Wednesday, 17 March 2021

New EU rules to prevent greenwashing could have “huge repercussions”


On 10 March, the Sustainable Finance Disclosure Regulations were introduced by the EU. Designed to prevent greenwashing, all asset managers will have to make detailed environmental, social and governance disclosures to potential investors. 

Maria van der Heide, head of EU policy at ShareAction, called the new regulations "groundbreaking": 
It allows investors to compare between different products and how sustainable they are and see what asset managers are doing to integrate sustainability.
Marcus Björksten, lead portfolio manager for Fondita Sustainable Europe, one of Europe’s best-performing sustainable funds, said: 
Greenwashing is a real problem. Nowadays, every second fund is claiming it is in some way sustainable. The reporting will make it very difficult to have greenwashing.
But what about the effect on companies?
 
The new rules could have far-reaching consequences for asset managers — not just in Europe but around the world as investment firms are forced to demonstrate they are serious about sustainability. They will also influence the decisions of listed companies which will find themselves under pressure to focus more on ESG issues or risk losing investor capital. 
Mirza Baig, global head of ESG research and stewardship at Aviva Investors said: 
The consequences of companies being exposed for a lack of commitment or a lack of follow through [on ESG issues] will more likely result in a shift of capital and a more direct hit to their share price.
Perhaps, in time, pressure will be brought upon cement giant LafargeHolcim, parent of Aggregate Industries, practitioner in the art of greenwashing, a company with grandiose claims of reinventing, of low-carbon, net zero, et cetera, et cetera: 
As the world’s global leader in building solutions, LafargeHolcim is reinventing how the world builds to shape a world that is greener, smarter and that works for all. A world that is low-carbon and circular for a net zero future. A world driven by innovation and digitalization making more with less. A world that improves quality of life for all. 
You’d hardly know this was the same company that emitted 146 million tons of CO2 in 2020 – more than many countries. 

At the same time, some warn the financial impact of climate change issues are not being accounted for:
 
Listed companies appear to be competing with each other to be the most forthcoming on climate change disclosure.... Less good though is the disclosure on the financial impact of climate change issues. If, say, a company was likely to face a bill in the future to buy permits to emit carbon, that is an impact that could be accounted for. 

For example, in the EU, companies which emit carbon are required to reduce these by 2030. Effectively they have carbon budgets. They can use up some of their own carbon credits, provided freely by the EU, or buy carbon credits in a traded market to offset their emissions. 

Buying credits is a rising cost. The EU has cut back on the supply of available credits for industry and accelerated the required rate of emission reductions in the 40 years to 2030 from 40 per cent to 55 per cent. This has helped push the EU carbon price to $48 per tonne, up 83 per cent in one year. 

…the sums are not trivial for companies, particularly in sectors such as steel and cement which emit large amounts of carbon. 
You can understand the concern. BP "assumes a $100 per tonne cost for its emissions for 2030." Back of the envelope calculations show LafargeHolcim generated emissions in 2020 worth 3.7x the company’s recurring earnings before interest and taxes. Hardly an insignificant sum.
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