Take Five: Lost in Transition
A selection of the major stories impacting ESG investors, in five easy pieces.
Events this week reflected the complex nature of the net zero journeys facing companies, industries and governments.
In transit – The EU’s Taxonomy came under fire this week, with environmental campaigners taking the bloc to court over its inclusion of still-brown air and sea transport. NGOs filed a lawsuit at the European Court of Justice (ECJ) in Luxembourg, on grounds that labelling the aviation and maritime sectors as environmentally sustainable would “send completely the wrong signal to investors” – noting that today’s planes and ships would pollute the climate for decades into the future. The case rests on the thorny issue of what counts as a transitional technology or activity that legitimately helps a heavy-emitting industry to decarbonise. Screening criteria adopted last November allows the taxonomy to include certain technologies that can limit global warming, but campaigners pointed out that this opens the door to palpably unsustainable activities, like ordering a new fleet of fossil-fuelled Airbus aircraft (a taxonomy-aligned action, in theory, as they emit less CO2 than the planes they replace). The taxonomy already faces two separate ECJ complaints over its inclusion of gas and nuclear energy, and was criticised last month for not following scientific evidence by a group of NGOs that have launched their own independent version. Little wonder, perhaps, that the UK is taking such a long time to issue its own taxonomy.
Lego, let’s go! – Danish purveyor of plastic bricks to the universe Lego said this week it is using strong revenues to fund its transition away from oil-based inputs to its much-loved and ever-evolving product range. The family-owned firm announced a 26% jump in first-half operating profits, well ahead of struggling peers, claiming that healthy sales would allow it to pay higher prices for certified renewable resin. Petrochemicals investments by oil majors looking to offset falling demand from power utilities are yielding a glut of virgin plastic. This oversupply may be curbed by production limits in the UN’s planned plastics treaty, but for now Lego is paying a 40-60% premium to suppliers. The firm claims it is on track to using more than 50% certified renewable resin by 2026, on the path to being fossil fuel-free by 2032. Lego hopes its commitment can stimulate the still-nascent recycled and renewable plastics market, encouraging competition and investment that will reduce market prices over time. CEO Niels Christiansen also suggested the lack of investor pressure had eased the firm’s net zero journey. “With a family owner committed to sustainability, it’s a privilege that we can pay extra for the raw materials without having to charge customers extra,” he said. With Lego outperforming gold on the secondary market, it’s just as well he isn’t counting on recycling materials from those who perhaps should have grown out of playing with plastic bricks.
Funding China’s transition – A 2.5 billion yuan (US$349 million) sustainability-linked, green and social (SGS) bond – claimed to be the world’s first – was listed in Frankfurt this week by the Bank of China. The bond largely attracted Asian banks, but also some insurers and asset managers, and was seen as simultaneously furthering China’s green finance credentials and its efforts to internationalise its currency. The deal will finance or refinance a pool of eligible SGS loans, with KPIs contributing to a variety of social and environmental goals. The listing followed news last week that China had surpassed a target to add 1,200 gigawatts of clean energy capacity by 2030 – six years ahead of time. This rapid deployment of wind turbines and solar panels partly explains the sharp reduction in new permits being awarded for coal-fired power plants in China, which fell by around 80% in the first six months of this year. The figures fuelled speculation that China had already hit peak carbon emissions, well ahead of its 2030 deadline. But with solar and wind accounting for only around a seventh of domestic electricity generation – those SGS loans are going to be needed across the country’s power supply chains.
Trouble in store – The gender pay gap was reduced a little on the UK high street this week following a tribunal decision against fashion and homeware retailer Next. After a six-year battle, around 3,500 female store workers could be awarded backpay worth more than £30 million, after successfully arguing that their labour was of equivalent value to the firm as that of warehouse workers – who are predominantly men. The FTSE 100 firm claimed that the difference in rates between warehouse and store pay was down to market demand rather than gender-based discrimination. The tribunal, for its part, said there had been no evidence of conscious or subconscious bias but that the business need was not “sufficiently great” to overcome the discriminatory effect of lower basic pay. Next intends to appeal against the ruling, which sparked criticism that jobs involving notable differences in physical effort could be considered of equal value. Companies and shareholders will now need to be doubly sure that variations in pay between different roles can be justified – especially those with a tendency to develop monocultures.
Save our seas – UN Secretary-General António Guterres took time out of tense Middle East diplomacy to highlight the risks posed by climate change to coastal regions – particularly low-lying small island states. Visiting Tonga for the annual Pacific Islands Forum Leaders Meeting, Guterres acknowledged the region was uniquely exposed, telling delegates there was “no lifeboat to take us back to safety”. Guterres’ call to “save our seas” coincided with reports from the World Meteorological Organization – which said Pacific Islands faced a “triple whammy” of rising sea levels, ocean warming, and acidification – and the UN’s Climate Action team, which outlined the “disproportionate” impacts of surging sea levels on Pacific small island developing states. The reports reinforced the findings of the latest annual ‘State of the Climate’ assessment from the US’ National Oceanic and Atmospheric Administration, which said ocean heat and global sea levels were the “highest on record”. None of this stopped Exxon from warning of a global oil price shock if fossil fuel firms failed to keep investing to match predicted demand levels of 100 million barrels a day over the next 25 years. “It’s time to say ‘enough’,” said Guterres, by way of contrast.
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