Sustainability Newsletter – October 2023

The IEA updated its landmark report Net-Zero Roadmap: A Global Pathway to Keep the 1.5 °C Goal in Reach to reflect the complex and dynamic landscape since it was published in 2021.

Global CO2 emissions from the energy sector reached a new record highhttps://www.iea.org/reports/net-zero-roadmap-a-global-pathway-to-keep-th of 37 billion tonnes (Gt) in 2022 but are set to peak this decade. To make the net-zero scenario a reality, the IEA highlights the methods needed to achieve deep emissions reductions by 2030, including tripling global renewables capacity, doubling the annual rate of energy intensity improvements, accelerating electrification of end-uses, and reducing methane emissions quickly. Ramping-up all four methods with technologies available today will deliver more than 80% of the emissions reductions needed by the end of the decade.

IEA warns that the consequences of further delays to the energy transition would virtually guarantee a high overshoot of the 1.5°C limit. The IEA also advocates for secure, equitable and co-operative energy transitions. The report ultimately underlines the urgency of accelerating energy transitions today, as there is no slow route to limiting warming to 1.5°C.

Natural Resources Canada unveiled a new carbon management strategy which envisions two main national objectives of realizing its climate goals and facilitating the establishment of a ‘world-class, multi-billion-dollar’ carbon management sector.

The strategy emphasizes the deployment of technology-enabled carbon management solutions as part of the broader climate toolkit. In particular, carbon dioxide removal (CDR) approaches that remove CO2 from the atmosphere and store it durably in natural carbon reservoirs, can support “negative emissions” scenarios whereby more GHGs are removed from the atmosphere than are being emitted – especially important for addressing residual and historical emissions.

CDR, such as direct air carbon capture and storage (DACCS) and biomass carbon removal and storage (BiCRS) are just some of the tech-based approaches identified, alongside other pathways involving decarbonizing heavy industry, low-carbon hydrogen production, and low-carbon dispatchable power CO2-based industries.

To promote a competitive carbon management sector in Canada, the federal government will also prioritize: 1) Accelerating innovation and RD&D; 2) Advancing policies and regulations; 3) Attracting investment and trade opportunities; 4) Scaling-up projects and infrastructure; and 5) Building partnerships and growing inclusive workforces.

The strategy, which targets emissions reduction particularly for sectors like oil and gas, cement, iron and steel, and chemicals, supplements broader measures also outlined in Canada’s 2030’s Emissions Reduction Plan.

CIBC hosted its 2nd annual Renewables & Clean Energy Conference in New York City on September 7, 2023. The event discussed key trends, challenges and opportunities in renewable energy and energy transition.

Key highlights and themes include:

1. Resilient optimism – seeing more light at the end of the tunnel: There is strengthening optimism that projects to support emission reduction targets will eventually get built, with strong underlying demand for renewable energy helping to move up returns.
2. Partnerships increasingly bring value and risk mitigation – alignment is key: Broad acceptance and reliance on strategic partnerships to help support funding efforts and project returns, while changing the perception of risk for new technologies and markets.
3. Policy and objectives take time to iron out: Lingering questions and clarification remain for some US Inflation Reduction Act incentives for renewable energy investment, but overall strong tailwinds support longer term growth. 
4. Capital generosity not a constraint (tax equity could be a pinch point): Availability of capital for renewables remains healthy and not generally under constraint to project development, even despite a higher cost of capital and more demand for US tax equity that will require novel structures
5. Offshore wind developers are pushing back: The large-scale nature of offshore wind projects is helping developers leverage to push back on adverse market developments, and show more discipline as they look for future growth. 
6. Differing views on hydrogen market readiness: Willingness to invest meaningful dollars in support of hydrogen is mixed, with some actively advancing where government support is critical and the export market is key to the commercial viability of projects.

The Climate Bonds Initiative (CBI) published a study that delves into the critical role that Chief Financial Officers (CFOs) play in a company’s journey to achieve net-zero emissions.

The study, based on interviews with over 30 CFOs representing US $930 billion in market capitalization, offers valuable insights and recommendations for CFOs and corporate sustainability officers aiming to minimize their company’s climate impact while safeguarding revenues against climate-related risks.

Key findings include: a need for robust business cases underpinning climate investments, emphasizing the CFOs’ pivotal role in integrating climate actions into the financial framework; the rising demand for transparency and the opportunity for CFOs to demonstrate transition leadership; and their role in aiding companies in becoming recognized transition pioneers within their sectors.

Additionally, the study stresses the need for a comprehensive audit of risks and opportunities tied to the net-zero transition, urging CFOs to be catalysts for sustainable, integrated strategies benefiting all stakeholders and aligning with societal objectives.

The European Union (EU) is set to implement stringent measures to combat greenwashing and enhance consumer awareness regarding premature product obsolescence. 

Under a provisional agreement between the European Parliament and Council, new rules will ban products with: generic environmental claims that lack substantiated evidence; commercial communications designed to limit product durability without disclosure; misleading claims about emissions offsetting; and sustainability labels without proper certification. Unverified durability claims, and promoting premature replacement of consumables and non-repairable goods will also be prohibited.

To empower consumer awareness, new product guarantee information will feature more prominently, with a standardized label highlighting products that offer extended guarantees. While the new regulations present challenges and increased compliance costs for companies, they also offer an opportunity for businesses to enhance their credibility, innovate sustainably, and align with evolving consumer expectations for responsible and transparent practices.

The agreement now awaits final approval from the European Parliament and Council before becoming law, with expected implementation within 24 months across member states.

In related news, the EU has launched two consultations on the implementation of the Sustainable Finance Disclosure Regulation (SFDR) – one public and one targeted – both running until December 15, 2023. The targeted consultation aims to gather input from financial market participants, investors, NGOs, and relevant public authorities and national regulators on the useability of the regulation and its ability to tackle greenwashing.

SFDR is a transparency framework aimed at helping investors to assess sustainability risks integrated in the investment decision process.

The Task Force on Nature-related Financial Disclosures (TNFD) unveiled its final recommendations on nature-related risk management and disclosure. This marks a crucial step in aligning nature risk with financial and climate risk, encouraging capital flows towards nature-positive outcomes.

The recommendations include 14 disclosures and accompanying implementation guidance. They cover four key pillars: governance, strategy, risk & impact management, and metrics & targets. They offer a starting point for companies to identify, assess, and disclose nature-related issues while considering their strategy, materiality, cost, and capability. The disclosures align with existing and emerging reporting standards and the Kunming-Montreal Global Biodiversity Framework.

TNFD will release additional guidance and sector-specific disclosure metrics and will track voluntary market adoption on an annual basis, through a status report beginning in 2024.

The release marks the culmination of two years of consultations and pilot testing by over 200 companies and financial institutions, and will guide reporting requirements across jurisdictions with different approaches to materiality. Elizabeth Mrema, Co-chair of the TNFD, described the importance for businesses and finance as: “now squarely a central and strategic risk management issue”.

In summary, adopting TNFD can help companies to manage risks, ensure financial stability, meet reporting standards and satisfy stakeholder expectations.

The Network for Greening the Financial System (NGFS) issued a technical document on Nature-related Financial Risks: a Conceptual Framework to guide Action by Central Banks and Supervisors.

Nature-related financial risks could have significant macroeconomic implications relevant for financial stability. The NGFS created a principle-based risk assessment framework as a common starting point for central banks and supervisors to assess and – where relevant – act on economic and financial risks stemming from material dependencies and impacts on nature, and their nexus with climate change.

The NGFS will continue to refine the framework based on feedback and developing nature-related scenarios for risk assessment, to address any data gaps, enhance collaboration with stakeholders, integrate policies for environmental sustainability, and ensure interoperability with global standards.

Bottom Line: Both businesses and finance will see intensifying pressure to understand the way nature and climate-related risks interrelate and the impacts they have.

Wood Mackenzie’s ‘Energy Transition Outlook’ report reveals a concerning trajectory toward a 2.5°C global warming, potentially missing the Paris Agreement’s 1.5°C target without immediate action.

To limit warming to 1.5°C, prompt actions must be taken this decade, including rapid scaling of low carbon power supply, infrastructure, and renewables. The report also calls for collaboration and consensus at COP28 to shape global energy transition.

Key findings show an annual investment of US$1.9 trillion is needed to decarbonize the energy sector in a base case scenario of 2.5°C but will need to increase by 150% – or US $2.7 trillion more per year – to achieve the 1.5°C target.

The report views carbon pricing as a critical element to bridge the cost gap between conventional and low-carbon energy sources, and drive low carbon technology adoption for high-emitting sectors. Wood Mackenzie suggests the current global average carbon price of US$25 per tonne needs to increase to US$150 to US$200 per tonne by 2050, underscoring the need for more ambitious pricing.

In related news, the United Nations released a key technical report on the first global stocktake, which sets a robust scientific foundation on energy transition progress for discussion at COP28. The report emphasizes the need for intensified efforts and encapsulates 17 key technical findings, showcasing existing and emerging opportunities to bridge gaps and further global action to address the climate crisis.

COP28 President-Designate Dr. Sultan Al Jaber is urging decisive action, aiming for a 43% reduction in emissions by 2030 to keep the 1.5°C target within reach

The Science Based Targets initiative (SBTi) introduced the world’s first science-based decarbonization framework for global iron and steel manufacturers. The guidance delineates emission reduction objectives to limit global temperature increases to 1.5°C, calling for a reduction of over 91% in direct emissions by 2050 compared to 2021 levels.

The steel industry, responsible for nearly 9% of global emissions, holds immense economic importance across diverse sectors. A study emphasized that without substantial environmental improvements, steel companies risk losing 14% of their potential value by 2040 due to escalating carbon prices.

The guidance has garnered support from over 20 steel companies, validating the urgency for proactive industry-wide measures and approaches to sustainable steel production. The guidance also provides a crucial scientific foundation for stakeholders in the steel value chain, including investors evaluating portfolio steel companies on company-level and system-wide climate risks.

In separate news, SBTi recently released its Monitoring Report 2022, a fourth annual review of the progress companies are making in meeting science-based targets globally. The report finds a substantial surge in companies setting science-based targets in 2022, marking an 87% increase compared to 2021, with 1,097 targets validated—surpassing the total for the previous seven years combined (1,082).

By the close of 2022, companies covering 34% of the global market capitalization had committed, to or set, science-based targets. Major indices like FTSE and S&P demonstrated considerable engagement, with 69% of FTSE and 42% of S&P companies establishing such targets.

Chart: Annual cumulative number of companies with approved targets and commitments, 2015-2022

The Energy Transitions Commissions (ETC) published Materials and Resource Requirements for the Energy Transition. The report delves into the crucial natural resources and materials essential for fulfilling the demands of the transition.

While the report reassures that there is no intrinsic scarcity of raw materials essential for a global shift towards a net-zero economy, it does emphasize the urgency of scaling supplies of critical minerals, such as lithium, nickel, graphite, cobalt, neodymium and copper, to match the demand surge up to 2030.

The report underscores the necessity of 4 pivotal actions that policymakers, miners, and manufacturers should prioritize: 1) Building new mines and expanding existing supply of materials quickly, 2) Building more diverse and secure supply chains, 3) Driving sustainable and responsible material production, and 4) Boosting innovation and recycling to reduce pressure on primary supply.

These actions, combined with strong private sector leadership to innovate, invest and promote sustainable and responsible mining, can reduce the risks of a delayed or more expensive transition.

Verra has launched Article 6 Labels for Verified Carbon Units (VCUs) with associated guidance alongside recent updates to the Verified Carbon Standard (VCS) Program. These labels identify carbon credits authorized by host countries for use under Article 6 of the Paris Agreement. As a result, the VCS Program supports  how signatory countries account for their climate goals with greater transparency and scale.

The Article 6 Labels correspond to three use types: 1) Nationally Determined Contributions (NDCs), 2) international mitigation purposes other than NDCs (e.g. CORSIA), and 3) other purposes. The Labels are optional under the VCS Program but necessary for retirement against certain retirement purposes in the Verra Registry. The guidance also clarifies the conditions triggering corresponding adjustments (that avoid double-counting between parties) which vary based on the authorized use.

In related news, the UN Article 6.4 Supervisory Body recently held a two-week structured public consultation on modalities for operation of the Article 6.4 mechanism registry to advance the regulatory framework on carbon markets. Considerations being reviewed include the type of registry, its functional scope, role of the registry administrator and more.

Additional progress on the development and assessment of Article 6.4 methodologies and the treatment of activities involving carbon removals was also made. The Supervisory Body intends to provide final recommendations to the Parties of the Paris Agreement for adoption at COP28.

The World Economic Forum published a practical guide on Scaling Voluntary Carbon Markets: A Playbook for Corporate Action.

The report highlights that the voluntary carbon market (VCM) is falling short of its ambition, as the number of companies adopting science-based targets grew by a factor of 55.8 between 2018 and June 2023, yet the retirement of carbon credits only grew by a factor of 3.2 over the same timeframe – a shortfall of more than 90%.

To address this gap, the report offers 4 actionable steps to help companies embrace VCM effectively: 1) Define a net-zero role for credits while maintaining the ‘mitigation hierarchy’ of direct abatement; 2) Create value and recognition by identifying tangible outcomes from carbon market activities and communicating to stakeholders; 3) Tailor a portfolio to prioritize high quality, permanent carbon removal outcomes; and 4) Orchestrate the effort by integrating a carbon credit strategy into the company’s wider net-zero approach.

For VCM to mature, grow and contribute meaningfully, the report calls on governments and market standard setters to introduce regulatory mandates and incentives to encourage business utilization of carbon credits as a lever for climate action alongside dedicated mitigation efforts.

Chart: Growth in SBTi signatories not matched by retirement of carbon credits

A new study by Trove Research finds that more carbon credit projects are being developed and registered with the five leading carbon registries in the last 3 years since 2020 – representing a 160% increase over the 2012-2020 period. These new projects have the potential to save as much as 300 million tonnes of CO2 annually.

The study also highlights an additional 1,500 carbon credit projects are under development, complementing the already registered projects, yielding a further carbon saving of approx. 500 million tonnes of CO2 per year.

While this trend indicates a growing momentum in the global efforts to mitigate carbon emissions, the study points to a need for increased investment to meet corporate targets set for 2030 under the 1.5°C goal. Some $90 billion is needed to achieve the necessary volume of credits.

A study by Carbon Market Watch titled ‘Rating the raters’, examined the role of major carbon credit rating agencies—BeZero, Calyx Global, Sylvera, and Renoster—in the voluntary carbon market (VCM). 

While rating agencies’ assessments promote market integrity, the lack of a standardized approach on grading scales can lead to a confusing market, especially for indicators like additionality, non-permanence risks, leakage risks, co-benefits, and safeguards.

Recommendations to enhance consistency include: assessing reversal risk over a 100-year period, varying non-permanence ratings by credit vintage, adopting conservative leakage risk estimation, maximizing additionality scoring, evaluating co-benefits using Sustainable Development Goals, incorporating safeguards ratings into credit quality, ensuring transparent frameworks and ratings availability, and implementing a policy for regular rating updates.

The report also emphasizes the responsibility of credit buyers in understanding these frameworks to make informed decisions. Recommendations for buyers include: understanding rating scales, engaging with ratings, recognizing the limitations of carbon credits in achieving carbon neutrality, and understanding project shortcomings in low scores.

Generation Investment Management released its seventh annual Sustainability Trends Report 2023, which examines global progress for the transition to a low-carbon economy. 

This year, the report emphasizes a ‘political tipping point’, underscoring the growing centrality of climate change in global politics and the rapid policy shifts transforming the energy transition across sectors like power, transportation, buildings, and more.

Political will to combat climate change has gained momentum, driven by ambitious commitments from the US, EU, Australia, and Brazil. However, society is yet to fully commit to necessary actions like enacting more stringent laws, mobilizing more capital, changing conventional practices, and swiftly adopting clean technologies at the required pace.

While solutions are available, a race against time continues. The report discusses accelerating trends such as renewable energy dominating new power demand, the growth of electric vehicles, and advancements in decarbonizing buildings and industries. Additionally, it highlights the need for substantial investments and policy enhancements to drive the transition, urging the investment industry to reshape capital allocation toward a low-emissions economy.

The International Capital Market Association (ICMA) and partners, including the International Finance Corporation (IFC) and various United Nations entities, released a practitioner’s guide on Bonds to Finance the Sustainable Blue Economy.

This voluntary guidance framework offers market participants – such as issuers, investors, and underwriters – clear standards and practices for blue bond lending and issuances. “Blue bonds” have emerged as a pivotal financing tool, reflecting a growing interest in ocean-themed projects. Between 2018 and 2022, transactions reportedly labeled as blue reached a total value of US $5 billion, with a 92% CAGR between those years.

The guide covers aspects such as defining blue economy criteria, eligible project categories, key performance indicators, and case studies. It also calls for increased blue financing to achieve Sustainable Development Goal 14 and other global sustainability targets.

The guidance aligns with existing global sustainable bond standards and underscores the advantages and internal benefits of issuing blue bonds.

The World Resources Institute (WRI) released an explainer outlining lessons from California’s carbon dioxide removal (CDR) strategies to achieve net-zero emissions by 2045.

The state’s 2022 Scoping Plan sets ambitious carbon removal targets, aiming for 7 million metric tons of CO2 removal by 2030 and 75 million metric tons by 2045. These targets encompass nature-based as well as technology-based approaches like direct air capture and bioenergy with carbon capture and storage.

Crucial legislation like the California Climate Crisis Act (AB 1279) ensures that carbon removal doesn’t impede emission reductions, demanding at least 85% reductions from 1990 levels by 2045. Senate Bill (SB) 905 establishes regulatory foundations for evaluating and governing carbon capture and removal technologies, while SB 27 establishes a registry of carbon sequestration projects from natural, working lands, and direct air capture.

Additionally, proposals like SB 308 envisions mandating emitters to compensate for emissions by purchasing carbon removal credits, which could accelerate carbon removal at scale.

The state’s ambition in balancing emissions reduction and carbon removal may serve as a blueprint for other regions seeking effective strategies to combat climate change.

The Securities and Exchange Commission (SEC) announced amendments to the Investment Company Act’s “Names Rule”, aimed at preventing misleading or deceptive investment fund names, especially those related to Environmental, Social and Governance (ESG) factors. 

This move addresses concerns that fund names might mislead investors regarding a fund’s investments and risks. The amendments mandate that funds with names implying a specific investment focus, like “growth” or “value,” or “ESG”, adopt an 80% investment policy in line with that focus. They also require quarterly portfolio reviews and specific compliance time frames for deviations from this policy. Moreover, they enforce clear, consistent terminology in fund names, enhancing prospectus disclosures, and requiring rigorous reporting and recordkeeping.

The amendments will take effect 60 days after their publication in the Federal Register. Fund groups with net assets of $1 billion or more will have 24 months to comply, while those with net assets less than $1 billion will have 30 months.

The US Department of the Treasury published its Principles for Net-Zero Financing and Investment, providing private sector financial institutions with guidance to support the implementation of credible net-zero transition plans.

The 9 voluntary Principles, which focus on Scope 3 financed and facilitated emissions, recommends that financial institutions: 1) Develop credible net-zero transition plans in line with the Paris Agreement’s 1.5 degrees Celsius goal, 2) Consider transition finance, managed phase-out, and climate solutions practices, 3) Establish credible metrics and targets for all relevant financing, investment and advisory services, 4) Assess client and portfolio company alignment to their targets, 5) Align engagement practices with their clients’ and portfolio companies’ targets, 6) Develop and implement a strategy that integrates goals into relevant aspects of their business and operations, 7) Establish robust governance to oversee implementation, 8) Account for environmental justice and impacts, and 9) Be transparent on progress.

The Principles aim to help mobilize more private sector capital to address the physical and economic impacts of climate change, and may signal a benchmarking of emerging practices.

Earlier this year, the Canadian federal government and the Ontario provincial government announced production subsidies for two EV battery manufacturing facilities – Stellantis-LGES and Volkswagen – amounting to $28.2 billion by the end of 2032.

According to a new analysis¹ by Canada’s Parliamentary Budget Officer (PBO), the federal and Ontario governments’ revenues generated from these combined facilities may break-even with total production subsidies over a 20-year period, from 2024-2043.

The federal government previously projected a payback timeline of less than 5 years for the investment in Volkswagen’s production subsidy, relying on analyses from the Trillium Network for Advanced Manufacturing and Clean Energy Canada’s 2022 report, titled “Canada’s New Economic Engine”.

The PBO analysis may differ from the federal government’s initial modelling due to uncertainties in the EV supply chain and only includes government revenues generated by cell and module manufacturing that are the focus of the two subsidies.

Such subsidies allow Canada to compete with those offered in other jurisdictions, such as in the US through the Inflation Reduction Act.

^{1 Canada, Office of the Parliamentary Budget Officer, Break-even Analysis of Production Subsidies for Stellantis-LGES and Volkswagen, 12 September 2023.}

Save the Date – Carbon Summit, October 26, 2023

Q3 Update – Sustainable Finance

Roman Dubczak, Deputy Chair, CIBC Capital Markets, was joined by Amber Choudhry, Managing Director, Debt Capital Markets, and Siddharth Samarth, Managing Director & Head of Sustainable Finance, to discuss the key themes from the recently held Climate Week NYC, notable transactions in the third quarter of 2023, and recent developments in the market.

A Discussion on Today’s Carbon Markets

Roman Dubczak, Deputy Chair, CIBC Capital Markets, hosts a discussion withVice Chairs, Ryan Fan and Tom Heintzman, to share insights on the emerging ecosystem of carbon markets, how different projects can impact carbon credit quality and pricing, and the trends shaping how companies are meeting their net-zero commitments.

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