Recent practical updates coming from COP26 in Glasgow include:

Global offset market at risk. Developing countries – many of whom are at high risk of damage and social disruption from climate change – are fighting to increase their share of funding climate adaptation by extending a previous transaction tax to new offset markets. The EU is staunchly opposed to doing so.

Our view: If negotiators cannot find common ground, this could be a significant blow to the viability and credibility of offset markets globally. This comes at a bad time for offsets, which have faced significant criticism in recent months (see this) concurrent with overuse in Net Zero pledges (see this). This may be a good time to review your company’s plans for offsets and consider alternative emissions reductions options.

Oil price spikes trigger call for more oil production. The recent spike in oil and gas prices caught leaders by surprise. The US and EU have asked OPEC to increase production to bring prices down, especially as we head into the coldest months of the year for the northern hemisphere. OPEC has declined the requests, stating it will stick to its original plans that include only minor increases for the time being.

Our view: Three days into COP26 and asking for OPEC to increase production is not a good look.

Higher oil prices are a double-edged sword – they make alternative/transition energy sources look more cost effective and may attract more investment capital, especially given commitments made in COP26. But at the same time, domestic oil demand will increase, making fossil fuels an attractive investment at a time when – as I’ve written previously – many investors and asset managers are selling those assets at bargain prices.

With strong near term fundamentals and an established appetite for these assets by private equity, maybe this is the end of the real bargains. Divestitures (and investment decarbonization) could take longer because current owners may want to hold on a bit longer while potential buyers also seek more time to negotiate.

In the US, support for climate & ESG shareholder proposals. On November 3, SEC’s Division of Corporation Finance (CorpFin) issued Staff Legal Bulletin (SLB) 14L concerning the “ordinary business exception” as a basis for excluding shareholder proposals. SLB 14L rescinds SLBs 14I, 14J and 14K. This has meaningful impacts for ESG and climate related shareholder proposals for next year’s proxy season. Key excerpts from SLB 14L include:

… staff will no longer focus on determining the nexus between a policy issue and the company, but will instead focus on the social policy significance of the issue that is the subject of the shareholder proposal. In making this determination, the staff will consider whether the proposal raises issues with a broad societal impact, such that they transcend the ordinary business of the company…. For example, proposals squarely raising human capital management issues with a broad societal impact would not be subject to exclusion solely because the proponent did not demonstrate that the human capital management issue was significant to the company…

Additionally, in order to assess whether a proposal probes matters “too complex” for shareholders, as a group, to make an informed judgment, we may consider the sophistication of investors generally on the matter, the availability of data, and the robustness of public discussion and analysis on the topic. The staff may also consider references to well-established national or international frameworks when assessing proposals related to disclosure, target setting, and timeframes as indicative of topics that shareholders are well-equipped to evaluate.

Our view: My colleague John Jenkins blogged about this here. He said SLB 14L “takes a sledgehammer to four years of interpretive guidance on the exclusion of ESG-related shareholder proposals from proxy statements. In doing so, the new SLB may open the door for the inclusion of a wide range of previously excludable ESG proposals… Yesterday’s action effectively trashes the approach to the economic relevance & ordinary business exclusions outlined in [the rescinded] SLBs.”

It is reasonable to expect a significant jump in the number of ESG and climate-related shareholder proposals in 2022, especially if corporate action coming out of COP26 does not satisfy certain shareholders.

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