The Network for Greening the Financing System (NGFS) – 90 Worldwide Central Banks and Growing – The Advent of Pricing Carbon into Lending Rates

According to a recent Wall Street Journal Article by Simon Clark, this past December saw the US Federal Reserve join various international central banks and supervisors in the “Network for Greening the Financing System” (the “NGFS”), an international assembly of central banks who set monetary policy around the globe. The NGFS includes central banks and regulators of major European countries as well as Japan, China and Russia. Started in 2007 with 8 members, the NGFS now has over 90 central banks and regulators in its membership and is planning to meet later this month (June) to discuss further policy changes in the climate and risk arena.

Central banks throughout the world are quietly, but more publicly, getting much more involved in climate change risk analysis when setting monetary policy. Some of the central banks are even taking on what some would consider activist stances on the environment and risk. Formerly behind the scenes discussions are evolving into various central banks stating publicly that climate change is a current fiscal and economic risk and, that it is time to take into account these risks when setting monetary policy.

This pivot is already finding its way into monetary policy that will impact US companies doing business overseas, as banks like the Bank of England, now specifically include environmental sustainability as well as price stability in their monetary policy. This policy change will result in US based companies doing business in the UK being impacted by these types of policy changes as it will affect their borrowing rates overseas. For instance, earlier this year the UK Treasury chief changed the Bank of England’s interest rate setting for its committee, to require inclusion of strong sustainable and balanced growth that is also environmentally sustainable as part of its pricing review.

In addition to the Bank of England, the European Central Bank which overseas monetary policy in the EU, has also publicly stated that climate change is within their purview and they will begin taking climate change into consideration when setting monetary rates.

As noted in the Wall Street Journal article, the Bank of France has also begun collecting data on the potential costs of climate change, having found that the cost of insurance claims due to flood and drought impacts are likely to rise by as much as 6x in various French provinces by 2050.

Some of the central banks that are members of the NGFS have adjusted policy based on climate considerations, including higher capital charges for lending to fossil-fuel based companies and including stress testing for climate risk and rising temperatures in their portfolio analysis.

The NGFS’ beginning of increasing of interest rates to address climate concerns, comes at a time where the inflow of investor capital into consumer products, green bonds and stocks of companies focusing more on ESG and products that support ESG and sustainability efforts is at an all-time high and exponentially continuing to show signs of a stable base of investors looking for climate considered attributes.

According to Mr. Simon, the risks being explored include loss of loans or a decline in asset value given locations at or near waterfronts as well as risk adjusting properties in areas that are and have been the subject of wild fire risks. The central banks are also considering charging higher interest rates to lenders that pledge carbon intensive assets as collateral. Meaning, those member banks who continue to lend to carbon intensive asset classes will see higher interest rates that they will pass along to their more carbon intensive customers seeking to borrow these funds

Some of the central banks are also considering whether to require their member banks to set aside additional capital for loans to fossil-fuel companies and less to those in renewable arenas. This would likely translate into loans being made to more carbon intensive user/borrowers having to have a higher loan to value for their assets than their less carbon intensive competitors; resulting in more lending capacity for less carbon use intensive borrowers than their carbon consuming rivals.

Historically, the central banks have always avoided, at least publicly, attempting to influence lending decisions of their member banks where the decisions would have political implications regarding whether climate change is a man-made event. This shift at the NGFS in taking a more public stance, would effectively shift direction for their central bank members and put them directly into the cross hairs of the political discussion of how and what to do about climate change and whether climate change is “man-made”.

Triple Bottom Line – as the NFSG continues to garner more members and, as these members, including the US Fed, start to really include carbon intensity in their pricing decisions for lending, companies that borrow funds internationally will begin to see the impact of their carbon use and will likely face increased risk and higher borrowing costs depending upon how intensive their impact is on the environment. Thus, one’s carbon footprint will actually begin to have a fiscal impact to their operations which will likely create additional disclosure around this risk and attendant result.

Duane Morris has an active ESG and Sustainability Team to help organizations and individuals plan, respond to, and execute on Sustainability and ESG planning and initiatives within their own space. We would be happy to discussion your proposed project with you. For more information, or if you have any questions about this post, please contact Brad A. Molotsky, David Amerikaner, Nanette Heide, Darrick Mix, Vijay Bange, Stephen Nichol, or the attorney in the firm with whom you are regularly in contact.

ESG: Carbon Footprint Labels – Helpful or Green Washing?

Major Fortune 100 and 500 companies and others continue to focus on their ESG efforts in various forms and arenas, including the continued evolution of carbon emissions disclosures on various products.

As noted by Saabira Chaudhuri in her Wall Street Journal column, consumers, investors, Boards and regulators are becoming more and more interested in emission levels in the context of growing concerns over climate change and its impact. 

Unilever PLC – intends to introduce carbon footprint details on 70,000 of its products, given that sales of sustainable products are growing faster than their lines of non-sustainable products.  They are currently working on obtaining direct information about their carbon footprint for each ingredient supplier that provides products that are used in Unilever products.

Colgate- Palmolive – continues to work with their supply chain providers of various ingredients that are inputting into their products in an effort to avoid allowing estimates of amounts of impact in favor or real numbers.  Colgate continues to work on ways to measure and verify their footprint, and to require that their supply chain actually measure and verify these impacts.

Quorn/Monde Nissin Corp – began displaying carbon-dioxide/kilogram on-package carbon footprint details in 2020 for certain of their meatless products.

Oatly AB, Upfield Holdings BV and Just Salad brands have also started listing carbon emissions figures on both their packaging and menus.

Logitech International began listing carbon emissions figures on their computer keyboard products.

Having labelled and provided on line environmental impact numbers for its Garnier hair products already, L’Oréal SA announced it will be adding carbon labels for all of its “rinse off” products, including shampoos, in 2022.

To date, there is no market based, agreed upon, uniform way to report or measure these various GhG impacts but, each of the above mentioned companies, have attempted to outline their methodologies and have given their rationales on how they measure and report – an excellent first step.  As others either desire to join them or feel the pressure from consumers, their Board and/or stakeholders to measure and report as well, one can only hope that a quasi uniform methodology for monitoring, measuring and reporting is agreed upon and utilized so that consumers can measure apples to apples rather than apples to oranges or kilograms to pounds.

The Triple Bottom Line: While personally I am a big fan of labeling (whether this be nutrition or calories on a menu or ingredients in a chemical mixture to enable the consumer to review the information and make an informed decision), and, in my view, the growing use of “carbon labeling” represents a good step in the right direction to enable better, more informed consumer choices, I am just not so sure that everyone’s motivation and nomenclature is the same when using phrases like “net-zero”, “carbon emissions” and “greenhouse gas impact”.  As such, the reported results will not be comparable as between products, at least not yet.  Again, I am very much in favor of solid attempts by various organizations to self report their impacts, I just look forward to the day when everyone is measuring outcome in a similar fashion so that real comparisons by brand and product will be possible, rather than merely smart marketing by some with a lack of a verifiable real methodology for measuring and reporting.  As such, I will put “carbon labeling” in the “growing in interest” category, likely to become more and more real and relevant as time and measurement systems are put in place during 2021 and 2022 and, very likely that regulators like the EU, the SEC or trade associations like the SASB continue to push for more required and verifiable disclosure. As such, an area to continue to pay attention to and keep attuned to the market dynamics that continue to push for more and better information.

Duane Morris has an active ESG and Sustainability Team to help organizations and individuals plan, respond to, and execute on Sustainability and ESG planning and initiatives within their own space. We would be happy to discussion your proposed project with you. Contact your Duane Morris attorney for more information.

If you have any questions about this post, please contact Brad A. Molotsky (bamolotsky@duanemorris.com), Christiane Schuman Campbell, Darrick Mix, Dominica Anderson, Nanette Heide, David Amerikaner or the attorney in the firm with whom you are regularly in contact.