Shipping’s imperfect new carbon scheme may yet make an impact

Welcome back. Economists and environmental advocates have long pushed for international carbon pricing as a key means of driving decarbonisation. So why did Friday’s landmark deal on carbon fees in the shipping sector get such a muted response?

Also in today’s newsletter, we look at a new tack being taken by corporate governance activists in Japan. See you on Wednesday. — Simon Mundy

CARBON PRICING

The shipping industry’s controversial step forward on carbon emissions

The international shipping emissions deal reached in London on Friday was, in some respects, a major breakthrough. For the first time, a UN conference has agreed to impose carbon prices on an entire global industry. But environmental advocates and climate-vulnerable nations are dissatisfied — and not without reason.

A coalition of countries including low-lying Pacific island states had pushed for a carbon tax of $150 per tonne for all shipping emissions. Instead, last week’s meeting of the UN’s International Maritime Organization approved a system with a much greater level of complexity, and a much lower level of ambition.

“It’s a missed opportunity,” Aoife O’Leary, head of climate non-profit Opportunity Green, told me. “It’s very clear that certain countries are holding fast to the status quo.”

Shipping operators will by 2028 be expected to reduce their carbon emissions intensity by 17 per cent from a 2008 baseline, rising to 21 per cent by 2030. If they don’t, they’ll have to pay the IMO $100 for every tonne of carbon dioxide over the target level. (Those that achieve less than 8 per cent reductions by 2030 will have to pay higher rates of up to $380 per tonne.)

The proceeds will go into a fund that will support industry-wide decarbonisation. High-emitting operators will also have the option of buying “emissions units” from those that manage to go beyond the target reductions.

This marks a clear reduction in ambition from the IMO’s earlier stated goal of reducing emissions 30 per cent by 2030. That helps to explain why the Pacific island nations that spearheaded the push for shipping emissions pricing abstained from the vote. “We cannot support an outcome that does not live up to the agreed strategy,” said Manasseh Maelanga, the Solomon Islands’ minister of infrastructure development.

The motion nonetheless passed with majority support from nations present, including major economies such as China, India and Brazil. Oil exporters such as Saudi Arabia and the United Arab Emirates voted against the measure.

Potentially the most serious opposition has been expressed by Donald Trump’s US government, which boycotted the talks and threatened unspecified retaliation against countries that impose carbon levies on US shipping.

The system still needs to be formally adopted at a further IMO session in October. Even if it is fully implemented, it’s questionable how much it will do to move global shipping into the clean energy era. Rico Luman, an economist at ING, noted that the agreement failed to introduce targeted measures to push shipping companies to invest in next-generation fuel technologies such as green ammonia, which he said would be needed in the long term for the sector to fully decarbonise.

Ahead of the meeting, Danish shipping giant AP Møller-Maersk had warned that a weak pricing system could encourage companies to shift to using liquefied natural gas (which produces substantial emissions, albeit less than conventional shipping fuel) rather than truly low-carbon options.

Still, any kind of international carbon pricing agreement around a major global industry is an important development — providing a foundation upon which a more rigorous system could yet be built. “This is a first step, not the end stage,” Luman said. (Simon Mundy)

governance

Japanese activists roll out a new strategy

On the surface, Japan’s approaching annual general meeting season might look like a familiar rerun.

As they have in the past five years, some of Japan’s largest companies will face legally binding shareholder proposals on climate-related disclosures on Tuesday.

But a seemingly small procedural step by activists reveals that even as campaigners get more creative, Japanese companies are becoming more deeply entrenched in maintaining the status quo.

This year, non-profit groups Market Forces, Kiko Network, FoE Japan and Rainforest Action Network opted to first bring forth non-legally binding, advisory proposals to seven companies, which included megabanks Mizuho, MUFG and Sumitomo Mitsui, trading houses Mitsubishi Corporation, Mitsui & Co and Sumitomo Corporation, as well as the energy giant Chubu Electric Power. 

The non-profits said this was done in the hopes of “more open dialogue on enhancing climate change risk management”. However, all seven companies approached by the activists rejected bringing the advisory proposals to a vote, leading the activists to respond with legally binding resolutions. 

Advisory proposals are common in the US, with about 600 ESG proposals being filed last year, according to Harry Ashman, engagement specialist at Dutch asset manager Robeco. In the US, such proposals earned a support rate averaging roughly 19 per cent over the past four years. In the UK, Germany and France, the quantity of ESG advisory resolutions are significantly lower, but typically have had support rates of around 80 per cent in the past four years. 

In Australia, advisory resolutions on ESG issues are also becoming more common (although requiring a legal workaround), and increasingly viewed as a useful tool to show investor assessment on how well a company is dealing with climate disclosures.

“Our thinking was this less confrontational approach would allow for more fruitful engagement, benefiting both the company and the shareholder,” Eri Watanabe, the Japan energy finance campaigner at Market Forces, told me. “As it is not legally binding, the companies would have more freedom to decide how to handle disclosure, while allowing for shareholders to gain access to that important information,” she added. 

Previously, I wrote about how Japanese companies were reluctant to approve climate related shareholder proposals, due to structural issues related to Japanese law. Specifically, the explanation was that ESG proposals often took the form of an amendment to a company’s articles of incorporation, which companies do not take lightly as they are legally binding. The companies’ response to the latest move by activists, however, has challenged that argument.

But the rejection of the advisory proposal does not spell certain defeat — and was actually part of the plan all along. The activists hope to use the failure of the initial proposal to prime investors to support the resolution when it is put to a vote in June as a legally binding resolution.

In their legally binding shareholder resolutions, Market Forces, FoE Japan and Rainforest Action Network, will be calling on Japanese megabanks to disclose assessments by their audit committees on how directors are managing risk, as well as their assessments of climate change transition plans of their clients. 

We will see how this all plays out in June, when AGM season kicks off in Japan. Climate-related shareholder resolutions aimed at Japanese megabanks gained around 20 to 25 per cent of support last year. “While it’s real-world change from the companies we’re most concerned with, we’re hoping that this year we can exceed that number,” Watanabe said. (Kaori Yoshida, Nikkei)

Smart reads

Uneven playing field Gains for disabled workers are at risk under the Trump administration, experts warn, in this story from a new FT special report on disability in the modern workplace.

Sound the alarm Should the law be changed to make it easier for corporate whistleblowers to expose misconduct?

Hot off the press Don’t miss Pilita Clark’s latest lowdown on the best new environment books.