Sagan's Wisdom, "Termination Shock," & ESG in 2022
The newsletter for independent thinkers on carbon and climate.
(source: Laws of Nature)
Issue No. 104
Welcome to the latest issue of Carbon Creed - a curated newsletter for independent thinkers on carbon and climate.
3 Predictions for 2022 that will effect carbon and climate policy.
You probably thought Build Back Better would top my list, but I’m only 60% confident on that one. For these predictions, I have an 80% confident level that they will happen in 2022. Good, bad or indifferent, let me know what you think about my picks and share your own carbon/climate prediction for 2022, and I’ll publish them in next week’s issue.
1. Justice Stephen Breyer will retire from the Supreme Court
Supreme Court Justice Stephen Breyer is the Court’s oldest and most senior member. While he probably believes he has plenty of gas in the tank to continue serving, the memory of Ruth Bader Ginsburg serves as a cautionary reminder of things unforeseen. Partially as a reaction to Ginsburg’s mistake of not retiring strategically, Breyer will likely buckle to public pressure to retire before the 2022 midterms. Without a Democratic Senate, President Biden can’t replace Breyer with a like-minded jurist. Breyer is not a fool — he knows this is the dynamic, and I suspect he will ultimately let Biden pick his successor.
This decision is especially important for carbon policy, because the Court has agreed to hear four very similar cases — all likely to be consolidated under the name West Virginia v. Environmental Protection Agency — which could prove to be some of the most consequential court decisions in recent US history.
2. 2022 will be warmer than 2021
One of the more obvious — yet sometimes overlooked — consequences of climate change is that almost every year is warmer than the last, meaning experiencing the warmest year in recorded history is now routine. This means that a recurring prediction is this gloomy one: that it is 80 percent likely that each year will be warmer than the last. This is based on looking at the last 25 years of atmospheric temperature data: On average, in four out of five years, this prediction would be right. My fear is this recurring climate loop of gradual warming will lull leaders into normalizing the change, ignoring the urgent need to act now.
3. White House will set the social cost of carbon at $100 per ton
The social cost of carbon (SCC) is a measure, in dollars, of how much economic damage results from emitting 1 ton of carbon dioxide. SCC is an important measure because it guides policymaking — and there’s good reason to think we’ve been radically underestimating it. Although the Obama administration had set the SCC at $51 per ton, the Trump administration put it as low as $1. In early 2021, the Biden administration restored it to $51 as an interim move, promising to study the matter in depth and release its final determination in early 2022. Two top experts on SCC — Joseph Stiglitz of Columbia University and Lord Nicholas Stern of the London School of Economics — have said around $100 would be appropriate. I wouldn’t be surprised if the administration agrees.
We’ll keep you posted on the latest carbon policy and market insights as they happen.
If you have an opinion on any topic covered in this newsletter, please feel free to send me an email at mcleodwl@carboncreed.com.
Thank you for your viewpoint and the value of your time.
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QUOTES
Words that will inspire you…
“Here is a problem (greenhouse gas emissions) which transcends our particular generation. It is an intergenerational problem. If we don’t do the right thing now, our children & grandchildren will face serious problems.”
~ Carl Sagan (Scientist, Author)
BOOKS
Termination Shock
By Neal Stephenson
A maestro of the dramatic opener, Neal Stephenson began his 2015 novel, Seveneves, with the line “The moon blew up without warning and for no apparent reason.” That’s a hard act to follow, but he gives it the old college try in Termination Shock - his new climate thriller in which the celebrated science-fiction author is heralded for “finally” taking on the subject of global warning.
Termination Shock is set in the fairly near future. The world has now seen COVID-19, COVID-23, and COVID-27, and testing procedures are much more widespread and common now. Mostly, things are much like in the present-day (though there are a lot more drones buzzing about) -- but the effects of climate change have become more pronounced and so, for example, cooling earthsuits have basically become a necessity when venturing outside in parts of the world -- like most of Texas.
The story begins with the queen of the Netherlands piloting a business jet in an emergency landing at the Waco airport, a maneuver that goes terribly wrong when her plane’s landing gear collides with a herd of feral hogs that, chased by an oversize alligator, swarm the airstrip.
In the Texas desert, a quirky billionaire has set up a massive geoengineering project. In the meticulous process of detailing this, Stephenson digs into the personal history of an aide to the queen of the Netherlands; explains how, about 10 years from now, fire ants and supply chain issues have driven many Texans from their homes; and gives the backstory of a man named Rufus, who has a beef with one of those feral hogs.
Modern society tells us the climate crisis as a complex system in which every possible remedy produces winners and losers. The threat confronting the planet seems irredeemably political, a job for diplomats every bit as much as for engineers. Termination Shock is that rare climate thriller that's realistic about political stonewalling in the face of disaster yet unafraid to imagine a possible future where people might actually come together and try to save civilization.
This is the kind of climate-change fiction we all need.
Creed Comments: Neal Stephenson has a reputation for anticipating technological developments like Bitcoin ( 1999’s Cryptonomicon) and an immersive virtual-reality version of the internet he dubbed “the Metaverse” (1992’s Snow Crash). This adds an eerie valence to Stephenson’s fiction. You find yourself wondering if any of this might actually happen.
Further, his prior connection to Blue Origin, the private space travel company founded by Jeff Bezos, fosters the impression that he just might have inside dope on billionaires - rich men hubristic enough to take climate matters into their own hands. Stephenson’s novels typically valorize engineers who make things work, rather than political leaders. Having a can do spirit just might be the formula needed to solve our climate crisis.
INSIGHTS
(source: GreenBiz)
ESG in 2022: Seven Trends To Watch
The year 2021 saw significant emphasis on environmental, social, and governance (ESG) issues on a global scale, by governments, regulators, NGOs, the private sector, and other important stakeholders. Indeed, 2021 has been variously described as “a watershed moment for ESG” and “the year of ESG investing”[1] We should not expect this interest to recede, and given the societal importance that now appears to be placed on ESG issues, this growth trend should continue throughout 2022.
Curated from the third installment of Latham’s annual 10 Things to Look Out For, this post highlights the 7 ESG-related developments and trends that we expect to remain in the headlines in 2022.
1. Energy Transition/Technology
Climate change continues to be a leading ESG consideration. The global transition towards a net zero economy is likely to continue at pace in 2022, with renewables projects and sustainable infrastructure worldwide continuing to be planned and developed. However, after the events of late 2021 that led to supply shortages of natural gas and elevated energy prices in Europe and the rest of the world, considerations relating to energy security and affordability may impact the pace of the transition in 2022.
In addition, whilst the concept of the differing pace of energy transition (whereby developed countries will transition more quickly to renewable sources of energy than developing countries) is widely accepted (including within the Paris Agreement), 2022 may see tensions as to how this should be reflected in practice. For example, there have been concerns by developing countries that, in light of the accelerated efforts to decarbonise in developed countries, public and private sector organisations in developed countries will be less willing to provide financing for new energy projects within developing countries. Alternatively, products manufactured in developing countries may be subject to carbon taxation when imported (see, for example, the EU’s proposed carbon border adjustment mechanism).
Innovation and new technologies (from battery storage to advancements in hard-to-decarbonise industries such as steel and cement), may help navigate these tensions. However, affordability and financing will be a key issue. We can expect these issues to be topical matters for discussion at COP 27, which is meeting in Africa (Egypt) later this year – see below.
2. COP27
COP26, held in Glasgow in November 2021, met with mixed reviews as to its success in achieving progress towards limiting global temperature increases to satisfactory levels. The Glasgow Climate Pact (the Pact) established a number of new commitments by parties (see our blog post on our key takeaways from being on the ground in Glasgow), including the agreement of parties to the Pact to submit updated or revised Nationally Determined Contributions (NDCs) ahead of COP27 (which will take place in Egypt in November 2022). NDCs outline the efforts by each party to reduce national emissions and adapt to the impacts of climate change. The timeframe for updated NDCs is shorter than envisioned under the Paris Agreement, and the Pact requested that parties’ targets in their NDCs be strengthened, signalling the increasing efforts in accelerating the pace of the transition.
COP27 itself promises to also raise a number of interesting discussions, most notably on some of the issues in which COP26 was perceived by some as not having gone far enough. These issues include compensation to be paid to developing countries in relation to loss and damage from climate events and whether developed countries reach their target of providing US$100 billion per year in climate finance to help developing countries finance their transition. Early indications suggest that the topics of green and climate finance, both in relation to the public and private sectors, will also play a key role in discussions at COP27. Therefore the development of the narrative and discussions surrounding these topics in 2022 will be of considerable interest.
3. Scope 3 Emissions – Further Clarity Required
One particular aspect of ESG reporting that has become popular, and will likely continue to become more so in 2022, is the reporting of companies’ greenhouse gas inventories. In jurisdictions such as the UK, there are already requirements to report on climate change matters in line with the recommendations of the TCFD for a considerable number of companies.
When reporting emissions, companies tend to split their emissions into three categories, or Scopes, as identified by the leading framework in this area, the Greenhouse Gas Protocol. These Scopes categorise emissions as direct emissions from the company (Scope 1); indirect emissions from the electricity, heating, and cooling that the company uses (Scope 2); and all other indirect emissions from the company’s value chain (Scope 3).
As mandatory requirements to report emissions continue to develop in 2022, how companies engage with Scope 3 emissions reporting remains challenging. Aside from the fact that a company in practice may have limited control over its Scope 3 emissions (as the emissions are stemming from the activities of business partners and not the company itself), such Scope 3 emissions are complex to accurately record given the diverse and widespread nature of the emissions sources. As a result, companies that currently report their Scope 3 emissions do so using a wide variety of methods. This means that drawing comparisons between the results of companies may not be appropriate. For example, Scope 3 emissions can often be double counted as a result of overlapping supply chains, companies report (or do not report) on different categories of Scope 3 emissions, and a company may have to report Scope 3 emissions at a higher level than the amount of greenhouse gas actually emitted into the atmosphere (e.g., if carbon capture technology has been utilised).
The existing frameworks underlying Scope 3 reporting were established a number of years ago and may not reflect current practices and technologies. However, as climate reporting becomes increasingly popular with investors, and in many cases mandatory, in 2022, increased scrutiny on the methodology behind Scope 3 reporting may lead to questions about required revisions to the framework or the role of Scope 3 emissions in mandatory reporting.
4. DEI/Value Chain
In 2022, we will likely see a continued focus on diversity, equity, and inclusion (DEI) matters throughout the public and private sectors. A World Business Research study in late 2021 found that 79% of organisations across a variety of industries were planning to allocate more budget and resources to DEI in 2022 than in 2021, demonstrating the increasingly important role DEI is having across businesses.
Key to DEI initiatives in 2022 will be companies’ approaches to remote and/or flexible working. Companies will face the possible challenge of ensuring that employees who choose to embrace remote working more fully are not disadvantaged by their lack of time spent in the office. We also expect to see further focus on diverse employee retention and development.
5. SEC – When and What to Expect
The US Securities and Exchange Commission (SEC) has in recent years placed greater emphasis and focus on ESG and, in particular, on climate change issues, a trend which continued in 2021. By March 2021, the SEC had hired its first Senior Policy Adviser for Climate and ESG, created a Climate and ESG Task Force as part of the Division of Enforcement (the Task Force), directed the Division of Corporation Finance to enhance its focus on climate change disclosures, and sought input on any such climate change disclosures in the form of a request for public comments. Further, public remarks from SEC Chair Gary Gensler requested that such a climate risk disclosure rule be mandated “by the end of [2021]”. Gensler has also indicated that the new rule may “learn from and be inspired by” the Recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD), although some commentators believe that it is likely that a proposed new rule will be bespoke and not use an existing framework.
To date, the SEC has not released any such mandatory climate risk disclosure rule, and observers anticipate further developments in early 2022. If any such proposed rule is released by the SEC, then there have already been suggestions that a rule may well face a considerable amount of scrutiny. Notably, the public consultation saw multiple responses suggesting that climate disclosure rules will be challenged in court for being outside the SEC’s statutory authority. We will closely monitor the progress of the proposed rule and any related litigation throughout 2022.
Notwithstanding whether any proposed climate disclosure rule is subject to legal challenge, it is still expected that the Task Force will continue its work in relation to ESG-related enforcement actions (which would not require any specific new rule making). In September 2021, a sample comment letter was produced on the SEC website requesting information on various ESG issues and demonstrating the type of queries that issuers could receive in relation to ESG matters. The Wall Street Journal further reported that the SEC had sent tailored comment letters to “dozens” of companies relating to their climate change disclosures.
By way of example, one of the possible focus points for the SEC is combatting perceived greenwashing. Commissioner Caroline Crenshaw, on 14 December 2021, noted that there is an increasing number of companies making public climate pledges or committing to a net zero strategy, whilst providing limited or no information in relation to how those pledges will be achieved. Crenshaw stated that “while net-zero emission pledges are an important step forward, they underscore the loud, repeated and sustained calls for decision-useful metrics… That is a core purpose of the SEC’s disclosure obligations”.
6. Supply Chains – Tracking New Legal Proposals
Governments and regulatory authorities are increasingly looking to establish requirements for large (typically multinational) companies to take further steps to manage their value chain. A notable example of such an initiative is the European Commission’s expected proposed formal draft legislation in early 2022 on a mandatory supply chain due diligence law.
The European Commission’s action has already been pre-empted by certain national measures, as 2022 will see Germany continue the process of implementing its Supply Chain Act (which will initially require German companies with more than 3,000 employees worldwide to use their best efforts to prevent violations of human rights in their own business operations and in their supply chains). The law will also require German companies to conduct audits on their direct suppliers and extend risk analyses / risk mitigation measures to indirect suppliers to the extent those companies obtain substantial knowledge of a possible human rights or environmental violation. In addition, a number of cases are currently being pursued under the French Duty of Vigilance Act, in relation to companies having not performed adequate diligence on their supply chains.
This regulatory shift, placing an increased compliance burden on companies operating worldwide, is also resulting in greater consideration of technological solutions that companies can utilise to perform diligence on their supply chains.
7. ESG Litigation/Disputes
Finally, given the rapid development and growth of ESG disclosure obligations and practices discussed above (as well as the societal focus on ESG), companies will need to continue to mitigate the risk of, and manage any ongoing, ESG litigation. We expect the pace of ESG-related litigation to continue to increase as this litigation is likely to cover a broad and growing range of ESG factors.
To date, climate change has taken centre stage (and we expect will likely remain a key theme). However, as noted above, supply chain issues are likely to play a growing role in non-climate change-related ESG litigation. Further, in the context of voluntary and mandatory disclosures, greenwashing claims (from regulators, shareholders, and other stakeholders) may increase as green marketing and ESG commitments become ever more important to consumers and investors. Climate change litigation will continue to develop in scope, as public and private entities that finance high-emitting companies and/or infrastructure projects face increased scrutiny on their role in such activities, and whether such financing aligns with their publicly stated commitments.
In addition, given the notable successes of 2021 in relation to the climate-related proxy battles, we expect to see more such campaigns in 2022, with activist investors seeking to impact the ESG-related policies of high-emitting companies through shareholder action.
Boards and senior management may wish to continue to develop their ESG strategies and look at mitigation measures and stakeholder engagement strategies to seek to address ESG litigation risk.
[This post was adapted from the 2022 Latham’s annual 10 Things to Look Out For]
RESOURCES
The Keeling Curve a daily record of global atmospheric CO2 concentration.
Congressional Policy Tracker a summary of current federal energy legislation.
Click Clean your favorite apps and tech company clean power rankings.
Advancing Inclusion Through Clean Energy Jobs a report by the Brookings Institute.
Currents a podcast featuring in-depth discussions with experts on clean energy and sustainability, published by Norton Rose Fulbright.
Matter of Fact, a weekly newsmagazine that focuses on socioeconomic and climate issues in America, hosted by veteran journalist Soledad O'Brien.
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