Climate 411

Countries must heed IPCC reports as they review collective progress under the global stocktake

By Maggie Ferrato / Published: April 13, 2022

This post was authored by Maggie Ferrato, Senior Analyst for Environmental Defense Fund.

Forest family photo of World Leaders at COP26 in Glasgow, Scottland. Karwai Tang/ UK Government via Flickr.

The Intergovernmental Panel on Climate Change’s latest Working Group III report has made it clear that the world is not on track to meet the goals of the Paris Agreement—and emissions have continued to rise across all sectors—despite the technological and policy solutions that are increasingly available to decisionmakers.

It’s an important message that needs to be repeated with more urgency than ever. We already know we must do much more to reduce our emissions, including by transitioning more quickly from fossil fuels and rethinking how we grow our food. And in February, the IPCC’s Working Group II report highlighted the dramatic impacts the planet faces from a warming atmosphere, and how this decade is a critical window to adapt to our changing climate and limit the damage by dramatically cutting our emissions.

The IPCC reports taken together send a clear signal that countries must urgently set their ambitions much higher in the fight against climate change.

The good news is that the Paris Agreement was designed to ratchet up ambition over time. One of the mechanisms to make this happen, a process known as the “global stocktake,” is an opportunity to assess countries’ collective progress toward the Paris Agreement’s long-term goals on mitigation, adaptation and finance.

The IPCC reports provide an important backdrop for the UN’s global stocktake process. Here’s how countries can leverage the scientific research from the IPCC to conduct a stocktake that succeeds in increasing global ambition and action.

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Posted in International, Paris Agreement, United Nations / Comments are closed

Getting to net zero: New policy insights on the role of carbon management strategies

By Natasha Vidangos / Published: March 31, 2022

This blog was originally co-authored with Jake Higdon, former Manager for U.S. Climate Policy at EDF.

This summary for policymakers, based on new modeling from Evolved Energy Research, shares insights on the potential role of carbon removal and carbon capture strategies in reaching net-zero emissions in the U.S.

Emerging technologies to capture carbon are gaining traction at the federal level – evidenced by the new innovation investments in the bipartisan Infrastructure Investment and Jobs Act, the Department of Energy (DOE)’s re-organized Office of Fossil Energy and Carbon Management, and DOE’s Earthshot initiative to substantially cut the cost of carbon dioxide removal. However, it is hard to predict what role these technologies will play in reaching President Biden’s net-zero emissions goal when they are currently at different stages of development and vary widely in cost.

While harnessing widely available, cost-effective solutions we have at our fingertips right now is the unquestionable priority for tackling climate change, there are aspects of our carbon pollution problem that cannot be addressed with clean energy and efficiency solutions today. This is where technology-based “carbon management,” which refers to strategies that use technologies to capture carbon pollution from both heavy industrial facilities and the atmosphere, can help us close this emissions gap. Importantly, carbon management also addresses what happens after carbon is captured, whether it’s stored in geologic formations underground or utilized to help produce low-carbon materials or synthetic fuels.

Carbon Capture vs. Carbon Removal

To better understand these technologies’ potential and inform federal innovation policy, EDF commissioned Evolved Energy Research, a leading energy systems modeler, to explore a series of carbon management scenarios.

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Posted in Policy, Science / Comments are closed

Climate change creates financial risks. Investors need to know what those are.

By Michael Panfil / Published: March 30, 2022

Flooding in Baton Rouge, LA in August, 2016. Coast Guard photo by Petty Officer 1st Class Melissa Leake

(This post was co-authored by David G. Victor, nonresident senior fellow at the Brookings Institution. It is also posted here.)

The U.S. Securities and Exchange Commission (SEC) voted recently to move a proposal forward that would require publicly traded companies to disclose the financial risks they face from climate change. These rules aim to bring corporate obligations for the disclosure of climate risk level with the requirements for disclosure of other forms of financial risk. Doing so is long overdue and a critical step to ensuring investors have access to information about the investment risks faced from climate. Those financial harms include “transition risks” stemming from shifts in innovation, technology, and competitive landscape as well as “physical risks”, such as more severe wildfires to more frequent flooding.

Our financial system has always relied on publicly traded companies being transparent about the risks their businesses navigate. This open accounting of business prospects is fundamental to the healthy operation of our economy — reliable information is the bedrock of efficient markets. Publicly traded companies are required to regularly issue disclosure reports that investors — from Wall Street to Main Street — rely on when choosing where to invest their money seeking opportunity and avoiding unwarranted risk.

The consequences of climate change are creating new and growing forms of financial risk that investors need to consider when choosing how to prudently allocate capital. In the last two years alone, the U.S. suffered more than 40 weather disasters that inflicted at least $1 billion in economic damage each. A recent study found that 215 of the world’s largest companies face almost $1 trillion in climate-related risk. These climate risks pose sprawling challenges, disrupting “food supplies, business operations, and economic productivity, while damaging homes and personal property, public infrastructure, and critical ecosystems across the country.” The most recent assessment by the Intergovernmental Panel on Climate Change concluded similarly, finding that “extreme events and climate hazards are adversely affecting multiple economic activities across North America and have disrupted supply-chain infrastructure and trade.”

Disclosure is necessary because climate risk is investment risk, and market participants have a significant interest in understanding the size and scope of that risk. Other countries, from the U.K. to New Zealand to Japan, have taken concrete steps to require that the mounting harms of climate change to their financial systems are proactively identified and understood. Yet in the U.S., companies are not currently required to disclose the financial risks created by climate change. Our existing rules are voluntary and inadequate. One recent study found that only one percent of companies participating in a voluntary set of standards provided sufficient information on their transition plans for the lower-carbon future. Another, jointly conducted by researchers at Brookings Institution and EDF, found similar results, particularly on the disclosure of physical risk. Another study from Brookings, cited by the SEC in its new draft rule, found highly uneven patterns of disclosure about climate risks — especially on physical risks.

An efficient market requires more information. That’s why the investment community has been among the most vocal in calling for the SEC to act. Ninety-three percent of institutional investors believe that climate-related financial risk “has yet to be priced in by all key financial markets globally.” Many of the world’s largest asset managers have called for strong, mandatory climate disclosure rules to improve their ability to prudently manage investments — in their comments to the SEC they also urged (and the SEC heeded) some caution so that disclosure rules stayed in line with the information that the markets most needed to function well. Many of the large publicly-traded American businesses that would be subject to these rules have also expressed support for mandatory SEC climate risk disclosure, including Apple, Walmart, and FedEx. These businesses and many others understand that the U.S. financial system is healthiest when market participants are able to make well-informed decisions.

The proposed rule addresses these barriers by setting forth a range of information requests, all designed to address investor need. Physical risk disclosure, such as disclosure of risks associated with more severe extreme weather or increasing wildfires, is a critical part of the proposal, which requires registrants to disclose “any climate-related risks that are reasonably likely to have a material impact on the registrant’s business or consolidated financial statement.” The extent to which the company uses specific tools to understand the financial risks they face from climate, such as scenario analysis or transition plans, is likewise subject to the proposed rule. Other aspects of a registrant’s climate risk are additionally subject to disclosure, including provisions of information relevant to the company’s specific risk management processes, greenhouse gas emissions, line-item metrics on the effects of climate-related risks on corporate finances, and climate-related targets.

Understanding and responding to the danger climate change poses across the American economy will be complicated. Getting this right will take time and will require a lot of learning. Mandatory climate risk disclosure by the SEC is a necessary early step. It will bring disclosure of climate risk level with other forms of financial risk and will help ensure that investors have access to relevant information for prudent management of the capital they invest. The SEC’s new proposal aims to achieve this end, consistent with the agency’s clear and explicit authority. Commissioners should swiftly move to finalize the proposal and put this much-needed rule into effect.

Posted in Economics, News, Partners for Change, Policy / Comments are closed

As Congress makes big budget decisions, new polling shows bipartisan support for climate innovation investment

By Morgan Rote / Published: March 16, 2022

Every Spring, Congress starts the process of deciding on next year’s federal budget, which contains funding for agencies and departments that help drive climate and clean energy progress.

Stepping up investment in climate innovation – the creation of new or enhanced climate solutions that lower pollution, create jobs and cut energy costs – should be a priority for next year’s budget. The bipartisan Infrastructure Investment and Jobs Act injected new funding for climate innovation this year, including for projects to pilot carbon removal technology, battery storage and low carbon fuels, but we need innovation funding to continue growing in the coming years.

Despite the escalating challenges brought on by climate change, recent EDF analysis found that the U.S. is still under-funding key climate solutions and technologies, including clean transportation, clean industry and manufacturing, and some renewable energy programs in the Department of Energy. Meanwhile, other countries have raced to increase the pace and scale of their innovation investments, competing with American leadership in clean energy technology.

Lawmakers have an opportunity to help get the country on track by ramping up U.S. investment in climate innovation in next year’s budget. And recent national polling by Morning Consult, commissioned by EDF, makes clear that a bipartisan majority of voters support bolstering federal funding.

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Posted in News / Comments are closed

Governor Sisolak set the stage for strong climate action. Now, Nevada must deliver.

By Caroline Jones / Published: March 15, 2022
Lake Mead

Lake Mead. PC: Pixabay

The latest report from the Intergovernmental Panel on Climate Change (IPCC) issued a stark warning: societies have not done enough to mitigate and adapt to the effects of climate change, endangering millions of lives, and must take urgent, “transformational” action to avert the worst outcomes of human-caused climate change.

Nevada is already feeling a range of climate change impacts – from Lake Mead’s falling water levels and declining spring snowpacks threatening critical water supplies to rising summer temperatures in Las Vegas and Reno threatening public health. In fact, without strong action to curb climate change, the state could see more than triple the number of heat wave days, which are projected to rise from 15 days to nearly 55 annually by 2050. All of these impacts have a disproportionate effect on the health of low-income communities, communities of color and tribal communities because they often lack the community infrastructure, such as quality health care and housing, to cope with these impacts as a result of decades of disinvestment.

Governor Sisolak directly addressed the climate threats bearing down on communities across the state in his 2022 State of the State speech, highlighting strategic climate investments, clean energy development and heat mitigation as priorities. While these are crucial actions that signal Gov Sisolak’s continued commitment to climate action, they will not be enough to meet the accelerating climate challenge head-on. Nevada will have to go further and faster with strong policy that directly targets – and limits – climate pollution. 

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Posted in News / Comments are closed

How a proposed Department of Labor rule would help protect retirement savings from climate risk

By Stephanie Jones / Published: March 14, 2022

Source: pxhere

(This post was co-authored by Alex Song at the Institute for Policy Integrity at at NYU School of Law. You can also read it here.) 

Should retirement plan managers be able to consider climate change and other financially relevant environmental, social, and governance (ESG) factors in their decisions? A recent analysis of public comments found overwhelming support for a proposed rule from the Department of Labor (DOL) affirming their ability to consider these factors.

ESG factors, including climate change, can affect risk and return for all types of investments, not just ESG-labeled funds. For example, a company may have crucial assets that are particularly vulnerable to physical risks from climate-amplified extreme weather or may face transition risks from climate-driven policy or technology changes.

The Trump administration, however, limited retirement plan managers’ ability to consider ESG factors when selecting plan offerings and making other decisions. The DOL proposal would remove these irrational constraints, which would enable plan managers to better protect Americans’ savings.

DOL administers the Employee Retirement Income Security Act (ERISA), which sets forth fiduciary duties of prudence and loyalty for employers who sponsor retirement plans and anyone they contract with to help manage or advise those plans (collectively, “retirement plan managers”). Prudence requires that retirement plan managers carry out their duties with care, skill, and diligence. Loyalty requires that they act solely to benefit participants (the people invested in the plan). DOL’s proposal does not change or conflict with these core fiduciary duties, as some have misleadingly argued. Rather, it ensures that fiduciaries can fulfill their duties effectively in the context of the pervasive financial impacts of climate change. DOL’s proposal explains why retirement plan managers may often need to consider climate risk and other ESG factors and affirms their ability and responsibility to do so.

Environmental Defense Fund, the Institute for Policy Integrity at NYU School of Law, and the Initiative on Climate Risk and Resilience Law jointly submitted comments supporting the proposal, as did the overwhelming majority of the more than 100 other institutions and 20,000 individuals who commented.

Here’s why DOL’s proposal is so important:

  1. Climate change is a risk-return factor for retirement investments.

Climate change is already affecting companies’ bottom lines, and its effects on business operations are projected to accelerate over the next several decades. The National Oceanic and Atmospheric Administration reports that in 2021 alone there were 20 separate billion-dollar weather and climate change disasters in the U.S., causing $145 billion in damages. A wide range of industries will experience large climate-related losses. For example, climate change is expected to decrease labor productivity and agricultural yields, especially in the Southwest, and the real estate brokerage site Redfin estimates that climate-intensified wildfires could wipe out up to $2 trillion in property values in California alone.

These effects are relevant to financial risk-return analyses, especially for retirement investing. Because many retirement funds invest in a diversified portfolio representative of much of the economy, the overall impact of climate change on the economy is relevant to the interests of plan participants, especially in light of the long time horizons inherent in retirement investing. A systematic review of the economic literature on sustainable investing and climate finance found an “encouraging relationship between ESG and financial performance,” observing that ESG funds often outperform regular funds over longer time horizons and provide downside protection during social or economic crises.

  1. The Trump administration’s rules impede retirement plan managers’ consideration of climate risk.

In 2020, under the Trump administration, DOL issued new rules that targeted ESG investment strategies and departed from established ERISA practices. These rules amended longstanding regulations under Section 404(a) of ERISA, and imposed new procedural and documentation requirements that have, in practice, limited the ability of retirement plan managers to consider climate-related risks and other ESG factors in their decisions. As we noted in our July 2020 comment letter to DOL, such interference with fiduciaries’ prudent decision-making processes ultimately harms plan participants whose savings are at stake. In 2021, the Biden administration’s DOL announced that it would not enforce the Trump administration rules, but plan managers still need the clarity and certainty of a new rule.

  1. DOL’s proposal affirms that retirement plan managers should consider all factors relevant to investment risk and return, including climate impacts.

If finalized, the proposal would eliminate the Trump administration’s harmful limitations on fiduciaries’ ability to consider climate impacts when making investment decisions. The proposal affirms that fiduciaries should treat climate and other ESG factors like any other risk-return factor where relevant. Fiduciaries still “may not subordinate the interests of the participants and beneficiaries in their retirement income or financial benefits under the plan to other objectives.” In other words, fiduciaries should consider the financial impacts of climate and other ESG factors, but not their personal policy preferences. Retirement plan managers still have to work in the best interests of their clients, and current and future retirees can rest assured that their financial security is the sole objective.

  1. DOL’s proposal applies the same rational principles to default investments as to investment options generally.

The proposal also reverses a Trump-era bar on designating funds that consider climate or other ESG factors as default investments for plan participants who don’t otherwise specify how to allocate their contributions. Approximately 80% of new ERISA plan contributions are invested in such default funds, known as Qualified Default Investment Alternatives (QDIAs), which only underscores the importance of allowing fiduciaries to consider all relevant risk-return factors when selecting them. By restoring fiduciaries’ discretion to consider climate and ESG factors in QDIA selection where relevant to the risk-return analysis, the proposal will ensure that participants are not unnecessarily deprived of access to financially prudent investment options.

  1. DOL’s proposal reminds retirement plan managers of the potential value of exercising shareholder rights.

Lastly, the proposal corrects distortions to fiduciary decision-making that were introduced by the Trump administration’s proxy voting rule, which included several provisions that discouraged fiduciaries from exercising shareholder rights. Specifically, that rule included a statement that fiduciary duty “does not require the voting of every proxy or the exercise of every shareholder right,” and a “safe harbor” provision for voting on issues “substantially related to the issuer’s business activities or . . . expected to have a material effect on the value of the investment.” This language created incentives for fiduciaries to err on the side of waiving their right to vote on shareholder proposals and board elections. In other words, retirement plans would be less likely to have a say in the management of the companies in which they invest, despite the fact that shareholder voting can be an important tool for managing risk. The proposal correctly recognizes the value of shareholder rights and removes the statements that would have discouraged fiduciaries from exercising these rights to the most beneficial extent.

In sum, DOL’s proposal would protect Americans’ retirement savings by:

  • highlighting the financial relevance of climate change
  • undoing harmful Trump administration rules
  • affirming that fiduciaries should consider ESG factors like climate change when relevant to investment risk-return analysis
  • applying the same rational principles to selection of default investments
  • acknowledging the value of exercising shareholder rights
Posted in Economics, News, Policy / Comments are closed