It has been another busy week or so. Here are some highlights:
- PBCs got SPAC’d. Or maybe it is vice-versa. Honestly, I don’t understand the SPAC attack, but thankfully John Jenkins does. He recently posted an interesting observation that
… Delaware enacted amendments that eased the process of converting to a public benefit corporation (PBC), and that led to a significant upswing in conversions. High-profile public company conversions in 2021 included Veeva Systems, Amalgamated Financial, and United Therapeutics… in addition to conversions of existing public companies, newly public and private companies increasingly opted for PBC status:
PBCs entered the public markets in 2021 through all the various ways that were available to companies in 2021: IPOs of special purpose acquisition companies or ‘SPACs’ (Sustainable Development Acquisition I Corp.), de-SPAC mergers (AppHarvest, Inc. and Planet Labs PBC), direct listings (Warby Parker Inc.), and traditional IPOs (Coursera, Inc., Zymergen Inc., Allbirds, Inc., and Zevia PBC). More and more private companies are operating as PBCs as well – there were approximately 3,000 PBCs in Delaware in 2020, and the number has only increased since then.
Our view: Granted, SPACs are only one avenue for becoming a PBC but it was the best one for writing my intro. In all seriousness though, he also points out that “there’s still no Delaware case law directly addressing PBC issues.” Who wants to be the first? Bueller?… Bueller?…
- Electrifying. A new report from Reuters and insurance brokerage firm Marsh offers interesting thoughts on managing risks in the transition to low carbon energy in the US market. The report covered a few things I thought were insightful, for instance:
“… while large legacy power plants are relatively hardened against natural events such as floods and windstorms, the distributed and exposed nature of wind and solar projects makes them more prone to severe weather impacts. This changes the way insurers, project developers, and other stakeholders must approach both the financing and mitigation of natural catastrophe risk.”
And this – “the recent growth of the battery storage market has led to an increased focus on fire risks and mitigation for these systems.” Lithium – a major component of these batteries – reacts violently in water (watch this), so other means of fire control must be used unless you want a big and dangerous science experiment on your hands.
Risk transfer through insurance or some other means is part of the toolkit to manage financial challenges like higher operating costs, equipment breakdown, lower power output than expected and catastrophic events. The “starting point is to understand the risk and to have a realistic expectation of which stakeholder should carry that exposure. This should allow project developers and financiers to decide which risks they are comfortable retaining, and which are best left to firms that specialize in pricing and carrying risk for others.”
As of the end of 2021, insurance pricing globally has increased for most major coverage lines for seventeen consecutive quarters, according to Marsh data. Despite increasing supply in the insurance market for renewables, risk appetites between insurers can vary tremendously, which makes the process of optimizing that supply more difficult. When stakeholders combine these varying appetites, the broader insurance market price dynamics, the pace of technological development, and the requirements of project finance, the insurance market for renewables remains challenging.
Our view: Insurance will play a vital role in the transition economy, but the carriers are still working to understand the exposures/scenarios involved – including whether some risks may even be insurable to begin with (not every risk is). Some risks – such as fire – are part of carriers’ traditional lines; others may not be. Until carriers get comfortable with those scenarios and how to price coverage, we will likely continue to see substantial variation in terms, conditions, exclusions and costs.
- Private Climate. The Institutional Investors Group on Climate Change (IIGCC) is seeking feedback from a broad range of stakeholders to strengthen its Paris Aligned Investment Initiative (PAII) Net Zero Investment Framework for private equity and ensure they “have fully considered all issues relevant to alignment with net zero for this asset class.”
As background: “The Net Zero Investment Framework aims to provide a consistent basis for asset owners and asset managers to measure and manage portfolios towards the goal of achieving global net zero emissions by 2050 or sooner. It seeks to provide recommendations for methodologies and approaches to alignment that a broad range of investors can utilise. However, it recognises that investors will set their own specific strategies and undertake actions according to their circumstances and legal requirements. Investors utilising the Framework are therefore expected to do so on an ‘implement or explain’ basis.”
The deadline for submitting responses is February 27, 2022.
Our view: It will be interesting to see how private equity responds, especially in light of the potential that SEC may look to expand the use of Form PF to climate risk disclosure. Further, most private equity firms chose not to join the Glasgow Financial Alliance for Net Zero (GFANZ) that came about at COP26 in November. Pressure is increasing for private equity to become more active and transparent about how they are addressing climate risk. Earlier this week, Carlyle published goals for Net Zero 2050 for their portfolio companies.
- Prove it. Speaking of requests for feedback, the European Securities and Markets Authority (ESMA), the EU’s securities markets regulator, published a Call for Evidence on ESG ratings. The aim is to gather information on the market structure for ESG rating providers in the European Union (EU). Stakeholders are invited to submit their responses via the questionnaire available here by 11 March 2022.
The Call for Evidence’s purpose is to develop a picture of the size, structure, resourcing, revenues and product offerings of the different ESG rating providers operating in the EU. The call is mainly addressed to three target groups:
– ESG rating providers based anywhere in the world – not just the EU;
– users of ESG ratings; and
– publicly listed or private unlisted entities located anywhere in the world – not just the EU – that are subject to rating assessment of ESG rating providers.
Today’s Call for Evidence is intended to complement a separate consultation to be launched by the European Commission (EC), that will seek stakeholder views on the use of ESG ratings by market participants and the functioning and dynamics of the market.
The document states “… without regulatory safeguards for [ESG ratings] several issues and risks reduce the potential benefits of these ratings. In addition, a study commissioned by the EC and published in January 2021 identified a lack of transparency of ESG rating providers’ operations, a low level of comparability between ESG ratings, and potential conflicts of interest… [and] whether and how rated entities interact with ESG rating providers active in the EU. In particular, whether their interactions are subject to any contractual agreements and whether there are common problems with the nature, frequency and transparency of these interactions.”
Our view: This is an important call for information that no doubt the SEC, the International Organization of Securities Commissions (IOSCO), International Sustainability Standards Board (ISSB) and others will certainly be monitoring. Given that the request is not limited to EU entities, it seems that any company issuing, using or impacted by ESG ratings can submit comments.
