Equilibrium/Sustainability — Dam failures cap a year of disasters

Today is Monday. Welcome to Equilibrium, a newsletter that tracks the growing global battle over the future of sustainability. Subscribe here: digital-stage.thehill.com/newsletter-signup. 

Two dams failed this weekend after weeks of unseasonal rain across northern Brazil, with floods killing at least 18 people and swamping bridges, washing out highways and leaving tens of thousands homeless, Reuters reported.

The resulting scenes — people paddling down streets on dinghies, air mattresses and anything else that could float — were a familiar sight after similar flooding in places around the world, including Germany, China, New York and the Pacific Northwest.

It was another example of extreme weather, driven by global heating, breaking against a world whose infrastructure and systems are not prepared to handle it. 

This week we’ll look at some of the biggest stories of 2021 and how they are likely to impact the new year, and how when it comes to sustainability governments are no longer in the driver’s seat.

For Equilibrium, we are Saul Elbein and Sharon Udasin. Please send tips or comments to Saul at selbein@digital-stage.thehill.com or Sharon at sudasin@digital-stage.thehill.com. Follow us on Twitter: @saul_elbein and @sharonudasin. 

Let’s get to it.

Climate diplomacy bends from chaos to crisis

Last month’s COP26 climate change conference was marked by a strange paradox: Stark rhetoric from world leaders about the apocalyptic stakes of failing to act on climate, and agreements that seemed gradual and displaying little urgency.

At the end of 2021, governments around the world find themselves on a tightrope between those extremes. The agreements reached this year suggest the world could move to avoid the worst near-term doomsday scenarios, but international commitments to fossil fuels remain unshaken.

First words: “We are in fact closer than we have ever been before to avoiding climate chaos and securing cleaner air, safer water and a healthier planet,” U.S. climate envoy John Kerry said after COP26, as our colleague Rachel Frazin reported in The Hill. 

What brings us closer? COP26 brought a wide array of both formal and informal agreements from both governments and businesses that suggested a growing consensus on several key areas:

• Climate adaptation funding to developing countries was bolstered by rich countries
• Carbon trading market rules were finalized to prevent double-counting
• One hundred countries pledged to end deforestation by 2030, and then begin to reverse it
• President Biden joined the E.U. and 100 other countries in pledging to cut methane emissions 30 percent by 2030

That last commitment in particular would slash the production of a greenhouse gas — a common byproduct of natural gas drilling, animal agriculture and the decomposition of trash — that is dozens of times more powerful than carbon dioxide.

Then there were the national pledges: China, which just set up its own enormous carbon trading market, committed to peaking its emissions by 2030 and reaching carbon neutrality by 2060 — a conservative goal that may belie how fast the country can adapt its energy system, particularly given its staggering solar capacity, as The Hill reported.

And India surprised observers by committing to reaching net-zero emissions by 2070 and generating half its power from renewable sources by 2030. It’s already started a massive state-supported scale-up in the size of its domestic solar industry, The Hill reported.

BUT IS IT ENOUGH?

No. It’s not even close — at least, if “enough” means keeping the world below an average temperature increase of 1.5 degrees Celsius (2.7 Fahrenheit) above pre-industrial levels, according to a review by the World Resources Institute (WRI).

To see why 1.5 Celsius is considered the climate red-line, consider that all the extreme weather conditions we saw in 2021 came in a context where the world was an average of just 1.1 degrees Celsius (1.98 Fahrenheit) above pre-industrial levels, according to Reuters — still well below that red line. 

Every additional tenth of a degree means more disruption — and a greater level of disruption than the tenth of a degree before it. 

Where are we headed now? If the models are right and everyone at a minimum keeps their COP26 pledges, we’re looking at about 2.5 degrees Celsius (4.5 Fahrenheit) of warming by the end of the century, according to a United Nations report.

That’s not as bad as the 4 degrees Celsius we were headed for before the 2015 Paris Agreement, the WRI reported, but it’s still a world of dramatically more frequent and dangerous heat waves and storms, collapsing ice sheets and coral reefs, tens of millions of migrants and major interruptions in the food supply.

2.5 Celsius could also be a best-case scenario: Reaching even that number requires national governments to be able to deliver on the pledges that their leaders made in Glasgow — something that, for example, Sen. Joe Manchin (D-W.Va.) has put in severe doubt for Biden on the methane commitments.

Takeaway: Though we seem likely to avoid the collapse-of-society worst, hard times are coming.

“I just don’t think anybody’s really dealing with the reality that even if we’re wildly successful, we’re still going to have a warming planet,” Rep. John Curtis (R-Utah) told Equilibrium last month. “So let’s start preparing for that.”

As governments dawdle, focus turns to finance 

One group has been out in front preparing for the coming world: Massive institutional investors like BlackRock and State Street, who have emerged as key quasi-governmental structures in the attempt to steer the economy toward a transition off fossil fuels. 

As national governments have often struggled to take action to lower emissions or plan for a riskier world, these “universal investors” have been increasingly active in managing the companies they control. They have moved to steer both their investments — and the broader economy — toward a less risky and therefore more profitable world. In doing so, they are pulling Western governments along behind them.

First words: “The government is trying to keep up with investors — and that’s not a bad way to do it, to let the industry come out in front a little bit” said Alma Angotti, a former U.S. Treasury regulator now at financial consulting firm Guidehouse. 

“It’s not necessarily a bad thing that [the government] is a little bit behind.”

Companies that work like governments: A key watershed moment came this May, when major investors backed a small activist investment group in its campaign to replace three Exxon Mobil board members with new ones with actual experience in energy administration, Reuters reported.

A lot of things had come together at once, Madison Condon of Boston University School of Law told Equilibrium. “There was the fact that [companies like Black Rock] operate as universal owners,” with such control of the market that “the way Exxon was operating was harming the rest of the companies in their portfolio.”

Climate change, she added, was “a net loss to their other investments.”

SO WHAT DID THAT LET THEM DO?

A company that owns a sizable stake in a representative portion of the entire market can begin to take the kind of big-picture, economy-guiding steps more in line with what we expect from governments, Condon said.

“Because they’re so broadly diversified, they can press Exxon to stop polluting and GM to make electric cars. They can pressure supply and demand at the same time.”

Disclosure comes into its own: A key element that investors are clamoring for is a heightened and consistent standard for how to incorporate the risks posed by both climate change — and the epochal shift underway in the energy system — into the kind of long-term planning they are now increasingly doing.

The first of those risks — physical risk to assets and infrastructure — is what we traditionally think of in the context of climate change. For example, the threat that a hurricane will hit a power plant. 

But the second is every bit as large: That’s transition risk — the danger that, in an economy that is both dependent on fossil fuels and already moving off them, a given investor will be the last one holding the bag when their value collapses.

In the absence of government leadership, banks, investors and civil society groups have collaborated since 2011 on voluntary reporting measures like the Task Force on Climate Financial Disclosure (TCFD) and the Sustainability Accounting Standards Board (SASB) — creating a shared framework that governments are beginning to adopt.

For example: The U.K. will be requiring mandatory climate disclosures from its 1,300 largest companies in April 2022, according to a government statement, and the European Commission passed its own heightened disclosure requirements in April 2021, according to JD Supra.

Now it’s the turn of the U.S.: In December, the Office of the Comptroller of the Currency (OCC) released a list of draft rules for how the largest banks — those with more than $100 billion in assets — will manage their climate and transition risks, according to American Banker.

The goal of measures like this — which the SEC is expected to publish its own version of in spring of 2022 — is to avoid a situation where an unexpected climate disaster or shift in the perceived value of fossil fuels crashes the economy, The Hill reported.

Last words: While businesses can make progress on that front, they ultimately need someone to lead them, which is why it’s welcome that the U.S. government is getting involved, Guidehouse’s Angotti told Equilibrium.

“A lot of businesses want the guidance, and they want to have to do something that they know is the right thing,” Angotti said. While they can do it without a government mandate, she added, “it’s just, it’s just easier for them to sell internally if they have if they’ve got the right guidance and requirements” from federal agencies.

Monday Miscellanies

Three trends to watch in 2022.

Land conflict as Indigenous rights meet renewable manufacturing

• A proposed antimony mine in Northern Idaho mountains traditionally fished by the Nez Perce people has highlighted the gap between President Biden’s promises to respect Native sovereignty and his push to build up America’s domestic renewable manufacturing, “which is a process that is often far from clean,” The New York Times reported. 
• For Native communities across the West, there is a looming possibility that renewables will be just as hard on the land as any other mining, and “just as fights over the environmental costs of oil exploration helped define the fossil fuel era, conflicts like this one are creating the battle lines of the next energy revolution,” the Times reported. 

• Two years of record-setting wildfires have burned up 6.8 million metric tons of carbon offsets stored in the form of West Coast forests, jeopardizing California’s groundbreaking cap-and-trade system — which allows businesses to offset their emissions with such forest projects, the Wall Street Journal reported. 
• The burned lands constitute only 20 percent of the 29 million ton buffer established by California regulators to avoid risk to carbon offsets that have already been purchased, the Journal reported, so the market isn’t in immediate danger — but as wildfires are expected to get worse throughout the decade, the losses signal accounting trouble at the very least.

The building industry fought against tornado protections: report

• For nearly a decade, the building industry has successfully fought attempts to mandate the installation of tornado-proof “safe rooms” in new construction in tornado-prone areas, The New York Times reported. 
• “There’s a lot of building codes in this country that are based on hope: We just hope it won’t be that bad,” former FEMA Administrator Craig Fugate told the Times. “And people die.”

That’s it for today. Please visit The Hill’s sustainability section online for the web version of this newsletter and more stories. We’ll see you Tuesday.