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FACTSET RESEARCH SYSTEMS INC.

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Earth Day 2021: Governments and Corporations Increasingly Focus on Climate Change

04/22/2021 | 10:09am EDT
Earth Day 2021: Governments and Corporations Increasingly Focus on Climate Change ESG

By Tom Abrams, CFA| April 22, 2021

Since the first Earth Day was celebrated in 1970, this annual event focusing on environmental protection has gone global. According to EARTHDAY.ORG, more than one billion people in 192 countries now participate in Earth Day activities each year. The Earth Day 2021 theme is Restore Our Earth, focusing on 'natural processes, emerging green technologies, and innovative thinking that can restore the world's ecosystems, as well as create a green jobs-ready workforce, a green consumer movement, and an educated and civically engaged citizenry around the world.'

While environmental efforts by corporations have been growing over the past few decades, in the last year expressions of environmental concerns have really taken off. An indicator of this is the growth in environmental, social, and governance (ESG) reporting by companies and the rapid growth in investment funds with ESG mandates. In recent months, U.S. government agencies have begun to talk more about climate change and reflect it in policy choices; the same kinds of policy discussions and actions are happening globally. Below we discuss some of these corporate, domestic policy, and global trends in turn.

Corporate Actions Pick Up Pace

The growing corporate attention on ESG means that more studies are being done on the full life-cycle costs and greenhouse gas footprints of certain green efforts including ethanol, electric vehicles, cryptocurrencies, and even solar and wind generation. These studies should allow for smarter and more comprehensive rollouts of these technologies.

Numerous companies are beginning to reflect ESG metrics more directly in executive compensation. There have been some leadership changes on ESG grounds as well, with other companies pressed to make changes. While there continues to be management pushback where recommendations for change are viewed as too costly or disruptive, sentiment demanding ESG consideration has clearly picked up in recent quarters. FactSet data shows that, on average, 7% of S&P 500 companies mentioned 'ESG' in their 2019 quarterly conference calls, a number that more than doubled to 15% in 2020. In the fourth quarter of 2020, 79 companies (25% of the S&P 500) cited 'ESG' on earnings calls, the highest overall number of companies going back at least 10 years.

Each year, more firms are publishing Corporate Sustainability Reports (CSRs) to discuss emissions at their operations, their suppliers' operations, and even at their customers' operations; for some leading firms, 2020 and 2021 CSRs are their first reports. The Governance & Accountability Institute reports that 65% of the companies in the Russell 1000 published a CSR report in 2019. For smaller companies, only 39% published CSR reports.

From recent ESG summaries on FactSet's StreetAccount, we highlight the following developments across the corporate world in the past year:

Transportation
  • Several large investments (over $100 million) in research on vehicle electrification, sustainable energy, and carbon sequestration have been announced with many studies taking place. Some of these programs are being led by individual companies and some by industry consortia.
  • Auto companies are actively developing electric vehicles (EVs) and planning to stop making vehicles with internal combustion engines in the coming years. Automakers targeting all-electric production include Volkswagen and Mercedes by 2026, Volvo, Ford Europe, and Jaguar by 2030, GM by 2035, Toyota 2040, and BMW 2050. At the same time, more work is being done analyzing the full life-cycle carbon impact of EVs and what source of electricity charges them. Fleet developments are expected, as well. For example, FedEx expects its fleet to be all electric by 2040, President Biden wants to convert 700,000 government vehicles to electric, and Amazon has ordered 1000 compressed natural gas engines. In aviation, Boeing plans to produce commercial airplanes that can fly on 100% sustainable fuels by 2030; other aircraft manufacturers have embarked on short-haul electric aircraft development. In shipping, ammonia-based engines are getting some attention, too.
  • To support land transportation, battery technology and application investments have been getting a lot of attention. The expansion of electric vehicle charging locations-who pays for them, which charging system is used, and where they are placed-continues to see numerous announcements as well. Hydrogen as a fuel is getting more buzz; many companies are committing research dollars and test plants to study how to overcome its cost and potential environmental side effects.
Industrial Sectors
  • A few of the larger industrial firms are increasing efforts in low-CO2 technologies including concrete, hydrogen production, heat pumps, power grid upgrades, aluminum from solar energy, steel manufacturing decarbonization, and reduced water use.
  • Several companies in the oil and gas industry have announced investments in either carbon capture and storage, green fuel plants, hydrogen energy, or reduced or eliminated flaring goals; many companies stand ready to repurpose pipelines for CO2 or hydrogen. The purchase of carbon credits and some renewables investment has also been proposed. The American Petroleum Institute, one of the leading energy associations, has begun supporting a carbon tax to send more transparent signals through the economy.
  • Elsewhere, several real estate companies have announced plans to install solar panels in their buildings; banks have announced similar plans for their branches. In addition, there are new agricultural efforts to develop animal feeds from ingredients such as seaweed which cause less digestive methane.
Plastics and Packaging
  • Recycling plastic packaging is a very complex chemical and performance problem. That said, we're already seeing more recyclable packing materials and a focus on easier-to-recycle or 100% recycled containers, all the result of an increasing effort by chemical and packaging companies to develop more sustainable systems. For example, Coca-Cola recently debuted a 13.2-oz. bottle made from 100% recycled PET plastic.
  • Ironically, some recycling associations are noting a lack of recycled material to meet recycling mandates. Local 'shortages' of materials occur when recycling rates around 27% of PET bottles meet 25% recycled content requirements.
United States Government Policies

The U.S. Securities and Exchange Commission (SEC) announced it will seek input on what companies should be required to report about greenhouse gas emissions and other climate factors. In addition, the SEC has created a taskforce to police public companies that fail to disclose material business risks stemming from climate change. That team will also review advisors and funds pitching sustainable products for 'greenwashing,' where firms may be using unsubstantiated or misleading information to suggest that their funds or products are more environmentally friendly than they are. At the same time, the Commodity Futures Trading Commission is creating a new 'climate risk unit' that will focus on the role of complex derivatives in understanding and pricing climate-related hazards.

In February 2021, the Biden administration announced that federal agencies will be conducting regulatory and environmental analyses assuming a 'social cost' of emitting carbon dioxide of $51/ton (Trump used $8, Obama used $51). $51/ton is between the $25 and $100/ton that many experts say reflects carbon's negative impacts. Pushback on the announcement has come from industry groups and states whose economies rely on the industries most affected.

The Federal Energy Regulatory Commission (FERC), which in part regulates utilities and interstate pipelines, recently began including a consideration of greenhouse gas emissions in its project reviews. Now perhaps comes the hard part in the technical adoption of the new approach, a situation much like the debates around the adoption and application of ESG standards. Industry news source Natural Gas Intelligence highlights key items to watch at FERC, including how the commission defines what levels are permissible, how downstream emissions will be calculated, and what comes out of the process of public hearings and input on the issue.

Elsewhere in policy, the Federal Reserve has noted that 'climate change is already imposing substantial economic costs' and so will create two climate committees to identify economic risks including systemic bank exposure. Biden's infrastructure bill includes monies for capping old and abandoned oil and gas wells, reclaiming coal mines, adding EV charging stations, and investing in battery manufacture and metals.

As a final domestic item, President Biden put Vice President Harris in charge of revamping U.S. immigration policy. One of Harris' goals will be to establish better relations with Mexico, Guatemala, Honduras, and El Salvador, a policy that Biden campaigned on. We note this development because the reasons that have been offered as to why the immigration numbers are surging include poverty and violence but now also climate change.

Global Policy

At the United Nations (UN), 2021 is teeing up as an interesting year for the Paris Agreement on emission reductions, not least because the U.S. is rejoining the agreement. In 2015, member countries committed to emission reductions by 2030 to limit global warming to 1.5 degrees centigrade by the year 2100. Unfortunately, those 2015 commitments were far below the UN's estimated trajectory of what was necessary to keep global warming to the 1.5 degrees centigrade target. Heading into a November 2021 climate summit, participating countries are being asked to improve their commitments to reduce emissions, and several of the larger emitters should be presenting their plans later in April ahead of the autumn meetings. So far, the countries offering revised plans have indicated only about a 3% faster decrease in emissions by 2030; the UN says this decrease needs to be 55% greater than the original 2015 plan.

Though we await new CO2e commitments to be put forth by many countries, we are seeing several governments making multi-billion-dollar announcements to address climate change, and a few are beginning to trade emission credits. For example, Europe's carbon market has continued to firm in recent months, and some expect that power prices, reflecting those higher carbon prices, could be well above the forward curve there as regulations tighten and emitters scramble for carbon offsets. Many see carbon values either via trading or a carbon tax adding 10-20% to the cost of fuels. More firms are mentioning rising costs as a potential negative going forward; this could impact profits before inevitably being passed along to consumers. To create carbon offsets, several firms are investing in forest development with some investments located in Africa.

Interestingly, countries representing over half of global emissions have indicated zero-emission targets for 2050 (China 2060) so there may be some wrangling over the 2030 goals but with promises offered for a more stringent goal for 20 years out. Some large economies that have offered up 2050 net-zero goals have not said how they will get there, so there remains great interest in their plans. Meanwhile, the European Union (EU) is considering labeling natural gas as a transition fuel to enable the shift along the carbon continuum between coal and wind/solar. Some examples of proposals:

  • Canada's Supreme Court ruled that Canada's federal carbon tax is legal. Canada proposes a $24 per ton tax ($0.21 per gallon of gas) that will rise to $135 per ton ($1.22 per gallon) in 2030 (all figures converted to U.S. dollars)
  • China, India, France, and the UK intend to ban sales of gas-powered cars and trucks by 2040
  • 25% of large EU companies have linked pay to climate progress
  • India plans to get 40% of its power from solar by 2030 and is ahead of track
  • 40 lowland and island countries 'vulnerable' to climate change have agreed to 100% renewable power by 2050

The path to Earth Day 2022 looks like it will be an active one! Rely on FactSet's StreetAccount for relevant, real-time news summaries of ESG developments globally.

Disclaimer

FactSet Research Systems Inc. published this content on 22 April 2021 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 22 April 2021 14:08:04 UTC.


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