ESG Focus | Oct 13 2022
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ESG Focus: Taxes, COP And Biodiversity Schemes
FNArena's third and final installment on biodiversity gives investors a heads up to tax reforms to $1.8trn in harmful global tax subsidies; monetisation schemes; and the upcoming biodiversity COP.
-World leaders meet to adopt framework
-Sticking points: genetic sequences and payouts
-Deforestation and oceans guide debate
-Conventions and standards governing biodiversity
-Monetisation, taxes and schemes
By Sarah Mills
This is the third and final installment of FNArena’s Introduction to Biodiversity series.
It examines the major milestones scheduled for FY23 and the main conventions and standards governing biodiversity and early institutional financing schemes.
It also looks at the global steps being taken to reform the tax system (which could hit as early as 2024) and tax subsidies to polluters, before taking a more in-depth look at schemes to monetize biodiversity.
COP15 – Fourth Time Lucky?
The first major milestone for FY23 is the UN Biodiversity Conference (COP15) at which world leaders are expected to adopt the “Post-2020 Global Biodiversity Framework”.
The conference has been delayed four times due to covid and geopolitics but is scheduled for December this year in Montreal, Canada, (presided over by China).
It is the first time China has presided over major intergovernmental negotiations on the environment.
The framework will set countries’ individual and collective “outcome-oriented” and milestone-driven goals for this decade and beyond, in order to achieve the UN vision of “living in harmony with nature” by 2050.
The framework’s four overarching goals aimed at protecting 30% of land and ocean biodiversity by 2030 are: conservation; sustainable use of biodiversity; fair benefit sharing; and adequate funding and technology support.
Most controversially, discussions are expected to broach an “apex” target similarly to that used for Climate Change.
COP15’s lesser targets are wide-ranging and include: expansion of protected areas; pollution reduction; sustainable food production; and the phasing out of billions of dollars of public subsidies that harm nature.
This would have a clear impact on fossil fuel energy stocks, which typically rely on subsidies for profitability, and one assumes it will also extend to the petrochemical industry.
Similarly, expansion of protected areas is also likely to affect mining, fishing and agricultural industries, and downstream markets from both.
Deforestation Rising At An Alarming Rate
COP discussions are likely to be guided by the twin themes of deforestation and ocean degradation.
The permanent clearing of forests and conversion to non-forest use represents one of the largest issues in global land-use change, estimated at 20% of greenhouse gas emissions.
Industries driving land clearing include soybeans, palm oil, beef, timber, rubber, cocoa and coffee, infrastructure expansion and mining.
These industries are likely to be the prime targets of biodiversity regulation, which will impact downstream markets.
Key themes for Ocean degradation
Oceans are also a key focus area for biodiversity.
Oceans have taken a back seat to land-based decarbonisation (and have been consigned to the boot since the Ukraine conflict started), but are likely to come into sharper focus in the second half of this decade.
Here the No.1 enemy is considered to be reusable plastic, and others include ocean gas extraction and aquaculture.
The lifetime cost of plastic produced in 2019 has been estimated at US$3.7trn, US$3.1trn of which relates to marine plastic pollution.
Europe, the UK and the US have introduced taxes/levies targeting producers or sellers of finished plastic packaging products to incentivise plastic collection and recycled markets and disincentivise single-use plastic.
Asian countries have also taken strong steps to deal with plastic pollution but not much is expected on this front near term.
COP Sticking Points – Genetic Sequences And Pay-Outs
According to www.climate-diplomacy.org, two of the major sticking points for the COP are likely to be: digitally stored information on genetic sequences, and “resource mobilisation”.
A failure on these fronts could render the protocol useless.
On genetic sequences, the website says:
“Companies could profit from such information, such as by developing new medicines without needing physical access to the species in question.
“This means they could avoid having to comply with Convention on Biological Diversity rules on sharing with the country of origin the benefits arising from the use of genetic resources.”
This would be a major theme for the Pharmaceuticals industry.
Resource mobilization, meanwhile, refers to the funding of the Global Biodiversity Framework’s implementation.
Similar to the Climate COP, this boils down to how much richer countries are prepared to pay poorer countries to conserve biodiversity.
To date, it has proved a major sticking point given there is little incentive for wealthy countries to do so.