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For those who celebrated yesterday, we hope you enjoyed the Thanksgiving holiday.
The US Securities and Exchange Commission was in a giving mood this week — gifting a $4mn penalty to Goldman Sachs for misleading investors about environmental, social and governance (ESG) claims.
The case centred on two Goldman mutual funds and a separately managed account strategy, all marketed as ESG investments. The SEC found that Goldman investment teams completed certain internal ESG questionnaires — supposedly used to evaluate companies for potential investment — only after they had already decided to include the securities in question.
A $4mn fine for Goldman might not seem that much. But the specifics of the settlement underscore the fact that the SEC is willing to go after relatively minor infractions in its hunt for potential greenwashing. Expect the agency to bring additional ESG cases in the months ahead.
Today, I wrote about research delving into the world of assurance companies’ ESG disclosures. A new study suggests they might not be as thorough as you’d think.
But first, Kenza digs into new developments in nuclear power that are whetting investors’ appetite. See you next week. (Patrick Temple-West)
Has executive pay at major corporations reached unjustifiable levels? Or is it a fair reward for hard work and added value? That debate will be the focus of our next Moral Money Forum report — which will, as always, feature the views of our readers. Have your say by answering our short survey here.
The controversial investment case for nuclear
It might look pie-in-the-sky to some, but others hope that thorium, a radioactive element found on dark sandy beaches around the world, could one day power a potent new generation of small modular nuclear reactors.
Enthusiasts say these will be much smaller, safer and cheaper than today’s giant nuclear plants, which can cost up to £1bn ($1.2bn) to decommission over decades, according to the energy think-tank Ember.
Danish modular reactor start-up Copenhagen Atomics has applied for government funding in the UK to start commercial production of nuclear energy from the (ambitious) target of 2028, its chief executive Thomas Steenberg told me.
It plans to start testing its first prototype by Christmas on the outskirts of Copenhagen. This will look like a 40ft shipping container and will not contain any radioactive materials, Steenberg said, joking that some think it is “suicidal” to set up a nuclear company in Denmark where it is still illegal to build nuclear power plants.
While the business currently relies on venture capital (it says it aims to raise €40mn by the end of the year) he hopes the European Union’s controversial decision this year to include nuclear in its green taxonomy will open the door to interest from a broader suite of green-minded investors. “Just like you see large wind farms funded by pension and investment funds . . . we will be funded very much the same way,” he said.
If the UK follows the EU’s positive approach to nuclear — as South Korea has already done with its proposed green taxonomy — this could unlock investment for the energy from green pension pots, institutional investors and passive ESG funds. Its proponents say nuclear is a stable and low carbon energy source that could be used to fill gaps left by intermittent wind and solar power.
The International Energy Agency’s base scenario for the world reaching net zero carbon emissions by 2050 envisions spending on nuclear power more than doubling by that date.
In related news, Crédit Agricole struck a €1bn “green loan” deal with EDF last week, earmarked for the crucial task of fixing worrying cracks from corrosion recently discovered by inspectors at the nuclear power plants meant to help lessen France’s and the rest of Europe’s dependence on fossil fuels, including Russian gas. The deal was noteworthy because it was the first ever green loan specifically linked to nuclear activities, Crédit Agricole says, a quirk made possible by the new taxonomy.
Handily, the financing’s green label means it can be fully counted towards the bank’s low-carbon energy exposure target, Crédit Agricole’s head of sustainable banking Tanguy Claquin told me. More importantly, it is “a way of opening the door” to nuclear energy in the green finance space and increasing confidence in the technology. “There’s an element of signalling associated with such a transaction,” Claquin said.
Some still highlight issues including toxic waste, overheating reactors and design flaws — like those discovered at EDF plants. Austria’s government and environmental NGOs have already mounted legal challenges to the EU’s inclusion of nuclear energy in its green finance regime.
While green definitions are being ironed out, there are plenty of mainstream options for pro-nuclear investors. France’s Engie and Germany’s RWE operate reactors whose lives have been temporarily extended due to the energy crisis. They are currently “undervalued” and could do well on the back of high electricity prices until 2024, Tancrede Fulop, a European utilities equity analyst at Morningstar, told me.
A glitzier but riskier option are ETFs that track the price of uranium, the fuel source for mainstream nuclear reactors, according to Tal Lomnitzer, a senior investment manager at Janus Henderson. Constraints on mining capacity relative to demand for new nuclear plants in China and continued demand in the EU have caused the price of so-called “yellow cake”, uranium concentrate powder, to shoot up, he noted. “The case for nuclear power is arguably stronger than it’s ever been,” he said. (Kenza Bryan)
Assurance for ESG: Not such a sure thing
As central banks and other regulators have started scrutinising climate disclosures, companies have increasingly turned to third parties to give these reports a stamp of approval. The business of providing assurance for environmental, social and governance (ESG) disclosures has become a healthy source of growth for the Big Four accounting firms.
Now, researchers have raised concerns with some companies’ verified environmental disclosures. In its current form, assurance “often creates doubt and confusion” about companies’ sustainability practices, the three researchers — two in the UK and one in Switzerland — wrote in the Stanford Innovation Review this month. In some cases, which the researchers detail, assurance practices are “ultimately just a form of greenwashing”.
One of the companies the trio focused on was Taylor Wimpey, a UK residential construction company, whose 2020 sustainability report got assurance from the Carbon Trust, a consultancy. Although Taylor Wimpey reported nearly 100 non-financial performance metrics, the researchers alleged only three were externally assured: Scope 1 and Scope 2 greenhouse gas emissions, and energy data.
In a statement to Moral Money, Taylor Wimpey stressed the quality of the assurance that its report received from the Carbon Trust as well as the Science-Based Targets initiative. Its suppliers also have assurance processes in place, the company said.
The researchers also alleged holes in the assurance provided for sustainability disclosures provided to Severn Trent, a UK-based water provider. “We could pinpoint no information on the frameworks, criteria, or public benchmarks used in the assurance process,” they said.
Severn Trent told us: “We do not agree with the assertions made in this report and have not received contact from its authors.”
“We also ensure third-party certification and verification of our net zero commitments, plans and performance via The Carbon Trust,” the company added.
Assurance for ESG disclosures is one of the most controversial provisions of the Securities and Exchange Commission’s proposed climate disclosure rule. The SEC plan would force oil and gas companies, as well as other big carbon emitters, to get their emission reports assured. If adopted, the assurance requirement would add a big source of litigation risk to companies already facing court fights over pollution.
The report raises questions about the burgeoning market for ESG assurance. Regulators, already hunting around for signs of greenwashing, are probably taking a look at this carefully. (Patrick Temple-West)
“Beware the false hope of recycling,” urges academic Kristian Syberg in the journal Nature. Syberg warns that excitement about the “circular economy” is distracting from efforts to reduce the unnecessary use of plastics.
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