SEC’s proposed climate rule hangs in the balance

Hello from London, where I’ve just returned from a fascinating trip to India. After speaking about my new climate book Race for Tomorrow at the famous Jaipur Literature Festival, I headed to Mumbai to get up to speed with the conversation in India’s business capital — particularly on the sustainability front.

After terrible disruption during the coronavirus pandemic, including one of the world’s most stringent lockdowns, Mumbai now looked again much like the city I called home from 2016 to 2019, as the FT’s correspondent there. There were also new signs of the country’s gathering energy transition — notably the red electric buses, made by Mumbai-based Tata Motors, plying the city streets. The day before I arrived, Mumbai announced a target to hit net zero emissions by 2050, two decades before the rest of the country.

For India as a whole, the decarbonisation challenge looks severe, not least given that it coincides with the dire need to address the energy shortage faced by hundreds of millions of citizens. But my conversations with top executives in Mumbai gave some grounds for bullishness on the outlook.

You’ll find an account of those conversations in our next edition. Today, we take a dive into climate disclosures. Patrick digs into the Securities and Exchange Commission’s long-awaited proposal on this front, and I look at the rising pressure for auditors to up their game on climate. From Tamami, there’s a look at the wildly erratic standards among Asian banks when it comes to net zero targets. See you on Friday. (Simon Mundy)

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Spring brings green to Washington in more ways than one

Maybe it is because the city’s famed cherry blossoms bloomed this weekend: the mood in Washington DC turned decidedly green this week.

On Monday, the Securities and Exchange Commission advanced an unprecedented proposal to require companies to disclose emissions and other climate information.

Also this week, economic leaders descended on Washington’s Foggy Bottom neighbourhood for the National Association for Business Economics conference. Top of mind for conference attendees: greening the financial system.

Speaking to reporters, Mark Carney praised the SEC’s proposal as “absolutely a step in the right direction”. He had good reasons to be thumping his chest about the development: the proposal embraced much of the work Carney has spearheaded at the Task Force on Climate-Related Financial Disclosures (TCFD).

Companies were frantically digging into the proposal to see how it would affect them individually. One main concern for banks: the SEC would require them to disclosure internal carbon prices. That could be considered proprietary information that banks would be very reluctant to make public, sources said on Tuesday.

Though the SEC’s final rule could look different from what was proposed, there are dark storm clouds looming for the project. Right now, the crucial question for the SEC is whether the rule can withstand a fight in court. All signs indicate Republicans or companies themselves will sue the agency to halt the rule once it is final. The agency will need to make sure it has justified the need for this rule, said Satyam Khanna, a consultant and former SEC staffer who worked on the climate rule last year for the agency’s acting chair Allison Lee.

“It’s critical for the rule’s survival that the agency produce a robust and reliable economic analysis of the costs and benefits of climate disclosure,” Khanna told Moral Money. “SEC actions are frequently being challenged in federal court, and it is to be expected with a rule of this importance that it may be litigated.”

Though Carney and other environmentalists can say hope springs eternal at the SEC, the reality is climate disclosures are far from a done deal in the US. (Colby Smith and Kristen Talman)

Climate pressure grows on the Big Four

It’s pretty clear by now that the energy transition presents some serious long-term threats to the fossil fuel assets of the world’s biggest energy companies. On the question of just how much value could be destroyed, however, investors have struggled to obtain rigorous estimates from companies’ management teams.

But a close look at Shell’s annual report, published last week, shows an unusually stark warning on this front. If action is taken to keep global warming below 2C, Shell estimates, it will need to write down the value of its upstream hydrocarbon assets by up to 19 per cent, or $17bn. For its natural gas business as a whole, the potential writedown is $16bn, a quarter of that unit’s valuation.

In a report accompanying Shell’s accounts, Shell’s auditor EY nodded to the rising investor pressure that is helping to drive this sort of disclosure. The Institutional Investors Group on Climate Change, whose members manage more than €51tn in assets, has been loudly calling for auditors to take a tougher approach to climate-related disclosures. UK-based firm Sarasin & Partners, meanwhile, has led an alliance of investors in calling for the Big Four auditing groups to properly account for climate risk, or else face votes against their reappointment.

EY had taken both these voices into account when designing its audit procedures for Shell, it said.

That looks like a small victory for Natasha Landell-Mills, Sarasin’s head of stewardship and the architect of the investor pressure campaign on the auditors. The accounting firms “are now absolutely putting the infrastructure in place to make this more consistent and rigorous”, she told me. “The direction of travel is very clear.”

Landell-Mills’s coalition of investors sent warning letters to EY, PwC, KPMG and Deloitte units in the UK and US last year, and another to their French businesses in February. A letter to their German operations will follow soon. “The auditors are supposed to challenge management’s assumptions, especially when there is a high degree of uncertainty,” said Sophie Deleuze, head of stewardship at Candriam, another leading member of the investor group.

When it followed through on the threat to vote against auditors’ reappointment last year, Sarasin found few other investors at its side. But in cases where auditors continue to wave through inadequate climate-related disclosures, this year’s proxy season could bring more substantial shareholder rebellions, Landell-Mills reckons. “It’s clear there’s a high level of buy-in across the investor community to the points we’ve been making,” she said. “My hope is that the inaction last year will turn into action this year.” (Simon Mundy)

Asian banks play catch-up in the emissions reduction race

As home to some of the world’s largest emitters, Asia has outsized importance in the global decarbonisation effort. However, most banks in the region have failed to align their emissions with government net zero targets, a new report shows.

According to Asia Research and Engagement (ARE), a Singapore-based consultancy, only nine of 32 top banks in the continent’s major economies have long-term net zero commitments for financed emissions. Only 13 banks have policies that prohibit financing of new coal-fired power.

“Without course correction at an accelerated pace, widespread capital misallocation will continue, leaving the Asian region vulnerable to financial correction and climate change aggravated disasters,” the report warned.

Overall, Singapore-based DBS Group obtained the highest score for its climate actions, but the grade was nothing spectacular: CC, with A-D being the top rating and NS the worst.

At the bottom of the barrel, Chinese banks such as Ping An Bank and Shanghai Pudong Development Bank, were rated as “NS”, which means that these banks have barely started their journey on climate readiness and may not fully acknowledge climate-related risks.

The report was conducted on behalf of the Asia Transition Platform, an initiative led by seven global investors representing $4.7tn in assets, including Aviva Investors and Fidelity International.

While the analysis does not compare Asian banks with western ones, managing director Benjamin McCarron at ARE said that the best practices in the United States and Europe were generally stronger than in Asia. However, some Asian lenders were closing the gaps fast. Investors could help further speed this process along, he added.

“If investors can only ask for one thing, they should push banks to restrict financing in line with medium-term (2030) targets that align with the Paris agreement or at a minimum to national net zero pathways,” McCarron said. (Tamami Shimizuishi, Nikkei)

Chart of the week

Energy professionals are increasingly looking towards a career in renewables, according to research released yesterday by the Global Energy Talent Index. It found that three-quarters of surveyed workers in the sector were considering switching jobs within the next three years, with the bulk of them eyeing a position in the renewables space.

Energy companies are keenly aware of this trend, judging by their strong presence at the South by Southwest festival last week in Texas, where they stressed the opportunities they could offer green-minded young professionals. An executive at BP Ventures, a unit of the energy giant focused on low-carbon investment projects, said that job applications had surged over the past year — driven in part by rising concerns about energy security.

Smart read

• An argument that motorsport science could help save the world ranks among Pilita Clark’s list of the best new books on climate change. For younger readers, there’s The Tantrum that Saved the World, an illustrated children’s book by climate scientist Michael E Mann. See Pilita’s full list here.