ESG Weekly Update – February 8, 2022

8 February 2022

EU: European Commission Proceeds with Labelling Gas and Nuclear Activities as “Transitional,” in the Face of Challenges

Despite challenges from various EU member states and civil society organizations, the European Commission will go ahead with a proposed classification of certain natural gas and nuclear activities as “transitional” in connection with the EU’s Green Taxonomy. On February 2, the Commission published the Taxonomy Complimentary Climate Delegated Act (the “Act”) setting out conditions under which certain gas and nuclear activities may be considered transitional. The Act, if passed, will enter into force January 1, 2023.

Transitional activities are those that “cannot yet be replaced by technologically and economically feasible low-carbon alternatives” but can contribute to climate change mitigation, therefore potentially playing “a major role in the transition to a climate-neutral economy … subject to strict conditions.” These conditions include:

  • all gas and nuclear activities must contribute to the transition toward Net Zero;
  • nuclear activities must comply with nuclear and environmental safety requirements; and
  • gas activities must contribute to the transition from coal to renewable energy.

Under the Act, companies and financial institutions involved in such activities are subject to additional disclosure requirements related to those activities, with the goal of enabling investors to make informed investment decisions.

The proposal to treat gas and nuclear activities as “transitional,” first issued in January, has sparked significant outcry. In response, EU Commissioner Mairead McGuinness noted that despite the classification, investors are “free to choose if they want to invest in [these activities] or not.”

The Act will be transmitted to the European Parliament and the EU Member States’ Council and will be reviewed in the coming months. Unless 353 Members of the European Parliament and 20 member states object to the Act, it will take affect at the start of next year.

Press Release


U.S.: Court Vacates Biden Administration Oil and Gas Leases, Citing Climate Change

A U.S. district court judge in Washington, DC has ruled that federal leases covering more than 80 million acres in the Gulf of Mexico must be vacated, citing a failure by the Biden Administration to sufficiently consider the leases’ effects on climate change during the auction process. At issue was whether federal agencies had relied on outdated environmental analyses in a calculation of the total greenhouse gas emissions that would result from exploitation of the leases, the largest lease sale in U.S. history. The court ruled that the Bureau of Ocean Energy Management and the Department of the Interior acted in an arbitrary and capricious manner when they excluded foreign consumption metrics from their greenhouse gas emissions calculation. The court vacated the leases and remanded the decision to the agency for further proceedings, including conducting a new environmental analysis that would consider the climate effects of the eventual exploitation of the leases before undertaking a new auction.

United States District Court Decision
Lease Sale 257


EU: European Central Bank Announces Climate Risk Stress Test

The European Central Bank (the “ECB”) announced the launch of its supervisory climate risk stress test, the objective of which is to assess banks’ preparedness for the economic impacts of climate change. Starting in March, banks in scope are required to submit templates of their climate risk stress test for ECB assessment, with results to be issued in July.

The stress test consists of three modules:

  • a questionnaire relating to a bank’s internal stress-testing capability and capacity;
  • a peer benchmark analysis based on climate risk metrics reflecting a bank’s income and exposure to emission-intensive companies; and
  • a bottom-up stress testing of transition and physical risk.

The ECB notes that the “stress test targets specific asset classes exposed to climate risk rather than banks’ overall balance sheets,” focusing on exposures and income sources that are most vulnerable to climate-related risk and “combining traditional loss projections with new qualitative data collections.”

To this end, the test uses macro-financial scenarios prepared by the Network for Greening the Financial System, including:

  • long-term transition risk scenarios with an orderly and disorderly variant. The orderly scenario is based on achieving Net Zero by 2050. The disorderly scenario considers a delayed transition (where new climate policies are not introduced by 2030) and a hot house world scenario (where no new climate policies are implemented and significant global warming occurs);
  • short-term disorderly transition risk scenarios focusing on banks’ short-term vulnerabilities due to a sharp increase in the price of carbon emissions over the next three years; and
  • physical risk scenarios considering drought, heat and flood risk.

Press Release
Macro-financial scenarios for the 2022 climate risk stress test


Global: Interim Climate Change Deterrence Event Indicates COP26 Promises Are Stalling

During the recent Building Momentum to UN COP27 event, U.S. climate envoy John Kerry called on governments to identify steps being taken to fulfil promises made at last November’s United Nations climate summit, COP26. Governments have committed to a goal of limiting global temperature rise to no greater than 1.5 degrees Celsius from preindustrial levels.

Following the event, sponsored by the U.S. Chamber of Commerce and the government of Egypt, host of COP27 later this year, Mr. Kerry noted that the world is “not on a good track” with respect to limiting global temperature rise, citing significant increase in the use of coal, for example, in 2021 as compared to 2020 and existing plans to generate 300 additional gigawatts of power from coal.

Recent reports indicate that numerous countries will not be producing more ambitious plans to reduce emissions this year as they had promised at COP26, increasing concern that actions taken by governments are falling far short of what’s necessary to limit temperature rise in accordance with the Paris Climate Agreement. The countries that won’t be submitting updated climate action plans include the United States, China, Australia and Canada, among others.

Reuters – “We’re in trouble:” U.S. Envoy Urges Faster Action on Climate Goals
Reuters – Egypt to host COP27 International Climate Conference in 2022


Global: PRI Issues Report on Responsible Political Engagement for Investors

The UN Principles for Responsible Investment (“PRI”) has published a report on responsible corporate political engagement by the investment community. PRI defines responsible corporate political engagement as companies and other interest groups participating in the political process to shape laws, regulations and policies that affect business objectives alongside broader environmental and societal goals.

The report notes the business community’s legitimate interest in shaping laws and policies that affect it, recognizing that political engagement by itself is not problematic and can be broadly beneficial. The report notes that the key is to ensure that such engagement is done in a responsible manner, which the PRI report defines as:

1. adhering to the letter and spirit of existing regulations and international best practice;

2. conducted in line with business principles that ensure integrity and sustainability goals that have been set out in international agreements or national policy targets;

3. preserving the long-term interests of the company, including the broad interests of diversified shareholders and those of stakeholders;

4. inspiring trust and grounded in robust governance and transparency; and

5. leading to well-informed, inclusive and effective public policy decisions that contribute to a stable economic system and minimize firm- and system-level risks as well promoting positive real-world sustainability outcomes.

The PRI report urges the investor community to engage more proactively with their portfolio companies in connection with their own political engagement activities, noting that further stewardship guidance addressing this issue will come from PRI later this year.

UNPRI Report – The Investor Case For Responsible Political Engagement