Some level of progress is being made in areas around ESG concerns, despite the headwinds of political polarization still swirling around
Recent developments in environmental, social & governance (ESG) issues point to positive momentum in the United States, despite the divisive wave of anti-ESG sentiment in some political circles.
International financiers were unabashed in describing the numerous sustainable projects and investments in which they were involved or were spearheading because of the Inflation Reduction Act (IRA) at recent events involving the United Nations (U.N.) General Assembly, which brought together institutional investors, asset managers, big bank sustainability officers, as well as niche investment firms that are focused on opportunities to tackle carbon emissions. In addition, California’s Governor Gavin Newsom appears poised to sign a bill requiring large companies in the state to report their carbon footprints ahead of the federal government’s plan to set corporate climate disclosure rules.
IRA cited as major catalyst for sustainable finance
Many financial services executives involved in the U.N. events cited the new IRA as a key driver of sustainable finance, even though the U.N.’s goal of limiting the earth’s rise in temperature to 1.5 °C is proving elusive. According to one executive, the IRA has been a springboard for private sector investments and has outperformed most people’s expectations.
Passed in 2022, the IRA provides $369 billion in energy security and climate change incentive programs over the next 10 years. Experts said there already was clear evidence that the U.S. government program was unleashing substantial private sector investment. For example, in the state of Maryland, the IRA has jump-started investments, including more than $10.3 million in funds from the IRA being used as part of $130 million in private capital investment that’s focused primarily on energy efficient transportation.
Since the IRA was signed into law, it is easy to see how public funds can push private investment. In fact, there has been more than $110 billion in new clean energy manufacturing investments, including more than $70 billion in investments in the electric vehicle (EV) supply chain and more than $10 billion in solar manufacturing, according to the U.S. government and industry experts. In addition, IRA investment tax credits are transferrable, prompting even industry incumbents such as oil and gas companies to take notice and examine how they could use such credits to transition towards renewable energy.
Adding to progress, Gov. Newsom gave signs that he will sign new legislation that requires U.S. companies operating in California with more than $1 billion in revenue per year to report on their own climate emissions. The regulation includes reporting on Scope 3 emissions (those to do with third-party suppliers and vendors) and is due to take effect in 2026.
This bill is a key development as corporations face increasing demands from both governmental authorities and shareholders to transparently report their role in greenhouse gas emissions, which contribute to global warming and pose a threat to conventional business paradigms. ESG advocates may view the move by California is necessary in the absence of Securities and Exchange Commission (SEC) rules on greenhouse gases, which have been delayed several times.
SEC climate disclosure rules critical
Indeed, corporate climate disclosure rules from the SEC are critical to continue the trend of investment in sustainability. Under its initial proposal, impacted businesses would need to report their full carbon inventories (known as Scope 1 and 2), and include Scope 3 emissions, which has been more controversial. U.S. companies argue that the ability to collect such data is burdensome and often unavailable, and it remains to be seen whether the SEC will include Scope 3 in its final rule.
In the backdrop of the SEC’s delays of is climate rules, investors and companies are gearing up for the European Union’s regulations on climate disclosure, in particular, the Corporate Sustainability Reporting Directive (CSRD), which requires large and listed companies to publish regular reports on the social and environmental risks they face, and on how their activities impact people and the environment. While the CSRD is primarily targeted at E.U.-based companies, non-E.U. companies with significant operations in the region will also be subject to the regulation by 2025. The CSRD requires Scope 3 reporting, which some said would put U.S. companies operating in the E.U. at a disadvantage should the SEC decide to exclude the requirement from its final rules.
The tailwinds of the anti-ESG may be making its mark at the moment, but the staying power of regulatory advancements that bring increasing reporting requirements appear to be accelerating the forward momentum of the pro-ESG movement.