Take Five: Green Means Green

A selection of the major stories impacting ESG investors, in five easy pieces. 

European regulators have ratcheted up efforts to eliminate greenwashing from the investment sector.

End of an era I – The fight against greenwashing inched ahead with the release of final guidelines for naming ESG- or sustainability-related funds by the European Securities and Markets Authority (ESMA). It had previously been possible to launch an EU environmental opportunities fund, claiming Article 8 classification under the Sustainable Finance Disclosure Regulation (SFDR), while allocating as little as 10% of assets to demonstrably green investments. ESMA has now declared that era to be over, with new guidelines and thresholds including a minimum of 80% of investments to meet funds’ environmental or social characteristics, or sustainable investment objectives. Initial reactions suggested the market has welcomed some aspects – such as definitions for what could be included in a fund with an ‘impact’ or ‘transition’ label – but is baffled by others. These include ditching plans to require funds labelled ‘sustainable’ to contain at least 50% sustainable investments as defined by SFDR – due to feedback saying this was too open to discretion – instead opting to introduce a commitment to invest “meaningfully” in sustainable investments – whatever that means.

End of an era II – Until recently, opportunistic portfolio managers could stuff their ‘green’ portfolios with tech stocks to deliver strong returns at relatively little expense to the planet. That scam has long been rumbled, but the gig is definitely up now that Microsoft – which in 2020 pledged to become carbon negative by the end of the decade – has admitted its carbon emissions jumped 30% last year, as it pursued dominance in the AI market. The upsurge – confirmed in the tech giant’s annual sustainability report this week – followed news of a deal with asset manager Brookfield to build 10.5 gigawatts of renewable energy capacity to support its plans to rely solely on clean power sources by 2030. With Microsoft having offered to relocate staff amid rising US-China tensions, its AI strategy might face as many ‘S’ and ‘G’ as ‘E’ headwinds. But a sector-wide power grab seems likely, within the context of wider demand trends, with the International Energy Agency forecasting data centres will double their energy needs to 800 terrawatts by 2026, fuelled by both cryptocurrencies and AI.

Levels of engagement – More evidence was provided this week

Carbon Markets can Move the Needle

Improvements in technology and measurement are showing that forest conservation projects do work – and should be accelerated, says Antoine Rostand, Co-founder of Kayrros.

The voluntary carbon market continues to divide opinion. Just recently, the Science Based Targets initiative (SBTi) provoked a backlash – including from within the organisation itself – when it revised its Corporate Net Zero Standard to let companies use environmental attribute certificates, including carbon offsetting schemes. A group that claimed to speak for the “overwhelming majority” of SBTi staff said they were “deeply concerned’ by the move”. SBTi later appeared to backtrack, saying that there were “no changes” to its standards and a formal draft of rules on carbon offsetting would be presented in July.

The strength of the reaction shows how polarised – a now-familiar term – the conversation has become. This does no one any good: we’re all conscripts in the battle to prevent the climate crisis spiralling out of control. Taking swipes at each other merely wastes precious time. We need to find a way to direct the flow of money from those who have a lot of it to those who have much less, and who are, by virtue of where they live, charged with protecting resources on which we all depend.

The climate finance gap – the difference between the amount of funding allocated for climate-related activities and the amount actually needed to effectively address climate change – stood, as of late 2022, at US$2.61 trillion a year. According to BloombergNEF’s ‘Long-Term Carbon Offsets Outlook 2024’ report, carbon credits could reach US$238 per tonne in 2050, and the market could be worth US$1.1 trillion annually by the same year.

Support for the green transition

The world cannot afford the green transition without the carbon market. This is the hard truth of the matter. The good news is that, despite the scepticism and the bad press, the carbon market does, in fact, work. In June last year, we used our Forest Carbon Monitor to assess more than 90% of the Amazon, which is the world’s largest rainforest and one of the world’s largest carbon sinks. Our analysis, which we ran by processing terabytes of satellite data with AI, showed that of 75 reviewed conservation and emissions-reduction projects funded by the carbon market, just five showed the same static deforestation rates. In other words, 96% were working.

More recent analyses have yielded similar

Weak Carbon Pricing Stalls Energy Transition

Low and patchy carbon prices will delay the transition to a clean economy but present political advantages, says the Institute of International Finance.  The sluggish spread of carbon pricing around the world risks holding back the urgent transition to a low-carbon economy, a leading financial industry bodies has warned. In…

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BHP’s Carbon-Heavy Bid for Anglo-American

The Australian miner’s attempt to buy Anglo-American has been pitched as a copper deal, but would create a huge coal producer with emissions equivalent to a mid-sized country’s.

Mining giant BHP’s bid to acquire Anglo-American would create the world’s biggest shipper of metallurgical coal and a global mega-polluter, exposing shareholders to stranded asset risk as the world moves away from fossil fuels, a think tank has warned.

This is a particular danger if steelmakers solve the problem of decarbonising steel faster than BHP assumes, and if carbon capture, use and storage (CCUS) – which could extend the life of dirty blast furnaces – fails to take off, the Institute for Energy Economics and Financial Analysis (IEEFA) said.

Australia-based BHP, the world’s biggest miner, offered to buy London-listed Anglo-American last month in an all-share deal that valued the company at £31 billion (US$39 billion). Anglo-American rejected the offer saying it was undervalued, but BHP is expected to increase its offer.

Most commentary has focused on the copper component of the proposed deal, a positive public-relations angle for BHP given the red metal’s central role in the clean energy transition.

But the deal would have a dirty side. Both companies have large metallurgical coal and iron ore divisions, supplying the carbon-spewing steel mills of China, India, Japan and South Korea. Steel is one of the world’s most polluting industries, producing around 8% of global carbon emissions.

Combining the two companies would result in annual emissions of around 490 million tonnes of carbon dioxide equivalent a year, analysis of each firm’s 2023 annual reports shows.

That’s equivalent to the emissions of a mid-sized industrialised country (well above the UK’s total annual greenhouse gas emissions, and about level with notoriously high-emitting Australia). This enormous, hard-to-abate carbon footprint is set to be an ongoing ESG headache for the firm – even as it spins off or shuts down its dirtier mines.

Most of the companies’ emissions come in the form of Scope 3 – emitted by the miners’ steelmaking customers. In BHP’s case, Scope 3 emissions from iron ore represented an eyewatering 283 million tonnes last year (on par with Spain’s total emissions), and from its metallurgical coal about 29 million tonnes. Meanwhile, Anglo-American’s Scope 3 emissions from processing iron ore were 51 million tonnes.

Steelmaking coal still ‘essential’

Iron ore is not intrinsically carbon-emitting. The ore itself contains no carbon, and if alternative methods

Natural Gas Threatens Canadian Taxonomy

Despite warnings on its climate impact, demand for Canadian liquefied natural gas continues to grow.

Industry experts have expressed concern on the potential inclusion of natural gas in Canada’s proposed taxonomy and the way it could undermine its domestic and international credibility.

Launched in 2021, the Canadian Sustainable Finance Action Council delivered a roadmap report detailing the taxonomy’s approach and governance structure the following year – setting the path for further progress. The council completed its three-year mandate on 31 March.

But progress on the taxonomy has been slow. Research from Canadian environmental advocacy organisation Environmental Defence pointed to reports suggesting that internal government conflicts around the place of natural gas in the taxonomy had stalled its release.

“There was significant pressure for the taxonomy to specifically allow liquefied natural gas (LNG) exports as a ‘transition’-labelled activity, even though there is scientific consensus that averting the worst impacts of climate change requires the rapid phase-out of fossil gas,” Adam Scott, Executive Director at Shift: Action for Pension Wealth and Planet Health, told ESG Investor.

He added that the inclusion of gas in the Canadian taxonomy was “entirely unworkable” and a “recipe for additional greenwashing”.

“Institutional investors should listen to experts [and] be sceptical of any claims made by the LNG industry about its role in our future energy system,” said Scott.

Crushing credibility

The environmental impacts of natural gas, particularly LNG, are high. Methane, the primary component of LNG, has a global warming potential around 82 times higher than CO2 when burned as a fuel.

“Wrongfully labelling gas as ‘sustainable’ under this taxonomy would entirely squash its international credibility,” warned Julie Segal, Senior Manager for Climate Finance at Environmental Defence, adding that the inclusion of fossil fuels that do not align with climate goals would also defeat its purpose.

“If Canada diverts further from science it will not only be embarrassing, but will invalidate all of the work that has gone into creating a tool that helps clean up and align our financial system with climate action.”

Ahead of the publication of the UK’s own taxonomy, the CEOs of three major sustainable investment organisations echoed similar concerns on the inclusion of natural gas –

Listen to the Science

As the fallout continues over the Science Based Targets initiative’s approach to offsets, questions arise over the net zero target-setting landscape for corporates. 

In 2024, the number of listed companies with a climate commitment validated by the Science Based Targets initiative (SBTi) jumped to 20% from just 12% in 2023. In 2020, a mere 1% of listed companies had a decarbonisation target validated by the organisation.

According to SBTI’s website, the number of companies and financial institutions setting greenhouse gas (GHG) reduction targets and having them validated doubled to 4,204 by the end of 2023 from 2,079 in 2022.

This steep growth marks SBTi as a focal point of corporate climate action, said Guy Turner, Head of Carbon Markets at MSCI. “It holds a significant cachet among companies,” he explained.

But SBTi’s status as the gold standard for companies serious about decarbonising in line with the Paris Agreement took a serious hit last month after a highly public spat between staff and executives.

On 9 April, SBTi’s board of trustees released a public statement  announcing a consultation on allowing validated companies to use carbon credits to offset their Scope 3 emissions. Mere hours later, SBTi staff and advisors fired off a letter to management, calling for the statement to be withdrawn and for the resignation of CEO Luiz Fernando Do Amaral and any board members who supported the decision.

The incident reheats the long-running debate on whether credits are a credible way for companies to reduce their carbon emissions. But it also raises questions about whether organisations are fit to assess and accredit the decarbonisation strategies of corporates.

Cottage industry

MSCI’s Turner addressed this issue in a LinkedIn post that went viral, arguing that while NGOs have played a critical role in the creation of global decarbonisation frameworks and benchmarks to date, an update to their modus operandi was needed, given high stakes measured in degrees of global warming and investment dollars.

Using the voluntary carbon markets (VCMs) as an example, he noted that what used to be a cottage industry is now in the mainstream. Billions of dollars are dependent on decisions made by its ecosystem of verification bodies and carbon credit sellers. “I don’t think the organisations have grown up in line with the decisions they are making.”

SBTi, a UK-registered charity, is a collaboration between the UN Global Compact and NGOs CDP, World Resources Institute and the