The top five climate risk and disclosure stories this week.
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Global temperature rise may exceed 1.5°C in next five years
Average global temperatures may briefly exceed 1.5°C above pre-industrial levels in the next five years as a result of human-caused greenhouse gas (GHG) emissions and the naturally occurring El Niño effect.
The World Meteorological Organization (WMO) says there is a 66% likelihood that the annual average near-surface global temperature between 2023 and 2027 will breach the 1.5°C threshold for at least one year. In addition, it says there is a 98% chance that at least one of the next five years, and the five-year period as a whole, will be the warmest on record.
The WMO findings do not mean the world has failed to keep global warming below the 1.5°C level specified in the Paris Agreement, as this refers to long-term warming over many years. However, WMO Secretary-General Professor Petteri Taalas said the next few years will push global temperatures into “uncharted territory” and will have “far-reaching repercussions for health, food security, water management and the environment.” Global average temperatures already exceed 1.1°C over pre-industrial levels because of human-induced emissions.
Climate groups said the WMO findings should prompt increased action by governments, companies, and financial institutions. “Report after report shows the urgent need to take action to reduce carbon emissions to protect people and planet,” Catherine Howarth, chief executive of sustainability group ShareAction, said. “Banks, investors and asset managers have to take responsibility in cutting the flow of finance to fossil fuel companies and redirect this capital towards the low carbon energy supplies of the future.”
Canadian lawmakers back climate-focused financial regulations
A cross-party group of Canadian legislators is urging the government to align the nation’s financial system with the Paris Agreement’s aim of limiting global warming to below 1.5°C.
Led by Liberal MP Ryan Turnbull, the group — which includes lawmakers from the NDP, Bloc Québécois, and Green parties — is seeking to utilize “all legislative and regulatory tools at its disposal” to ensure banks, insurers, and pension funds invest in climate-focused initiatives. Turnbull introduced a private member’s motion last month to advance this goal.
Climate groups welcomed the news. “Canada finally has an all-star team of firefighters ready to tackle the biggest gap in Canada’s climate plan: private finance,” said Julie Segal, senior program manager at Environmental Defence. “This team needs to work together to deploy the tools at their disposal and require all financial institutions to cut emissions from their investments in half by 2030.”
Segal recommends that the group pushes the government to bring a sustainable investment taxonomy into law, gets crown corporations to reduce emissions in line with Canada’s stated targets, and encourages the country’s federal financial regulator to require credible climate transition plans from financial institutions within the next year.
Exxon counters shareholder proposal on net-zero risks
Exxon Mobil, the largest US oil producer, has countered investor demands to report certain climate transition risks in its financial statements, claiming that a popular net-zero pathway is unlikely.
In a response to proxy advisor Glass Lewis on Wednesday, the oil supermajor argues against the view that its asset retirement obligations (AROs) represent a material financial risk if the world rapidly shifts away from fossil fuels as projected under the International Energy Agency’s Net Zero Emissions by 2050 (IEA NZE) scenario. AROs are the costs and legal responsibilities associated with cleaning up environmentally hazardous assets, like oil wells. Glass Lewis had supported a shareholder proposal seeking a report on AROs under the IEA NZE, which is set for a vote on May 31.
Exxon argues that it does not incorporate in its financial statements risks that are as “remote” as those laid out in this scenario. “It is clear that the IEA NZE does not, by the scenario authors’ own assessment, meet the level of likelihood required to be considered in our financial statements,” wrote Exxon. “Likewise, it is highly unlikely that society would accept the degradation in global standard of living required to permanently achieve a scenario like the IEA NZE.”
Exxon adds that it has estimated the potential impacts of the IEA NZE scenario in its 2023 climate report. However, this document is not intended to communicate material investment information and does not contain actionable financial data. This report says that Exxon’s climate strategy makes it resilient to the kind of transition impacts that would be brought about under the IEA NZE scenario.
To meet the net-zero emissions scenario, the IEA stipulates that new oil exploration should have ceased in 2021 and nations should transition from fossil fuels to renewable energy sources. Exxon is among the oil supermajors continuing to invest in new exploration and intending to produce oil and gas for decades to come.
Coalition aims to formalize ‘Scope 4’ emissions calculations
Financial institutions have teamed up to draft an international standard for measuring and comparing companies’ avoided emissions in order to better understand how they are making progress toward net-zero goals.
The coalition, led by asset managers Mirova and Robeco, wants to formalize the calculation of these so-called ‘Scope 4’ emissions, where no consistent methodology currently exists. The G7 has recently called for the private sector to collaborate on developing an international standard for this metric.
To answer the call, the financial institutions aim to create a global database of avoidance factors to estimate the emissions avoided by a broad range of listed companies. The new datasets will be based on principles such as full life cycle analysis, attribution of avoided emissions across the entire value chain, selection of the least advantageous baseline scenario, and transparency in calculation methodology.
The financial institutions say the Scope 4 initiative will provide valuable information for investors, enabling them to better assess companies’ contributions to global net-zero goals and redirect financial flows towards those driving the decarbonization process.
Asset owners concerned over climate risk alignment with managers
The UK Asset Owner Roundtable plans to convene a meeting of major fund managers to assess how asset owners’ climate risk concerns are being addressed through managers’ stewardship and proxy votes at major European oil and gas firms.
A Wednesday LinkedIn post from the Roundtable’s Chair, Faith Ward, stated that members of the group — which includes Brunel Pension Partnership Limited, Scottish Widows, and The Church of England Pension Board — have “expressed concerns about a perceived misalignment between their long-term interests and the actions of investment managers.”
The asset owners believe that despite clear warnings from the United Nations and the Intergovernmental Panel on Climate Change on the risks of delayed climate action, investment managers’ short-term interests may be taking precedence over pension funds’ and institutional investors’ long-term aims — which include protecting their investments from climate-related financial risks.
Ward added that after the current proxy voting season, the Roundtable plans to commission a top academic “to review the way significant asset managers have interpreted their clients’ long-term interests in the exercise of their stewardship duties.” She added they will particularly focus on how managers have voted at key annual general meetings in Europe.
