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PracticalESG

PracticalESG.com

Keeping you in-the-know on environmental, social and governance developments

In the past few days, news from both companies and governments about the future of fossil fuels has been inconsistent to say the least. There has been uncertainty before, but this week seems to have been particularly uncertain. While these actions can seem too high-level to create near term risk to individual companies, they actually do.

For example:

Bloomberg reported the US is creating its own additional roadblocks to solar project timing and costs:

The Commerce Department is probing allegations that Chinese companies are circumventing decade-old tariffs designed to prevent subsidized solar gear from flooding the US market by assembling the products in Cambodia, Malaysia, Thailand and Vietnam. If the agency concludes tariffs are being circumvented, it could extend antidumping and countervailing duties to the companies’ operations in Southeast Asia.

In the EU, Business Insider wrote the cost for the EU to transition away from natural gas will be much higher than expected – this coming at a time of record energy costs and inflation in the region.

– The EU’s current energy plans will cost it $200 billion more than it expects by 2030, a think tank said on Wednesday.

– The plans, which include cutting the bloc’s reliance on Russian gas, will add hugely to its energy bill as prices rise.

– “Decades of over-reliance on fossil gas has made Europe incredibly vulnerable to volatile prices whilst empowering Putin,” Global Witness said.

Except maybe there are other fossil fuel sources to help during the transition period according to Reuters:

“Over time, steadily rising volumes from Middle East OPEC+ and the U.S. along with a slowdown in demand growth is expected to fend off an acute supply deficit amid a worsening Russian supply disruption,” the IEA said in its monthly oil report.

And Germany looks like they have their answer according to Bloomberg:

Germany plans to abandon fossil-fueled power by 2035. But instead of shutting down natural gas infrastructure, it’s speeding up construction of several new terminals that will allow companies to import the planet-warming fuel by ship for decades to come.

To reconcile the rush to procure gas with the government’s ambitious net-zero plan, Germany wants each of the proposed terminals to eventually handle carbon-free fuels imported from countries such as Australia and the United Arab Emirates.

The compromise allows Germany to address the current energy crunch while planning for an emissions-free future. Companies can import LNG for a few years to make up for the loss of Russian gas, then use some of the same infrastructure to handle green fuels that can power grids and heat homes. But the mechanics of making that switch are complicated, and, at this stage, largely theoretical.

“The very short-term action is to reduce the dependency on Russian gas,” said Han Fennema, chief executive officer of Dutch state-owned gas network operator NV Nederlandse Gasunie, which has invested in one of the new German terminals. “I think the second phase will go quicker than expected with green hydrogen.”

But an article in Treasury Today indicated maybe continuing to sanction Russian oil doesn’t really matter:

As Robert Rapier, author of ‘Power Plays: Energy Options in the Age of Peak Oil’, explains for Forbes, as Russia is such a large producer, it is impossible to take action without prompting oil prices to skyrocket. And if prices are sky high, Russia stands to benefit from selling its oil to countries that haven’t banned it.

Janis Kluge, Senior Associate at the German Institute for International and Security Affairs (SWP) in Berlin, citing figures from Russia’s Ministry of Finance, tweeted that Russia’s oil revenues hit a record high in April of 1.8 trillion rubles, after 1.2 trillion rubles in March. After the first four months of 2022, Russia has already received half of its expected revenue from oil and gas revenue for the year, he explained.

And while the G7 countries ban, or phase out, Russian oil, there are still other countries that are willing to buy it…

In amongst this and the debate about the impact, the White House statement noted that it was “accelerating our efforts to reduce dependence on fossil fuels”. This, Rapier writes, is the way forward: “In a world that is heavily dependent on oil, the only way to effectively impact Russia’s oil revenues is to reduce global dependence on oil.”

New reports from Bloomberg indicate the Russian sanctions aren’t really sticking anyway:

Ten more European gas buyers have opened accounts in Gazprombank JSC, doubling the total number of clients preparing to pay in rubles for Russian gas as President Vladimir Putin demanded.

A total of twenty European companies have opened accounts, with another 14 clients asking for the paperwork needed to set them up, the person said, speaking on condition of anonymity to discuss confidential matters. He declined to identify the companies.

Financial Times wrote the UK just announced they are pulling back their sustainability disclosure regime:

Ministers made a last-minute decision to withdraw plans to force big UK companies and asset managers to disclose their environmental impact from Tuesday’s Queen’s Speech…

The government has said it would allow those corporate reporting standards to be set in conjunction with the International Financial Reporting Standards Foundation, an international body which is drawing up its own climate-related standard. 

One aide said there had been a last-minute U-turn: “I would see this in the context of Downing Street not wanting to impose new regulations on business at this stage.”

Last but certainly not least, over on TheCorporateCounsel.net, Liz wrote about big climate news in the investment world:

BlackRock Investment Stewardship has issued new commentary to preview why its support for proposals this year could be lower than in 2021, when it supported 47% of ESG resolutions.

This announcement was met with criticism and derision claiming that the world’s largest investor is trying to back away from its climate commitments.

What This Means

I see two take aways from all this news:

  1. The fluid nature of today’s geopolitical situation is having a direct impact on both corporate plans and assumptions for meeting climate goals/commitments. I’ve written previously about risks to corporate climate commitments – most recently here. This post today shows how wide-ranging those risks really are. And if you aren’t staying on top of the shifting sands, your company may end up missing goals, getting called out for greenwashing, being targeted by investor activism and – yes – possibly face the growing amount of climate litigation.
  2. Critics of BlackRock’s statement are, in my opinion, wrong. BlackRock has supported the concept of a transition economy which will take years. During that time – as the Ukrainian situation has made crystal clear – fossil fuels can’t simply be cut off, they must play a role. But how the financial world engages with those industries is evolving. In my mind, BlackRock gets that and sees the importance of fossil fuels in the near- to mid-term transition. Unfortunately, other companies – investors or otherwise – that explicitly acknowledge or indicate support for oil and gas in any context may face similar intolerance, criticism and possible activism. And that may be a factor in how companies choose to discuss/explain climate goals, plans and commitments in their disclosures – regulatory and otherwise.

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The Editor

Lawrence Heim has been practicing in the field of ESG management for more than 35 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 at the height of regulatory development, working across a range of disciplines. He was one of the firm’s leading environmental compliance and management… View Profile