ESG+ Newsletter – 07 November 2024

This week’s newsletter begins by looking at some of the expected impacts of a Trump presidency on the US renewables sector, and whether the sector will continue to grow despite the new administration’s preference for fossil fuels. We also look at the outcomes of the COP16 biodiversity conference; how delays to EU deforestation laws are causing uncertainty for chocolate companies; and, how a period of relatively low M&A activity has led activist investors to change their approach. 

The outlook for renewables under a Trump Administration

Ahead of the US election result, the Financial Times published a summary into how the renewable energy sector will likely be affected under a Trump presidency. Given that a Trump presidency is now a reality, the article provides interesting insight into what to expect for the US renewable energy sector, particularly how some projects might be heavily impacted by the US presidential election result. A Kamala Harris’s victory would have likely benefited the sector by sustaining Biden’s Inflation Reduction Act (IRA) and its tax credits, crucial for some projects. In contrast, Donald Trump has pledged to halt offshore wind projects and repeal the IRA. While the feasibility of doing so – with much of its funding in train – will be tested, it has the potential to reduce new renewable energy projects by 17% by 2035, with offshore wind suffering the greatest setback.

The IRA has driven nearly $450 billion in private investment into US clean energy, benefiting many GOP districts, though Republicans have debated repealing it. Analysts forecast that a Trump presidency could slow the energy transition, raising emissions by an estimated 683 million tons by 2030 and potentially diverting clean energy investments abroad. The outcome of this election holds significant implications for the sector, with renewables facing their greatest losses under a Trump administration. 

Mixed results emerge from COP16 

The recent COP16 biodiversity summit in Colombia ended on a contentious note, with crucial funding and monitoring issues reported to be unresolved despite important steps forward. The two-week summit aimed to advance global efforts to halt nature’s destruction, following an agreement during the previous summit held in 2022. COP16 succeeded in establishing a global levy on commercial products derived from genetic data from nature, aiming to funnel profits back to biodiversity conservation. Additionally, Indigenous communities secured a permanent role in UN biodiversity decision-making, a historic achievement enhancing their influence on global environmental policies. However, these breakthroughs were overshadowed by developing nations’ dissatisfaction over unmet funding commitments from wealthier countries, who had pledged $20 billion for biodiversity protection by 2025. Many developing countries argued that they lack the resources needed to protect biodiversity effectively, further emphasising the urgent need for a reliable funding mechanism beyond the Global Environment Facility. The summit’s lack of progress on implementing a transparent monitoring framework for biodiversity targets was another critical setback. Although there was consensus on a draft framework, prolonged debates on divisive issues delayed its approval. The failure to formalise a monitoring strategy and secure sufficient funding led to an incomplete agreement, casting doubt on the feasibility of meeting ambitious global biodiversity targets. This unfinished agenda now shifts to an interim meeting in Bangkok next year, where countries will revisit these unresolved issues. 

EU deforestation law subject to ongoing debate

Life is like a box of chocolates. You never know what you’re going to get. The same, it seems, applies to the EU’s legislative enforcement schedule, according to the Financial Times. Europe’s chocolate groups have made it clear that a recent announcement from the European Union to delay its landmark deforestation law is causing uncertainty for the sector. The law, which could impact around $401 billion of EU trade annually, will prohibit the sale of goods in the EU produced with commodities from deforested land across seven sectors including cocoa, palm oil, rubber, and wood. Initially set to be enforced from 30 December 2024, protests from producing countries, particularly those which export palm oil and soya beans, have led the European Commission to postpone the law coming into force by a year. This allows for MEPs to make changes to the legislation which has caused uncertainty for leading companies, particularly those that import rubber and cocoa.

Ministers from 18 countries including Brazil, Ghana, Malaysia, and Peru wrote a letter to the commission last week arguing that their concerns, particularly regarding the EU’s benchmarking system which assesses countries’ deforestation risk, must be addressed following the postponement. Meanwhile, chief executives of leading chocolate companies, as well as supermarket chains and other consumer companies, have argued that subjecting the deforestation law to changes could lead to a meltdown of entire supply chains. It could also disrupt the progress businesses have already made in implementing measures to ensure compliance with the legislation – penalties against which could reach 4% of a company’s annual turnover. 

Activists call for CEO replacements amid slower M&A activity 

This week, Barron’s highlighted an increase in CEO departures following activist pressure. Traditionally, activist investors have pushed struggling companies to sell themselves arguing that a sale would be the most effective way to maximise shareholder value. However, amid a period of slower M&A activity, activists this year appear to be making a different demand: they are seeking to displace the management team they deem accountable for lagging company performance. According to Barclays’ Shareholder Advisory Group, activist campaigns globally have reached 184 in the first nine months of 2024 – a 24% increase over the four-year average. Jim Rossman, Global Head of the Group, notes that while M&A remains activists’ most frequent demand, calls for leadership changes have risen. Among the S&P 500 companies targeted this year, 38% have replaced their CEOs.  

With M&A activity potentially picking up in 2025, it will be interesting to watch how activists adjust their strategies, balancing calls for sales, break-ups or tie-ups, with demands for operational improvements and leadership overhauls. 

ICYMI 

• The Irish Times reports that more than a third of Irish businesses say they are aware of the reputational risks from making false or misleading green claims.
• New research has revealed that most companies lack plans to cut emissions from business travel, demonstrating a stark gap between sustainability ambitions and actual practices. 
• The Scottish government has launched a strategy to scale up private investment in high-integrity nature markets, specifically looking at how to use blended finance, according to Environmental Finance.