AvantGardeEnergy_Logo_white.png 2022-2023 Spring Term Green transition from international and European perspective Decarbonisation & Business Lecture 1 │30 March 2023 Marina Olshanskaya & Aleksandra Novikova ALEKSANDRA NOVIKOVA, PhD BERLIN •20+ years in analysing and financing energy transition and climate actions • •Carbon accounting and modelling decarbonization pathways for 25+ countries and all sectors • •Lead author of the IPCC awarded the Nobel Prize for Peace in 2007 A picture containing person, wall, indoor, person Description automatically generated MARINA OLSHANSKAYA BRATISLAVA •Environmental economist with 20+ years in de-carbonization in business • •Designed de-carbonization programmes in 30+ countries worth 250+ mln $ and 20 mln tCO2-eq • •Senior Advisor to the UN, World Bank, EBRD, and European Union • • A person smiling for the camera Description automatically generated with low confidence Course outline •Lecture 1. Intro to corporate decarbonisation: understanding drivers •Lecture 2: GHG emission management: understanding corporate carbon footprpint •Lecture 3: Science-based decarbonisation targets and roadmaps •Lecture 4: Climate risks assessment and disclosure • • AvantGardeEnergy_Logo_white.png Lecture 1. Intro: why decarbonisation & business? Decarbonisation: definition •Measures leading to reduction of greenhouse (GHG) emissions of an organization •Climate change mitigation is a bit broader term, also includes nature-based solutions (enhancement of carbon stock) •Corporate GHG emission inventory = carbon footprint •Improving energy efficiency and renewable energy – the most common examples of decarbonisation measures • • Why decarbonisation is important for businesses? •Meet requirements of regulators and financiers •Access international capital markets •Become a market leader •Increase company’s value •Attract climate-sensitive customers •Boost employees’ motivation • • The science is clear Achieving global net zero carbon is the only solution to global climate change: Limiting human-induced global warming requires as a minimum reaching at least net zero CO2 emissions, i.e. the level at which anthropogenic CO2 emissions are balanced by removals of CO2 Paris Accord goal: to stay within 1,5C Chart Description automatically generated Source: https://www.visualcapitalist.com/sp/race-to-net-zero-carbon-neutral-goals-by-country/ PARIS ACCORD: NET ZERO CARBON EMISSIONS BY 2050 GLOBALLY Nation and sub-national net-zero carbon objectives and policies Corporate net-zero carbon commitments PARIS ACCORD: NET ZERO CARBON EMISSIONS BY 2050 GLOBALLY EVERY BUSINESS will have to learn how to manage its carbon footprint and create value from climate actions Net zero carbon commitments by 200 Fortune Global companies push net zero obligations along their entire value chain – like a snowball Source: https://www.naturalcapitalpartners.com Global leaders are already doing this •Climate change was a key theme in Davos 2020 •Central Banks have been called on to contribute to fighting climate change •Wall Street is incorporating a new risk metric when evaluating companies: climate resiliency •At Amazon, more than 8,700 workers have signed an open letter to CEO Jeff Bezos demanding development of a plan to get to zero emissions • Financial Market and Investors require Since 2017, more than 370 investors with over $35 trillion in assets collectively under management are engaging companies to: •Implement a strong governance framework: board’s accountability and oversight of climate change risks and opportunities; •Take action to reduce GHG emissions across the value chain, consistent with the Paris Agreement’s goal; •Provide enhanced corporate climate disclosure Singapore Stock Exchange •Minimal climate reporting for all issuers from 2022 •Full climate reporting and decarbonisation plan for issuers from financial, agricultural and food sectors from 2023 and for issuers from transport, construction and industrial sectors from 2024 Consumers want to be able to make a difference in saving the planet 72% are personally concerned about their environmental footprint. 66% choose to purchase products or services based on their “environmental friendliness.” Source: Capgemini Research Institute, Sustainability in Consumer Products and Retail Survey, March 2020, N=7,520 consumers Chart, bar chart Description automatically generated AvantGardeEnergy_Logo_white.png Impact of EU Climate Regulations on Business 2021 EU Climate Law •Achieve carbon neutrality by 2050 •Intermediate target: at least 55% net reduction in GHG emission by 2030 •EU countries are legally obliged to reach both the 2030 and 2050 climate goals •Focus on: • Green finance standards • EU emission trading system • Climate-friendly innovation • Fairness and cost-effectiveness EU Emission Trading System •ETS is a cornerstone of the EU’s climate policy and its key tool for reducing GHG emissions cost-effectively • •It is the world's first major carbon market and the biggest one • •Limits emissions from around 10,000 installations in the power sector and manufacturing industry, as well as airlines operating between these countries •Covers around 40% of the EU’s total GHG emissions. • EU CBAM •EU Cross Border Adjustment Mechanism (CBAM) is designed to function in parallel with the ETS to expand its functioning on imported goods •All exporters have to report on carbon footprint of their product from 2023 •Covered sectors: electricity, cement, steel, aluminium, oil refinery, paper, glass, chemical and fertilisers. These sectors represent 94 per cent of industrial CO2 emissions of the European Union •From 2025, EU importers will have to buy carbon certificates corresponding to the carbon price that would have been paid if same goods have been produced in EU • EU CBAM: implications for exporters EU climate finance commitments ØAt least 20% of EU 2014-2020 budget to climate actions ØThe European Structural and Investment Funds (ESIF) represent over half of the EU budget. ØIn 2014, the EC adopted an approach based on the Rio Markers to identify the climate-relevant share of the ESIF 2014-2020 disbursement ØClimate mitigation can either be a “principal”, “significant” or “untargeted” objective of a policy action. Accordingly, the spending will be accounted for as 100%, 40% or 0% climate-relevant. ØAt least 30% of EU 2021-2027 budget to climate actions based on EU Taxonomy AvantGardeEnergy_Photo_3.jpg Evolution of green/climate finance rules: from minimal disclosure to mandatory climate portfolio targets EU Green Finance Regulation - background ØIn 2016, High-level expert group on sustainable finance (HLEC) ØIn 2018, Action Plan on Sustainable Finance No common definition of 'sustainable investment' Risk of ‘greenwashing’ of investment products Banks and insurers often give insufficient consideration to climate and environmental risks Investors often disregard sustainability factors or underestimate their impact' Too little information on corporate sustainability-related activities EU classification (taxonomy) for sustainable activities Standards and labels for ‘green’ financial products give investors certainties Capital requirements should reflect exposure to climate change and environmental risks Clarify institutional investor duties to consider sustainable finance when allocating assets Enhancing non-financial information disclosure Key challenges Actions Source: EC factsheet on Sustainable Finance EU As announced in its communication on Capital Markets Union – Accelerating reform, the European Commission established a High-level expert group on sustainable finance (HLEG) in December 2016. The HLEG comprised 20 senior experts from civil society, the finance sector, academia and observers from European and international institutions. The group was mandated to provide advice to the Commission on how to steer the flow of public and private capital towards sustainable investments identify the steps that financial institutions and supervisors should take to protect the stability of the financial system from risks related to the environment deploy these policies on a pan-European scale. The recommendations of the High-level expert group on sustainable finance form the basis of the action plan on sustainable finance adopted by the Commission in March 2018. The action plan sets out a comprehensive strategy to further connect finance with sustainability. Its key actions include establishing a clear and detailed EU classification system – or taxonomy – for sustainable activities. This will create a common language for all actors in the financial system establishing EU labels for green financial products. This will help investors to easily identify products that comply with green or low-carbon criteria introducing measures to clarify asset managers' and institutional investors' duties regarding sustainability strengthening the transparency of companies on their environmental, social and governance (ESG) policies. The Commission will evaluate the current reporting requirements for issuers to make sure they provide the right information to investors introducing a 'green supporting factor' in the EU prudential rules for banks and insurance companies. This means incorporating climate risks into banks' risk management policies and supporting financial institutions that contribute to fund sustainable projects To discuss its action plan, the Commission organised a high level conference on 22 March 2018. In May 2018, the Commission adopted a package of measures implementing several key actions announced in its action plan on sustainable finance. The package includes: A proposal for a regulation on the establishment of a framework to facilitate sustainable investment. This regulation establishes the conditions and the framework to gradually create a unified classification system ('taxonomy') on what can be considered an environmentally sustainable economic activity. This is a first and essential step in the efforts to channel investments into sustainable activities. A proposal for a regulation on disclosures relating to sustainable investments and sustainability risks and amending Directive (EU)2016/2341. This regulation will introduce disclosure obligations on how institutional investors and asset managers integrate environmental, social and governance (ESG) factors into their risk management processes. Delegated acts will further specify requirements on integrating ESG factors into investment decisions, which is part of institutional investors' and asset managers' duties towards investors and beneficiaries. A proposal for a regulation amending the benchmark regulation. The proposed amendment will create a new category of benchmarks comprising low-carbon and positive carbon impact benchmarks, which will provide investors with better information on the carbon footprint of their investments. In addition, from 24 May to 21 June 2018, the Commission has been seeking feedback on amendments to delegated acts under the Markets in Financial Instruments Directive (MiFID II) and the Insurance Distribution Directive to include ESG considerations into the advice that investment firms and insurance distributors offer to individual clients. The Commission intends to clarify how asset managers, insurance companies, and investment or insurance advisors should integrate sustainability risks and, where relevant, other sustainability factors in the areas of organisational requirements, operating conditions, risk management and target market assessment. It will do it either by amending existing delegated acts under the UCITS Directive 2009/65/EC, the AIFM Directive 2011/61/EU, the MiFID II Directive 2014/65/EU, the Solvency II Directive 2009/138/EC and the IDD Directive 2016/97, or by adopting new delegated acts under the same Directives. Directorate-General for Financial Stability, Financial Services and Capital Markets Union sent a formal request to EIOPA and ESMA for technical advices in this respect. On 28 September 2018, the Commission requested EIOPA for an opinion on sustainability within Solvency II, in particular relating to those aspects that concern climate change mitigation. On 1 February 2019 the Commission requested advice from ESMA, EBA and EIOPA on undue short-term pressure from the financial sector on corporations. This Call for advice is a part of action 10 from the action plan on financing sustainable growth that aims at fostering sustainable corporate governance and attenuating short-termism in capital markets. On 18 April 2019, the European Parliament endorsed the legislation setting the building blocks of a capital markets union, including the regulation on disclosures relating to sustainable investments and sustainability risks. EU Green Finance Regulation Landscape The Commission’s action plan on sustainable finance has triggered several legislative initiatives on mandatory climate and ESG practices for financial institutions and large companies in the EU: • •Non-financial Reporting Directive (NFRD) / Corporate Sustainability Reporting Directive •Sustainable Finance Reporting Directive (SFRD) •Capital Requirements Regulation (CRR) •EU Taxonomy Regulation Taxonomy regulation – Article 8 CRR disclosure of prudential information on ESG risks NFRD and COM non- binding GL on climate- related reporting SFDR and Joint ESAs RTS •Corporate Sustainability Reporting Directive (CSRD) •50,000 large companies, including all financial institutions, must disclose climate information, Paris-alligned carbon emission reduction targets and actions •EU Taxonomy Regulation •Mandates all financial institutions to disclose how and to what extent their activities are associated with environmentally sustainable economic activities •European Banking Authority •Pillar 3 requires financial institutions to disclose quantitative information and KPIs on climate change mitigating measures Bildergebnis für eu taxonomy technical report EU climate disclosure and reporting regulations Key regulations: CSRD EU Corporate Sustainability Reporting Directive (CSRD): •publicly listed companies, large non-listed companies, financial institutions and even larger SMEs (from 2025) have to disclose climate information, decarbonisation targets and actions to reduce carbon emissions in line with objectives of Paris Accord •50,000+ EU and non-EU entities with 150 mln EUR+ turnover in EU •Adopted by EU Parliament in November 2022 • EU taxonomy regulations vEU Taxonomy of environmentally sustainable economic activities ØBased on NACE statistical framework of economic activities ØA list of economic activities with performance criteria (emission intensities and/or energy use) for their contribution to 6 environmental objectives* ØCurrently focused on substantial contribution to climate mitigation * > *Environmental objectives •Climate change mitigation •Climate change adaptation •Sustainable use and protection of water and marine resources •Transition to a circular economy, waste prevention and recycling •Pollution prevention and control •Protection of healthy ecosystems Bildergebnis für eu taxonomy technical report > Taxonomy Technical report (414 pp) ØFull methodology ØUse cases and case studies Ø67 economic activities assessed across the sectors agriculture, forestry, manufacturing, energy, transportation, water andwaste, ICT and buildings * Barrier: No common definition of 'sustainable investment' One of the most ambitious current international projects aiming to standardize the definition of climate finance is the work of the Technical Expert Group (TEG) "Sustainable Finance" of the European Commission. In June 2019, the TEG submitted a draft report (EU TEG 2019) for public consultation. The report defines sustainable finance in the form of a taxonomy for the area of climate finance. It defines sectoral threshold values, which a financed project (e.g. in the aluminum or steel sector) must comply with in order for the corresponding financing to be considered "sustainable finance". According to the proposals of the European Commission, it is planned to establish a "Sustainable Finance Platform", which will continuously develop and adapt this taxonomy in the coming years, also beyond climate financing for other important sustainability dimensions. How can the Taxonomy be used by investors? ■ Expressing investment preferences; ■ Selecting holdings; ■ Designing green financial products; ■ Measuring the environmental performance of a security or product; ■ Engaging with investees Key regulations: European Banking Authority • •European Banking Authority (ITS Pillar 3 Disclosures) require banks to •disclose and show how climate change exacerbate other risks within institutions’ balance sheets and how institutions are mitigating those risks • •disclose the extent of their alignment with the green taxonomy, financed carbon emissions, exposure to fossil fuel companies excluded from sustainable climate benchmarks, and progress towards net zero goals • •Establish Green Asset Ratio (GAR) and Book Taxonomy Alignment Ratio (BTAR) targets Initiatives in the financial sector •Net Zero Banking Alliance : 90 banks with US$ 66 trillion in assets committed to align their investment and lending operations with net zero emissions by 2050 •1,069 financial institutions with assets of $194 trillion implements recommendations of the Task Force for Climate-Related Financial Disclosures (TCFD) established by the Financial Stability Board – Standard for Discloser/ Reporting Task Force on Climate-related Financial Disclosure (TCFD) was established in 2015 by G20 Finance Ministers and Central Bank Governors within the Financial Stability Board (FSB), and its chair at the time, Mark Carney, then Governor of the Bank of England. From an Investment - to a Climate-bank European Investment Bank (EIB) EIB Board of Directors approved an ambitious new Strategy for Climate Action and Environmental Sustainability •Support €1 trillion worth of investments in climate action and environmental sustainability from 2021 to 2030; •Increase the share of the EIB’s financing dedicated to climate action and environmental sustainability to 50% by 2025; •Ensure Paris-alignment of all investment in energy and industrial sectors EBRD has also committed to: •Make more than half of its investments green by 2025 •Verify alliance of its operations with the goals of the Paris Agreement for both climate mitigation and adaptation, in order to ultimately: •Ensure that all EBRD-financed projects are fully aligned with the goals of the Paris Agreement by 2023 Why EU Green Finance Regulation important outside EU? •EU is an important source of finance for the EU neighborhood countries • •EU financiers increasingly require from its partners within and outside EU compliance with high standards of corporate climate governance: •Assessment of GHG emissions , direct and indirect •Establishment of climate-related KPIs for portfolio and projects •Demonstrating alignment of financed activities with Green Taxonomy •Climate risk management: physical and transition •Establishment of corporate climate governance policies Key take aways •Global climate change goal – net zero carbon emission by 2050 • •Every business will be affected by requirements to achieve net zero: regulators, clients, financiers, shareholders, or general public • •Successful businesses must learn how to make value from climate actions