What we're reading about, 3/1/24
Climate, energy, and sustainability coverage we've been following around the web
(1) The US Securities and Exchange Commission (SEC) will drop the requirement that companies report “Scope 3” (supplier and customer) emissions in its proposed climate reporting rules, per Reuters. The SEC’s five commissioners are set to vote on the proposal on March 6th. While a final draft hasn’t been released, the original proposal called for companies to disclose emissions and quantify “actual and potential” climate risks, plus spending to mitigate climate risk.
Scope 3 emissions, as defined by the GHG Protocol, cover “emissions a company is responsible for outside of its own walls - from the goods it purchases to the disposal of the products it sells.” Scope 3 emissions represent over 70 percent of most companies’ emissions, and are important for making apples to apples comparisons between companies in a world of sprawling supply chains. As Boston University law professor Madison Condon warned, without Scope 3 disclosures, “companies could begin outsourcing their most emissions intensive processes to third parties in order to appear greener than they actually are.”
Scope 3 emissions are most relevant for looking at industries where competing products have very different lifecycle emissions (think ICE cars versus EVs), but measuring them is much more complex than tracking direct or purchased-electricity emissions (Scope 1 and Scope 2), because it requires companies to track down data from thousands of suppliers and make estimates of customer emissions. For now, it looks like these issues with Scope 3 are being assigned more weight than its benefits, at least at the SEC.
(2) The US Inflation Reduction Act (IRA) mostly focuses on “carrots” rather than “sticks” - incentives for clean-energy technology instead of penalties for fossil fuels. But there is one rather notable “stick” in the bill - new fines for methane emissions. Thanks to the IRA, the US Environmental Protection Agency (EPA) can charge $900 per tonne of methane emissions above a certain threshold, starting in 2024. That equates to roughly $32 per tonne of CO2-equivalent emissions, which is actually on the higher end of carbon pricing schemes worldwide. Natural gas is nearly pure methane, which can leak from storage tanks, pipelines, valves, and other oil and gas infrastructure. Per the EPA, petroleum and natural gas systems emitted more than 64 million metric tons of methane in 2022.
(EPA Greenhouse Gas Reporting Program)
According to Grist, major players like Chevron and Shell have publicly welcomed the new methane fee rule, as they happen to fall well below the threshold for the fees. The rule will likely fall harder on companies that own older wells, like Diversified Energy Company, which buys wells nearing the end of their useful lives on the cheap. Cumulatively, the new rule could apply to about a third of all methane emissions from US oil and gas infrastructure.
(3) ExxonMobil and Chinese oil and gas explorer CNOOC are considering exercising their right to acquire Hess’s 30 percent stake in an offshore oil development in the Stabroek block off of the coast of Guyana. The move could impact Chevron’s plans to acquire Hess for ~$53 billion, which it announced back in October. Hess’s Guyana assets are the company’s crown jewel and key to Chevron’s investment case. ExxonMobil and CNOOC claim that they can exercise a right of first refusal and purchase the assets themselves - ExxonMobil is the operator of the project. In an emailed statement to Bloomberg, a Chevron representative was adamant that the right of first refusal over the change of ownership of the Hess stake doesn’t apply:
“As described in the S-4, there is no possible scenario in which Exxon or CNOOC could acquire Hess’ interest in Guyana as a result of the Chevron-Hess transaction.”
(4) Chord Energy Corp. (CHRD) and Canada’s Enerplus Corporation (ERF) have announced a merger in an $11 billion cash and stock deal. Combined, the new entity will create a “premier” operator in the Williston shale basin, which sits primarily in North Dakota. According to the investor deck, the deal is expected to generate ~$150 million per year in cost savings and be accretive in the short and long run. The combined assets will span ~1.3 million acres and give Chord enough inventory to support ~10 years of development.
(Chord Energy)
(5) A succinct op-ed by Roula Khalaf in the FT nicely summarizes the growing disillusionment with the idea that “green” investing and positive returns are directly correlated. The early days of ESG were premised on the idea that dirtier companies would ultimately underperform, but “the climate tide has turned.” As Khalaf points out, voluntary initiatives like Climate Action 100+ now have to choose between how aggressively they challenge companies and their appeal to mainstream investors (at least in the US).
As Khalaf writes, if climate investor initiatives “aim to use their heft to influence company policy, they may find their members limited to ‘impact’ investors, who prioritize the social effect of their choices.” Furthermore, it seems that the energy transition “is now much less likely to be propelled to success by a wave of cheap capital.” She goes on to conclude:
“That puts the onus squarely back on policymakers’ shoulders. They will need to mandate carbon reductions rather than hoping that the market delivers them on its own.”
(6) A climate finance buzzword to pay attention to this year is “biodiversity.” For example, a number of climate shareholder resolutions on biodiversity have been filed for the upcoming proxy season, such as those at Granite Construction (GVA) and General Motors (GM).
Now, a market for “biodiversity credits” is emerging in the UK. Asset Manager Gresham House raised $380 million for a fund that ties investment returns to demand for these biodiversity credits. Under the UK scheme, landowners can create “habitat banks” that earn and ultimately sell credits via the Environment Bank. Each credit represents a unit of “biodiversity improvement.”
Demand for credits comes from biodiversity planning requirements (under 2021 legislation, developers must deliver a “10 percent biodiversity net gain” when they build new real estate projects), and could also be boosted by voluntary demand for credits, each of which represents a unit of “biodiversity improvement.”
Per Bloomberg:
“The UK’s new offsetting regulation requires developers in England to achieve a net gain in biodiversity of at least 10% in order to obtain planning permission. They can do so by either setting aside land on-site or by purchasing credits generated by habitat banks elsewhere. Each credit represents a unit of biodiversity improvement, based on a metric provided by the government.”
Further Reading:
Why the SEC’s New Climate Rules Matter (Heatmap)
Exclusive: US regulator drops some emissions disclosure requirements from draft climate rules (Reuters)
Biden’s climate law fines oil companies for methane pollution. The bill is coming due. (Grist)
Exxon Considers Pre-Emption Rights to Hess’ Guyana Oil Stake (Bloomberg)
Asset managers’ green U-turn exposes energy transition cakeism (FT)
Gresham House Fund Targets $380 Million for ‘Novel’ ESG Credits (Bloomberg)
CRE Market Woes Mount as Assets Get ‘Stranded’ by CO2 Rules (Bloomberg)
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