The information you need to make your sustainability ambitions a reality
In this edition
- On the Path to Net Zero: Recommendations for Policy Makers
- Energy Shortage: China’s Increase in Coal Production
- Progress Report on Sustainable Finance in Canada
- Podcast: Project Carbon – Update
As this newsletter goes to press, the 26th United Nations Climate Change Conference, or COP26, gets underway in Glasgow, Scotland. CIBC is sending several members of our team to attend the event. Listen to the upcoming Sustainability Agenda podcast, where Dominique Barker interviews Brian O’Hanlon from the Center for Climate-Aligned Finance, who provides some predictions. Wednesday, November 3, 2021, is the ‘Finance Day’ and we expect a flurry of news announcements on that day, including net zero progress and ambitions. While some recent press has been critical of the Conference (the Economist cover story is entitled ‘COP-out’), we are more optimistic.
To review the key takeaways from COP26 as well as the expected impact on Canada, Dominique will speak to Bruce Lourie of the Ivey Foundation and Canadian Institute for Climate Choices on our CIBC Market Update & Perspectives call on November 18, 2021.
CIBC joins Net Zero Banking Alliance
This past month, CIBC, along with all other major Canadian banks officially signed on to the Net Zero Banking Alliance (NZBA). NZBA is an industry-led, UN-convened body committed to bringing banks together to align lending and investment portfolios with net-zero emissions by 2050. Financial institutions play an essential role in transitioning towards a Paris-aligned future. By joining the alliance, Mark Carney says that Canadian banks will bring “their deep expertise and strong balance sheets to drive solutions for the sustainable economy that Canada and the world needs.”
What are “Science-based Targets” that everyone is talking about?
However, it is important to note that targets are sector dependent. For example, in the power and utilities industry, decarbonization needs to happen the fastest to help other sectors decarbonize, while for the oil and gas industry, a framework hasn’t been developed yet for decarbonization. Businesses and governments play a vital role in building a Paris-aligned future and in order to achieve this, targets must be grounded in science.
On the path to net zero: Recommendations for policy makers
The Canadian Institute for Climate Choices (a federally funded climate think tank) released their latest report, Canada’s Net Zero Future, outlining four recommendations for policy-makers on the path to net zero. The Institute recommends governments should:
- Increase the stringency of existing policies to create incentives for widespread deployment of “safe bet” solutions (low-risk, proven technologies such as Electric Vehicles).
- Manage the risk and opportunities posed by “wild card” solutions (high-risk, potentially high reward such as hydrogen and negative emissions technologies) through a portfolio approach, backing multiple potential solutions and incentivizing involvement from private and civil sectors.
- Increase policy certainty by implementing robust climate accountability frameworks – governance structures that connect long-term emissions reductions targets to near-term policy actions; regular and transparent monitoring and reports; opportunities for course correction; and mechanisms to enhance government accountability.
- Work to ensure a just transition – targeted support which does not impose disproportionate costs and/or exacerbate existing barriers to employment.
B.C. launches ambitious climate roadmap to meet 2030 targets
British Columbia (B.C.) has launched a more ambitious climate plan – CleanBC Roadmap to 2030 – to meet 2030 targets of 40% GHG reduction below 2007 levels by 2030 (eventually reaching net zero by 2050). This plan is focused on transitioning away from fossil fuels at a faster rate while adopting clean energy solutions in its place.
The roadmap includes a series of actions across eight pathways which include:
- Develop new zero emission vehicle targets for medium- and heavy-duty vehicles.
- Stronger regulations to nearly eliminate industrial methane emissions by 2035.
- New requirements to make all new buildings zero-carbon by 2030.
- Support for innovation in clean hydrogen, forest-based bioeconomy and negative emissions technologies.
Energy shortage: China’s increase in coal production
There’s been some talk around China’s recent commitments to decarbonizing its economy and its carbon neutrality by 2060 pledge. We are starting to see concerns that reality may hamper those good intentions. The energy shortage and price spikes in European countries is also acutely affecting China and other APAC economies.
One of the centrally planned Chinese government’s responses to dealing with a supply shortage is to allow coal producers to exceed their annual production quotas. The National Development and Reform Commission (“NDRC”), China’s top economic regulator, said in a recent statement that it had asked major coal producing provinces and enterprises to increase production and streamline transport to ensure energy supplies. This is a stark reflection that despite its rhetoric and popularity, green energy supply will not replace traditional energy markets overnight and China’s policies will continue to be flexible in the near to medium term.
The current allowance for increased coal production is expected to be temporary and reflects the reality that China must live with as it balances its international commitments to the environment with the needs of its people and its economy.
Meanwhile, back in the disclosure file…
In October, the Canadian Securities Administrators (CSA) published a proposed National Instrument 51-107 Disclosure of Climate-related Matters for a 90-day public comment period. This policy would mandate all reporting issuers (except for investment funds) to provide information related to the four core elements in the Task Force on Climate-Related Financial Disclosures’ (TCFD) recommendations which include; governance, strategy, risk management, and metrics and targets. It would also require the reporting on specific GHG emissions data (or an explanation of why it isn’t included). The CSA is looking to implement these climate-related financial disclosure rules by December 31, 2022.
Launch of new asset class to put a price on natural assets
The Intrinsic Exchange Group (IEG), an investment firm based in Washington, in partnership with the New York Stock Exchange (NYSE) are launching a new equity asset class called Natural Asset Companies(NAC) to monetize the value of nature. NACs are corporate structures designed to hold and manage the rights to the ecological performance of natural resources.
The value of a NAC will be based on the intrinsic value of the natural asset and its production of ecosystem services added with any traditionally monetized revenue sources which the company manages. NACs will be able to generate financial capital through an IPO to support the continued protection and/or restoration of natural assets that the company manages.
Natural assets produce approximately $125 trillion annually in ecosystem services such as carbon management, biodiversity and clean water. This development shows investor interest for climate solutions, as NACs are able to act as a hedge to climate risks that are exposed across an investor’s portfolio.
Insurance for natural assets: Impact on Indigenous Communities
The National Day for Truth and Reconciliation – a federal holiday in Canada, dedicated to reflecting on the lasting impact of the residential school system and other forms of institutionalized racism to First Nation communities – was observed on September 30th. Aon published a report on protecting nature from damage and destruction through Insurance for Natural Assets which these indigenous communities rely on. Indigenous lands make up approximately 25% of the Earth’s surface area and is home to 80% of the remaining world’s biodiversity. However, indigenous reserve lands are disproportionately exposed to flooding, and wildfires; both of which could affect the traditional lands that indigenous people rely on.
The Aon report recommends that the indigenous communities be given a seat at the table to begin to explore the role of insurance in protecting these natural assets from climate-related disasters.
Progress report on sustainable finance in Canada
The Institute for Sustainable Finance (ISF) recently released a progress report on Sustainable Finance in Canada. The report assessed the market’s current state of sustainable finance development benchmarked against the 2019 recommendations, and identified key areas of action for both the private and public sector.
The report identified seven key themes:
- Accelerated execution is needed as Canada is falling behind Europe and the UK with the US poised to move very quickly.
- Canada’s financial ecosystem needs to embrace change as sustainable finance has become a commercial imperative, with private, public, and public-private sector priorities.
- Canadian-specific solutions are required including sector-specific decarbonization pathways and the importance of a Canadian Transition Taxonomy.
- Sustainable finance must include more than just climate to one that is more inclusive and socially focused.
- Canada’s net zero transition requires a more unified approach and narrative including policy certainty, well-defined concepts and a centralized Canadian narrative.
- While climate mitigation is critical, we need a greater focus on adaptation and resiliency as the number and intensity of floods and wildfires have increased.
- Clean Innovation and other opportunities need more support in order to scale Canadian opportunities, such as carbon management.
A successful transition to a sustainable economy is essential for Canadian competitiveness and the two keys to making this happen are creating a more unified approach and unlocking private capital.
The role of derivatives in the voluntary carbon markets
The International Swaps and Derivatives Association (ISDA) recently published a paper on the role of derivatives in the compliance and voluntary carbon markets. Carbon derivatives can help individuals, investors, and companies to meet compliance obligations, achieve corporate social responsibility goals, avoid exposure to carbon price risk, and enhance transparency. In particular, investors can use price signals from carbon derivatives to assess climate transition risk, access liquidity pools to manage risk and allocate capital to benefit from energy transition opportunities.
Petrochemical plastic producers: Aligning capital with circular and ESG metrics
The Conference Board of Canada recently published an impact paper on how performance-based sustainable finance products such as sustainability-linked loans, sustainability-linked bonds and transition bonds, offer advantages to petrochemical plastic producers in their transition to a circular economy, and align with Canada’s net zero emissions goals.
As ninety-nine per cent of plastics are produced from fossil fuels, a survey has shown that “dealing with the problem of plastics which is not recycled” was ranked as high priority in sustainability for Canadian investors and debt issuers. In addition, government commitments, such as Canada’s Zero-Plastic Waste Strategy, can bolster investor interest. Direct emissions from the global chemical sector need to fall from 1.3 billion tonnes in 2020 to 65 million tonnes in 2050, according to the International Energy Agency Net Zero Roadmap. Since North American plastic producers receive government funded investment incentives, aligning public capital linked with ESG metrics can accelerate the transition of plastic producers while enhancing economic competitiveness.
The impact report also recommends three key actions for the Canadian government: 1) deepening collaboration and coordination across all tiers of government; 2) matching private sector ESG criteria and encouraging international partners; 3) incentivizing other segments of the plastics value chain to reduce emissions.
Mapping definitions and taxonomies of five jurisdictions
In 2020, the Organisation for Economic Co-operation and Development (OECD) released a report that mapped sustainable finance definitions and taxonomies in five jurisdictions: the European Union (EU), China, Japan, France and the Netherlands. The report introduced the overall taxonomy and main principles in different jurisdictions, then went on point out that taxonomies can help avoid green washing, develop market standards, reduce market fragmentation, and accelerate the flow of investment to sustainable economic activities. Taxonomies can serve as a basis to develop incentives for channeling investments to desired objectives. They can also facilitate the monitoring of such flows.
The report outlined a number of similarities and differences among taxonomies. EU and China taxonomy shared the most similarity in mandatory requirements and binary, objectives and goals, and addressing green bonds and green loans. At the sector level, similarities can be found in forestry, hydropower generation, and green buildings. Meanwhile, major differences highlighted in non-renewable (nuclear and fossil fuel based) power generation, transport and manufacturing sectors. International investors can find a common language in existing legal definitions across jurisdictions, while many frameworks are still under development to cover more activities, especially for environmentally harmful activities, also known as “brown activities”.
The report identified several policy considerations, including environmental and other objectives linked to taxonomies; usability for end users, issuers and investors; and data availability, verification and proportionality for small corporates compliant with taxonomies. In the end, the report advocates for the importance of enhancing international dialogue and cooperation on taxonomies.
Sustainability across CIBC
At CIBC, we are committed to making sustainability a reality for our clients and the communities we serve. We have built a market-leading Renewables franchise to provide our clients with expert advice, capital and access to capital markets in this important sector. Whether through greening your balance sheet or providing sustainability advisory services, our objective is to help our clients become global leaders in environmental stewardship and sustainability.
Publications
‘The Sustainability Agenda’ – Podcast Series
CIBC Capital Markets’ latest podcast series focusing on the evolving complexities of the sustainability landscape – with a view to addressing current issues in a concise format to help you navigate and take action.
Chart of the day:
Could direct air capture cost/ton show a similar pattern?
Calculated $/Watt using Our World in Data.
Over the last 40 years, the average price per watt of solar energy has decreased by 99%. Could we see a similar pattern emerge over time for carbon capture technologies? At many points in the past 30-40 years, pundits questioned the benefits of solar, given the high costs compared to fossil fuel sources. Solar PV has come a long way.
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