Hardline on Russia No More?
According to Responsible Investor,
… an investor statement on the Ukrainian crisis has ditched explicit commitments regarding engaging with – and potentially excluding – portfolio companies…
A person familiar with the statement told Responsible Investor: “What has become clear in the process of developing an investor response to the Ukrainian invasion is that investors feel far more comfortable formulating human rights expectations of their portfolio companies than they do about making their own commitments in terms of assessing and monitoring their portfolios for exposure to human rights harms and considering the exclusion of companies that are unwilling to unable to mitigate harms.”
Our view: If the investor statement remains in its present state, controversy is sure to follow those signatories. Portfolio companies shouldn’t look to this investor statement as a guidepost for how to manage their own response to the situation in Ukraine. Operating companies will be held accountable by other investors, asset managers, ESG ratings agencies that are monitoring company responses to the invasion, customers, the public and the media.
Full Report on Climate Disclosure Costs Now Available
Earlier this week I wrote about the fact sheet published on a study conducted by ERM that was sponsored by Ceres and Persefoni on costs to develop voluntary climate disclosures. Although the study was in development before the SEC published its climate disclosure proposal, the study addresses the cost questions posed by the SEC – and then some. The complete study and analysis is now available and definitely worth a read.
One particularly interesting insight from the authors:
While issuers noted a broad range of benefits as discussed above, the one that scored the lowest on average was “lower cost of capital.” While issuer respondents rated this benefit lowest, some ranked it highly, and a correlation was found between spending more on overall climate-related disclosure and recognizing a lower cost of capital. This suggests that issuers spending more on climate-related disclosure may be recognizing additional benefits.
The 11 issuer respondents that rated “lower cost of capital” as a 4 or 5 (very important) on a scale of 1 to 5 spent nearly twice as much on average on overall climate-related disclosure activities as did the 28 issuer respondents that rated it 3 or below.
Our view: Critics of the proposal will likely grab on to this point and use the data to argue that climate disclosure is outside of the Commission’s mission of capital formation and protection. I am not sure that is an accurate reflection of the whole picture, however. I suspect there is a whole lot more to the “additional benefits” the authors refer to – but analyzing those was beyond the intent and scope of the original study as I understand it. Besides, as I wrote at length in Killing Sustainability:
Cost of capital is a double-edged sword. On one hand, it means that some investors expect higher returns. That investors anticipate companies will outperform their peers (or other market benchmarks) sounds like a good thing. However, in the context of ESG, cost of capital conversations revolve around it being punishment for lower ESG performance with companies paying higher prices for new capital as fewer investors become willing to buy shares or issue credit – ultimately with the goal that low ESG performers will become so capital constrained that they will either change or go out of business. We’ll see later this isn’t exactly what happens in the real world of equities, although it does seem to hold true with debt financing.
Chevron’s Gorgon Carbon Capture Project
Chevron Corp’s Gorgon carbon capture and storage (CCS) project in Australia is working at only half its capacity nearly three years after starting up and the company has no timeframe for delivering on targets it has so far failed to meet… it was forced to buy carbon credits for falling short of goals for burying emissions from the Gorgon liquefied natural gas (LNG) plant. read more. The project was designed to bury 4 million tonnes of carbon dioxide (CO2) annually but only managed 2.1 million tonnes last year.
Our view: Once again, reality clashes with promises of new CCS technology. I’ve written about that before. Companies relying on unproven or lab-scale technologies as part of their climate action plans/commitments need to develop contingency plans for the real possibility of technology failure, or at least meaningful underperformance.
And speaking of contingency plans for technology failure, any company involved in underground injection of CO2 should learn about the 1986 Lake Nyos incident in Cameroon that killed 1,700 people and 3,000 domestic animals. Yes, this was a natural occurrence, but the point is the effect of a massive acute CO2 emissions event. In the U.S. under EPA’s Risk Management Program (RMP), companies managing specific chemicals have to conduct Off-Site Consequence Analyses to identify “sensitive receptors” within a certain radius from the facility, estimate the population at risk within that radius and develop an emergency response plan in the event of a worst case and alternative scenario chemical release. RMP may be a good model for CCS facilities to consider to avoid a anthropogenic Lake Nyos event.