Category: Sustainability

Moving Industrial Clusters Toward Net Zero

July 15, 2022 Climate Change

Jeff Bartel

Chairman and Managing Director

Executive Summary

Industrial clusters are one tool for companies to take the climate action consumers are demanding. An estimated 70% of the global economy appears committed to reaching Net-Zero by 2050. For the past decade, industry has accounted for more than 25% of the global economy. The industrial and energy sectors account for more than 50% of global greenhouse gas emissions.

By working together, businesses within industrial clusters can significantly impact emissions and help achieve net-zero goals on time.

Net Zero Solutions for Industrial Clusters

Industrial clusters have a lot of power and responsibility as essential drivers of wealth and growth in various global regions. That includes responsibility for social and environmental factors that may feel impacted by industrial businesses. With around 70% of the global economy, including economies in China, India, Africa, and Saudi Arabia, committing to net zero, industry clusters must find solutions to support net-zero emissions and other environmental goals while helping maintain economic stability within their regions.

Direct Electrification

Electricity is a crucial factor in moving toward net-zero energy for all types of industrial clusters. Relying more on electric power over fossil fuels and other energy sources can significantly affect pollution emissions. However, moving in that direction involves an energy transformation that has not been seen since the Industrial Revolution and, even then, likely outpaces that historic time of innovation. Therefore, energy companies and industrial clusters must embrace new solutions from digitization and low-carbon technologies. 

Carbon Capture

Despite the excitement over direct electrification, resource and functional limitations mean that not all efforts within industrial clusters can transition to these cleaner forms of energy — certainly not in the immediate future. Carbon-capturing technology has become increasingly critical in this environment, and current efforts are falling short. According to data from the International Energy Agency, at the current rate of progress, carbon capture projects will fail to capture the 1.7 tons of CO2 required by 2030 to keep up with global goals for a 2050 net-zero scenario. Industry cluster businesses must step up to push these efforts further and gain more ground in this area.

Hydrogen Technology

Hydrogen technology is a low-carbon, clean energy alternative that may help industries turn away from high-carbon gasses and fuels. While hydrogen technology is currently in use, it is a relative newcomer to sectors that have long relied on fossil fuels. Nevertheless, industry leaders are committing to hydrogen research and developing this technology. Others in the niche must follow suit by implementing these technologies as they become available.

Bioenergy

Bioenergy is the oldest form of energy used by humans, who began burning wood for warmth centuries before electricity, fossil fuels, and other energy sources were available. Researchers are delving into different biomass energy resources, including byproduct residues from industries such as forestry and agriculture and even fumes from landfills. Bioenergy is frequently focused on turning the byproducts of one process into energy sources for another.

 

Carbon Net Zero in industry can be attained through industrial clusters

Collaborations for Net Zero Industrial Clusters

Organizational and governmental actions must drive collaborations to help create net-zero industrial clusters. Since the world is already falling behind on total net-zero goals, U.S. government efforts, U.N. collaboration, and buy-in from large sectors, such as China’s industrial clusters, are critical to future success.

Industrial Cooperation

Profound transformation must occur by 2030 to support the final goals of net-zero emissions by 2050. It is a relatively short time frame, requiring intense cooperation and collaboration among industry clusters. The IEA notes that investments are already being made in technologies to support low-carbon and net-zero approaches. By 2040, the average expected investment in technologies for this purpose is $350 billion; by 2060, those investments are expected to rise to $3 trillion.

While alternative energy investments are significant, businesses and agencies within industrial clusters must also cooperate to:

  • Set and work toward short- and long-term goals together. Goal-setting is a requirement for companies adopting the Net-Zero Standard. Working together can help businesses within industrial clusters set realistic goals and work through the challenges of obtaining them.
  • Find ways to make rapid, deep emissions cuts in the short term. By working together to find the low-hanging fruit and enacting quick cuts to emissions where possible, businesses in industry clusters can significantly impact global emissions, even in the near future.
  • Moving beyond value chains. Most businesses prioritize cutting emissions within value chains, but industry cooperation lets organizations move beyond those goals to find further options for reducing emissions.

Government Initiatives for Industrial Clusters to Reach Net Zero

With approximately half the global population highly vulnerable to the impacts of negative climate change, governments across the globe have reasons to join in the cooperative effort to reduce emissions. Some ways government initiatives and collaborations can lessen the impacts of climate change by supporting industrial cluster moves to net-zero include:

  • Setting priority policies to support net-zero efforts. These can range from creating and enforcing regulations for driving net-zero approaches to funding and rewards for industrial clusters and businesses that meet goals.
  • Creating opportunities for investors. Public-private partnerships increase available capital for green-tech efforts and drive flexibility for rapid adoption and implementation of sustainable technologies.
  • Being aware of internal issues. Understanding government issues and how they might create blockers for success with net-zero is important, as it allows nations and agencies to address challenges and create smoother paths to success for industrial clusters and businesses.

Collaboration across business sectors, national borders, and industries is critical to reaching net-zero goals and objectives. Industrial clusters can lead the way by modeling collaboration and implementing rapid new developments.

Sustainable Banking to Address Climate Change

June 17, 2022 Sustainability

Jeff Bartel

Chairman and Managing Director

Modern finance and banking must integrate a new green — one that has nothing to do with the color of the American dollar bill. Organizations within the industry are being called upon to address climate change through policies, investment practices, and sustainable banking.

These burdens come when the nation — and the world — is looking to change. The disruption of the COVID-19 pandemic created new normals in all sectors, and leaders and citizens wonder if returning to old ways following the global health crisis would be a wise or sustainable move.

One of the drivers behind a desire for ongoing change is the climate crisis. According to the National Oceanic and Atmospheric Administration July 2021 was the hottest month on record at that time for planet Earth. Wildfires, record-breaking rainfall in many areas, and rising sea levels lead to growing concerns, and those concerns are turning into action.

Governments are initiating regulations, pushing banks and other financial organizations to enact sustainable practices. Discover more about these practices and the current transition in financial sectors below.

How Financial Institutions Enact Sustainable Banking Practices

Supporting Partnerships With Regulatory Organizations

One essential strategy for sustainable banking is collection action between regulators and others within the industry. Banks and other financial organizations get a say in those policies by partnering with regulatory agencies and demonstrating a sincere desire to enhance sustainable policies. They can bring expertise and background to the table to help regulators understand changes’ business and economic ramifications and find the right compromise between sustainability and support for financial concerns.

Helping to Direct Private Sector Financing with Sustainable Banking

Sustainable investing, such as socially responsible real estate investing, can amplify positive policies enacted by governments, bringing practical change to financial sectors. But environmental integrity is a top-down asset. So financial institutions must model it and encourage private investors to do the same.

Moving Toward Green Agendas With Financing

Banks can help push forward green agendas by choosing to finance efforts with those goals. Ultimately, corporate responsibility for sustainability is shared across industry sectors, and banks can support partners by backing the appropriate measures.

Windmills financed with sustainable banking.

Impact of Low-Carbon Transition on Asset Values

The move to reduce carbon footprints across all sectors around the globe is changing asset valuation for banks. During this period, financial organizations may be looking for sustainable banking opportunities such as alternative energy investments, but they must also be mindful of assets in transition that may become stranded.

Examples of Investment Needs During the Transition to Sustainable Banking

Investment needs during the transition range from supporting new infrastructure to backing products and projects that drive positive outcomes for the environment. Some examples include:

  • Sustainable energy, including infrastructure such as wind farms and solar panels as well as R&D on innovative solutions
  • Upgrading existing infrastructure, particularly in fields such as manufacturing, to support ongoing functionality with a reduced carbon footprint
  • Products and services that move communities and nations away from reliance on fossil fuels, such as electric vehicles

Financial Factors Impacted by the Transition

The evolution during this transition has an impact on financial factors, including:

  • Operating expenses are likely to increase — at least in the short term — for organizations that work to enact change. Research and development, implementation, and training are just some efforts that could drive up operating costs and impact asset cash flow during the transition.
  • Depreciation and amortization of equipment and assets that don’t align with sustainable practices. The value of these assets may drop faster than initially planned, creating monetary stress that ripples up through financial organizations.
  • Costs of financing can create burdens for investors and other businesses as they seek to generate sustainability while maintaining current cash flow and other financial goals. As a result, investment financing may be an option that more partners turn to during this period.

Stranded Assets

Going increasingly green means abandoning long-term infrastructure and processes, stranding once valuable assets. As a result, transportation, oil and gas, and manufacturing are all at risk, and assets in these sectors may quickly become liabilities soon.

Climate-Focused Credit Risk Assessments

Banks are working to embed climate risk into lending practices to reduce the potential for losses in the future. Some techniques in this effort include:

  • Considering climate risk assessments at the origination of investments or loans. Businesses and even individuals seeking financing may need to demonstrate a plan for sustainability on top of traditional factors such as creditworthiness.
  • Banks are using practices such as ESG scoring to include climate concerns in underwriting practices to mitigate risks further.

Sustainable Banking Stress Testing

Traditional risk forecasting does not work well in assessing climate risks because traditional models were never built with sustainability in mind. So instead, governments, central banks, and other institutions are implementing climate stress testing.

At its highest level, sustainable banking stress testing looks at whether an institution or process is taking the right actions and has a good mix of suitable investments to make it through the climate transition. However, stress testing should also occur at lower levels concerning each customer, investor, and investment.

Mitigating Risk in Climate Change Investment

May 3, 2022 Sustainability

Jeff Bartel

Chairman and Managing Director

Since 1880, the average global sea level has risen more than 8 inches, and that change has accelerated in the past decade. Extreme weather also threatens a variety of locations, impacting lifestyles, businesses, and the peace of mind of individuals across the globe.

As increasing numbers of people become concerned with climate risk, renewable energy, and responsible investment, financial markets are evolving. As a result, modern businesses face several risks ranging from damage to physical infrastructure related to climate change to higher tax or regulator costs.

Proactively approaching climate change investment and mitigation efforts can increase businesses’ stability. This article looks at climate risks for businesses, and ways organizations can reduce climate change risks now and in the future.

Climate Risks for Businesses

Climate-related risks can impact business bottom lines, workforces, and reputations. Below are five of the most prevalent climate risks.

Physical Damage to Buildings and Facilities

In 2018 alone, the United States incurred $91 billion in damages from climate- and weather-related events. The historic extremes have continued.

In 2020, 22 unique events resulted in more than a billion dollars in damage each — well above the record of 16 previously reached in 2017. Severe storms spawned tornadic events, tropical cyclones, droughts, and wildfires combined to create $95 billion in damages in 2020.

In 2021, there were 20 unique billion-dollar events, coming in behind only 2020 in number but well outpacing the previous year in damages. The 2021 total for damages was $145 billion.

Extreme weather events and shifting climate frequently lead to:

  • Damage to buildings from wind, including lost roofs or walls or even total loss of structures
  • Damage from flood and water, including loss of equipment and or structure
  • Damage from fire, including loss of structure or partial structures or loss of supplies or equipment

Supply Chain Disruption

Global supply chains are increasingly impacted by climate change, particularly severe weather events. For example, a large hurricane or typhoon hitting a major port city can be enough to disrupt supply chains for months, and experts believe weather events of such scale will become more likely in the future. According to McKinsey, by 2040, the probability of a hurricane event large enough to disrupt chip supply chains could grow by two to four times.

Health and Productivity of Workforce

Even outside of extreme weather events such as hurricanes or tornadoes, climate change can put the health and productivity of workers at risk. Those employed in occupations regularly performed outdoors may contend with severe heat or cold. Workers in indoor situations without air conditioning or heat face similar concerns.

Climate risks can also increase toxic substances or a higher risk of infectious disease, especially in hot environments. Add in the impact of emergency weather situations, requiring dangerous, excessive work from first responders, law enforcement, and medical personnel. As a result, climate change may drive increasing worries for employees.

Higher Regulatory and Tax Costs

As governments latch on to ESG requirements and other potential mitigation factors to subdue carbon footprints, businesses may increasingly find themselves holding the bill for such efforts. Those additional costs could include the expense required to meet more stringent regulatory requirements in various industries and locations as well as additional taxes charged by governments trying to pay for their eco-friendly efforts.

Repricing of Risk Premiums

The cost of peace of mind is likely to increase as climate damage becomes a more frequent and expensive risk. As property and casualty insurers cover billions of dollars in damages caused by weather and climate-related events, they will likely increase risk premiums, leading to higher insurance costs for businesses.

Reducing Climate Change Risks

Acting now to mitigate coming climate change risks can help businesses create better bottom lines and stability for themselves, employees, and partners in the future. Here’s a look at some climate change investments businesses may want to make now.

Diversification of Coastal Real Estate Holdings

While coastal areas are not the only locations impacted by climate risks, they bear the brunt of rising sea levels and tropical storms. As a result, businesses and investors may want to diversify real estate portfolios heavy in coastal properties. Including inland properties or different coastal properties can mitigate some losses during critical events.

Diversification is also an opportunity for operations. For example, businesses with warehouses, call centers or other operations properties on or near the coast may want to engage in disaster planning to create redundancies with backups in other locations.

Focusing on Building Efficiency and Disaster Resilience

Energy-efficient processes put businesses in a more competitive space as reliance on sustainable energy becomes a more prevalent concern among governments, customers and investors. Efficiencies assist with attracting those interested in ESG impact investing. It also reduces business reliance on power utilities and infrastructure, making rapid recovery after a disaster more likely.

Creating a Diversified Supply Chain

Diversified supply chains are a significant risk mitigation step, particularly for businesses that need raw goods or inventory shipped from overseas. Companies can also look to invest in green or circular supply chains to reduce their environmental impacts. Increasing eco-conscious supply chain diversification efforts can help relieve some of the impending climate risks.

Focusing on Water Quality

Turning to business processes that impact water quality is one-way organizations can stave off financial risks from government issues. It can also position businesses as climate-friendly organizations, leading to potential support from ESG investors.

Paying Attention to Emission Profiles

All businesses can look to create better emission profiles. In some sectors, such as agriculture, reducing emissions can mean overhauling accepted standard modern practices that have led to climate-negative outcomes that aren’t necessarily required to get the job done.

Preparing for Carbon Regulations

Carbon regulations are already part of governance changes in most nations, and businesses can expect them to grow. Getting ahead of the game by preparing for increased regulation can help businesses avoid hefty fines or taxes and position themselves as eco-friendly leaders. Investing now in alternative or renewable energy is just one-way businesses can prepare for the future.

Whether businesses are working to inspire ESG investors now or position themselves for better stability in the future, environmental integrity is essential in climate change investment.

Proactively Addressing ESG Reporting Concerns

March 25, 2022 Sustainability

Jeff Bartel

Chairman and Managing Director

ESG reporting is triggering a backlash from investors, activists, and regulatory agencies. The mechanisms that are supposed to make it easier for investors and activists to support like-minded entities with purchases, venture capital, or stock buying often fail due to ESG reporting concerns. Discover more about these concerns, what agencies and governments can do to improve ESG accounting standards, and how businesses can proactively avoid reporting issues.

ESG Reporting Concerns

In September 2021, financial news outlets exploded with commentary on leading financial service provider Deutsche Bank AG’s ESG reporting woes. The firm’s DWS Group was accused of potentially misrepresenting environmental and social credentials of investment products that it had labeled ESG.

It’s not the first — or the last — potential greenwashing issue. Companies, hedge funds, and money managers can be tempted to engage in inaccurate reporting to make products and opportunities look more attractive to the growing number of conscientious investors and buyers in the markets.

The concern is that those seeking to bolster the bottom line by looking attractive to ESG impact investors are muddying the ESG waters — which need to be kept pristine to ensure the ESG label has any value at all.

Greenwashing in the Regulatory Crosshairs

Regulators are stepping up enforcement to reduce greenwashing and malevolent reporting that leads ESG private equity astray. And when the regulatory crosshairs hover over a target, that company can expect a backlash in the markets. 

SEC Oversight

The SEC says it’s taking an “all-inclusive agency approach” to the need for better ESG reporting. Just a few examples of the steps the SEC has taken to address these issues include:

DWS Group Share Declines

Even the potential for ESG reporting issues can be a problem for companies’ brand reputation and bottom line. As a result, the SEC joined the investigation into DWS Group’s ESG reporting issues, and the response in the market included a stock value drop of 13.6% in one day.

Financial Conduct Authority in the UK

The Financial Conduct Authority in the UK publicly published a letter to the Chairs of AFMs. The letter defined expectations for fund managers concerning ESG and called out greenwashing efforts affecting the UK’s climate change mitigations.

The messaging is clear: Regulatory entities across the globe are gearing up to look at ESG reporting more carefully.

Proposed ESG Reporting Regulations

The UK government is working on a new strategy to combat greenwashing and other regulatory concerns, including creating new Sustainability Disclosure Requirements for asset managers and businesses.

Climate-Related Financial Disclosures

Climate-related financial disclosures, often mandated under certain governments, are part of ESG reporting. Even when these disclosures aren’t flagged as ESG or related to ESG-labeled assets, they may still fall under current and upcoming regulations on how companies must report such information.

Pressure From Environmental Groups

On top of regulatory requirements, agencies, investors, and businesses face increasing pressure from environmental groups. Groups are pushing for changes that will better hold companies accountable for reporting that misleads investors and others about their ecological impact as well as the negative impacts themselves.

How To Improve ESG Accounting Standards

It’s clear from the present situation that ESG accounting standards can be improved. In fact, the current confusing environment makes it more likely that companies may fail to produce satisfactory reporting as they scramble to hit what seems like an ever-moving regulatory target. Here are recommendations for improving ESG reporting standards:

Adopting a Global Baseline Climate Standard for ESG

Numerous nations, including the US, UK, and India, have current reporting standards and are adopting new, more robust regulations. But businesses don’t always report in a domestic-only environment, and investors have an increasingly global approach. Not to mention, environmental and social impacts matter across borders.

Adopting a global baseline, primarily for climate standards related to ESG reporting, lets everyone start from the same place. It also makes it easier for businesses to comply with multiple regulations.

Promote Alignment of ESG Measurement and Disclosure

ESG criteria have, to date, been somewhat subjective. Developing a standard measuring stick of sorts and methods for accurately disclosing those measurements is vital for all entities involved. It’s not enough to assume ethics and social responsibility will lead companies in the right direction; clear mark points help all organizations.

Set Actionable Targets To Achieve and Demonstrate Real Progress

Some sources of pressure in the ESG space may be working with unactionable or unrealistic goals. Creating actionable targets that look to change realistic timeframes supports more impactful ESG reporting. ESG reporting becomes less of a checklist item and more of a partnership activity in this environment.

Use Real Political Capital To Achieve Policy Change

Governments that step away from only talking about solutions and start walking the way toward ESG policy change can be leaders in effecting those changes. That creates natural political capital and reduces government issues with ESG movements. It also creates a foundation to foster partnerships domestically and internationally to support ESG reporting and actual ESG criteria adoption and adherence.

How Businesses Should Get Ready for Coming ESG Requirements

ESG reporting can be good for companies when done correctly. With more investors interested in sustainable impact investment opportunities or ESG criteria, companies that report accurately and demonstrate eco-friendly, socially conscious processes and strong governance can increase values. However, it’s not enough to have environmental integrity or buy into corporate responsibility. Here are a few things businesses should do to get ready for coming ESG requirements:

  • Honestly review ESG status.
  • Gather and document measurements that demonstrate ESG status.
  • Invest in time and experts to keep up with evolving ESG requirements to ensure the business is ready to report as needed when regulations are launched
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