Friday Climate Focus: CEO Report Card on Environmental Goals, Confusing Times to be a Climate Leader, and more
Friday Climate Focus #2
In Today’s Edition:
#1/ Fossil Fuel Companies are apparently exceeding their environmental targets every year. You heard it right.
#2/ Banks and lenders have committed to Net-Zero emissions by 2050, but continue to fund new fossil fuel projects. Is defunding a hairy problem or is it just greenwashing?
#3/ China and 3 reasons why it is a confusing time to be a climate leader.
#4/ Bonus - ‘That’ TED talk with the CEO of Shell; Google and Cool Things in Climate Stewardship; Margin for Error in Emissions Data
#5/ Banter - You know how you struggle to pick a movie to watch when you have a few friends over? Think what would happen if it was nearly 200 …
Welcome to the 2nd edition of Friday Climate Focus, where I break down the most recent climate developments of significance, with context and without the end-of-the-world overture.
I am trying a few different things with the range of topics I cover and the commentary I offer. I’d love to hear what you think. Please hit reply on this email, or leave a comment on this post.
Oil & Gas CEO Report Card: A+ on Environmental Goals
Fossil fuel companies exceed their environmental targets almost every year. It is true.
So much so that CEOs of major oil and gas companies are getting paid their full bonuses for scoring highly on environmental goals.
In 2018, one of Marathon Petroleum’s underwater pipelines cracked and let out nearly 1,400 barrels into an Indiana Creek. It went ahead and handed its Chief Executive Gary Heminger $272,251 for “excellence in environmental, personal safety and process safety improvement", for delivering the best performance in 8 years.
The Reason
Because these reviews account for the company’s number of significant oil spills in a year — not the total volume of oil — the Indiana spill counted as just one of 23 incidents in 2018.
Safety and environmental performance cannot be measured as a cutoff or a minimum requirement, when downside of flouting is disproportionately negative compared to the upside of meeting the cutoff. In other words, extremely poor performance in a single site cannot offset outperformance in multiple sites.
Even if we overlooked the inadequacy of environmental criteria, it is counterproductive and/or perverse to inconsistently “incentivize executives to grow financial or production metrics, such as earnings, cash flow or total oil production”.
Something’s Gotta Give
ESG advocates have long fought the good fight to push for a higher weightage to environmental criteria in executive compensation for fossil fuel majors, and a lot of progress has happened in its integration over the last few years.
Without active intervention, the road might be long(er) and hard(er) according to this (fantastically-titled) research published last month outlining the decarbonisation contribution of four global oil majors.
Despite the growing disruption of the oil and gas sector, accelerated by the Covid-19 pandemic, we conclude it is unlikely that the executives and directors at these four companies will decide to proactively decarbonise in line with climate science.
There are a couple of sound suggestions in there, including -
Ranking compensation to highlight personal incentives to delay decarbonisation.
Attributing companies’ emissions to executives and directors based on their shareholdings, and more
Time to fight a better fight along these newly drawn lines, I’d say.
To fund or not to fund fossil fuels (in times of Net Zero)
Mark Carney, former Head of the Bank of England, now UN Special Envoy on Climate Action and Finance, is heading a very important climate coalition in the buildup to the UN Climate Summit next month called the Glasgow Financial Alliance for Net Zero Emissions (GFANZ).
The alliance includes almost 300 funders with nearly $90 trillion in assets.
Last week, over 90+ climate action groups wrote an open-letter to Mark Carney and placed ads in global newspapers urging him to curb ‘greenwashing’ within GFANZ (Yeah, I am not a fan of the initialism/acronym either, but that’s all we got)
On the One Side
The climate groups argue that a net-zero alliance is mere tokenism, when signees continue to fund new fossil-fuel exploration projects
The criteria to be a part of the alliance is flimsy when signees do not outline their near-term commitments or strategies for emissions reduction
Hello from the Other Side
As countries across the world transition out of their fossil fuel dependence, there are reasons to continue financing new fossil-fuel exploration projects
A lot of investors and lenders have signed up and committed to net-zero by 2050
A voluntary commitment means walking away from profitable projects
The Fine Print
The Alliance calls on its lenders to put forth climate targets based on scientific evidence - either from the UN IPCC Report’s findings or the Paris-based IEA findings
IPCC, which is not a prescriptive report, does not call for a ban on new fossil fuel exploration projects, while the IEA does.
GFANZ is pushing for its signees to adopt the IEA recommendations, with little luck
So, is there a middle-ground?
Short Answer. Regulations.
You can hear certain factions say that the lenders are carrying out their fiduciary responsibility to their shareholders. While I don’t think that should be an industry-wide position, it is an understandable position for lenders to take.
Calling all inaction as greenwashing does not pave way for a solution, especially when an intent to profit is difficult to establish beyond reasonable doubt.
Even if certain responsible lenders (like the French Bank La Banque Postale) make hard commitments, we cannot only rely on the banking sector to organise itself into defunding new fossil fuel projects.
Regulations work best when there is a misalignment in incentives (as is clearly the case here). They are definitive and more importantly, binding.
Here’s a quick starter kit for regulators to consider —
Annual disclosures of emissions profile and carbon intensity of its loan books and underwriting business
Five-Yearly Emissions Reduction Strategies that includes a weighted composition of ‘do-no-harm’ and ‘do-explicit-good’, based on existing exposure to fossil-fuels
For those (tenacious) emissions that cannot be gotten off the books after best-efforts, purchase of high integrity, fully transparent carbon credits capped at ~15-20% of the overall emissions
Oh in the meanwhile, here is a (slightly twisted) leading indicator of reduced investor allocation towards fossil fuels -
Hedge funds have been quietly scooping up the shares of unloved oil and gas companies discarded by environmentally minded institutional investors, and are now reaping big gains as energy prices surge.
[…]
“People don’t understand how much money you can make in things that people hate,” said Bison Interests’ managing partner and co-founder Josh Young, who says his fund avoids the “dirtiest companies”
China Doing What China Does Best
Here are 3 developments that came out of China this last week. Or as I’d like to call it, 3 reasons why it’s confusing to be a climate leader.
Go ahead and make what you want of it.
Reason #1 - China recently kicked off a massive renewable energy project.
It is not massive by conventional standards, but massive by Chinese standards.
China recently started construction on a massive wind- and solar-power project in the country’s deserts, President Xi Jinping said.
Construction has started smoothly on the first phase of 100 gigawatts of generating capacity, Xi said via video link
A 100 GW (eek!)
That’s more than the cumulative wind and solar capacity of India. Let that sink in.
(Should you be curious, here is a list of other super-sized renewable energy projects under development around the world)
Reason #2 - China committed $232 million and pledged to restore natural habitats and reverse biodiversity loss by 2030 in developing countries. This was announced during the first of the two-segment UN Biodiversity Conference held in China, where parties also signed the Kunming Declaration and agreed on a global biodiversity framework.
Along with establishing the Kunming Biodiversity Fund, Chinese President Xi Jinping also announced the creation of several new national parks to cover 230,000 square kilometers (88,800 square miles) of land across China. Officials say the parks will protect nearly 30 percent of the country’s key terrestrial wildlife species, including pandas, tigers and leopards.
Despite the commitment not legally binding, environmental bodies see this as a promising development to finance protection and restoration efforts of natural habitats around the world. There is a consensus that tackling climate change is impossible without arresting a rapid collapse of species and ecosystems that sustain life on Earth.
It was a landmark development for two reasons -
a/ China is leading the pledge and has made strong commitments (given its history of rapid urbanisation at the cost of significant biodiversity damage); and
b/ it increases political impetus for global adoption of the biodiversity framework when the group convenes for the 2nd segment of the conference in 2021
And finally, for the pièce de résistance and to drive home how tricky energy transitions can be …
Reason #3 - China ordered coal mines to ramp up domestic production to ease outages in over 20 provinces that has affected industrial and residential power supply.
Authorities in Inner Mongolia, China's second largest coal-producing province, have asked 72 mines to boost production by a total of 98.4 million metric tons […] citing a document from Inner Mongolia's Energy Administration.
[…]
The figure is equivalent to about 30% of China's monthly coal production, according to recent government data
This announcement came at the back of heavy floods hitting Shangxi this week, disrupting output in its biggest coal producing province.
Shanxi province produced 1.06 billion tons of coal in 2020, more than a quarter of the country’s total
—
It is the reality of being a climate leader these days - to balance domestic strategies for climate mitigation and adaptation, alongside international climate diplomacy.
Bonus
— ‘That’ TED Conversation with the CEO of Shell
It’s hard to overlook developments from the TED Countdown Summit on Decarbonising Fossil Fuels that happened on Thursday in the buildup to the Climate Summit, when a climate activist called out (to put it mildly) the inconsistency in Royal Dutch Shell’s Climate Response.
The conversation included Chris James, cofounder of Engine No. 1, the activist fund that successfully installed three new directors on the board of ExxonMobil; Lauren MacDonald, Scottish climate activist and a member of the Stop Cambo campaign; and Ben van Beurden, CEO of Royal Dutch Shell, the largest Europe-based oil and gas company.
It was a tense panel that brought together three actors (one of whom certainly has higher levels of culpability and a greater ability to act on the matter) with different views on pathways to decarbonisation, the urgency with which it has to be done, and how feasible different strategies are.
Here’s the unedited version of the entire conversation.
And here is an article that reasonably describes what transpired and the subtext of the discussion (that is definitely more nuanced than what meets the eye).
— Google and Climate Stewardship
Google introduced a bunch of cool new sustainability initiatives over the last week including, policies to address climate misinformation, carbon footprint data on Google Maps and Google Flights, as well as way to measure, report, and reduce cloud-related carbon emissions.
— Margin For Error in Emissions Data
On a related note, a survey conducted by BCG of nearly 1,300 companies in Europe, Asia, North America, and South America, found that fewer than 1 in 10 companies are measuring their emissions correctly.
Only 9% of companies have the ability to count their emissions frequently and accurately, the business strategy firm said in a study released on Wednesday. The research showed that 81% of companies don’t report emissions related to their own activities, while 66% omit emissions from their suppliers and customers. Over half of firms acknowledged an error rate of as much as 40%
We sure do grant a higher margin for error in certain things over others. Imagine if companies had an error rate of 40% on operational or financial data …
… heads would roll for a lot less.