April 20, 2021

Biden to Issue Executive Order for Climate Disclosure

President Joe Biden is set to issue an executive order on climate disclosure within capital markets, according to John Kerry, the US Presidential Special Envoy for Climate. Details are not available yet, but that one sentence pretty much says it all.

Theranos Redux? Why Governance Needs to Underpin E&S Commitments

Meeting greenhouse gas emissions/climate challenges will be a monumental undertaking for years to come and will require an array of solutions, some of which haven’t even been invented yet. Solutions will offer technological advances, social/environmental benefits and huge business opportunities. Fortunately for everyone, some will be successful and beneficial. Others may do more harm than good.

This Bloomberg article about a carbon capture company caught my attention for several reasons. One is that some form of ambient CO2 capture may be necessary to achieve reduction targets. But another reason is that in my years of auditing and fraud training, I’ve become somewhat competent in spotting patterns/trends in data and behavior. And – based solely on that piece – I see eerie similarities here to Theranos. And there is more reason this is top of mind given this week is the 20th anniversary of the Enron failure. This company is painting itself as a savior, but is it realistic?

Most companies know that chasing “E” goals needs to include using internal “G” processes and staff (indeed, the SEC’s recent Risk Alert on The Division of Examinations’ Review of ESG Investing points out this very thing). Here’s another reminder to proceed with caution. If you’re making public commitments of environmental/social progress based on third-party performance, you need to vet the service and qualify your statements. You may wind up with more risks & liabilities than you bargained for, especially if the third party doesn’t make good on their own promises.

Environmental Solutions & “The Law of Unintended Consequences”

Let’s look at an interesting element of technical solutions (such as carbon capture) that companies could end up getting dinged for: secondary impacts. Newton’s Third Law (with some poetic license) holds true in environmental solutions – a solution that solves one problem may create a secondary problem.

What is a “secondary impact”? In my view, a secondary impact is a meaningful environmental effect (or risk) that is created as a result of the intended benefit. Two examples of this are:

– I once visited a client site that had spent quite a bit of money to reduce their Scope 2 emissions (those that are associated with power purchased from the utility). The centerpiece of the reduction strategy was an on-site company owned and operated fuel cell. What the company had overlooked is that the fuel cell chemistry resulted in CO2 emissions that drastically increased the site’s Scope 1 (direct) emissions. I don’t recall the absolute emissions numbers and whether this resulted in an overall CO2 emissions reduction given the electricity production, but it had a real impact on how emissions were reported.

– An article on the Japan shipping industry’s evaluation of capturing and converting CO2 into methane as a fuel points out implementing the technology “would mean developing special vessels to transport the CO2. Key to commercialization would be the viability of shipping CO2 long distances.” So… transporting large volumes of CO2 in ocean vessels to reduce CO2 emissions from other ocean vessels? That’s a head scratcher.

This article from the Yale School of Environment also describes negative latent impacts of large scale tree planting.

… planting programs, especially those based on large numerical targets, can wreck natural ecosystems, dry up water supplies, damage agriculture, push people off their land — and even make global warming worse.

Unintended consequences can also show up as product issues that affect the business. More examples:

– Increasing the water recycling/reuse rate at one paper mill I audited years ago saved water and money, but made the paper turn brown. The mill was unable to remedy the problem and ended up reducing their water reuse.

– In order to reduce waste and save on raw material costs, one company dramatically increased their used product recovery and repair rates. Because the used products had to be washed before being put back into circulation, the more they upped their recovery, the more water they used.

The moral of the story is that companies should thoroughly evaluate identified solutions in advance. Use a wide angle “life cycle” view to eliminate surprises – and encourage directors to ask difficult questions.

– Lawrence Heim