ESG+ Newsletter – 08 February 2024

This week, the newsletter looks at significant announcements in both the EU and the US, detailing efforts to commit to significant reductions in emissions; and, what that could mean for uranium supply chains as nuclear power’s popularity makes a resurgence. We also review the latest governance developments in Italy, the finalisation of regulation of ESG raters and the growing demand for biodiversity experts.

EU confirms emission target, as UK confirms a halving of emissions

As reported by Reuters, the European Commission recommended on Tuesday that the EU slash net greenhouse gas emissions by 90% by 2040, from 1990 levels. The target is an ambitious one and is likely to test political appetite for continued action on climate change as certain measures continue to face pushback. Certain sectors face particular challenges, with farming particularly vocal about the efforts recently, while traditional industrial sectors note fierce competition from China. In response, and as part of an effort to take a “balanced approach”, the specific target of a 30% reduction in farming emissions was removed from a previous draft. In order to achieve the target, the Commission pointed to the final phasing out of coal, continued reliance on nuclear energy and significant investments in carbon capture and green technologies. With EU elections looming in June, the pursuit of the target may hinge on which political side of the spectrum is victorious.

While progress toward the EU’s goal has been reasonable – cutting emissions by a third from 1990 to 2022 – the UK announced this week that it has halved its emissions over the same period, while growing the economy by 80%. The progress emanated from a shift in the energy production mix, with renewables up to 40% of electricity production (from 7% in 2010); and coal-based production falling from 40% in 2012 to zero later this year, potentially showing a path for others.

Pause on approvals for LNG exports subject to hearing in Congress

As the focus on the Biden administration’s decision to pause exports of liquified natural gas (LNG) has grown, Congress began hearings on the decision this week, as detailed by Reuters. As part of the hearings, a Republican representative introduced legislation that would make the Federal Energy Regulatory Commission solely responsible for approving new exports from LNG projects. With the growing demand for US exports part of the EU’s goal of delinking from Russian exports, there is a global dimension to the latest stance on LNG. While the EU is confident it has enough gas for a decade, in an election year, striking the balance between energy security, cost of living pressures and addressing climate change will be front and centre of many debates, and have ramifications for companies and public markets. 

FTI Consulting: Uranium and the revival of nuclear power

Indeed, as the clamour for ways to address climate change without disrupting economies grows, the benefits of nuclear energy appear to be front and centre again. As set out in a recent article from our FTI colleagues, “there’s a new buzz around nuclear power, particularly its role as a key solution to tackle climate change, both in the U.S. and globally.” Although the benefits of nuclear in tackling decarbonisation challenges are clear, it does have its detractors. One area that has perhaps escaped these discussions though, is the supply chains associated with uranium and associated difficulties. This FTI Insight aims to address some of those challenges and provide helpful guidance to corporates.

EU regulators crack down on ESG ratings 

European lawmakers have reached an agreement to finalise the regulation of ESG rating providers, with increased oversight and transparency of the methodologies underpinning the ratings. Under the new rules, ESG ratings providers operating in the EU will be required to register with regulators and comply with strict conflict of interest policies, quality standards, and reporting rules. The latest development comes amidst rising criticism of overreliance on ESG ratings from investors in guiding sustainability-linked investment decisions, with the lack of regulatory guardrails raising concerns about potential greenwashing and risks from poor quality or unreliable ratings. By authorising the European Securities and Markets Authority (ESMA) to supervise ratings providers directly, the regulation aims to stamp out opacity and inconsistent standards.  

Smaller niche providers are likely to face heavier compliance burdens under the centralised oversight; however, exemptions are being considered during an initial transition period as a means of avoiding a reduction in competition. ESG ratings providers have long been the target of criticism, with the likes of Elon Musk, highlighting their inefficiencies in assessing company performance. Overall, though, if done right, developing accountability structures in the EU can serve to enhance the credibility of sustainability performance benchmarks, while reducing avenues of attack for their critics.

Big banks are hiring senior staff to work on biodiversity-linked opportunities 

According to the Irish Independent, major banks have created senior roles to work on biodiversity-linked opportunities. Their objective is to capitalise on biodiversity through financial innovation, while dealing with emerging regulations aimed at preserving the natural environment. One of these innovations, brought to market by Credit Suisse in 2021, is called the debt-for-nature swap, allowing borrower nations to refinance their debt at better rates in exchange for commitments to preserve nature. Several of the world’s biggest banks are now contemplating similar deals, with Barclays estimating that the market may eventually be worth $800 billion. One difficulty though with the development of biodiversity-linked products is the continued lack of consistent and rigorous data. However, given the rapid development of new data collection and analysis techniques, as well as reputable frameworks and regulations requiring additional – comparable – disclosures from companies, biodiversity data and efforts are quickly becoming commoditised. 

Italy’s company board reforms 

Italy’s parliament recently passed a controversial measure changing the way directors at public companies are appointed, despite strong opposition from international investors. The proposed measures were, according to a recent Financial Times article, added by the right-wing government, as part of a broader bill aimed at reforming the country’s capital markets, a process that has lasted three years. The proposed amendments grant long-term investors holding over 9% of a company’s share capital an advantage in board appointments and restrict the outgoing board’s capacity to nominate its list of candidates, after its three-year term. The changes argue their promoters, are designed to improve the competitiveness of the Italian stock market, an issue that many exchanges globally are reviewing.

Opposition lawmakers and international investors criticised the move, warning of potential negative market impacts and investor flight. Analysts argue that these governance changes may overshadow the benefits of broader capital market reforms, with some stating an individual minority shareholder may now usurp the board in terms of power.