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Net zero targets: Ask what you can do for your country . . . 

Good morning from Boston, where I’ve spent part of this week digging into the race to bring fusion power to market (I also stumbled across a street advertisement that made me wonder whether we have now hit peak ESG).

More on the fusion story in our next edition on Monday. Today, we kick off with an item from the UK that highlights a critical question: are corporate net zero goals useful?

As Kenza writes below, an official “task force” in the UK is sidelining such targets — focusing instead on the national net zero goal, and how companies can do their bit to help the country hit it.

This follows an important statement last year from ADEME, France’s environment and energy agency (a useful analysis in English is here). ADEME urged companies and other non-state entities not to set net zero goals, warning that “carbon neutrality is a notion that can only be defined on a planetary or state scale”.

Corporate net zero targets, ADEME warned, could encourage companies to focus on simply offsetting their emissions through low-cost carbon credits, instead of considering their maximum potential contribution to global and national climate goals.

This is a subject we’ll be returning to, and in the meantime we welcome your thoughts on it — drop us a line at (Simon Mundy)

UK transition plan rules start to take shape

As in other major economies, big companies in the UK have been lining up to vow that they’ll eliminate their net carbon emissions by 2050, or even sooner. But such pledges are not set to be made mandatory, according to a “task force” of business and government leaders preparing new national guidelines on climate-related reporting.

From next year, companies and large asset managers and owners must start publishing explanations of how they will help the UK reach its 2050 net zero target.

A first draft of guidelines for these plans is due to be published at November’s COP27 summit by the Transition Plan Taskforce, which is jointly led by Amanda Blanc, who is head of the insurer Aviva and non-executive director at BP, and by the Treasury.

Transition plans currently published by UK companies are of “hugely varying quality”, Jacques Morris, team leader at the Transition Plan Taskforce’s secretariat, told Moral Money. “If we have a world in which major organisations only have a net zero target, but don’t actually set out how they’re going to get there, then there’s no accountability. And that leads to greenwashing.”

High-quality plans could help the Financial Conduct Authority root out greenwashing by gathering a company’s emissions reductions targets and sustainability-related data in one place, Morris said — either in a company’s financial accounts or in a separate dedicated document.

The TPT is taking a “whole-economy approach”, meaning it believes that companies need not reach net zero individually in order for the UK to reach its national goal, he added. “At a principles level we know that divestment simply from high carbon assets isn’t the answer.”

This philosophy is meant to avoid “paper decarbonisation” — where, for example, a fund might sell off a stake in a high-emitting asset like a power plant, only for it to be snapped up by another institution.

Many of the questions asked by business in the TPT’s recently closed consultation were on the issue of mandatory scope 3 emissions disclosures, according to Morris. These are emissions in a company’s value chain — such as those arising from activities it underwrites or finances.

Some investors are calling for regulators to impose higher standards in this space. Cathrine de Coninck-Lopez, head of ESG at US investment manager Invesco, said she hoped the TPT would make third-party verification of carbon accounting disclosures mandatory. Invesco could be ready to publish its own scope 3 financed emissions from next year, she added, using methodology drawn up by the Partnership for Carbon Accounting Financials and data provided by ISS, a shareholder advisory business. She said: “There would be a higher level of confidence in what we’re looking at if other investors used verification too.”

The UK task force has yet to make key decisions around the requirements on scope 3 disclosures, including whether they should be published in financial accounts or in a separate document.

But Morris said this was a major area of focus for the group. Financed emissions represent the “lion’s share” of the City of London’s impact on the climate, he noted, far outweighing the UK financial sector’s scope 1 and 2 emissions covering energy, travel and infrastructure costs. “Obviously scope 3 is too big to ignore.” (Kenza Bryan)

The climate fallout from Pelosi’s Taiwan trip

US House speaker Nancy Pelosi’s visit to Taiwan earlier this month set off a series of reactions from China, including nearly weeklong military drills around the island. One of these looked to have especially far-reaching implications: China’s decision to freeze climate dialogue with the US.

Environmentalists have voiced concern about the suspension of climate collaboration between the two countries. “I don’t see a way where the global climate crisis can be solved without the two biggest emitters talking to each other,” said Li Shuo, Beijing-based policy adviser at Greenpeace China.

With climate co-operation a rare oasis in the desert of difficult diplomatic relations between China and the US in recent years, this is an unfortunate case of diplomatic tensions undermining crucial global action, said Yan Qin, Oslo-based carbon analyst at Refinitiv. It stands in contrast with the strengthening collaboration between the US and Taiwan: this week the two governments announced they would hold formal talks on trade and investment, with economic co-operation on climate one of the key areas for discussion.

Escalating tensions between the world’s two largest economies could have a chilling effect on the upcoming COP27 meeting in November, when the world leaders gather to discuss climate collaboration. This is another burden on the global climate effort, as energy security dominates the policy scene and climate policy takes a back seat following Russia’s invasion of Ukraine, Qin told me.

Climate dialogue between the two countries picked up when US president Joe Biden took office in January 2021, after being put aside under the Trump presidency. Biden’s climate envoy John Kerry and Xie Zhenhua, China’s climate issue representative, brokered a rare joint declaration on climate from the superpowers in Glasgow last year.

Kerry hit out at China’s decision on Twitter, warning: “Suspending co-operation doesn’t punish the United States — it punishes the world, particularly the developing world.”

Despite that admonition, some specialists don’t expect Beijing’s move to have a huge impact on the global effort to cut emissions.

“China appears to be good to its word in stopping coal plant construction offshore and has relaunched [the Belt and Road Initiative] as the Green Belt and Road Initiative,” said Norman Waite, energy finance analyst at the Institute for Energy Economics and Financial Analysis. This break in talks seems like a step change in a trend rather than an entirely new environment, as relations between the US and China have been fraying for some time, he added.

Sha Yu, an energy researcher at the University of Maryland, also argued that the impact will be limited as the climate issue is not a “bilateral” matter, and domestic efforts to cut emissions continue in each country. There is no sign that China will halt climate collaboration with other countries, including the EU, Yu told me.

For example, China released a plan for carbon-intensive industries such as steel and cement to hit peak emissions by 2030 earlier this month. In the US, Biden has just signed the Inflation Reduction Act which provides for more than $360bn in green spending. Some of that will go towards domestic production of clean energy technology to reduce reliance on Chinese imports.

The impact on businesses and investors in the west from the China-US climate talks freeze is hard to assess for now, experts said.

Waite at IEEFA highlighted an incident in 2010 when China cut off supply of rare earth metals to Japan over a fishing dispute, causing major industrial disruption. While he didn’t expect such a drastic step from China towards the US at this moment, he said companies with substantial reliance on Chinese imports — which include many areas of the clean technology sector — should brace for potential trouble. “This may be time to review exposure to Chinese supply chains in the event that Sino-US relations substantially deteriorate,” he said. (Tamami Shimizuishi, Nikkei)

Smart listens

If you’re struggling to keep up with the soaring number of ESG-related podcasts, here’s a list of 10 worth checking out from the helpful folks at Sustainability magazine. They include Kamea Chayne’s Green Dreamer podcast, Alex Blumberg’s How to Save a Planet and Christiana Figueres’s Outrage + Optimism.

Due Diligence — Top stories from the world of corporate finance. Sign up here

Energy Source — Essential energy news, analysis and insider intelligence. Sign up here

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