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IPCC Issues Newest Report

The IPCC issued another 3,500-page report with even stronger dire warnings. You may want to start off with the Summary for Policymakers, which is a mere 63 pages long, a pretty technically difficult read and lacks a table of contents. The report’s purpose is more informative than it is to offer pragmatic action at the corporate level, but I’ve extracted a few things that are reasonably practical and that you may not see others mention:

“Net-zero CO2 emissions from the industrial sector are challenging but possible. Reducing industry emissions will entail coordinated action throughout value chains to promote all mitigation options, including demand management, energy and materials efficiency, circular material flows, as well as abatement technologies and transformational changes in production processes. Progressing towards net zero GHG emissions from industry will be enabled by the adoption of new production processes using low and zero GHG electricity, hydrogen, fuels, and carbon management.

… mitigation options costing USD100 tCO2-eq-1 or less could reduce global GHG emissions by at least half of the 2019 level by 2030 (options costing less than USD20 tCO2-eq-1 are estimated to make up more than half of this potential) (Ed. note: Figure SPM.7 is worth a look. From my reading, transportation efficiency increases, wind & solar energy offer the most reductions at lowest cost. Nature-based solutions offer higher costs and, notably, higher ranges of uncertainty.)

Climate governance, acting through laws, strategies and institutions, based on national circumstances, supports mitigation by providing frameworks through which diverse actors interact, and a basis for policy development and implementation.

Economy-wide packages, consistent with national circumstances, can meet short-term economic goals while reducing emissions and shifting development pathways towards sustainability.

Partnerships, agreements, institutions and initiatives operating at the sub-global and sectoral levels and engaging multiple actors are emerging, with mixed levels of effectiveness.”

Our view: Yes I am a broken record here, but I see “transition economy” all over this, along with an acknowledgement that fragmentation of voluntary programs isn’t getting us very far, probably adding to confusion and uncertainty. For any company seeking new business opportunities, I suggest taking a hard look at Figure SPM.7 – that is probably the most practical page in the entire Summary report.

In contrast to the report’s tone and urgency, global demand for fossil fuels isn’t slowing that much – oil companies are profitable and US coal prices are highest since 2008. The EU announced a ban on Russian coal that will further fuel the flames (ahem…) of high prices and supply constraints in the face of strong demand. And this morning, the House Committee on Energy and Commerce will hold a hearing called “Gouged at the Gas Station: Big Oil and America’s Pain at the Pump.” CEOs from bp American, Chevron, Devon Energy, ExxonMobil, Pioneer Natural Resources and Shell USA are expected to testify.

One thing that strikes me is that society is demanding action against ubiquitous, low cost fossil fuel while simultaneously rebelling against high costs from supply constraints, expecting government to step in to fix that. I can’t help but feel this is a premonition for what would happen if constraints in ubiquitous, low cost energy tightened before alternative sources are readily available at the same scale and at competitive pricing as fossil fuels. In other words, absent a reasonable, planned transition that many groups are fighting by trying to rapidly cut off capital and revenue to fossil energy companies.

Speaking of which…

JPMorgan Chase Pushes for Transition Economy, Touts DEI

CEO Jamie Dimon’s annual letter to shareholders addressed competing priorities of the energy crisis, climate and finance.

“.. the war in Ukraine and sanctions on Russia are driving gasoline prices up and threatening Europe’s access to natural gas. Resource scarcity leads to higher energy costs and reduces reliability, hindering national security and hurting the most vulnerable. Disruptions to the global energy system are again highlighting our urgent global need to provide energy resources securely, reliably and affordably and, at the same time, address long-term clean energy solutions and strategies to reduce our carbon footprint…

First, we must promote energy security. Constraining the flow of capital needed to produce and move fuels, especially as the war in Ukraine rages on, is a bad idea. The world still needs oil and natural gas today, but not all hydrocarbons are equal when it comes to their carbon footprint. We should be directing more capital toward less carbon-intensive fuel sources and investing in innovations, such as carbon capture and sequestration, as we look to transition to green technologies delivered at scale for society.

Second, we need to scale investment massively in clean technologies. As the International Energy Agency has emphasized, ‘huge leaps in clean energy innovation’ are core to achieving net zero. This is because the world will rely on traditional fuels until alternatives, like clean hydrogen, are fully available…

Third, governments should play a leadership role by enacting thoughtful policies that spur long-term and large-scale capital deployment for low-carbon solutions that create jobs and benefit the global economy. Here are some examples: a carbon tax that directs some proceeds to help offset energy costs for underserved communities; measures to promote investment in technology R&D; and reductions in permitting timelines for energy infrastructure, such as wind and solar farms and liquefied natural gas.

Finally, let’s set meaningful goals and identify a few tangible, cost-effective solutions to reduce emissions today. This should include minimizing fugitive methane emissions and virtually eliminating wasteful flaring of natural gas. Immediately actionable opportunities like these might require more financing, not less, to reduce the short-term rate of climate change and prepare companies to thrive in a lower-carbon future.”  

In addition, Dimon discussed the firm’s DEI effort and achievements:

“We’ve made tremendous progress over the past few years to create a more inclusive company and promote equity in all our communities.

  • More women were promoted to the position of managing director in 2021 than ever before; similarly, a record number of women were promoted to executive director. By year’s end, based on employees who self-identified, women represented 49% of the firm’s total workforce. Overall Hispanic representation was 20%, Asian representation grew to 17% and Black representation increased to 14%. 
  • We expanded our global Diversity, Equity and Inclusion department to include three new Centers of Excellence: Advancing Hispanics and Latinos, The Office of Asian and Pacific Islander Affairs, and The Office of LGBT+ Affairs. 
  • To promote greater participation in our workforce by Black professionals, we expanded our Historically Black Colleges and Universities partnerships to 17 schools across the United States to boost recruitment connections, expand student career pathways, and support long-term student development and financial health.
  • We continue to find ways to lift our LGBT+ employees, professionals with disabilities and military veteran colleagues. We just celebrated the 10th anniversary of the Veteran Jobs Mission, which is a coalition JPMorgan Chase co-founded in 2011 as the 100,000 Jobs Mission. It began as 11 companies committed to hiring military talent across the private sector, and now membership exceeds 300 companies with more than 830,000 veterans hired.

By the end of 2021, we had deployed or committed more than $18 billion toward our [$30 billion racial equity commitment] goal.  That commitment focuses on increasing homeownership, expanding affordable rental housing and growing small businesses, spending more with Black, Hispanic and Latino suppliers, improving financial health and access to banking, investing in minority depository institutions (MDI) and community development financial institutions (CDFI), and investing in communities through philanthropic capital.”

Our view: Dimon was criticized for continuing to support fossil fuels at the same time he calls for investing in alternative fuels. Such criticism doesn’t reflect the reality of a necessary transition economy. The firm’s DEI commitments and update offer reason to be optimistic. With the updates on leadership diversity with respect to gender and race, and the growth of partnerships and investments in underrepresented communities, the company seems to be making progress towards DEI commitment, but the company shouldn’t rest on its laurels. I haven’t seen any contrasting views on this yet, but it’s only been a couple days.

FDIC Seeks Climate Comments

On April 4, the FDIC published in the Federal Register a request for comment

“… on draft principles that would provide a high-level framework for the safe and sound management of exposures to climate- related financial risks. Although all financial institutions, regardless of size, may have material exposures to climate- related financial risks, these draft principles are targeted at the largest financial institutions, those with over $100 billion in total consolidated assets. The draft principles are intended to support efforts by large financial institutions to focus on key aspects of climate-related financial risk management…

The draft principles are an initial step to promote a consistent understanding of the effective management of climate-related financial risks. The FDIC plans to elaborate on these draft principles in subsequent guidance that would distinguish roles and responsibilities of boards of directors (boards) and management, incorporate the feedback received on the draft principles, and consider lessons learned and best practices from the industry and other jurisdictions. In keeping with the FDIC’s risk-based approach to supervision, the FDIC intends to appropriately tailor any resulting supervisory expectations to reflect differences in institutions’ circumstances such as complexity of operations and business models. Through this and any subsequent climate-related financial risk guidance, the FDIC will continue to encourage institutions to prudently meet the financial services needs of their communities.”

The document lays out general principles of:

A. Governance
B. Policies, Procedures, and Limits
C. Strategic Planning
D. Risk Management
E. Data, Risk Measurement, and Reporting
F. Scenario Analysis

It also reviews management of risk areas:

A. Credit Risk
B. Liquidity Risk
C. Other Financial Risk
D. Operational Risk
E. Legal/Compliance Risk
F. Other Nonfinancial Risk

Comments are due by June 3, 2022.

Our view: It seems FDIC took a few pages from the SEC’s climate disclosure proposal – which I think is good. It shows there has been an attempt to align the actions of different parts of the federal government. Companies under both FDIC and SEC jurisdiction may be able to kill two birds with one stone – although being “principles” rather than requirements under FDIC, conformance may not mandatory and it is unclear what disclosures, if any, would ultimately be necessary.

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The Editor

Lawrence Heim has been practicing in the field of ESG management for almost 40 years. He began his career as a legal assistant in the Environmental Practice of Vinson & Elkins working for a partner who is nationally recognized and an adjunct professor of environmental law at the University of Texas Law School. He moved into technical environmental consulting with ENSR Consulting & Engineering at the height of environmental regulatory development, working across a range of disciplines. He was one… View Profile