Transition Guardrails Needed

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    The NordSIP Laundromat has had to get the builders in to construct an extension.  There was no longer enough room to accommodate all the washing machines needed for the ever-expanding range of greenwashing behaviours exhibited by the corporate world.  We had machines labelled greenwashing, greencrowding, greenlighting, greenshifting, greenlabelling, greenrinsing, and greenhushing.  We managed to squeeze in new ones next to the sportswashing machine for the laundering of financed emissions, facilitated emissions, and insurance-related emissions.  However, the crunch time came with the advent of transition washing.  Time for a bigger Laundromat.

    The low-carbon transition is fundamental to pretty much all facets of sustainable investing.  For instance, the main argument against divestment rests on engaging with investee companies to encourage them to come up with credible transition plans and demonstrably implement them.  Some investment strategies purposefully focus on high-emitting sectors based on the premise that helping hard-to-abate energy companies, cement producers, or steel manufacturers to transition has a much greater impact on global emissions than restricting investments to low-emitting sectors.  Unfortunately, as Laundromat regulars will know, many companies are using the concept of a low-carbon transition as a means of kicking the can down the road and effectively doing nothing beyond throwing some of their marketing budget at the issue.

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    On 24 June 2024 environmental law non-profit ClientEarth released Guardrails to address greenwashing of climate transition finance, a paper in which it sets out its recommendations to help policymakers tackle the problem.  ClientEarth defines transition washing as follows: “It occurs where claims, acts or omissions create an impression that an entity is transitioning its economic or business activities to a state of net zero greenhouse gas emissions to a greater extent or more rapidly than it actually is.”  According to ClientEarth, since it fundamentally undermines the ability of the market to allocate and price capital properly, transition washing may well represent the biggest threat to effective global climate action.  The report warns of financial, reputational, and legal risks to institutional investors exposed to transition washing companies that may eventually be “found out” by the market and suffer a major loss of value.

    The scope of transition washing is broad, as it encapsulates not only individual companies’ business strategies but also their related sustainability-linked and transition-labelled financing.  When it comes to basic business strategy, the Laundromat has driven itself slightly mad exploring the efforts of the fossil fuel industry to duck, dive, and dodge any significant shift towards low carbon alternatives.  The industry-led Oil and Gas Climate Initiative (OGCI) and Laundromat Greenwasher of the Year 2023 the Alliance to End Plastic Waste (AEPW) are masters of the art of transition washing.  The oil and gas companies sign up to net-zero pledges based on peripheral, expensive and unscalable carbon capture, use, and storage (CCUS) and a reliance on their own arbitrary labelling of liquefied methane as ‘natural’ and a ‘transition fuel.’  Many even then go on to use captured CO2 for Enhanced Oil Recovery that can extend the life of near-depleted oil wells by decades.  The oil companies also conveniently focus on ‘operational’ decarbonisation while completely ignoring their vast Scope 3 emissions.  Meanwhile the AEPW steers the fossil-based plastics industry’s production ever upwards while extolling the virtues of manifestly failing recycling schemes.

    ClientEarth urges policymakers to sort out this gigantic mess with six policy guardrails, the first two of which aim to address the shortage of scientifically robust, Paris-aligned transition pathways for carbon-intensive sectors and activities.  The third guardrail aims to impose common standards to address the current free-for-all that allows firms to ‘mark their own homework’ and use Paris-aligned transition pathways designed by their CEO’s primary school-age kids.  Guardrails 4 and 5 take aim at companies perverse financial and reputational incentives to raise bogus transition finance that is not underpinned by genuine measures to reduce Scope 3 emissions.  Regulators should be given sharper teeth and clearer minimum performance thresholds set.  Finally, ClientEarth advocates more radical systemic reforms that would include restricting public market access to firms with Paris-aligned transition plans and strategies wile locking out the bad guys.

    The Laundromat is not alone in being enormously frustrated by the corporate world’s ability to persistently delay and obfuscate in the face of the climate, biodiversity, and pollution crises.  ClientEarth’s recommended guardrails seem eminently sensible, so here is hoping that regulators take heed and begin genuinely and visibly clamping down.  Rather than expanding the Laundromat, we should be really looking forward to closing it down and converting it into a café serving low-food-mile vegan fairtrade wholemeal wraps to retired sustainability professionals.

    Image courtesy of Josh Applegate on Unsplash
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