Insights and Commentaries
Environmental, Social and Corporate Governance (ESG) – A role for CCS
18th November 2020
Global installed capacity of carbon capture and storage (CCS) must increase more than a hundredfold on today’s levels for the technology to play its vital role in reducing carbon dioxide (CO2) emissions and reaching net-zero by 2050. To facilitate this rapid escalation in deployment, significant commitment from the finance and investment community is required.
In recent times, the Institute has witnessed increased interest from this sector, and there is no doubt that CCS is being recognised as generating value to investment portfolios that are aligned with achieving global climate change goals.
However, many in the financial and investment sector are unaware of the current status of CCS deployment, or indeed the significant abatement potential it offers to a range of emissions intensive processes.
Alongside these observations is the trend of increased consideration by investors of a company’s attitude towards Environmental, Social and Corporate Governance (ESG) factors. Recent years have seen closer scrutiny and reporting of ESG issues, material to a business’s core activities, emerge as a critical aspect of commercial behaviour. While companies are increasingly willing to adopt more sustainable practices, the rise of socially conscious investment practices, the concept of the enlightened shareholder and increased public activism surrounding environmental, social and governance issues have also driven their uptake.
The ‘environmental’ aspect of the ESG acronym has proven particularly significant for the finance and investment communities. More specifically, it is the risks and challenges of climate change that pose the greatest concern for many and investors and financiers are increasingly seeking information on a company’s response to climate change.
Several major investors, financial institutions and asset managers have made clear their intention to limit their investment in fossil energy, including JP Morgan, EIB and Black Rock. In addition, there would now appear to be near industry wide agreement as to the significance of climate change within future investment strategies.
Whether CCS is viewed as playing a role in mitigating the impacts of companies’ emissions intensive activities, or equally the external pressures they face as a result of these activities, remains largely unexplored. Our early experience suggests that when the technology is accepted as a commercially viable form of mitigation, the ESG-related benefits of CCS will be of interest to both investors and companies alike.
For those organisations with significant CO2 exposure, seeking to improve both public and investor-led perception of their activities and demonstrate their commitment to emissions reduction, the adoption of low-carbon technologies will undoubtedly prove an important factor.
External pressure in the form regulatory intervention, or the threat of litigation, is increasingly motivating commercial organisations to adapt their approach to voluntary reporting. In parallel, corporations are increasingly encountering direct action, with some facing resolutions that have been filed by shareholder groups and investors seeking to ensure companies adapt their practices to reflect their impact upon the environment.
Further, climate-focused litigation may also pose a serious risk to those organisations with significant emissions exposure and is therefore an area of interest for CCS deployment. Climate litigation continues to become more widespread globally, with an increasing number of cases being brought against governments and high-emitting companies. Recent years have seen several, high-profile cases succeed before the national courts and many companies are taking greater notice of the risks posed by this form of litigation. The recent legal settlement, in the case brought against the Retail Employees Superannuation Trust (REST), is perhaps indicative of the pressure being brought to bear upon the investment community to consider the effects of their investments upon climate change. Although the case does not provide a precedent, REST’s commitment to “implement a long-term objective to achieve a net zero carbon footprint for the fund by 2050” among other initiatives, is clearly demonstrative of the challenge faced by the investment community to take action and demonstrate their commitment.
Recent years have also seen a significant shift in the approach adopted by companies, particularly regarding expected levels of reporting and disclosure of climate risk.
The foundation of the Task Force on Climate-related Financial Disclosures (TCFD) in 2015 signalled a global step-change for climate-related reporting. The TCFD’s subsequent recommendations are supported by climate-related financial disclosures that are aimed at providing the key climate-related information for investors and others. Since 2015, nearly 800 public and private-sector organisations have adopted these recommendations and announced their support for the TCFD and its work, including global financial firms responsible for assets in excess of $118 trillion.
Notwithstanding the success of both the TCFD and other voluntary frameworks’ in promoting more comprehensive and accessible reporting information, however, the scope and ambition of these various models varies greatly, and they do not presently offer a standardised approach. Perhaps more significantly, however, is that there has been limited consideration of the role of CCS within the reporting methodologies to-date.
Overall, the role of CCS in within this emerging environment, particularly as a practical and visible means of mitigating CO2 emissions, remains largely unexplored. This is a fact that the Institute sought to remedy in our most recent Thought Leadership Report; Environmental, Social and Governance (ESG) Assessments and CCS.
The study, completed at the request of the US Department of Energy, examined the significance and the extent of the influence of ESG ratings in supporting investment in CCS project deployment.
The resulting assessment successfully addressed each question and provides a clearer picture of the complex relationship between the development and scope of ESG ratings, the impacts of a company’s ESG performance and ultimately, whether this will influence future investment in CCS.
If the world is to have any hope of meeting the goals of the Paris agreement and, most significantly, achieving net-zero emissions by mid-century, CCS deployment must accelerate at a rapid pace. The finance and investment sectors are vital to realising these ambitions. Clear guidance and substantive CCS-specific analysis will be essential for these sectors to both understand the value of CCS to low-emissions portfolios, and how investment in the technology may be seen as mitigating climate related risks.
The Institute will continue to provide this guidance and analysis to our Members, stakeholders and clients as we work towards our mission of accelerating the global deployment of CCS.
This piece was written by Ian Havercroft, our Melbourne-based Senior Consultant - Legal & Regulatory.