Fossil fuels: does divestment work?

The success of the fossil fuel divestment movement has been remarkable in recent years. It has persuaded the owners of trillions of dollars’ worth of assets to shun oil, gas and coal companies. But not everyone is persuaded that divestment works.

Campaigners and academics disagree on whether investors can have more leverage by dumping a company’s stock, or by engaging and pushing its board to clean up its act.

Opponents of exclusion argue that, in a world of seemingly limitless private capital, the disapproval of public markets might not be the incentive for change it was thought to be. Instead, they warn, divestment could drive the dirtiest assets into less accountable hands.

Our latest Moral Money Forum report dives into this debate, with input from many Moral Money readers. As the FT’s Sarah Murray found out, the apparently simple question of whether to exit or engage comes with complex financial, sustainability and strategic considerations. Meanwhile, she tells us, fresh thinking about a third way to approach the problem is reshaping what has long been a binary debate.

We welcome your feedback on where this debate goes next. Meanwhile, in today’s newsletter, we have the latest on the fight for higher standards in the carbon offset market, and a look at China’s new ESG disclosure framework. (Andrew Edgecliffe-Johnson)

Carbon offsets: good for more than greenwashing?

To its many detractors, the carbon offset market looks like the wild west — an unregulated space that companies can use to greenwash their image while putting off the hard work of cutting their emissions.

Yesterday, a very different vision for the market emerged from the Voluntary Carbon Markets Integrity Initiative (VCMI), an international project set up last year with backing from the UK government.

The VCMI’s new draft code of conduct is intended to set clear benchmarks for corporate use of carbon offsets — and thereby help investors and consumers identify which companies are playing fast and loose with their climate claims.

“We’re giving companies a chance to understand what they really need to do, in order to be making the claims that they are,” VCMI co-chair Rachel Kyte told Moral Money.

The need for transparency is looking increasingly urgent as the scale of this market continues to surge. In 2021 the traded volume hit $1bn, more than triple the size just two years earlier, and analysts expect massive further growth in the years and decades ahead.

So what does responsible usage of carbon offsets look like, according to the VCMI? For one thing, it has to go with serious work to cut emissions. To have their offset strategy considered for approval by the VCMI, companies need to make public a detailed, science-aligned commitment to reach net zero emissions by 2050, as well as interim targets on emission cuts.

They then face a three-tiered grading system. Gold and silver grades are open only to companies that are on track to hit those interim targets, and offset all (gold) or some (silver) of their remaining emissions with high-quality carbon credits.

The requirements for the “bronze” category are less rigorous. Before turning to the offset market, companies have to be on track to meet their targets around Scope 1 and 2 emissions (from their own operations, and the energy they use) but not Scope 3 (from suppliers and customers).

That flexibility might alarm those who fear that corporations are using offsets as a substitute for emissions cuts. But Kyte said it was important to help companies get on a path to best practice, rather than “knock them out of the game at the beginning”. The bronze category will exist only until 2030.

The draft, which you can read here, is now open for public feedback and testing by businesses including Google and Unilever, with the final version due by early next year.

A lingering question: what exactly will be deemed a high-quality credit under this framework? The VCMI is focusing entirely on how companies use offsets — rather than assessing the offset schemes behind them, a task being pursued under a separate initiative by the (unhelpfully similarly named) Integrity Council for the Voluntary Carbon Market.

Kyte hopes that the framework will be useful to government authorities when they finally get down to crafting regulations for this market. But the push for clear, widely recognised standards around offsets cannot wait any longer, she said. “If we can’t start coalescing around integrity, then bad actors will always be there, and poor activity will happen. And it won’t help us.” (Simon Mundy)

China gets its first ESG disclosure standard

Experts have welcomed China’s introduction of its first ESG disclosure standard, saying the move is expected to improve local companies’ quality of reporting and promote more sustainable investments.

The Guidance for Enterprise ESG Disclosure was first published last month by Beijing-based think-tank China Enterprise Reform and Development Society, with input from dozens of companies in China including insurer Ping An. It took effect on June 1.

The guidance is specifically designed to match the operating conditions in China. Ping An, which contributed its knowledge from developing its own proprietary ESG disclosure framework in the country, explained that the guidance “is based on relevant Chinese laws, regulations and standards”.

For example, items such as corporate charity, resources contributed to corporate social responsibility activities such as poverty relief and the building of public infrastructure, and aid to the disabled and other vulnerable communities in terms of volunteer hours or donations are included in the guidelines, said Cécile Zhang, manager of international media relations & international ESG at Ping An.

Adherence to the guidance is voluntary, but “it is a helpful starting point to have specific metrics of what companies should be considering to report on”, said Alexander Chan, head of ESG client strategy in Asia Pacific at Invesco.

Market stakeholders expect that official and mandatory requirements on ESG disclosure for listed companies are likely to be introduced by the end of the year, said Yuki Qian, head of policy at the Association of Chartered Certified Accountants China.

China has pledged to reach peak carbon emissions in 2030 and carbon neutrality in 2060, and the decarbonisation efforts will require more than $21tn in investment. That means the world’s largest emitter needs to attract green investment from overseas.

“Just because there is now a single standard doesn’t mean all reporting issues are solved, but the guidance doesn’t appear far away from global ESG norms otherwise,” said Norman Waite, energy financial analyst for Asia at the Institute for Energy Economics and Financial Analysis. “So for those companies trying to attract international ESG flows, this will be helpful.” (Tamami Shimizuishi, Nikkei)

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