Weekly Roundup December 16
Invert is focused on providing clients and subscribers up-to-date news on net-zero developments, carbon markets, and how many sectors are evolving to meet climate change goals and ESG requirements.
The US Federal Reserve Board has released a new set of proposals aimed at supporting banks’ efforts to incorporate climate-related financial risks into their risk management frameworks by providing a high-level framework for the safe and sound management of exposures to climate-related financial risks. The proposals, applicable to banks with over $100 billion in total assets, highlight the emerging risk on financial institutions from the economic effects of climate change and transition to a lower carbon economy.
Invert Insights: As climate-related hazards grow in frequency and severity, and their occurrences become increasingly correlated, the potential for macroeconomic shocks capable of disrupting the global financial markets becomes increasingly possible. To address these risks, the proposed regulations aim to broaden the risk management procedures already in place through additional obligations specifically related to climate-related risks.
The European Union (EU) has reached a deal on a world-first carbon dioxide emissions tariff on imported goods. The levy will be imposed on imports of iron and steel, cement, fertilizers, aluminum and electricity, and will require companies importing these goods into the EU to buy certificates to cover their embedded CO2 emissions. The tariff is part of the EU's efforts to fight climate change, and is designed to prevent European industry being undercut by cheaper goods made in countries with weaker environmental rules.
Invert Insights: Globalization led to the unabated exporting of carbon emissions to countries powered by cheap, polluting fuel sources and weaker environmental standards and the implementation of a cross-border adjustment mechanism seeks to reverse that trend. Cross-border adjustment mechanisms are one of the only mechanisms capable of circumventing the need for global cooperation on environmental and climate regulations by reducing the competitiveness of these products and placing them on par with sustainably produced alternatives.
The European Commission has announced a provisional political agreement on an EU Regulation on deforestation-free supply chains. The law is set to ensure that key goods placed on the EU market will not contribute to deforestation and forest degradation. The regulation will cover palm oil, soy, coffee, cocoa, timber, rubber and cattle and their derived products, including chocolate and furniture. Companies will be required to conduct strict due diligence on products placed on the EU market or exported from it.
Invert Insights: Supply chain traceability and product provenance is growing in scope in order to tackle both legal and illegal deforestation and address the true impact of the production of these commodities. While the regulations are currently limited in scope to the commodities and products with the greatest impact, the reach of these regulations could grow over time if the current proposals are adopted and implemented.
Few businesses have examined the impact of their operations on nature and biodiversity, which is slowing progress towards net zero, according to a World Benchmarking Alliance (WBA) report. The WBA analyzed the policies and practices of firms across eight sectors, finding that 5% had carried out a science-based assessment of their impact on nature, and fewer than 1% were aware of the extent to which their businesses relied on nature. The WBA said protecting forests, water sources and biodiversity was essential to every business.
Invert Insights: Companies must not only focus on reducing emissions, but on reducing overall impact. The ecosystems, communities, and jurisdictions within which organizations operate are all impacted by water usage, energy usage, greenhouse gas emissions, land-use changes, and a myriad of other factors. As evidenced by the EU’s fight to end deforestation, a holistic approach to production must be taken to ensure sustainable outcomes.
The International Emissions Trading Association (IETA), the World Bank and the Government of Singapore have launched the Climate Action Data Trust (CAD Trust), which aims to create an open-source metadata system to share information about carbon credits and projects across digital platforms. The system will connect major registries, national registries and the wider registry ecosystem, and will use distributed ledger technology to protect against double counting, increase trust in carbon data and enhance climate ambition. The first layer of data will be made publicly available in early 2023.
Invert Insights: There are numerous benefits to the development of a centralized digital registry for carbon credits including improved transparency, reduced transaction costs, enhanced market liquidity, and improved data quality, all of which are needed to ensure the continued scaling and adoption of carbon markets.