Introduction

Welcome to our Snippets newsletter which as always endeavours to provide coverage of developments in energy and environmental issues, from both here in New Zealand and around the world. We hope you continue to find our fortnightly collection of articles to be of interest in what is a rapidly evolving area.

Okay, so last year’s COP21 was all about keeping temperatures below the 2C warming limit. But what if we had already breeched that, even if only for a short time? Well - we have, much earlier than anyone expected. It took “from the dawn of the industrial age” until last October to reach the first 1.0 degree C rise, and since then, there has been another huge rise. Much of this can be attributed to the record El Nino, with the Arctic experiencing winter temperatures in parts, more like summer ones. Rapidly melting ice means less heat being reflected, leading to warmer oceans and warmer air above them, ultimately leading to rapidly changing climate zones that are moving north far faster than people or crops can adapt to.

As if this wasn’t alarming enough, we are now being advised that the Carbon budget - the amount of carbon that can be emitted, to limit atmospheric warming to 2C, has been incorrectly calculated, and really may be only half that agreed at COP21. Cutting emissions must therefore be accelerated if we are to avoid catastrophe. Unfortunately, most countries appear to have adopted a “business as usual” approach, and yes, a disaster waiting to happen, unless we act now with urgency.

So what are the implications of the Paris Climate deal on New Zealand businesses? With it absent from John Key’s recent “State of the Nation” address, NZ is unlikely to be one of the early signatories to the Agreement. Our INDC’s are inadequate and with business continuing “as is”, the Carbon Budget will be depleted in 20 years. Possibly even 10 years, according to our previous article. Rules on agricultural emissions and forest sinks are still being determined, and fossil fuel subsidy reform is starting to get more international attention, all of which, if implemented, will impact NZ industry. It seems that business, not government, will need to take a lead on lowering emissions.

Is 2016 the year to start valuing natural capital? Very possibly, with the launch of the Natural Capital Protocol this year in July. Globally, government and corporate accounts are missing a conservative $40 trillion of natural capital from their balance sheets. The hope is the Protocol will allow the values and benefits of natural capital to be fully realised into accounting and decision-making platforms. It’s not just about taking natural capital, but the value of what is being taken (water, land, wild life etc).

An example of the taking of natural capital is the degradation of old forests. New data has revealed disturbing trends in forest loss, where the hearts of the world's forests are vanishing, due to the development of new roads, dams, power lines, pipelines and other infrastructure, rapidly slicing into the world’s last wild places, deforesting, and opening them up to poaching and other destructive activities. Only by placing a financial value on these ‘assets’ can they be protected.

It would appear that for far too long we have only been fixated by the accountancy definition of value - profits, loss and cashflow. This, in turn, seems to be largely reflected by financial services limiting their interest to the traditional way of valuing a business, disregarding the environmental, social and governance (ESG) factors. In other words, if the financial returns looks good (e.g. forestry, with no concern for its native inhabitants or the local ecosystem), then it is a good investment.

Times however may be changing with fund managers who ignore climate risk potentially facing legal action. With global warming posing a systemic risk to the world’s economy and a significant cut in the value of investments, those with fiduciary responsibility have a duty to act to reduce that risk, or be taken to court. Perhaps the threat of legal action for continuing to invest in the now high risk fossil fuel companies will only accelerate divestment.

A further step in the change from ‘business as usual’ is to use internal Carbon pricing to manage climate risks. How corporations monitor, manage, and plan for the risks and opportunities posed by a changing climate are becoming widely recognised. CFOs across the globe are heeding the call to better manage what tomorrow’s world may look like. Maybe accountants and investors will save us in the end.

Even better - female investors, who take factors such as ESG into account when selecting investments more readily than their male counterparts do, seeking more meaningful investment opportunities than the traditional investment community.

With a move to more transparent supply chains and reporting, the spotlight is increasingly focused on poor work practices and the use of slave labour. Unfortunately slavery is still a problem – yes, in the 21st century! Nearly 21 million people are victims of forced labour, which generates about $150 billion a year in illegal profits. A study by KnowTheChain found that just four of 20 companies surveyed were fully open about disclosure and the way they track and deal with forced labour in their supply chains. We hope public scrutiny will lead to an appropriate consumer reaction.

The recent decrease in the price of oil, to around $33 a barrel, has had a significant and noticeable impact on the sales of electric vehicles. The reported sales of EV’s dropped 4% in 2015, whereas, SUV sales jumped 10%. Fortunately, this trend is not expected to continue. A report from Bloomberg New Energy Finance (BNEF) shows a bright future for EVs with a massive jump in sales by 2040, to around 41 million vehicles, or around 35% of global vehicle sales. The forecast relies on a number of assumptions such as slight increase in the price of oil, improved battery technology and increases in government subsidies and grants, resulting in EVs becoming a cheaper option than combustion engines. The report noted that this increased use of EVs is expected to save around 13 million barrels of oil per year by 2040, and the overall transport Carbon footprint is expected to decrease significantly.

With the expected growth in global EV sales, it is great to see a New Zealand home builder taking steps towards future proofing their homes to meet that increased demand. Jennian Homes are starting to pre-wire all of its new homes for Solar, Batteries and Electric vehicle chargers. This development signals a future where PV and electric vehicles are now thought to be mainstream.

Finally, to much delight, Landcorp is backing down from their forest to dairy conversion. The conversion to dairy produced much controversy with opponents pointing to forecasts showing the potential damage to the environment, specifically the Waikato River. Landcorp stated that the environmental impacts of the conversion were too great and other possibilities were being pursued. Dr Joy, a freshwater ecologist, said the announcement was a win for the environment, and we agree.