Also in today’s newsletter, Wall Street regulators target the carbon offset market
Greetings from New York, which will soon have a “back to school” feel: the city is preparing for the crazy whirl that is the UN General Assembly and Climate Week. Ahead of this, McKinsey has released a very thought-provoking report that looks at how much investment it would take to simultaneously hit net zero targets and raise living standards for the global population above the so-called “empowerment” line of a putative $12 a day of purchasing power parity.
The bad news is that this would need additional investment equivalent to 40 per cent of global gross domestic product, which seems impossibly high. But McKinsey stresses that there need not be a trade-off between economic growth and turning green if innovative forms of renewable energy are deployed. “We see potential for almost $10tn of low-emissions alternatives to become viable for private actors, especially in power and mobility,” it writes. Check out my column on one of these low-emission alternatives (albeit an ultra-controversial one) — small modular nuclear reactors.
Meanwhile, in today’s newsletter we offer a first-hand report from Kaori on what is really happening (or not) with ESG in Japan. Plus, we look at a pending crackdown by US regulators on the carbon credit market. And take note of an embarrassing saga linked to Glencore about the “G” in the ESG tag. Read on. — Gillian Tett
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A key obstacle to climate-related shareholder proposals in Japan
Achieving environmental, social and governance goals is often contingent on global co-operation — but the reality is that these aims exist in a fractious world, where each nation faces varied obstacles. During my time in New York I’ve become accustomed to the US challenges — but I got a flavour of what’s going on back in Tokyo on my recent trip home to Japan, where I learned a legal requirement is presenting an unexpected hurdle to ESG shareholder proposals.
Under Japanese law, the approval of a shareholder proposal would result in passing an amendment to a company’s articles of incorporation — the corporate equivalent of a constitution.
In turn, approved shareholder proposals hold more weight. Not following the proposal precisely could open the company up to legal risks, such as potential lawsuits. By contrast, US companies that do not adhere to agreed shareholder proposals can face reputational risk, but approved proposals are not legally binding.
Still, the number of climate-related shareholder proposals put forth at Japan’s most recent annual general meeting season in June doubled compared with the year before. With this in mind, I asked Koichi Taira, senior deputy general manager of Mitsubishi UFJ Trust and Banking Corporation’s corporate consulting division, for his reflections on June’s annual meetings.
Support for shareholder proposals on the “environment” category of ESG, such as climate disclosures, fell from the previous year, according to analysis from Taira’s team. Support for climate proposals dropped by an average of 6.6 points at companies that voted on proposals put forth in the past three years. And even at Electric Power Development (also known as J-Power), which rate the highest support rate among these companies for climate proposals submitted by non-governmental organisations and activist investors, the figure was a meagre 21 per cent.
In addition to the legal implications of accepting a shareholder proposal, there was a second likely reason for the decline. “This year’s proposals focused heavily on disclosing companies’ net zero transition plans. But companies, especially Japanese banks, consider this redundant as they believe they are already making progress in this regard,” Taira said.
MUFG, for example, said in its notice to shareholders in May that it had “already committed to disclosing a transition plan for MUFG’s decarbonisation by the end of fiscal 2023”, and urged shareholders to vote against the proposal. Taira pointed out that the non-governmental organisations and proposing shareholders had not been able to garner much support, as institutional investors more or less agreed with the companies’ assessment.
“Institutional investors are supportive of disclosing net zero transition plans, but are less likely to be on board for proposals that request specific action,” Taira noted, adding that companies and institutional investors were concerned it would severely limit business.
Looking forward to next year’s AGM season, Taira’s team expects both the number and scope of climate change related proposals to grow.
“At the moment, clear explanation on how the proposals will lead to an improvement in corporate value may be lacking from proposing shareholders,” he said. Perhaps communicating this may hold the key to improving support for climate proposals next year. (Kaori Yoshida, Nikkei)
US intensifies enforcement for carbon offsets
Like them or hate them, carbon credits have become an essential part of companies’ net zero efforts.
The global market for voluntary carbon offsets is set to grow to $100bn by 2030 (from about $2bn in 2022), according to Morgan Stanley. But the market has been criticised as a “wild west” where little regulation or transparency exists.
Some companies recognise these risks as they explore offsets. “Given concerns about the credibility of some of those early carbon credits that were developed and sold, we’re really hoping to see improved standards and best practices further evolve before issuing our own carbon credits,” said Douglas Long, an executive vice-president at Rayonier, a real estate investment trust.
Now companies have an extra incentive to be wary of offsets: Wall Street regulators are investigating the market. The Commodity Futures Trading Commission this summer issued a rare whistleblower alert, which asked people to come to the agency with tips about potential fraud in carbon markets. The agency also created a new “environmental fraud task force” to investigate misconduct in the carbon credits market and other environmental products.
Alex Holtan, a partner at Holland & Knight, and member of the law firm’s “greenwashing mitigation team” told me the CFTC was probably hunting for double-counting — where a company claimed the same underlying environmental asset (an area of forest, for example) for two different kinds of credits. The CFTC was also going to be looking for offset “project developers that are not doing any sort of diligence”, he said.
“It wouldn’t surprise me if [the CFTC] had at least a handful of ongoing investigations,” Holtan added. At this stage in an investigation, “I would expect that they have at least ongoing information collecting activity from enforcement.” The CFTC has been quiet on specific companies that might be in the crosshairs and no mentions of investigations under way have emerged in regulatory disclosures.
“The financialisation of the voluntary carbon markets is here,” CFTC chair Rostin Behnam said in July. “At the same time, public and private efforts are working across the globe on what can only be described as a burgeoning credibility crisis.”
Companies will now need to be extra careful about the carbon offsets they buy lest they invite Wall Street’s derivatives regulator to start looking under their hood. (Patrick Temple-West)
Smart read
Glencore has never been considered a bastion of environmental or social standards. But now it is facing severe embarrassment over its governance, following the news that 197 asset managers are suing the commodities trader for misleading them about its shady past. Managers are apparently furious about the company’s “failure to disclose that bribery, corruption and fraud was prevalent in the business activities of operating subsidiaries”. Ouch.
