ESG News

Kim Quirk
 on 
October 7, 2021

Q3 saw some continued effects of the unrelenting brutality of climate change with record temperatures being reached in Canada and the US. Torrential rain in Germany saw the worst flooding experienced in years and only days later, Belgium and China suffered similar fates. Fires raged in the US and parts of Europe due to the high temperatures and strong winds, with devastating effects on life and land. Scientists are now warning that extreme weather is likely to be a more frequent occurrence.

The UN’s World Metrological Organisation admitted that it has been difficult to keep track of all the records that have been broken. One city that experienced both ends of the meteorological spectrum was Portland in the US. Back in February, the city set up a centre to provide a place of refuge from what was then a harsh winter storm, only to reopen the centre 5 months later for the exact opposite reason!

Extreme weather conditions are estimated to have cost insurance companies $40 billion in the first half of 2021 alone. Other than the obvious weather disruption, the consequences are having far reaching effects on people’s livelihoods.  Agricultural land and forests are being destroyed. This has the devastating impact of undoing some of the corrective measures that have been taken such as the regeneration forests which generate carbon offsets for major companies. Air travel is being impacted too, as storms, wildfire smoke and heat reduce aircraft lift. Even wine makers are experiencing issues as the rise in temperatures is said to have an effect on the taste of red wine; the increase in heat produces a higher sugar content and therefore higher alcohol levels which are thought to bring about palate imbalance.

Global Moves

July also saw a major sell off of assets by the large oil and gas companies which have come under intense scrutiny from investors and activists. There is certainly a need to ramp up the shift from oil and gas to lower carbon technologies if most companies and countries are to meet their commitments by 2050.

G20 Finance ministers met in Vienna in July where a number of hot topics were discussed in preparation for COP26 in November. Ministers have pledged to boost efforts in reaching their climate targets ahead of COP26; however, they failed to reach agreement on phasing out coal or removing subsidies for fossil fuels, largely because of opposition from Russia, China, India and Saudi Arabia.

There is rising frustration over the lack of innovative, blended finance solutions currently available, which would assist with channelling funds to emerging markets to invest in transition policies. Lack of imagination and bureaucratic inertia were some of the reasons blamed. Whilst the G20 Finance Ministers are in support of the global carbon tax proposal, it is set to generate a lot of controversy. Some global policymakers are supporting the move, with Europe being the first to introduce it; however, others like the Biden administration remain resistant. There is also a call to focus on energy companies doing the right thing, as critics view the carbon tax as allowing people to pay for the “indulgences”, rather than addressing the core issues and thereby lessening the punishment for the sin. Allowing companies to buy carbon offset credits may allow them to work towards climate targets whilst failing to actually address their own operations and as a result, carry-on polluting.

The European Commission unveiled 13 policies designed to address climate change which they have coined their “Fit for 55” package. The ultimate aim of this is to reduce the EU’s net greenhouse gas emissions by at least 55% by 2030, a particularly ambitious target which runs the risk of backlash from poorer EU countries, as increased regulation could become a financial burden. One of the measures is the Carbon Border Adjustment Mechanism which will put a carbon price on imports of a targeted selection of products to ensure that ambitious climate action in Europe does not lead to “carbon leakage”. This emotive proposal has seen European aluminium producers calling for exclusion from the first phase, claiming it would put the industry at a competitive disadvantage to foreign rivals and do little to tackle climate change.

The European transport sector faces the biggest shake-up as Brussels seeks to curb the rising carbon footprint of this industry. New vehicles will be subject to stricter CO2 reduction standards over the next 15 years, with a de facto ban on the sale of new diesel and petrol cars by 2035. Aviation and shipping companies are due to be penalised for polluting, with a proposed tax on aviation and maritime fuels being suggested. This has unsurprisingly come under scrutiny from carmakers, airlines and heavy industry. Lufthansa agreed that ambitious climate protection and carbon prices were “both right and necessary”, despite this disadvantaging EU airlines. To level the playing field, they suggested that a financing mechanism should be developed to support paying for sustainable fuels, which are several times more expensive than kerosene. In stark contrast, energy companies were largely positive about the changes with the majority supporting the measures.

The EU roadmap is the first policy put forward by a large jurisdiction that measures up to the scale of the challenge. The loudest business critics are those who have failed to adequately prepare for the transition and the biggest supporters are those who had the foresight to position themselves for change.

In contrast to Europe, countries like China are lagging behind their climate pledge and have been accused of putting growth ahead of climate as they continue to accelerate their expansion of coal-powered steel mills.

The US Congress met mid-September to discuss their long-awaited energy transition strategy, with two key proposals being at the heart of the bill:

1) A “Clean Electricity Performance Program” (CEPP) to incentivise utilities to go green.

2) New tax breaks to drive the build of clean energy infrastructure

The US Department of Energy released a Solar Futures Study detailing the significant role solar will play in decarbonising the nations power grid. Solar currently powers 3% of the grid, but the proposal suggests that this number could hit 40% by 2035 and 45% by 2050. If this goal is to be met, significant developments will need to be made around grid flexibility, energy storage and transmission expansion.

John Kerry, US Special Presidential Envoy for Climate, met with his Russian counterpart in Moscow in July. US-Russia relations tumbled to a low point under the presidency of Donald Trump, with little improvement since. However, this trip was not about discussing the thorny issues, rather the bigger, more existential threat of climate change. As the world’s second and sixth biggest polluters, they agreed to forge close co-operation on climate change, the first positive sign of a potential easing of tensions between the two countries.

Company News

Zurich-based Climeworks opened its Orca “direct air capture” project in Iceland in September. Orca will collect about 4,000 tonnes of CO2 a year and store it underground; this is the first time CO2 is being extracted from the air commercially.

Siemens Gamesa also announced the first offshore wind turbine blades that can be fully recycled, potentially saving the significant amount currently being spent on disposal costs.

Nature

September also saw the good news of the increase in Bluefin Tuna numbers, moving it from being classed as endangered to a species of “least concern”. Unfortunately, not all the news from the International Union for Conservation of Nature (IUCN) was good; more than a third of shark and ray species are now threatened with extinction and so is the Komodo dragon which has been moved to the endangered category due to rising sea levels encroaching on the islands where it lives.

Fusion ESG Performance

In Q3, Fusion ESG H5 again outperformed the benchmark; Fusion ESG H5 returned 1.64% vs the ARC Balanced PCI benchmark performance of 0.28%. Over 12 months, Fusion ESG has returned 11.04% compared to the ARC Balanced PCI benchmark performance of 10.33%.