering climate finance and mitigation at the necessary speed and scale.

The consultation covers nine themes, including determining the nature and scale of commitment, deploying resources and finance across BVCM activities, and reporting. Running until July 30, 2023, the feedback will inform the development of BVCM guidance to help companies with climate finance decision-making.

In SBTi’s report on Corporate Net-Zero Standard, BVCM is defined as “mitigation action or investments that fall outside a company’s value chain, including activities that avoid or reduce GHG emissions, or remove and store GHGs from the atmosphere”. It cites examples of BVCM activities as the purchase of forestry REDD+ credits, investing in carbon dioxide removal (such as direct air capture (DAC) and storage) and more.

Alongside the guidance, SBTi will publish a research paper in Q4 2023 that will help to define the eligible scope of companies’ carbon credits procurement and how this can scale up the carbon market.

SBTi perspective on prioritization of mitigation action

Best practice:

1. Abatement
2. Beyond value chain mitigation
3. Neutralization

Emission reductions within the value chain to transition to net-zero

• Companies must prioritize making real emissions reductions within their value chains that align with 1.5°C pathways
• To do this they must complete emissions inventories following the GHG Protocol and set near and long-term science-based targets
• Implement strategies to achieve these targets
• Disclose progress annually
• This is the minimum ambition and where possible, decarbonization should be achieved ahead of target years

Beyond value chain mitigation can accelerate the global transition

• In the near-term, prioritize securing and enhancing carbon sinks (terrestrial, coastal and marine etc.) to avoid emissions that arise from their degradation. There is also a critical need to invest in nascent GHG removal technologies (e.g., direct air capture and storage). These actions do not count towards achieving science-based targets.
• In the long-term, when the net-zero target date is reached, companies must neutralize any residual emissions that cannot be abated through permanent emission removals. Companies must continue to neutralize any remaining emissions

Source: SBTi (2023), Corporate Net-Zero Standard

Net-Zero Tracker published its annual Stocktake 2023 report on the net zero progress of national governments and the world’s largest publicly listed companies.

There has been an overall doubling in entities who have set net zero targets in the past two years, from 769 in 2020 to 1,475 in 2023, representing approximately 88% of global greenhouse gas emissions. The share of large publicly listed companies with net zero targets also doubled in the same period, increasing from 417 to 929.

The report also reveals approximately 26% of companies plan to use carbon dioxide removal (CDR) to achieve their targets, including companies who plan to purchase carbon credits from CDR projects from both inside as well as outside their value chain.

Yet despite the increase in pledges, many large companies have not yet set net zero targets, and no major producer countries or companies have committed to phasing out fossil fuels. Eight years on from the Paris Agreement, focus is already shifting toward implementation of net zero targets – companies will need to catch-up quickly.

Chart: Planned use of carbon dioxide removal (CDR)

Microsoft published a 3rd annual report on Carbon Dioxide Removal (CDR), containing lessons observed and learned through efforts to establish a robust worldwide carbon removal market.

For backdrop, actual CDR deployment planned this decade is estimated to fall short of global needs this century. To address this gap, Microsoft aims to pursue a CDR portfolio of greater than 5 million metric tonnes per year in 2030, enabled by long-term offtake agreements. The ‘power purchase agreement (PPA)-style’ offtakes – as seen in the renewable energy sector – may serve as a starting model for carbon removal, providing secure long term supply while driving new capacity development.

The report also highlights observations from the market’s supply-side, such as issues on additionality and low, medium and high-durability carbon removal; as well as on the demand-side with a heightened need to match upfront CAPEX investments to quality projects, and coalesce around a set of high integrity requirements. Focus is also needed on voluntary certifications and harmonization of market standards which could further facilitate a greater influx of private capital for funding mitigation measures from both corporate and private entities.

The Network for Greening the Financial System (NGFS) published a stocktake on financial institutions’ transition plans. It is an assessment of emerging best practices relating to climate transition plans and the role of central banks and supervisors.

The report offers several key findings, including that transition plans are a useful source of information to develop a forward-looking view of whether risks from an institution’s transition strategy are commensurate with its risk management framework; that institutions will engage entities that they finance on their respective transition plans, and the forward-looking information contained in transition plans can enable the financial sector to mobilize private finance in support of the transition.

The NGFS proposes to engage and collaborate across regulatory agencies and standard setters (such as FSB, BCBS, IAIS and IOSCO) on the potential roles that supervisors can play in assessing financial institutions’ transition plans and planning processes.

In separate news, the Monetary Authority of Singapore (MAS) announced it will issue a consultation later this year to set expectations around financial institutions’ transition planning, covering frameworks and client engagement processes to manage climate-related financial risks.

Oxfam released a Climate Finance Shadow Report 2023 which provides a global stocktake on the progress of high income countries in delivering USD 100 billion per year in climate finance to low and middle-income countries by 2020.

The report found that USD 83 billion was reported in 2020. However due to inconsistent accounting practices, it estimates a more accurate value of this financial support at closer to USD 21 to 24.5 billion. An excessive number of loans, insufficient grants, inadequate funding for adaptation, and misleading accounting practices mean that climate finance is far from fulfilling its purpose.

Oxfam’s top recommendations include enhancing transparency in the reporting, calling on developed nations to make-good on the shortfall by increasing their contributions, prioritize locally-led climate-related projects, and develop ‘new and additional finance including from new sources’, such as through the private sector. This need was further reinforced by the multilateral development banks (MDBs) who recently announced a shared set of principles to work as a system in aligning financial flows towards the Paris Agreement goals. The newly agreed principles include mobilizing private sector finance by expanding the use of innovative risk-sharing tools and platforms and providing project preparation, and improving execution capacity.

The World Economic Forum published a whitepaper on Private Market Impact Investing, in which it explores the impact fund market and its value for investors.

It highlights a growing trend among market players that impact investing in private markets can provide unique benefits – ‘where firms can take a longer-term view compared to that taken in public markets; company management teams can be proactively incentivized to pursue positive, measurable social and environmental impact alongside a financial return; and make more strategic moves to grow or reposition existing business models to maximize growth and beneficial impact simultaneously’.

Additionally, regulatory drivers, such as the Sustainable Finance Disclosure Regulation in Europe, have increased demand and alignment on product standards and features. More established impact and transition investing franchises from more GPs with LPs will enable greater uptake in the ecosystem, which may be accretive to fund investors.

A first-ever US National Clean Hydrogen Strategy was unveiled by the Biden-Harris Administration. The new framework aims to accelerate the production, processing, delivery, storage, and use of clean hydrogen, to achieve a carbon-free grid by 2035 and a net-zero emissions economy by 2050.

Key focus areas will include high-impact uses for clean hydrogen; reducing its cost; and a focus on regional networks. The strategy also underpins the need for partnership and alignment between the public and private sectors, and sets a vision for how clean hydrogen can help to reduce emissions in energy-intensive sectors, contribute to national decarbonization goals, as well as boost jobs and competitiveness.

Domestic production will be complemented by USD 9.5 billion in investments provided by the Bipartisan Infrastructure Law and the Inflation Reduction Act, including a production tax credit for clean hydrogen. Canada’s Hydrogen Strategy has been underpinned by investments from the Clean Fuels Fund, and a more recent Clean Hydrogen Investment Tax Credit.

In the nine months since the US Inflation Reduction Act (IRA) was passed, tax credits have boosted clean energy manufacturing. But are incentives working effectively for electric vehicle (EV) battery producers?

According to a recent article, citing research from Wellesley College, some 331 gigawatt-hours of new planned battery production capacity was announced in the US between August 2022 and May 2023 as a result of supportive IRA measures. The research also indicates the US is ‘on track’ to produce the needed 910 gigawatt-hours-worth of batteries each year by 2030, to power the 5.3 million EVs projected to be built per year by 2030.

While the IRA’s 30D tax credit has attracted EV consumers and prompted dialogue with international trading partners on reciprocal treatment, it is the 45X production tax credit that has had significant impact. At $45 per kilowatt-hour for domestically produced batteries, as well as credits of 10% of the cost of production for cathode and anode materials and critical minerals, 45X is helping to close the gap in cost between batteries made in the US and those made in China who currently dominate the supply chain. As a result, US EV battery production is set to expand twenty-fold over the next decade – a boon for US producers.

Update: US Electric Vehicle Supply Chain

IRA +9 months

• 48 new projects announced
• $50.3 billion in investments
• 37,000 jobs announced

May 2023

• 37 in planning
• 6 in construction
• 3 in partial operation
• 1 in piloting

Source: James Morton Turner (2023)

The European Central Bank (ECB) is taking nature-related risks seriously. In economy and banks need nature to survive, the ECB highlights that degradation of nature can impair production processes and consequently weaken the creditworthiness of many companies.

As it raises this warning for other central banks and supervisors, the ECB itself is starting to look at nature dependencies for more than 4.2 million companies, accounting over EUR 4.2 trillion in corporate loans. It found that 75% of all bank loans in the euro area are tied to corporate borrowers highly dependent on at least one ecosystem service – such as food, water, timber and minerals. Continued degradation of nature poses significant risk to these businesses (such as the potential for supply chain disruptions and price inflation) and makes bank credit portfolios riskier (through potential higher defaults and financial stability concerns).

The ECB recommends an integrated approach to climate and nature and will publish results of a detailed analysis later this year.

Chart: Exposure of euro area banks’ loan portfolios to nature-related risks

Share of corporate loans from banks to companies with a high dependency score (greater than 0.7) for at least one ecosystem service.
Loans are allocated to the country where the headquarter of the bank is located.

A final consultation on the European Sustainability Reporting Standards (ESRS) was launched on June 9, 2023, for four weeks only. Companies will need to act quickly before the July 7, 2023 deadline if they want to share any concerns.

ESRS will apply to all companies within the scope of the EU Corporate Sustainability Reporting Directive (CSRD). This will include large EU companies, including EU subsidiaries of non-EU parent companies with either securities listed on EU-regulated markets or net turnover of more than €150 million.

A previous ESRS consultation was issued by EFRAG in November 2022 (refer to our December 2022 newsletter). Since then, changes to the draft touch upon materiality, phasing-in, voluntary disclosures, flexibility in certain disclosures, coherence with EU legal framework, and interoperability.

ESRS is expected to pass as law by the start of August, followed by a two-to-four month scrutiny period by the European Parliament and the Council, before becoming effective from 1 January 2024.

Carbon emissions released by this year’s early onset of wildfire season in Canada reached 100 megatonnes in the first three weeks of June, according to the Copernicus Atmosphere Monitoring Service (CAMS). The main volume of smoke has since reached western Europe. The unusual distribution of fires from coast to coast has been described as ‘one of the worst wildfire seasons on record’, according Environment and Climate Change Canada.

In the Province of Alberta alone, carbon emissions from wildfires this year reached approximately 20 megatonnes – the highest since the extreme fires in May 2019; while carbon emissions for Saskatchewan, British Columbia, Ontario, Quebec, Northwest Territories and Nova Scotia are near, or at, record levels.

A new study on forest fires found 37% of the total burned forest area in Western Canada and the United States between 1986-2021 could be attributed to emissions from major fossil fuel producers and carbon-intensive manufacturers. With increasing focus on loss and damage at international levels, companies should also consider the potential risks of their corporate emissions and climate impacts, and ensure credible climate strategies are in place to accelerate decarbonization.

Chart: CAMS total aerosol optical depth forecast from 25 June, 2023

Note: Aerosol Optical Depth (AOD) is the measure of aerosols (e.g., urban haze, smoke. particles, desert dust, sea salt) distributed within a column of air from the Earth’s surface to the top of the atmosphere (NASA).

In June, Canada proposed Bill C-50, known as the Sustainable Jobs Act, which seeks to guide the federal government’s ‘Just Transition’ efforts over the next two years.

The Bill, underpinned by an Interim Sustainable Jobs Plan released earlier this year, contains three core elements: 1) guiding principles to encourage engagement and consensus on pathways to a net zero economy; 2) governance structures through the creation of a Sustainable Jobs Partnership Council; and 3) reporting requirements through the publication of a federal plan every five years, starting in 2025.

The federal government sees a ‘generational opportunity’ to help workers gain training and skills for the new economy, and to help companies who are trying to decide where to invest and where to build. As of late June, the Bill is currently in its second reading in the House of Commons.

The Assembly of First Nations and the Government of Canada released a fifth Annual Report of the Joint Committee on Climate Action, which outlines actions to achieve a stronger climate partnership.

The report emphasizes accelerating the full and effective participation of First Nations in conservation, clean growth, and climate change programs. It lists a number of ongoing priorities, including for the Canadian Net-Zero Accountability Act to take Indigenous Knowledge into account when setting an emissions reduction target; the First Nations Climate Leadership Agenda to identify and jointly develop recommendations for how to operationalize changes to the First Nation-federal partnership on climate; as well as determine how these changes influence broader Canadian climate policy and programs, such as carbon pricing.

Key takeaways from the Canada Circular Economy Summit 2023

CIBC Capital Markets attended this year’s Canada Circular Economy Summit in Toronto, which brought together over 400 delegates from government, corporates, startups, non-for-profit, universities, financial institutions and investors.

In the Climate and Circular Economy Nexus panel, the Hon. Steven Guilbeault, Minister of Environment and Climate Change Canada, discussed Canada’s Zero Plastic Waste Agenda and the need to keep plastic waste in the economy but not in the environment. Highlighting the social benefits and new economic advantages of transferring from overconsumption, he called for collaboration among all partners.

In the Scaling Circular Economy Action in Canada panel, the Hon. Mona Fortier, President of the Treasury Board Secretariat, underscored the importance of ‘billion-level public procurement’ and how circular economy principles need to be baked in the net zero strategy. Collaboration on public procurement has extended to provincial and municipal government levels, and Canada has joined international action that is leveraging ‘buy-power’ to scale circularity within supply chains.

CIBC Perspectives: Sustainable finance – Quarterly update

CIBC Capital Markets’ Roman Dubczak hosted a discussion with our sustainable finance experts, Amber Choudhry and Siddharth Samarth, to share insights on how issuers are accessing the sustainable finance market, and how corporate climate agendas are being influenced in the process.

Running time: 14 minutes, 50 seconds

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