Humanity is continuing to pump global warming gases into the atmosphere, and Planet Earth is responding with ever more frequent and scary weather events.
The world has warmed by a little over 1° Celsius (33.8° Fahrenheit) since pre-industrial times and the consequences include heavy floods, droughts, and heatwaves.
Governments see the finance and business worlds as key to putting the world on course for a greener future, because they either fund or are responsible for the bulk of activities that emit global warming gases — from oil rigs and power stations to farms and manufacturing facilities.
Some countries — the European Union is leading — are putting systems in place to reliably inform the public which investments and businesses are really green, and not just marketed as such.
On Wednesday, Israel’s Environmental Protection Ministry was set to take a giant step forward by publishing a draft green taxonomy — a detailed list of criteria with which banks, pension and saving and insurance companies and businesses will need to comply — voluntarily at first — if they want to market themselves or their products as green.
The question is whether systems like these will, within the necessary period of time, divert the necessary trillions of dollars away from harming the planet toward helping it, and whether they will ensure that the money that banks and big financial institutions invest on our behalf is protected.
Governments around the globe are setting, and in some cases improving, targets to cut their countries’ emissions.
But the planet is still far from meeting the Intergovernmental Panel on Climate Change’s (IPCC) call to cut carbon emissions by 45% in the next eight years in order to have any hope of limiting global average temperature increases to 1.5°C, in line with the 2015 UN Paris agreement.
At last year’s COP26 international confab in Scotland, it took much handwringing before several dozen countries were able to agree to “phase down” (as opposed to phase out) coal and fossil-fuel subsidies. Oil and gas, responsible for almost 60% of global warming (GHG) emissions, were not even mentioned in the deal.
COP27 kicks off in the Egyptian resort of Sharm el Sheikh on November 7.
As things stand, according to Geraldine Ang, an OECD policy analyst on green investment who addressed an Israel Society of Ecology and Environmental Sciences confab in July, the planet is on track for a temperature increase of 2.7°C (36.9°F) or even 3°C (37.4°F) by the end of the century.
Global greenhouse gas emissions continue to rise, according to the International Monetary Fund. The trend was clear even before the Russian invasion of Ukraine sparked a rush for new oil and gas exploration (including in Israel) in the face of rising energy prices.
All of which is a gift for fossil fuel companies, which appear determined to make hay while the sun shines, many of them publicly announcing climate commitments while doing the opposite in practice.
A chilling fossil fuel finance report issued with the backing of environmental groups this year found that the world’s 60 largest banks have invested $4.6 trillion in fossil fuels — meaning the financing of anything that produces or uses coal, oil or gas — since the 2015 Paris agreement, and $742 billion in 2021 alone.
Fossil fuel finance, the report said, was dominated by four banks in the US — JPMorgan Chase, Citi, Wells Fargo, and Bank of America. Together, these accounted for one-quarter of all fossil fuel financing identified over the last six years. Royal Bank of Canada was the biggest fossil fuel investor in Canada, with Barclays topping the list in Europe and MUFG in Japan.
In Israel, according to the not-for-profit Clean Money Forum, around a third of the nation’s pension money was invested in fossil fuels during the last quarter of 2021, totaling NIS 57 billion ($16.2 billion according to current exchange rates).
Public money is helping to fund global warming
The inconvenient truth — to borrow the title of a 2006 film documenting former US vice president Al Gore’s efforts to educate about global warming — is that much of the money that allows this situation to continue is ordinary folks’ money.
Around three-quarters of human-generated global warming gases come from burning fossil fuels, for energy in buildings, transportation and industry. All the companies involved need investment to operate their businesses.
Those in a position to provide the cash — loans (via bonds) or investments (via stocks) are mainly the banks (state and private), asset managers, and the big institutional investors, such as mutual funds, pensions, and insurance companies.
These all depend largely on the money that they manage on behalf of their clients.
At some point, in the not-too-distant future, oil and gas producers and companies that depend on fossil fuels are expected to lose value in a move that could hit taxpayers’ pockets hard.
This might happen, for example, when renewable energy storage becomes more available to enable a reliable supply of energy when there’s no sun and the demand for fossil fuel plummets.
Orly Aharoni, an expert on climate regulation and sustainable finance, who chairs the Clean Money Forum, cited the 2008 financial crash.
This was preceded by a housing bubble in the US fueled by cheap loans and easy lending terms. When the bubble burst, the banks were left holding trillions of dollars of investments with no value. The banks were bailed out by the US government, but the crash cost many ordinary people their jobs, savings, and homes, and sometimes all three.
“Climate change is not just about the world heating up,” warned Aharoni. “People need to know that it’s also about our pensions, all of our assets.”
Can we rely on private capital to do the right thing?
Taxpayers won’t be able to fund the massive changes the world will have to make to reduce emissions (“mitigation,” in climate speak) and ensure that countries can cope with the effects of climate change (“adaptation”), according to Gal Tamir, who coordinates regulatory policy at the Environmental Protection Ministry and advises the Finance Ministry, under which the country’s financial regulators work.
That will require private capital, he told The Times of Israel, a large chunk of which is in the hands of the big institutions.
The UN’s Intergovernmental Panel on Climate Change has estimated that an average of $3.5 trillion will be needed annually over the next 30 years to keep temperature rises to 1.5°C.
That number equals about one-quarter of total annual government expenditures globally, according to OECD data.
With increasing pressure by the public to know how its money is being spent, the trend in recent years has been for governments to simply ask, rather than instruct, the financial and business worlds to report on the risks that climate change poses for their operations, and in turn, for those who might invest in them.
And the focus is on physical risk, and risks connected to the world’s transition from fossil fuels to renewable energy.
Investing in construction of an industrial plant on the seafront, for example, might be exposed to the physical risk of sea level rise.
But stocks in an oil company could suddenly lose value if, for example, a government introduced legislation forcing companies to pay for their own emissions.
Measuring sustainability — or greenwashing?
A popular measure designed to help companies show how sustainable they are is known as ESG, which stands for environment, social and governance.
“Environment” includes policies and operations related to pollution and use of energy, water and various natural resources.
“Social” is about a company’s relationships with its employees and suppliers, and issues such as gender representation and worker health and safety.
“Governance” deals with a company’s integrity, transparency and accountability.
The EU, Australia, the UK, France and the US all have obligatory ESG disclosure and reporting requirements.
Israel’s three regulators — of the banks, the Tel Aviv Stock Exchange companies, and the capital markets, insurance, and savings institutions — have each either required or invited those they are responsible for to take ESG factors into account and report on them.
According to the TASE, 61 Israeli companies have provided ESG reports.
Meir Levine, deputy legal adviser to the government on economic law, admitted at the Ecology and Environmental Sciences conference that he had reviewed the ESG reports of 30 of these companies but was unable to get a clear picture of environmental risk exposure from any of them. “Boards are not used to dealing with this yet as a risk,” he said.
Indeed, a quick scan of the TASE reports reveals huge variety. Some are far less detailed than others. Some do not address climate change at all.
ESG reporting has spawned several international standards boards as well as a whole industry of ESG rating firms equipped with digital platforms that companies can hire.
Also available are a myriad of funds and other financial products labeled as ranking well on ESG metrics, which are often sold, for no apparent reason, with an especially high management fee.
According to Bloomberg Intelligence, global assets marketed in terms of ESG metrics are on track to exceed $53 trillion by 2025 — a third of the $140.5 trillion in projected total global assets under management.
But the tool has come under heavy criticism over recent months and been attacked as a vehicle for allowing companies to greenwash activities that might not actually be climate-friendly.
As Orly Aharoni put it, ESG is just a loose concept, as opposed to a detailed, standardized and legally mandatory set of instructions.
As those attending the Ecology and Environmental Sciences conference heard, many companies find ESG confusing and overwhelming. Reports require huge amounts of data, which companies don’t always have.
There is no standardization, not even in countries where ESG reporting is compulsory.
Companies can choose which international standards and which ESG rating organizations to use. Research published in May showed that different rating companies can give different scores to the same businesses.
Many of the investors who report on the ESG credentials of their portfolios don’t check the basis for the ESG claims made by the companies or funds that they’re investing in.
One rating agency, Morningstar, removed “sustainability” tags from one in five ESG funds, representing more than $1 trillion in assets, in February, Bloomberg reported.
Furthermore, it can be misleading to reduce performance in such different fields as E, S and G to a single set of statistics. The Stanford Social Innovation Review cited one company that scored well because it produced green technology, even though it abused its workers.
In the US, and possibly also in Israel (depending on interpretation), the law actually prohibits portfolio managers from investing in products that could benefit the environment if they are not profitable.
An investor’s “legal, fiduciary duty is to measure value in terms of dollars,” said Tariq Fancy, a former chief investment officer for sustainable investing at BlackRock, who has become the bête noire of the ESG industry for so publicly turning against it.
That same BlackRock, the world’s biggest asset manager, told a British parliamentary committee this month that it would not stop investing in coal, oil and gas because, as Reuters reported, “BlackRock’s role in the transition is as a fiduciary to our clients – it is not to engineer a specific decarbonization outcome in the real economy.”
In Israel, Clause 11 of the Companies Law says a company should operate “according to business considerations to make profits,” while it can also take into account, “within these considerations,” factors such as its creditors, its workers and the public.
The Environmental Protection Ministry wants environmental considerations added to profits as an obligation in Clause 11, according to Tamir, although it has not yet written a formal position paper.
Dov Khenin, a left-wing former Knesset member who chairs the President’s Climate Forum, told the Ecology and Environmental Sciences conference that the climate crisis was “a function of our economic system.”
“We can’t complain about people who play according to the rules of the system. Companies are machines for making money. If we want companies to act differently, we have to define the operating instructions for the machines differently,” he said.
Green initiatives are not only often expensive to invest in in the short term, the Ecology and Environmental Sciences meet heard.
It can be decades before they turn a profit — a timescale that clashes with the short-to-medium-term investment approach taken by asset managers and the fact that their bonuses are paid annually on the basis of the profits they have made.
“It’s not clear whether a director [is permitted by law to] take this long-term view if it clashes with the immediate and interim business interest,” Levine, the government economic adviser, opined.
Much of ESG reporting focuses only on the risk to a company and not on the danger that the company poses for the environment. It’s often about protecting a company against litigation, for example, not about emissions for which the company might be responsible.
Perhaps counterintuitively — climate change is not always assumed to be part of what is measured by ESG.
Aharoni argued that climate risk disclosure should be mandated separately because “climate change threatens all areas of our lives, from public health, food security and national security to infrastructure and jobs.”
‘Government can change the market’s rules’
Fancy, the former BlackRock executive, told the conference, “I’m a capitalist. I started my career as an investment banker. There’s no such thing as a free market. It would be like playing sport with no rules. There are rules in the market. And the rules can be changed… (by) government.”
In the US, this is proving difficult.
In March, the US Securities and Exchange Commission published ambitious proposals to require companies to report on greenhouse gas emissions from their internal operations, the energy they purchase, and, in certain cases, their supply lines.
The backlash has been enormous.
A number of large US companies have also managed to water down an ambitious pledge they signed onto in Glasgow last year to direct up to $130 trillion of private capital away from projects that are bad for the environment (with the exception of coal for the next few years), such as agriculture-led deforestation, and toward initiatives that cut carbon, by 2050. Big fossil fuel funder Bank of America is one of them.
The European Union, by contrast, is moving forward on mandatory, detailed, and standardized environmental disclosure.
The bloc sees regulation as a critical tool to force a redirecting of finance and to enable Europe to become the first climate-neutral continent by 2050.
The EU has created three main tools, which will eventually form the basis for the green labeling of companies and products.
The Sustainable Finance Disclosure Regulation sets out the metrics for assessing the ESG values of financial products to prevent greenwashing.
The Corporate Sustainability Reporting Directive mandates around 49,000 companies across Europe to disclose environmental (including climate) and social risks and opportunities that they face, and that their activities pose to people and the planet.
Most significantly, perhaps, the EU Taxonomy attempts, for the first time, to define what “green” means and to list which kinds of economic activities can legitimately be called “environmentally sustainable.”
It sets the standards with which the Sustainable Finance Disclosure Regulation and Corporate Sustainability Reporting Directive have to be aligned.
To be classified as a sustainable economic activity — and the EU is publishing ever more detailed definitions — a company will have to show that its operations contribute to at least one out of six environmental objectives, and don’t violate the other five.
The objectives are climate change mitigation; adaptation to the effects of climate change; sustainable use and protection of water and marine resources; transition to a circular economy; pollution prevention and control; and protection and restoration of biodiversity and ecosystems.
Israel is following Europe
According to the Environmental Protection Ministry’s Tamir, Israel is taking its cue from the EU.
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The Israeli taxonomy, which will initially be voluntary, divides into categories — manufacturing; energy; water, sewage and waste; transportation; building and real estate; data and communications; and professional, scientific and technical activities.
Each chapter breaks down into subheadings, including building and real estate contains subheadings on new buildings, renovation of existing ones, and equipment for energy efficiency; electric car recharging; renewable energy such as solar panels.
Each subheading is then further broken according to the six main categories of adaptation, mitigation, and so on. For a new building to be classified as green, for example, it might meet the criteria of a circular economy, which include reusing at least 70% of nontoxic building waste generated by the construction.
In early 2020, a Green Finance Regulators Forum was established under the chairmanship of former Bank of Israel governor Karnit Flug, with voluntary representation from the financial regulators, the Bank of Israel, the Finance Ministry’s accountant general, the National Economic Council within the Prime Minister’s Office, the Environmental Protection and Justice ministries, and the Israel Democracy Institute’s Daphna Aviram-Nitzan and Erez Sommer.
The forum meets every two to three months to exchange information and learn about developments in the world. The most recent get-together also involved figures from Israel’s financial community.
Israel is currently at the stage that the EU was between 2019 and 2020 in terms of developing its own taxonomy, which will initially be voluntary, Tamir said.
The work is being done under a steering committee that includes representatives of the National Economic Council in the Prime Minister’s Office, financial regulators, the Accountant General, the Justice Ministry, environmental consultancy firm Ecotraders, and consultants from the EU.
“The taxonomy says to the financial player, ‘If you want to create a green product, it should align with the taxonomy and do no significant harm,'” explained Tamir. “Think of the changing world. If you want to capture the opportunities, the taxonomy helps you do that too.”
“The EU is the best standard there is so far,” he added. “[The taxonomy] helps to avoid greenwash.”
He added that a detailed, interactive map of climate risks that the ministry will be unveiling at COP27 would further help Israeli companies to assess their risk.
Flug told the Times of Israel that the taxonomy would provide the basis for reliable, standardized disclosure. Around 75% of the funding the world needed to transition to a greener future would have to come from the private sector, she said, adding that a “red” taxonomy, detailing harmful activities (which the EU is preparing), would also be necessary to help companies manage their risks.
Emissions: The elephant in the room
In 2006, the UK’s Stern Review on the Economics of Climate Change coined the phrase “the greatest and widest-ranging market failure ever seen” to describe the inability of the markets to correct a situation in which external costs, or “externalities,” don’t have a monetary value.
Externalities are indirect costs (or benefits) to an uninvolved third party. An example would be the costs to public health of air pollution. The costs aren’t met by the companies that cause the problem, because air pollution doesn’t have a price. Instead, our taxes are used to fund the hospitals that treat people with pollution-related respiratory diseases.
Rob Zochowski, program director for Impact Investing and Sustainability Special Projects at Harvard Business School, told the Ecology and Environmental Sciences conference in July about research that looked at more than 2,500 companies, going back to 2010, and found that together, they were responsible for $30 billion of environmental damage.
Of these, more than 860 delivered more environmental damage than operating profit, while 1,400 delivered environmental damage equivalent to a quarter or more of their profits.
Carbon taxation — forcing the emitter to pay — has only been implemented in 46 national jurisdictions as of June 2022, according to the World Bank.
But the trend is clear and Israeli companies will inevitably be impacted.
In the face of a widespread failure of European banks to include climate in their credit risk models, the European Central Bank has decided to condition loans on emissions.
“If all banks in Europe do this, it must be clear that the effect will be broader and that it will eventually come to us,” Aharoni, the climate regulation expert, said.
Also set to impact countries like Israel, which has no operational carbon tax yet, is Europe’s Carbon Border Adjustment Mechanism. Set to be introduced in 2026, this will put a carbon price on imports of certain products coming from countries that don’t have the tax.
Inaction today will be paid for tomorrow
State Comptroller Matanyahu Englman made clear in a stinging climate report issued just before COP26 last year that Israel could move toward a low carbon economy without harming long-term growth targets and that, on the contrary, the move would increase production and social welfare.
He quoted international research estimating the worldwide damage to GDP by 2050 to be 2.5% to 18.1%, if the world continued emitting global warming gases as usual.
For the Middle East and North Africa, where temperatures are warming faster than the global average, the figures were 8.5% to 27.5%.
“If climate change is so dangerous, why don’t we relate to it like we relate to dangers such as terror?” asked Khenin, the ex-Knesset member.
“We have a terror law that includes economic mechanisms that are effective. Why do we allow public funds, funds from pensions, to be invested in things that kill us and our children… Why do we tax something positive like work but not something damaging like emissions?”
He added that there was no time to waste when it came to cutting carbon in the atmosphere because climate change was not linear. “We assume that tomorrow will be a bit worse than today,” he said. “We don’t understand that the [planetary] system can just collapse.”
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