ESG Focus: Takeaways From COP27

ESG Focus | Dec 05 2022

This story features BEACH ENERGY LIMITED, and other companies. For more info SHARE ANALYSIS: BPT

FNArena's dedicated ESG Focus news section zooms in on matters Environmental, Social & Governance (ESG) that are increasingly guiding investors preferences and decisions globally. For more news updates, past and future: 
https://www.fnarena.com/index.php/financial-news/daily-financial-news/category/esg-focus/

ESG Focus: Upshots From COP27

FNArena summarises the key developments at COP27 and Macquarie checks out their implications for Australian stocks.

-Loss and damage fund for vulnerable countries
-Successful oil and gas lobbying
-Transforming the financial system
-Crackdown on greenwashing
-Private sector eyes US$2trn opportunity in developing countries
-Macquarie checks out implications for Australian stocks

By Sarah Mills

It would be fair to say that COP27 ended with a whimper rather than a bang, and that was pretty much to be expected.

However, there were a few developments worthy of note, and a few regressions.

The main big-ticket item was the estimation that decarbonizing developing countries will require US$4trn to US$6trn a year prior to 2030.

Estimates suggest current investment falls about 30% short of this figure, and it is an investment opportunity many corporations and governments appeared keen to support.

The Energy Transitions Commission identified six critical areas going forward: energy efficiency, deforestation, methane, power, road transport and heavy industry.

It outlined 25 actions to accelerate decarbonisation in hydrogen, road transport, steel, power and agriculture in 2023 and expected building and cement sectors would be added to this list by COP28.

A US$410m green hydrogen investment in Egypt was also announced as part of a World Bank plan for a US$1.6bn green hydrogen global program.

On the regressions front, The Ukraine conflict may well have strengthened the suit of oil and gas producers.

Environment Analyst reports that the producers and their 636 industry lobbyists may have won this COP, noting language on phasing out oil and gas was removed from the Glasgow Climate Pact, which was agreed at COP26.

The Indian government, backed by 80 member states led a proposal for the text “unabated coal” to be expanded to include all fossil fuels but this fizzled.

Although to some extent, this is a moot point given big capital is driving the decarbonisation regardless of COP27 commitments.

Progress on international carbon markets also fizzled, with Article 6 being watered down and no consensus was reached.

Other key points included:

Loss And Damage Fund For Developing Countries

The establishment of a loss and damage for developing countries went hand-in-hand with an agreement to let developed countries off the legal hook for climate change damage.

The terms of the fund are poorly articulated, and it doesn’t appear to be a giveaway, but rather will likely be distributed in the form of loans, so one suspects that, pending terms, the agreement is more hot air than substance.

An Adaptation Fund also garnered $230m in new pledges, chicken feed in the broader scheme of things.

Methane Pledge Gains Momentum

The battle against methane emissions did make some headway, the Pledge gaining 50 new signatories committing to cut methane emissions by 2030.

US President Biden signaled domestic methane regulation of oil and gas producers, aimed at cutting leaks by 87% on 2005 levels. This would cost the industry $20bn, depending on government support, and would ensure producers cap high-volume leaks.

Macquarie expects the methane pledge will, in the future, have repercussions for Beach Petroleum ((BPT)), Cooper Energy ((COE)), Woodside Energy ((WDS)), Santos ((STO)), Karoon Energy ((KAR)), Strike Energy ((STX)), a2 Milk Company ((A2M)), and Cleanaway Waste Management ((CWY)).

Alliances, Programs and Partnerships

Dollar-commitments and regulations were thin on the ground but decarbonisation alliances, programs and partnerships were abundant.

One of the major partnerships, and one with some financial heft albeit widely expected, was a $20bn JustEenergy Transition Partnership to phase out coal signed between Indonesia and the US, as well as the UK, Denmark and Italy. Bankers Citi, Macquarie, HSBC and Deutsche Bank were also signatories.

The Asian Clean Energy Coalition, Global Renewables Alliance, Global Offshore Wind Alliance, African Green Hydrogen Alliance and African Cities Water Adaptation Fund, were among the other initiatives.

Transforming The Financial System

One of the potentially more impactful developments was the Sharm el-Shiekh Implementation Plan’s call to transform the global financial system (Sharm el-Shiekh being the location of the meeting in Egypt).

The gist is that multilateral development banks and international financial situations will soon be called upon to reform their lending practices and align them to climate policy.

Macquarie expects this will have impacts for Australia’s four major banks: Commonwealth Bank ((CBA)), ANZ Bank ((ANZ)), National Australia Bank ((NAB)) and Westpac ((WBC)).

Crackdown On Greenwashing

The other was the United Nations’ signaling of its intent to crackdown on greenwashing with tougher reporting standards and verification.

The UN called for corporations to include interim emissions target (2025, 2030 and 2035) to give investors a clearer indication of the progress of their investments’ transition prospects.

The other big call was for corporations to include emissions from their entire value chain – Scope 1, Scope 2 and Scope 3 emissions, although there were no hard dates set. Already, ASX300 companies are starting to add Scope 3 emissions into their reporting.

Also, corporations will not be able to claim to be net zero as long as they build or invest in new fossil fuel supply.

Already, greenwashing is shaping up as a new challenge for ASX-listed stocks, ASIC issuing its first greenwashing fine of $53,000 fine to Tlou Energy in October, and the ACCR slapping a greenwashing lawsuit on Santos ((STO)) in Australia’s Federal Court.

Macquarie expects the crackdown may have implications for Commonwealth Bank and Santos.

Deforestation And Biodiversity

Deforestation and biodiversity also featured prominently, COP27 linking biodiversity to climate change for the first time.

Brazil President-elect Lula da Silva committed to ending deforestation in the Amazon, but this appears slightly toothless given the strong incentive for landowners to clear forest prior to the introduction of biodiversity measures.

The Ocean Economy Report announced its Ambition Loop and Roadmaps and Partnerships were announced for the Mangrove Breakthrough.

Macquarie says that deforestation and sustainable agriculture commitments may have implications for food-system companies such as a2 Milk, Coles ((COL)), Woolworths ((WOW)), Endeavour Group ((EDV)), Genex Power ((GNX)), Inghams Group ((ING)), Treasury Wine Estates ((TWE)) and United Malt Group ((UMG)).

FNArena's dedicated ESG Focus news section zooms in on matters Environmental, Social & Governance (ESG) that are increasingly guiding investors preferences and decisions globally. For more news updates, past and future: 
https://www.fnarena.com/index.php/financial-news/daily-financial-news/category/esg-focus/

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

FNArena is proud about its track record and past achievements: Ten Years On

Share on FacebookTweet about this on TwitterShare on LinkedIn

Click to view our Glossary of Financial Terms

CHARTS

A2M ANZ BPT CBA COE COL CWY EDV GNX ING KAR NAB STO STX TWE UMG WBC WDS WOW

For more info SHARE ANALYSIS: A2M - A2 MILK COMPANY LIMITED

For more info SHARE ANALYSIS: ANZ - ANZ GROUP HOLDINGS LIMITED

For more info SHARE ANALYSIS: BPT - BEACH ENERGY LIMITED

For more info SHARE ANALYSIS: CBA - COMMONWEALTH BANK OF AUSTRALIA

For more info SHARE ANALYSIS: COE - COOPER ENERGY LIMITED

For more info SHARE ANALYSIS: COL - COLES GROUP LIMITED

For more info SHARE ANALYSIS: CWY - CLEANAWAY WASTE MANAGEMENT LIMITED

For more info SHARE ANALYSIS: EDV - ENDEAVOUR GROUP LIMITED

For more info SHARE ANALYSIS: GNX - GENEX POWER LIMITED

For more info SHARE ANALYSIS: ING - INGHAMS GROUP LIMITED

For more info SHARE ANALYSIS: KAR - KAROON ENERGY LIMITED

For more info SHARE ANALYSIS: NAB - NATIONAL AUSTRALIA BANK LIMITED

For more info SHARE ANALYSIS: STO - SANTOS LIMITED

For more info SHARE ANALYSIS: STX - STRIKE ENERGY LIMITED

For more info SHARE ANALYSIS: TWE - TREASURY WINE ESTATES LIMITED

For more info SHARE ANALYSIS: UMG - UNITED MALT GROUP LIMITED

For more info SHARE ANALYSIS: WBC - WESTPAC BANKING CORPORATION

For more info SHARE ANALYSIS: WDS - WOODSIDE ENERGY GROUP LIMITED

For more info SHARE ANALYSIS: WOW - WOOLWORTHS GROUP LIMITED