EY logo in Madrid
EY, like many big global businesses, has put carbon offsets at the centre of its sustainability strategy © AFP via Getty Images

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It’s been encouraging to see the world’s biggest companies start paying serious attention to sustainability issues. In particular, there is now an overwhelming — and overdue — consensus within big business that it has a vital role to play in the race to tackle the climate crisis. It is crucial, therefore, that we journalists apply the same level of critical scrutiny to this area as we do to other angles of corporate coverage: highlighting both what businesses are doing right, and what they can do better.

Today’s edition features an analysis of EY’s eye-catching announcement that it has already become “carbon-negative”. Some readers may consider it uncharitable to criticise a plan that was developed with constructive intentions. Others may feel that precisely because best practice in this field is still being established — and given that the planet’s future is at stake — we must work still harder to exercise oversight. Whatever your view on this debate, we want to hear it. Tell us what you think at moralmoneyreply@ft.com.

Unpacking EY’s ‘carbon-negative’ claim

When the professional services giant EY told me that it had achieved net-negative carbon emissions — the first announcement of this sort, to my knowledge, from any major business group — I was keen to hear more details.

Like many big global businesses, EY has put carbon offsets at the centre of its sustainability strategy. The offset sector has come under serious scrutiny, with concerns that many nature-based offset schemes — such as initiatives to protect forests — have much less impact than they claim. In the absence of a properly regulated and rigorously assessed market in offset certificates, some experts have warned, companies should be wary of claiming to have cancelled out their emissions through such projects.

EY, however, was bolder than most. In the statement it sent me this week, it said that it had gone far beyond other companies aiming to neutralise their emissions in the coming decades. EY, it said, was already “carbon-negative”: offsetting and removing more carbon than it emitted through its business activities (principally employees’ travel).

Despite the intensifying scrutiny of this space, EY’s initial statement gave only two sentences of information about the offsets themselves. It said it was offsetting or removing 528,000 tonnes a year of carbon dioxide equivalent (which refers to the warming impact of all greenhouse gas emissions, expressed in terms of the warming impact of a tonne of carbon dioxide) through six projects run by offset provider South Pole. The statement mentioned the QianBei afforestation project in south-west China, as well as unspecified projects in reforestation, regenerative agriculture, biochar and forest conservation.

The level of detail reflected “the length of press release we think journalists can absorb”, Steve Varley, EY’s global vice-chair for sustainability, told me. But when I asked Varley to tell me about the five offset projects not named in the statement, he was unable to do so, saying: “I don’t have them all in my head.”

It might seem churlish to pick holes in the pitch set out by Varley, whose belief in the need for serious climate action came across as genuine. But the procurement manager of a major global business would be expected to know about his biggest suppliers in great detail. In an era of climate crisis, there is no obvious reason to apply a lower standard for a sustainability leader.

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And when it comes to the standards applied to corporate climate action, Varley and EY are in a position of real influence. There is currently no universally accepted assessment framework for carbon offsets, and the negative emissions claims that they underpin. Through its fast-growing sustainability consulting work, and the example it sets as one of the world’s most prominent businesses, EY plays an important role in that conversation — particularly given its decision to position itself as a trailblazer.

For readers unfamiliar with the concerns that have been raised about the carbon offset market, I’d point to this recent FT Big Read, and this Bloomberg investigation on “carbon-neutral” natural gas. The latter looks at how France’s TotalEnergies used South Pole, the same offset provider used by EY, to support the Kariba forest conservation project in Zimbabwe — and then cited this work to brand natural gas shipments as “carbon-neutral”.

As these articles and many others highlight, it is extremely difficult to give precise estimates of carbon sequestration by nature-based offset schemes. That is one of the big challenges facing those trying to work towards consistent standards in the space — including Mark Carney, who is spearheading the new Taskforce on Scaling Voluntary Carbon Markets. If low-quality carbon offsets are allowed to count towards net-zero targets, experts warn, the corporate sector could claim carbon neutrality on paper, while continuing to heat the planet.

Varley told me that EY, with its deep expertise in audit and accounting mechanisms, had been impressed by South Pole’s internal experts, proprietary assessment process and reputation among previous clients. “As an organisation we provide assurance for a living, so we know what a good validation and verification process looks like,” he said. While EY would have the right to inspect the offset schemes on the ground if it saw fit, “that’s not something I expect to do”, he added.

EY later followed up with more details of the offsets. The projects include the Kariba scheme, and others in Germany and South America. EY noted that all the projects had been certified by Gold Standard or Verra — two prominent non-profit groups that conduct assessments of carbon offset schemes — and said it had selected South Pole after a “rigorous and transparent procurement process”. You can read that follow-up statement in full here.

Varley was not willing to disclose the price EY paid South Pole for its carbon offsets, but the Bloomberg report mentioned above said that Total paid South Pole less than $3 per tonne of estimated carbon sequestration for offsets from the Kariba scheme — about a 20th of the rate that power companies pay on the European carbon permit market.

At that price, the US would be able to neutralise its annual carbon emissions for less than $50 per inhabitant. And if EY paid a similar price for all its offsets, the $40bn-revenue business’s carbon-negative claim would have cost it well under $2m. If all this sounds too good to be true, that may be a reflection of the urgent need for higher standards in the carbon offset market. (Simon Mundy)

ESG barbarians at the gate

RWE logo
© Reuters

This month, Henry Kravis and George Roberts stepped down from KKR, the private equity firm they founded in 1976. The duo’s $25bn takeover of RJR Nabisco in 1989 earned them the moniker “barbarians at the gate” for the landmark book that featured their takeover attack.

Today, raiders are increasingly turning to environmental, social and governance criteria to form attacks. Engine No 1 led the way with its shocking win at ExxonMobil this year. But other activists have been sharpening spears, according to Lazard in its recent report on activism developments from July through September.

More scrutiny of ESG claims “has been one of the key themes of the quarter”, Lazard said. 

The report highlighted a campaign launched in September at German energy giant RWE. Enkraft Capital, a little-known investment firm, had pushed RWE to accelerate the divestment of coal operations, Lazard said. In a letter to RWE, Enkraft said the company’s coal operations had become an increasing liability as ESG became more of a priority for investors, according to Lazard.

Notably, ESG activism more often comes from far less barbarous investors. The big three investment firms — BlackRock, Vanguard and State Street — have felt pressure from big pension funds to prioritise ESG. As a result, the trio have increased their support for environmental shareholder petitions at companies’ annual general meetings. Typically, big investors shrug off the environmentalists and religious organisations that pressure companies for environmental or social changes.

There is yet another case under way that requires watching. Bluebell Capital is trying to build a coalition of shareholders to pressure chemicals multinational Solvay to halt alleged pollution into the Mediterranean (our colleagues have covered the fight here).

Lazard said COP26 could drive additional ESG activism attention. Companies have been rolling out net-zero carbon emissions pledges. One question for the months ahead: will activists seize on these commitments if they are not backed up with corporate action? (Patrick Temple-West)

To catch up with Europe, Washington calls for greater climate risk oversight at banks

Janet Yellen, US Treasury secretary, at the White House this month
© AFP via Getty Images

US banks and other global financial firms should face increasing oversight of the risks they face from climate change, Washington’s regulator for systemic vulnerabilities said in an unprecedented report released on Thursday.

To catch up with Europe’s climate risk oversight for banks, the Financial Stability Oversight Council (FSOC) recommended that US regulators analysed what specific climate change scenarios could pose threats to banks, insurance companies and other firms.

While FSOC stopped short of calling for new climate-related risk analysis in banks’ stress tests, the scenario analysis “can be a building block for assessing the impact of climate-related risks on key sectors of the financial system and the financial system as a whole”, the report said.

The FSOC report comes as Joe Biden’s administration is under pressure to arrive at next month’s high-stakes climate meetings in Glasgow with strong initiatives to combat global warming. So far, it’s been bogged down by the US Congress.

On a call with reporters, a senior Treasury department official acknowledged the US was racing to catch up with climate-related financial oversight that had galloped ahead in Europe. 

 “Are we behind? Of course we are,” he said.

FSOC noted that the Bank of England, the European Central Bank and other prudential overseers had already conducted initial climate scenario risk analyses.

US regulators should also consider stronger public reporting requirements for climate risks. The Securities and Exchange Commission is drafting new climate disclosure rules, but the regulations will not be finalised until later next year at the earliest.

In the meantime, the FSOC also recommended its members should consider using climate risk scenarios being developed by the Financial Stability Board. (Kristen Talman and Patrick Temple-West)

Smart read

  • Climate change “will exacerbate long-standing threats to global security”, the White House, the US intelligence community and the Pentagon found in new reports, according to the Washington Post. The assessments highlight a broader shift within the US security establishment as officials begin to incorporate climate risk into strategic planning.

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