Fossil fuel power plants will need to be retired decades sooner than has been done historically, and almost 2.8 terawatts of capacity must be decommissioned early worldwide, says Angelika von Dulong, a researcher at Berlin’s Humboldt University and author of the study.

This process – known as asset stranding – is needed to achieve the Paris Agreement goal of limiting warming to 2°C by 2100, but leaves owners of those assets unable to recover capital costs.

The study compares the climate-compatible capacity of fossil fuel power plants globally with the operating capacity in a given year and region to identify plants that have to be stranded between 2021 – the year the study starts from – and 2050.

According to the study, the value of assets that will be stranded as a result of current climate pledges – including 2030 pledges and net-zero targets – totals US$212bn.

But this leaves an “ambition gap” of almost US$300bn between what governments have currently pledged and the stranding needed to keep within the International Energy Agency’s sustainable development scenario, which outlines how much regional fossil fuel power capacity is permissible to keep Earth in line with the 2°C goal.

The study calculates this total in terms of sunk costs, but not lost profits. This is based on overnight capital costs, which include a power plant’s pre-construction, construction and contingency costs and excludes interest during its construction, as if it had been built overnight.

“Stranded assets in terms of lost profits may be a lot higher with important implications for the feasibility of climate policies,” von Dulong says.

For listed parent owners, stranded assets could total up to US$24 per share outstanding or 78% of their share price, the study claims.

Asia Pacific, Europe and the US are particularly exposed to stranded assets, the study finds. Asia Pacific countries excluding China, India and Japan make up around US$100bn of the gap, while India, China and non-EU countries in Europe have shortfalls of US$80bn, US$60bn and US$33bn, respectively.

The study says that this might lead asset owners to resist more stringent climate policies.

“Opposition to climate policies fostering a sustainable development may be particularly strong if such policies result in more stranded assets than those under currently announced policies,” von Dulong suggests.

How stranded assets in the power sector are distributed between direct and parent owners varies by country. The majority of stranded assets in India are held by one owner, but are more equally distributed in the US.

The study finds that “resistance to climate policies may be moderated if affected asset owners are also invested in alternative energy assets”, defined as renewable and nuclear energy power plants. This again varies by country, with China owning significant alternative energy capacities in comparison to India.

Details of how governments plan to phase out fossil fuels continue to be debated ahead of Cop28, which begins in Dubai at the end of November.

This week the EU laid out its plans for negotiating a fossil fuel phase-out agreement, due to be hammered out during the climate change conference.

While it reiterates “the importance for the energy sector to be predominantly free of fossil fuels well ahead of 2050”, critics have picked up on the dropping of a 2025 deadline for phasing out “inefficient fossil fuel subsidies”, which currently provide the sector with billions of dollars worldwide.

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The Taskforce on Nature-Related Financial Disclosures (TNFD) launched its final recommendations in Europe this week, after an initial release in New York last month, with suggestions aimed at capturing the effect of nature-related impacts, risks and opportunities on a firm’s business model, value chain, strategy and financial planning.

Businesses are urged to pay attention to the location of their direct operations, as well as upstream and downstream value chains, determining whether they are affecting water or land use, and disclosing the locations of assets and activities.

Companies are also encouraged to disclose the goals and metrics they use to assess and manage nature-related risk.

Though the framework is voluntary, the idea is that the rules will follow the path of the Taskforce on Climate-related Financial Disclosures (TCFD) and form the basis of mandatory requirements in future.

The TCFD is already being used by large corporations such as Tesco and Unilever, and is the foundation of UK legislation due to come into force next year that will introduce legally binding climate-related disclosure rules.

“For many years, globally the focus has been on climate change. Businesses are very familiar with reporting and disclosing on climate change,” Elizabeth Maruma Mrema, the assistant secretary-general of the UN and co-chair of the TNFD, said at a conference in Geneva this week.

Business and financial institutions have only recently begun to “realise that climate change and nature loss are intrinsically connected, and that solutions to climate change will not happen if they are taken in isolation”, Mrema told the audience at the Building Bridges event, organised by a coalition of Swiss authorities, financial bodies, the UN and other international partners.

“The connection between climate change and nature loss is what TNFD had in mind from the beginning,” Mrema said.

She added that the rationale behind the TNFD was not to add extra obligations for businesses or financial institutions, but to use the mechanism of the TCFD, which was first set up in 2015.

Likewise, the TNFD and the TCFD should not be viewed as two separate frameworks, Mrema said, but instead as a means of addressing the interconnected issues of climate change and biodiversity loss.

“Nature is more complex than climate. For nature, we don’t have the 1.5 degrees,” Mrema said, referring to the acceptable global temperature increase stipulated in the 2015 Paris Agreement.

The framework is designed to underline the fact that human society, economies and financial systems “are embedded in nature, not external to it”, the TNFD says.

But critics of the TNFD have accused it of “facilitating corporate greenwashing”, according to non-profit BankTrack, and failing to engage with indigenous peoples and local communities.

“Nothing in the TNFD framework challenges a corporation’s right to keep 100% of the profits it may make off environmental or human rights abuses,” says Shona Hawkes, an advisor at Rainforest Action Network.

“It is full of loopholes that can allow for rampant greenwashing, and its reporting takes a generalised form that means that company claims cannot be checked against realities on the ground,” Hawkes adds.

Another criticism is that there is no evidence to suggest these kinds of guidelines will achieve their goals.

“We don’t disagree with TNFD that the financial system and corporate behaviour is a key part of the biodiversity and extinction crisis. However, fixing that problem requires an evidence-led approach and regulation,” says Lim Li Ching, coordinator of the biodiversity programme at Third World Network, a Malaysia-based environmental non-profit.

A TNFD spokesperson tells GTR in a written statement that the taskforce is market-led and has “run an open innovation process to design and develop its recommendations and suite of additional guidance”, including “working with a diverse range of 19 knowledge partners and the transparent publication of four draft prototypes of the framework”.

“Throughout this process, the taskforce also ran dedicated dialogue sessions with a group of indigenous leaders from around the world and with a network of civil society organisations. Their views and feedback were the source of valuable input into the work of the taskforce and has helped to shape the final recommendations and implementation guidance,” they say.

New goals

There have also been a number of other initiatives and organisations set up to enable financial institutions to manage nature and biodiversity-related risks, including the Nature Positive Initiative, a group of nature conservation organisations and finance coalitions that was launched last month.

And the Network for Greening the Financial System released its own framework for nature-related financial risks in early September, aimed at central banks and financial supervisors.

These initiatives build on the Kunming-Montreal Global Biodiversity Framework (GBF), which was adopted at last year’s Cop 15 – the UN’s biodiversity conference – by 188 governments, and has been dubbed the biodiversity equivalent of the Paris Agreement.

The GBF makes significant demands on financiers, including the mobilisation of US$200bn annually through public and private funds for biodiversity-related projects, and an increase in financial flows from developed to developing countries to at least US$30bn per year by 2030.

Other targets include phasing out or reforming at least US$500bn per year in subsidies that are harmful to biodiversity, in addition to scaling up positive incentives for biodiversity conservation, and reducing to “near zero the loss of areas of high biodiversity importance”.

Transnational companies and financial institutions should also monitor and disclose risks and impacts on biodiversity through their operations, portfolios and value chains.

Though the GBF is not legally binding, financial institutions will likely have to deal with mandatory nature-related disclosure as a result of its adoption.

The TNFD’s announcement comes after a study found the Earth is beyond six of nine planetary boundaries – such as climate change, land system changes like deforestation and the availability of freshwater – that are deemed the safe limits for the world’s stability and resilience.

The research, published in the Science Advances journal by a team of 29 academics, suggests that the Earth “is now well outside of the safe operating space for humanity”.

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The Sustainable Finance Disclosures Regulation (SFDR) requires financial market participants and advisers to tell investors their approach to sustainability risks that might affect investment values, and the potential impact of investments on the environment and society. It applies to both firms and specific products.

Designed to funnel capital to sustainable projects, the regulation has drawn criticism since it came into force in 2021 for not clearly defining sustainability.

The Commission last week launched a consultation seeking feedback on the law’s “potential shortcomings”, including “legal certainty, the useability of the regulation and its ability to play its part in tackling greenwashing”.

“The consultation raises a multitude of questions, some of which carry the potential to trigger a seismic shift from the SFDR as we otherwise know it today,” Terry Yiangou, managing associate in Linklaters’ financial regulation practice, tells GTR.

According to the Commission, the SFDR “does not force market participants to consider green criteria when investing” but instead requires them “to justify the sustainability claims that they make in relation to their financial products”.

One of the issues under consultation is disclosure requirements for products promoted as sustainable. “The SFDR was designed as a disclosure regime, but is being used as a labelling scheme, suggesting that there might be a demand for establishing sustainability product categories,” the Commission says.

Firms claiming their products are sustainable “need to disclose information to back up those claims and combat greenwashing”, the Commission says.

It adds that since this could be seen as “placing additional burden on products that factor in sustainability considerations”, it is looking into whether to make it easier for investors to also have “proportionate information on the sustainability profile of a product which does not make sustainability claims”.

Currently, article 9 of the regulation covers products with specific sustainable goals as their objective, while article 8 concerns products promoting environmental or social characteristics.

Yiangou says “the acknowledgement by the Commission that the terms ‘article 8’ and ‘article 9’ have inadvertently become de facto labels or marketing tools” raises the question of whether “concepts such as ‘[environmental/social] characteristics’ and ‘sustainable investments’ should be scrapped in favour of a dedicated categorisation system that instead focuses on a product’s type of investment strategy”.

This would be more like the UK sustainability disclosure requirements’ product labelling proposals, he adds.

Other questions focus on the cost of complying with the SFDR, difficulties obtaining good quality data and how the rules interact with other sustainability legislation, like the corporate sustainability reporting directive.

Yiangou says that combined with the other points raised by the Commission, such as “the potential for a product’s sustainability to be contingent on the sustainability of the entity managing it”, the consultation “collectively points towards a risk that the SFDR could be sent back to the drawing board”.

Earlier this month, the International Trade and Forfaiting Association announced it will set up a cross-industry body to create a set of common audit standards for ESG reporting in a bid to reduce the confusion over ESG regulation.

In June, the UK’s Financial Conduct Authority (FCA) also signalled its intention to crack down on greenwashing, writing to banks to say it was increasing its scrutiny of loans linked to sustainability targets.

The consultation is open until December 15.

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The London-headquartered lender says the loan offering will provide “much-needed” liquidity to financial institutions globally, in turn accelerating borrowers’ efforts to meet their sustainability targets and net zero commitments. 

Eligibility for the loan is based on Standard Chartered’s green and sustainable product framework, which was co-authored with ESG ratings provider Morningstar Sustainalytics. 

Initial focus is on sustainable end use in the renewable energy sector, such as projects involving wind turbines, solar panels and battery storage systems, the bank says. 

“The lack of funding for sustainability initiatives continues to be a challenge for companies,” Standard Chartered says. 

According to a report published by the bank in April, 70% of large corporates and mid-sized companies are being held back from making ESG commitments by difficulties accessing finance. The bank describes obtaining funding as “a major issue’. 

Samuel Mathew, the lender’s global head of flow and financial institutions trade, adds that the loan offering will help clients “play a greater role in driving sustainable outcomes by directing capital to where it matters most in their markets”. 

The loan follows Standard Chartered’s launch of a set of sustainable trade finance solutions in March 2021, based on the Loan Market Association’s green and sustainability-linked loan principles. 

In December, the bank announced it was piloting a sustainable supply chain finance programme in the United Arab Emirates, which it said was the first of its kind in the Middle East. 

The post Standard Chartered unveils sustainable trade loan for financial institutions appeared first on Global Trade Review (GTR).

The Sustainable Transition Foundation (STF) will define standards targeted at the trade finance sector, where ESG-related financial risks are currently measured in a range of different ways among corporates and banks.

Because regulators do not apply capital ratios to sustainable trade finance, pricing is a challenge and means that sustainable lending can lack proper incentives, ITFA says.

The foundation will also establish “the world’s first data repository for climate-related risk modelling”, including the development of capital requirements frameworks for risk mitigation and transition pricing, and combine expertise to create a common approach to audit standards.

“Sustainability is a very, very big topic. But in most organisations, it’s done at a high level, and it doesn’t have the granular dive into trade finance, which is exactly why we’re doing all this work here,” Johanna Wissing, ITFA’s ESG committee chair, tells GTR.

ITFA chairman Sean Edwards said in a webinar announcing the news yesterday that it is seeking up to £500,000 to fund the venture, with £150,000 sought for the first year from trade finance banks and ITFA members.

Funding will be tiered, with the top level giving banks a seat on the founding board, a role in defining the audit standards and the ability to give recommendations to the advisory board. Shares proportionate to investment will be issued after a year.

The STF will be set up as a community interest company, which takes into account the public interest component of climate change but also allows it to make a profit.

After the first year, it will be funded by its advisory, data, training and research services.

The audit standards will need to be common across the world, as well as being comparable, benchmarkable and repeatable, Rebecca Harding, independent trade economist with boutique consulting firm Rebeccanomics, tells GTR.

The STF will set the audit standards based on what banks say they need, Harding says, and then pool the data and run models “that will tell us the financial risk associated with the climate risk”.

“The combination of those two things is completely unique in the marketplace, and it gives us a real framework to move ahead on a collaborative basis with everyone else in the industry,” Harding says. “It’s potentially game changing as a prospect.”

Sharing data is essential, Harding adds. “This won’t work unless we do share – and all of this is pre-competitive and anonymised from the start, so we can’t stress enough that it is in the interests of the whole industry to do.”

ITFA says it will also use AI to identify the common features of existing standards and provide automated updates in an online portal.

The creation of the foundation comes in response to research carried out by Harding for ITFA that revealed how the plethora of sustainability reporting standards and lack of data was failing to properly incentivise the green transition.

These regulations “take a backward-looking ‘one size fits all’ perspective” that “restricts finance for projects which may in the longer term be more sustainable by providing weak incentives to corporates and their financial providers”, ITFA says.

Edwards pointed out in the webinar that supply chains “are both a promise of how we can do better, and potentially our Achilles’ heel”.

He said the foundation has to avoid the “nightmare” associated with anti-money laundering compliance, which involves “too much box ticking and is not driven by data”.

Current regulatory systems also risk disadvantaging or excluding smaller banks, African banks and credit insurance providers, Harding says. “The whole trade finance ecosystem is at risk because of the amount of data that’s out there and the amount of reporting that potentially will need to be done.”

Harding explains that the foundation’s tiered funding structure is intended to “make sure that the costs are not prohibitive” for smaller and niche providers.

“The problem is too big for us to fail,” she adds.

ITFA aims to reveal the first board-level investors at its annual conference in Abu Dhabi next month, with first-year seed funding slated to be achieved by December.

An investment round will be launched in Q2 2024.

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The Papua LNG project risks leaving “US$13bn in stranded assets without securing guaranteed sales”, according to Oil Change International, at a time when the Pacific island faces significant climate threats.

In an August 29 letter to US Exim president and chair Reta Jo Lewis, 27 groups, including Friends of the Earth US, Australia’s Market Forces and the Papua New Guinea-based Centre for Environmental Law and Community Rights (Celcor), highlight the “significant financial risks and opportunity costs, as well as harmful climate impacts” of the project.

The Papua LNG project is operated by TotalEnergies, with major oil and gas companies ExxonMobil and Santos both co-venturers. Papua New Guinea’s national oil and gas company, Kumul Petroleum, is also a partner.

In 2021, Reuters reported Jean-Marc Noiray, TotalEnergies’ managing director for Papua New Guinea, as saying the company aimed to secure a final investment decision by Q4 2023, with production slated to begin at the end of 2027.

Classified by US Exim as a category A transaction, the project requires an environmental and social impact assessment that must be made public for at least 30 days before the export credit agency (ECA) can consider making a final decision.

“Climate science has advanced greatly in the last 10 to 15 years, yet Exim is failing to keep up. It should reject another handout to ExxonMobil and instead invest in renewables that will help the people of Papua New Guinea transition to a clean energy future,” says Kate DeAngelis, senior international finance programme manager for Friends of the Earth US.

Analysis by the Institute for Energy Economics and Financial Analysis (IEEFA), an international think tank, estimates the project’s total scope three emissions to be 220 million tonnes of CO2 equivalent, equivalent to the total annual emissions of the whole of Bangladesh.

“None of the project partners have any ambition to reduce their scope three emissions, raising concerns with investors who are starting to ask for more action to align with the Paris Climate Agreement objectives,” IEEFA says.

“The people of Papua New Guinea are already facing the full force of climate change,” says Peter Bosip, executive director for Celcor.

“Rising sea levels, extreme weather events, and environmental degradation are already threatening many people’s existence and threatening our way of life. Papua LNG will add to and exacerbate this climate crisis – and financiers cannot, and should not, finance it,” Bosip says.

The letter claims that Papua New Guinea “does not need fossil gas for its own energy needs” and has the potential to cover “78% of its on-grid energy needs from renewable energy by 2030 were appropriate financing made available”.

Gas was first discovered in this part of the country’s Gulf Province in 2006, in a jungle-covered area south of the Bismarck mountain range.

According to TotalEnergies’ website, the Papua LNG project “is committed to collaborating with the Papua New Guinea communities and government officials to safely develop these resources in a manner that protects the environment, encourage additional foreign investment, and contributes to the long-term social and economic stability of the country”.

US continues to lag behind

Despite committing to ending new, direct public support for international fossil fuel projects in the Glasgow Statement, agreed at Cop26 in 2021, the US has yet to do so.

“Supporting new fossil fuel infrastructure investments through public finance institutions such as ECAs is not compatible with the letter and the spirit of the Paris Agreement,” says Igor Shishlov, head of climate finance at Perspectives, a German climate policy think tank that previously alleged US Exim was “unaligned” with the Paris Agreement.

According to the International Energy Agency and the Intergovernmental Panel on Climate Change, new oil or gas projects of any kind are not compatible with keeping below 1.5°C of warming.

In a statement provided to GTR, Shishlov says: “By approving support to the LNG project in Papua New Guinea, Exim is breaking the US’ commitment to end public support to international fossil fuels under the Glasgow Statement”.

US Exim has also failed to publish plans for ending its support of the sector, despite agreeing to do so before the end of last year.

And while the final investment decision for the Papua LNG transaction is pending, US Exim has already provided substantial financing for fossil fuel projects this year.

Oil Change International calculates that US Exim and US Development Finance Corporation have together approved US$1.5bn for four projects so far in 2023, making the US the biggest provider of fossil fuel finance out of the countries that signed up to the Glasgow Statement.

The two projects approved by US Exim are a US$99.7mn expansion of an Indonesian oil refinery and coverage for US$400mn in revolving credit facilities that enable Trafigura to buy LNG.

Discussing the Indonesian refinery, a senior US Exim official told GTR at the time that the ECA was “prevented from discriminating against deals solely on the basis of industry, sector or business”, a policy that includes the fossil fuel industry.

As of press time, US Exim had not provided a comment in response to GTR’s request.

TotalEnergies, ExxonMobil, Santos and Kumul Petroleum did not immediately respond to requests for comment.

The post Campaigners urge US Exim to oppose gas project in Papua New Guinea appeared first on Global Trade Review (GTR).

According to a draft policy, the ECA intends to continue providing export credit guarantees for certain projects involving oil and gas fields, gas pipelines and infrastructure, which would contravene Germany’s commitment made during 2021’s Cop26 to end public finance for unabated fossil fuel projects.

Oil Change International says the proposed policy will “continue multi-billion overseas fossil fuel finance and break a major international climate promise”.

The current draft permits public financing for the development of new gas projects, including transportation and storage facilities, until the end of 2025, provided they are deemed necessary for national or geostrategic security – a concern rooted in the food and energy crisis triggered by Russia’s invasion of Ukraine.

The maintenance of existing gas production projects will also be allowed to continue until the end of 2025 for industrialised countries or the end of 2029 for developing countries.

Oil production that uses routine venting and flaring – a practice in which the gas released during the oil drilling process is burned off – is excluded, however, as is the extraction, processing, transportation, storage or conversion of petroleum and its derivatives into electricity.

The draft policy states that all projects must be compatible with a 1.5°C warming limit, aligning with the Cop26 pledge that financing of fossil fuels is only reserved for “limited and clearly defined circumstances that are consistent with a 1.5°C warming limit and the goals of the Paris Agreement”.

However, critics argue that the policy contradicts the International Energy Agency’s pathway for net-zero emissions by 2050, which stipulates that no new oil and gas fields should be developed due to the risks of creating stranded assets or exceeding the 1.5°C target.

“This policy is anti-science – it runs against everything that the world’s scientists are telling us,” says Adam McGibbon, Oil Change International’s public finance strategist.

“No new fossil fuel infrastructure can be built if the world is to meet climate targets, and yet this policy keeps German public finance flowing to new fossil fuel infrastructure.”

“It is terrible timing to release this weak policy in the midst of climate disasters across the globe,” adds Regine Richter, energy and finance campaigner at non-profit environmental organisation Urgewald.

“It sends the message to international negotiators and civil society that energy security and German companies’ business interests override climate protection and undermines whatever climate credibility is left for German negotiators,” Richter says.

The policy is out for consultation with business associations, trade unions and NGOs for the next four weeks, starting from today, with the guidelines due to become binding in this year’s fourth quarter.

The German ministry for economic affairs and climate action, which oversees Germany’s export credit guarantee programme, did not respond to GTR’s request for comment.

Germany is one of 39 governments and public finance institutions that committed to publishing plans to end the financing of polluting energy sources by the end of 2022.

While the UK, Canada, France, Denmark, Sweden, Finland and New Zealand have all met the target, some countries have lagged behind.

Italy, the US and Portugal failed to publish their transition plans on time, and Italy has since revealed it has watered down its commitment.

The Export-Import Bank of the United States has also come under fire from environmental NGOs for backing the expansion of an Indonesian oil refinery, which was cited as an example of it reneging on its Cop26 pledge.

According to Oil Change International’s public finance for energy database, the G20 countries and major multilateral development banks “provided at least US$55bn per year in international public finance for oil, gas and coal projects between 2019 and 2021”, almost twice as much as their support for renewable energy.

The NGO, which campaigns for an end to public financing for oil, gas and coal, says that Euler Hermes pumped US$6.6bn into fossil fuels between 2018 and 2021, versus US$2.9bn in clean energy.

In December 2022, a question raised in the German Parliament revealed that Euler Hermes was considering 10 large international fossil fuel projects worth €1bn, including projects in Brazil, Iraq and the Dominican Republic.

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The Financial Conduct Authority (FCA) is increasing scrutiny of loans that are tied to sustainability targets, writing to heads of ESG across the banking sector last month to warn of “potential market integrity concerns”. 

There is a risk lenders are not sufficiently incentivised to set tough sustainability targets for their borrowers, or to impose meaningful step-ups in margins where targets are missed, it says. Borrowers may also be discouraged from seeking sustainability-linked loans if costs, complexity and potential penalties are deemed too high. 

“There are some issues holding back more widespread adoption and market growth,” says Sacha Sadan, ESG director at the authority. “We want to build trust and integrity in these products.” 

For loans where borrowers can make savings on margins if they hit sustainability targets, the authority says those benefits “may be outweighed by costs and negotiation time with lenders or legal advisers”. 

Borrowers may also fear reputational damage if they miss targets, reducing the incentive to seek a sustainability-linked loan. 

And in situations where targets are missed, the FCA notes that step-ups in margins have not increased despite rises in global interest rates. 

For investment grade borrowers, those steps-up appear to be capped at around 0.02%, it says. For lower-rated and leveraged loans, typical figures are around 0.25-0.3%. 

The regulator adds there could be a conflict of interest internally in situations where banks have set ESG financing targets, particularly if incentivised by remuneration for staff, as that could encourage lenders to accept weaker KPIs from borrowers. 

Lack of clarity 

Rebecca Harding, an independent trade expert with consulting firm Rebeccanomics, suggests lenders are struggling with a lack of established definitions and reporting practices around sustainability-linked lending. 

“The definitions of a sustainability-linked loan are vague and vary between banks,” she tells GTR.  

“They are priced differently as well, and differential interest rates are being used by banks, but not necessarily profitably. Because definitions are unclear, and penalties likely to be high and punitive, it is likely banks will be less ambitious in the way they define a green or sustainable loan.” 

Harding adds that interest rates and capital liquidity ratios also have to be considered, as giving preferential treatment to sustainability-linked loans through lower interest rates alone “will not be a game-changer in terms of how the market works”. 

“Without a complete rethink of how the finance industry can work with regulators to improve definitions and reporting standards… the scope of the market to default to business-as-usual, with some products repackaged in unambitious sustainability wrapping, will always be there.” 

Jason Marett, a senior associate at HFW, adds that there is “little market guidance” on the use of trade finance instruments linked to sustainability goals. 

“For example, in the agri sector, banks are issuing letters of credit with sustainability linkages,” he tells GTR. “As with sustainability-linked loans, these products may count towards banks’ green finance targets, so there are greenwashing risks if these products lack scrutiny.” 

However, Marett suggests that the FCA’s growing focus on the topic “might encourage banks to start including more ‘teeth’ in sustainability-linked loan documentation, for example so that borrowers that fail to deliver sustainability reports are at risk of triggering an event of default and an acceleration of the loan”. 

“This would be a significant market development,” he says. 

The lawyer adds that commodity finance lenders are likely to increase use of external ESG consultants to assess the robustness of sustainability targets, and that developments in supply chain due diligence regulations and technology – such as satellite mapping showing deforestation – could also bring improvements. 

In Europe, the value of sustainability-linked loans totalled US$243bn last year, down from US$319bn the previous year, according to data provider Dealogic. 

However, it notes that ESG lending increased as a proportion of overall activity, amid a wider decline in loan volumes. Dealogic finds that in the first quarter of this year, loan volumes in Europe, the Middle East and Africa fell to their lowest level since 2009. 

Next steps 

The FCA says it does not currently plan to introduce regulatory standards or a code of conduct, but “will reconsider this if the market needs it”. 

“We will continue to monitor this market as part of our wider work on transition finance, with a view to considering the need for further measures to support the development of a robust transition finance ecosystem,” it says. 

The authority’s letter is the latest of several efforts to tackle greenwashing in the lending sector. In November 2021, the regulator warned it was receiving a “growing number of low-quality authorisation applications from ESG-themed funds”, whose sustainability claims “did not stand up to scrutiny”. 

HM Treasury noted at the time that the authority was taking a hard line against such companies. 

Worldwide, nearly a fifth of greenwashing allegations last year arose in the financial sector, according to a report published last month by the European Banking Authority. The EU regulator said it would consider changes to regulatory frameworks following concerns over financial institutions’ backing of fossil fuel companies, mining operators and companies linked to deforestation. 

In trade finance, however, industry insiders warn that increasing complexity and cost around sustainable lending requirements could worsen access to finance for smaller suppliers, particularly for short-term or high-frequency transactions. 

The post Experts call for rethink on greenwashing as FCA ups pressure appeared first on Global Trade Review (GTR).

The updated targets include a 20% reduction in total annual emissions by 2030 compared to 2008 levels and a 70% reduction in total emissions by 2040.

Net zero is set to be achieved “by or around” 2050, to allow for “different national circumstances”.

Previously, the goal was a reduction in total annual emissions of at least 50% by 2050, compared to 2008 levels.

Following two weeks of talks at the Marine Environment Protection Committee (MEPC 80), IMO member states also agreed that at least 5% of the energy used in international shipping should come from zero or near-zero GHG emission fuels and technologies by 2030.

Currently, zero-carbon fuels are at a relatively early stage of development, though hydrogen-based energy is likely to play a significant role.

Mid-term measures, which could enter into force as early as 2027, include a global fuel standard – which will reduce the allowable carbon intensity of marine fuels – and a levy on GHG emissions from international shipping to fund climate action and potentially support countries most at risk from climate change.

IMO secretary-general Kitack Lim says the revised strategy “opens a new chapter towards maritime decarbonisation”, but acknowledges that more needs to be done.

“At the same time, it is not the end goal, it is in many ways a starting point for the work that needs to intensify even more over the years and decades ahead of us,” Lim says.

Industry bodies have welcomed the news, with the Baltic and International Maritime Council hailing it as a “groundbreaking” strategy.

“This marks a new beginning for shipping’s energy transition, with clear goals and milestones,” says John Butler, president and chief executive of the World Shipping Council.

“The next two years will be critical – for 2050 targets to be achievable IMO member nations must develop and agree on a lifecycle-based global fuel standard and economic measure by 2025, so they can be implemented by 2027,” Butler adds.

“Any logistics or commodities company not yet reducing its vessel emissions, and not accurately reporting those reductions, will struggle to keep up,” Adam Hearne, CEO and co-founder of CarbonChain, a carbon accounting solutions provider, tells GTR.

“With tightening regulation and carbon regulations like the EU carbon border adjustment mechanism coming into force, the whole supply chain is waking up to the need to select lower-carbon suppliers and offer lower-carbon services and products,” he says.

Hearne notes that levies are still “firmly on the table”, and that “2027 seems late for the corresponding regulations to come into force — but if they’re stringent enough, the target is possible”.

Yet for some campaign groups, the revised strategy is not as ambitious as it could have been.

Delaine McCullough, campaign manager for shipping emissions at environmental advocacy group Ocean Conservancy, claims that “the IMO’s struggle to set a GHG strategy this week that adequately responds to the climate emergency raises questions of whether the organisation ultimately is up for the task”.

“While the new GHG strategy nearly doubles the long-term ambition over the initial 2018 strategy, the checkpoints for 2030 and 2040 that were finally agreed to fall short of what is needed to ensure a warming limit of 1.5°C,” McCullough says.

According to the International Council on Clean Transportation, global shipping will exceed its share of the 1.5°C carbon budget by around 2032, but will not exceed 1.7°C, provided it follows the revised plan.

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Drawing on feedback from UK-based farmers, sustainability specialists and financiers, the report calls on banks to integrate just transition principles into their relationships with food and agricultural sector customers and focus on driving product innovation.

“The finance sector has a critical role as a provider of capital to the entire food and agricultural system. It can use its relationships with food retailers, processors and suppliers to drive a systemic response to social impacts and sustainability targets,” notes the report, titled Sowing seeds: How finance can support a just transition in UK agriculture.

Carried out as part of the Financing a Just Transition Alliance, convened by the London School of Economics’ Grantham Research Institute on Climate Change and Environment, the report suggests that banks could support food and agriculture clients by offering discounted finance for sustainable initiatives, ringfencing lending capacity for the sector or linking the financing of companies, including commodity traders, to improved social performance.

“Food manufacturers, traders and retailers must also integrate just transition principles into their decisions,” it adds.

Brendan Curran, senior policy fellow in sustainable finance at the Grantham Research Institute, tells GTR that a price incentive is vital: “Other than bringing down the cost of production over time for greener activities, from a finance point of view, linking sustainability performance to a cheaper cost of capital makes sense – it’s just about whether you can make the change sufficiently material to incentivise the behaviour change.”

“It can be a bit of a blunt tool at the minute, but it has some potential to be a lot more impactful, particularly if you can start to link social key performance indicators to financial products,” he says.

While the agriculture sector represents a relatively small percentage of banks’ portfolios, it accounts for a large proportion of their greenhouse gas emissions. For example, it makes up just 1.1% of NatWest’s total portfolio, but is “one of the largest contributing sectors to the bank’s financed emissions”, the report says.

The just transition is defined as “a shift to a net-zero and climate-resilient economy that delivers decent work, social inclusion and the eradication of poverty while simultaneously delivering biodiversity goals”, according to an August 2022 report from the Grantham Research Institute.

“UK banks are quite receptive to thinking about how they can find new market opportunities and bring an inclusive transition in terms of new green jobs and opportunities, and in allowing those stakeholders most at risk of the transition to have ownership of the transition,” Curran says, adding that international banks are similarly bearing in mind how this impacts them through their supply chains.

The report also flags up the need for banks to alter their approach to SMEs, as 90% of UK farms are sole traders or family partnerships, and the requirement to gather extra data and implement environmental and social improvements may add further burdens.

While landowners are generally perceived as “attractive borrowers”, the report adds that “some internal credit rating processes within banks, however, could be more sophisticated in calculating the credit risk of smaller agricultural clients”.

It suggests that the British Business Bank could play a role in supporting SMEs “via private sector banks through lending and guarantee schemes”.

Curran notes that a more general societal risk might arise if net-zero plans are not properly thought through.

“For example, rather than taking proactive action on product innovation, and active engagement with clients, banks may just decide to not offer them new products or try and remove them from their portfolios. The climate risk is removed from a single financial entity, but it still remains in society. This is particularly concerning in food production markets,” he says.

“It is unlikely, though, because a lot of the banks that we work with have demonstrated they are mindful of supporting customers through the transition in a just manner.”

To help regulate transition plans, the UK government has set up a transition plan taskforce – first announced at Cop26 in 2021 – to develop a “gold standard” for the ways in which businesses and financial institutions, including export credit agencies, banks and insurers, can include just transition principles in their plans for net zero.

The FCA will ultimately use the taskforce’s findings to beef up disclosure requirements and oblige banks and investors, as well as listed food and drinks companies and food retailers, to publish their transition plans.

The final disclosure framework is due to be published later this year, following a consultation period.

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