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April 12, 2022

Regulatory round-up

The EU Corporate Sustainability Reporting Directive should force companies to disclose transition plans, say major investor groups.

Last week, the Brussels-based European Sustainable Investment Forum (Eurosif), representing financial companies with over €20tn in assets, and the UN-backed Principles for Responsible Investment, a network of firms managing over $120tn in assets, wrote to EU institutions about the need for the inclusion of net zero disclosures in its CSRD regulation, which, they say, should include reporting on the scenarios companies used for these plans and the key assumptions underpinning them. Companies, in other words, need to back up their net zero targets.

The organisations and their members are concerned about the veracity of some corporate statements, and they call for companies that have committed to being carbon neutral by 2050 to be subject to  “robust, granular requirements”. They write: “During the lead up to COP26 and since, an increasing number of companies have made public commitments to reach ‘net zero’ by 2050. While this trend is encouraging, it is often difficult for investors to assess the extent to which these commitments are science-based and underpinned by credible climate scenarios, due to a lack of relevant and comparable data at company level.” 

Discussions on CSRD may conclude as early as May 2022, note Eurosif and the PRI. The directive’s first set of standards on corporate sustainability disclosures would be adopted by October 2022.

Beyond CSRD: There is a call for more precise disclosures and for accountability here, but there is also an obvious reference to issues around ESG data, making the case for policy intervention stronger as the EU has begun looking at ESG ratings regulation.

 

The EU Energy Purchase Platform held its first meeting as part of the bloc’s strategy for the common purchase of gas, liquefied natural gas (LNG) and hydrogen, which would include further regulatory action.

As agreed in March, and as part of the broader REPowerEU plan, the strategy will involve a voluntary coordination mechanism bringing together the European Commission and EU member states and “making optimal use of the collective political and market weight of the EU”.

It won’t just cover demand pooling and international outreach to wean European countries off Russia’s oil and gas following its invasion of Ukraine; the strategy also mentions the use of EU gas infrastructure to maximise the distribution of LNG imports, comply with gas storage requirements, and identify the additional infrastructure needed for the future use of hydrogen.  

What future regulation? Because of concerns over storage levels in Europe next winter, the EU is proposing new rules that would introduce a mandatory minimum level of gas in storage facilities (for “following winter periods” too) and include a mandatory certification for storage system operators. The regulation would look to incentivise the use of storage by exempting storage users from transmission tariffs at both entry and exit points. It would also seek to “reduce infrastructure and regulatory barriers to the shared use of LNG to fill storage facilities”.

Why LNG matters: Though LNG may feel like a complementary and temporary component of Europe’s energy strategy, its support by policymakers raises concerns. In a research note, Natixis writes that “a rush on liquefied natural gas is likely to first, affect emission pathways and second, questions the relevance of gas integration in the EU Taxonomy, which was controversial in the first place. The increased ‘cradle to grave’ carbon intensity of LNG make[s] it hardly contributive to climate change mitigation, and at risk of being stranded.”

Nataxis notes that the use of the technology also raises concerns on the ‘do no significant harm’ principle that underpins the EU green regulation since, as things stand, LNG is considered more carbon-intensive than pipeline gas. Natixis references a number of studies comparing the greenhouse gas emissions intensity of gas transport in the case of the now infamous Nord Stream 2 and compared it with that of LNG imports from a number of countries – the latter were multiples higher, ranging from 2.4 times (from Qatar) to 4.6 (from Australia). The research was conducted by the University of Stuttgart and consultancy Thinkstep.

Policy risk: This means that in the medium to long term, unless significant technological improvements happen, LNG-related assets are likely to face policy risk.

Short term reality: Europe’s LNG imports have been rising in 2022. As the EU currently seeks to replace 50bn cubic metres of gas supplied by Russia with other sources, the US is looking into providing the European bloc with an additional 15bn cm LNG by the end of 2022. Washington provided 22bn cm of LNG last year, over a quarter of the EU’s total LNG in 2021.

 

As analysts examine the UK’s own energy security strategy, announced last week, concerns emerge about British policymakers’ ability to maintain public support for renewable energy sources.

The strategy includes new nuclear and oil and gas projects, in addition to greater investments in offshore and onshore wind, solar, heat pump manufacturing and low-carbon hydrogen production. It has been largely criticised for failing to tackle spiralling costs for consumers, with fears of fuel poverty looming large. This has implications for the public’s long-term support of renewable energy, say ING economists James Smith and Gerben Hieminga.

In a research note, they write: “What stands out immediately is that, unlike the EU’s recent REPowerEU plan, the [UK’s] strategy is much less about shoring up near-term sources of supply and much more about long-term ambitions to reduce reliance on imported energy.”

ING puts the rebate necessary to neutralise the energy price increases due in October at £800 per British household, rather than the £200 planned by the government. Household energy prices rose by 54 per cent at the start of April, notes ING, which estimates another 30 per cent increase in October based on gas futures contracts.

The renewables challenge. ING notes the need for a “reliable backup fuel” for wind and solar energy, which are playing a larger role in the UK energy mix – power price spiked a year ago during a period of unusually low winds. Nuclear can help, but not in the short term: new plants need a decade to come online. In the meantime, this could spell trouble for the public support of renewable sources. 

“Set alongside the risk of future bouts of power price volatility as the UK continues its necessary journey toward net zero, there’s a growing risk that the public becomes more disenfranchised,” write ING’s economists. “Maintaining the currently high levels of public support for renewable energy will be a key challenge for the government over the coming years.”

 

A service from the Financial Times