French banking giant BNP Paribas sued for fossil fuels financing

Several non-governmental organizations (NGOs) sued BNP Paribas on February 23, 2023, for allegedly violating the French Duty of Vigilance law.

The plaintiffs want BNP Paribas to be ordered to:

• Terminate funding for new fossil projects. 

• Use its power as a shareholder to force portfolio companies to renounce new fossil projects and take actions to limit global warming to 1.5°C., or to divest those investments. 

• Take other actions compatible with the Paris Agreement 1.5°C goal. 

Why this matters 

• This case will be studied for its historic, precedential significance.

• There is a global movement to pressure banks and institutional investors to cut ties with the fossil fuels industry.

• Private climate litigation like this will be a major new weapon in the arsenal of environmental and human rights activists.

• The French law was the first Value Chain Sustainability (VCS) law. The VCS concept becomes more developed and stronger with each new VCS law.

What companies need to do

• Companies directly affected by the French law need to become compliant at once. 

• Direct and indirect suppliers to such companies will be under pressure to cooperate with the compliance demands of their supply chain partners.

• Sizable companies should (i) educate themselves systematically about VCS laws and (ii) develop strategies to survive and thrive under existing and future VCS laws.

This article is only a quick summary of the BNP Paribas case, its context and significance. For more detailed information, see Groundbreaking lawsuit against BNP Paribas, https://mcalan.com/groundbreaking-lawsuit-against-bnp-paribas.

©Allen Campbell 2023
Written Mar 09, 2023
By Allen Campbell, JD, MBA
www.linkedin.com/in/allencampbelljdmba
Email: AC@McAlan.com
Tel. 972-402-5300

Part II: Are All Carbon Emissions (And Credits) Created Equal?

by Mike Kraten and Jason Dodier

Author’s Note: On January 6, 2023, we authored an Insights post entitled Are All Carbon Emissions (And Credits) Created Equal? The Need To Consider Sources Of Energy. We concluded that post by challenging the reader to consider how a Chief Financial Officer should evaluate her options. We also promised a follow-up post that presents a case example involving biomass energy.

We keep our promise by authoring this post. Our comments (below) conclude by recommending an evaluation process that focuses on the classic Value – Risk paradigm.

If you ever find yourself gasping for breath as you dash from gate to gate in New Delhi’s Indira Gandhi International Airport, you might wish to visit India’s latest innovation in healthy breathing: the Oxy Pure Oxygen Bar.

What is an Oxygen Bar? It’s a bar that serves various “flavors” of oxygen instead of liquor or coffee. Given that New Delhi is plagued by one of the most polluted atmospheres on Earth, it’s no surprise that its entrepreneurs have developed this innovative business concept.

India’s intractable air pollution serves as an unfortunate reminder of the costs of utilizing its “dirty” energy sources. The nation is currently the world’s second largest consumer of coal (after China) and third largest consumer of oil (after the United States and China).

Fossil fuels like coal and oil impose significant environmental costs. Upstream extraction processes, for instance, lead to the destruction of mountain-tops and the atmospheric release of toxic methane gas. And downstream energy generation processes, for example, produce a wide variety of pollutants, ranging from coal ash to carbon dioxide.

And what of natural gas? Although it is a relatively cleaner energy alternative to coal and oil, its methane composition significantly damages the environment. Gas fracking is also responsible for seismic instability in regions that have never previously experienced earthquake activity.

What about alternative energy solutions that don’t produce waste substances? For instance, what about solar, wind, and hydroelectric power? Without feasible battery technologies to store power for extended periods, these solutions can frustrate energy users when the sun doesn’t shine, when the wind doesn’t blow, and when drought dries the rivers.

Biomass and Biochar

Biomass energy solutions avoid or minimize many of these problems. In addition, their production processes can generate biochar, a unique resource that provides value in a form that is lacking among other alternatives.

Biomass energy is generated from plant-based material; it is not reliant on intermittent sources like the sun, the wind, and the currents. Thus, there is no need for battery equipment – which is constructed with potentially toxic resources that are extracted from the earth – to store power during quiescent periods.

Furthermore, when biomass is exposed to high temperatures, it decomposes into a substance known as biochar. This material serves two environmentally healthy purposes: (1) it can fertilize agricultural soil, and (2) it can capture carbon in a storable physical state.

Thus, unlike the carbon ash that is produced by burning coal, the biochar carbon that is produced by biomass energy processes can improve the health of the environment. And unlike oil and/or gas based energy production processes, biochar does not produce any methane emissions or earth tremors.

Value vs. Risk

Is biomass energy the ideal choice for all energy users? Not necessarily; after all, your ideal choice is dependent on how you assess value vs. risk.

Let’s imagine that you live downstream from an area of groundwater that has been polluted by coal ash. In addition, let’s imagine that the climate is relatively temperate. For you, the value of a power source like solar or wind may lie in its total absence of any carbon generation, and in the lack of significant meteorological risk during intermittent energy shortages.

Now let’s assume that you live in an isolated and wintry Arctic climate. The value of the technological reliability of traditional oil and gas powered equipment may significantly exceed any risk of long-term damage to the environment.

For many of us, though, biomass offers an attractive mix of value and risk factors. As the economic, social, and environmental costs of climate change continue to escalate, the need to manage our carbon streams through end products like biochar will keep biomass solutions in the conversation.

European Council Advances Corporate Sustainability Due Diligence Directive

The European Union draft Directive on Corporate Sustainability Due Diligence (“CSDD”) took a big step forward on November 30, 2022, when the Council of the European Union (the “Council”) adopted a “negotiating position” on the European Commission’s CSDD proposal, and delivered it to the European Parliament. It is now ever more likely that CSDD will become law. 

The Council’s proposal includes the Commission’s climate change provisions. 

The Council proposes several noteworthy changes:

1. The financial services sector would enjoy a privileged position. When they individually “transpose” the Directive into their national laws, EU Member States would have the right to choose whether or not to apply CSDD to financial services companies.  

2. In-scope companies would not be responsible for the human rights or environmental shortcoming of their customers, as would have been required under the Commission’s draft – which would have made companies responsible for how their products and services are used and disposed of. 

3. Companies would have more time to comply with the legislative regime. 

4. Directors’ duties would be removed from the Directive. (Directors’ duties would remain within the purview of individual countries.)

5. There would be stiff government penalties for violating company duties. 

6. Civil liability would be retained and clarified. Significantly:

1. A company would not be held liable if the alleged damage was caused only by its business partners in its “chain of activities”.

2. The complaining party would be entitled to “full compensation” but not to “overcompensation”, such as punitive damages. 

Next Steps in the Legislative Process

The draft Directive is now under consideration by the European Parliament to determine its initial negotiating position, as per standard EU legislative procedure. Once that is done, the Parliament and the Council will negotiate to reach a final version of the Directive. Vigorous lobbying can be expected before the final version is agreed upon. Once the Directive enters into force, EU Member States will have two years to “transpose” the Directive into their national legislation.

What Should Companies Do at This Time?

CSDD will change the rules of the game and the business environment in which companies operate. CSDD directly targets companies with significant footprint in the EU. CSDD will indirectly affect companies in their value chains. 

Companies need to begin preparing for the days when CSDD gets enacted in Member States’ laws. Before then, smart, agile companies will have been at work to do what will be required of them, and beyond that, to find and/or create competitive advantages. 

This article is only a brief synopsis of the Council’s action. For more detailed information, see European Council Adopts Negotiating Position on Corporate Sustainability Due Diligence Directive at https://mcalan.com/european-council-adopts-negotiating-position-on-corporate-sustainability-due-diligence-directive.

Written Jan 06, 2023

©Allen Campbell, JD, MBA

www.linkedin.com/in/allencampbelljdmba

Email: AC@McAlan.com

Tel. 972-402-5300

Are All Carbon Emissions (And Credits) Created Equal?

The Need To Consider Sources Of Energy

by Michael Kraten / Jason Dodier

Consider this scenario: the employees who work at a firm’s downtown office location are uncomfortable taking public transportation home after working late hours on critical projects. The Chief Human Resources Officer recommends contracting with local limousine companies to drive them home, but the Chief Sustainability Officer warns that individual trips in gas-guzzling limousine vehicles are inconsistent with the practices of carbon-neutral firms.

So the Chief Financial Officer (CFO) decides to authorize limo services while supporting a carbon-neutral policy by purchasing carbon credits. She then asks her finance staff to research available credit options.

Then … Yikes! The CFO realizes that all carbon credits (as well as emissions, for that matter) are clearly not created equal. The firm could purchase credits from an overseas entity to plant seedlings that will eventually grow into trees, for instance, but she realizes that Mankind will need to wait a very long time to achieve any carbon reduction benefit. Alternatively, she could pay a property owner to maintain an existing forest, but she realizes that Mankind would recognize no net carbon benefit at all if the trees simply remain in place.

The finance staff then points out that the firm could generate a significant decline in net carbon emissions by transitioning from its current source of energy to a cleaner one. The firm is currently purchasing energy from a solar / wind provider who has arranged with a relatively clean-fuel natural gas company to provide back-up power whenever necessary. By shifting to a biomass-focused energy provider, the firm could eliminate the need for a back-up carbon-based energy source.

The CFO and her staff then discuss reporting implications. As a publicly traded company, the firm is expecting the S.E.C. to issue mandatory reporting requirements in the near future. Which of these potential net changes in carbon emissions would impact those requirements? Which would not?

So … how should the Chief Financial Officer evaluate her options? And more importantly, if you were in her position, how should you?

Next installment … The case example of biomass

New German Supply Chain Due Diligence Act Is Now Effective

Germany’s landmark Act on Corporate Due Diligence Obligations in Supply Chains went into effect January 1, 2023. It will require in-scope companies to monitor human rights and environmental due diligence obligations internally and in their supply chains. The Act will apply to all companies whose head office, main branch or statutory seat is in Germany, if the company has at least 3,000 employees. As of 2024 it will be extended to companies with more than 1,000 employees.

Risk Management is at the Heart of the Act

The Act requires companies to identify, analyze, prioritize and remediate specific types of internal and supply chain risks. The Act creates a duty of effort, but not a duty of success. 

Penalties and Civil Liabilities

The Act is enforceable by punitive government action, including hefty fines.

Generally, companies that violate the Act are not civilly liable, but there are exceptions.

Value Chain Sustainability Laws in the New Economic World Order

This Act is the most significant Value Chain Sustainability law enacted to date anywhere in the world. Other, stronger, more comprehensive laws are expected, with even greater global consequences.  The biggest of these will be the European Union Corporate Sustainability Due Diligence Directive.

What Companies Need to Do Now

In-scope companies (those that are directly affected by the Act) need to become compliant as soon as possible. Although they will not be in-scope per se, both direct and indirect suppliers will be under pressure to help their in-scope business partners become compliant – and to demonstrate that they will be reliable suppliers.

This article is only a brief synopsis of the new Act. For more detailed information, see German Supply Chain Due Diligence Takes Effect January 1, 2023 at https://mcalan.com/german-supply-chain-due-diligence.

Written Jan 03, 2023

©Allen Campbell, JD, MBA

www.linkedin.com/in/allencampbelljdmba

Email: AC@McAlan.com

Tel. 972-402-5300

Global Automotive Industry Faces Scrutiny over Labor Abuses in China’s Xinjiang Province

Dec 13 | Written By - Allen Campbell, JD, MBA - www.linkedin.com/in/allencampbelljdmba

Forced labor practices that oppress the Uyghur Muslim minority are normal in Xinjiang Province, according to many well-informed observers. A new study has found extensive business connections among global automobile manufacturers and their parts suppliers with operations there. This report could result in serious consequences for the auto industry.

Labor abuse has long been top-of-mind for human rights advocates. The United Nations estimates that forced labor, a form of “modern slavery”, affects 28 million people worldwide.

In response to international outrage, many governments have enacted or are considering laws intended to end forced labor: 

• In the United States, the Uyghur Forced Labor Prevention Act assumes that products made wholly or partly in Xinjiang are produced with forced labor, and they are subject to seizure if they are brought into the United States. California has its own legislation on this subject. 

• Outside the US, there is enacted or pending forced labor legislation in:

• United Kingdom (Modern Slavery Act)

• France (Duty of Vigilance Law)

• Germany (Supply Chain Due Diligence Act), effective January 1, 2023

• Australia – legislation at the national (Commonwealth) and state (New South Wales) levels.

• Canada – legislation pending

• Brazil – various legal provisions 

• Norway – legislation under consideration 

• Netherlands – in process

• New Zealand – proposed

• European Union (Corporate Sustainability Due Diligence law) – currently being negotiated by the European Council and the European Parliament. This landmark legislation will have major global effects.  

The research effort was led by Professor Laura Murphy, an expert in human rights and contemporary slavery at Sheffield Hallam University. There are no human rights violations in Xinjiang, according to the Chinese government. 

Renewables vs. Coal: Will Clean Energy Emerge Triumphant?

Written By: Michael Kraten, PhD, CPA - https://www.linkedin.com/in/michaelkraten/

Did you know that coal remains the #1 fuel source of global electricity generation? Even though our economy has been transitioning towards clean renewable sources for many years, King Coal remains dominant.

Furthermore, the past few years have featured a dispiriting increase in global coal consumption. Excluding the unique pandemic year of 2020, “coal consumption in 2021 rose above 2019 levels, taking it very close to its all-time high and significantly contributing to the largest ever annual increase in global energy-related carbon dioxide (CO2) emissions in absolute terms.” These trends have continued into 2022; as a result, even the United Kingdom has decided to open a new coal mine for the first time in three decades.

If we are still increasing our coal consumption, and if we are continuing to rely on coal for electricity generation more than on any other natural resource, how can we possibly hope to reduce global carbon emissions? Fortunately, the International Energy Agency (IEA) delivered some good news about these concerns last week.

Namely, the IEA predicted that renewable energy sources will finally replace coal as the world’s leading source of electrical power by the year 2025. Its prediction was released in last week’s publication of Renewables 2022, a voluminous 159 page report that presents a five year forecast of energy trends.

And why is the IEA a credible predictor of future trends? In response to the 1970s energy crisis, the agency was established by the OECD to coordinate energy reserves, respond to supply disruptions, and produce economic data. It now serves 31 member and 11 associated nations, a group that is responsible for three quarters of the world’s energy consumption.

If you are worried about our ability to wean away from coal, the IEA’s report should provide you with some comfort. After all, despite some significant short-term concerns, we may cross a historic threshold of electricity generation in just three years.

Does Microsoft Keep Track Of Your Carbon Emissions?

Written By: Michael Kraten, PhD, CPA - https://www.linkedin.com/in/michaelkraten/

When you add content to Microsoft’s LinkedIn service, the technology giant learns more about you. Because you consciously add each item to your profile, that isn’t very surprising.

But what about the amount of carbon that you indirectly emit into the atmosphere when you use Microsoft’s products? Are you conscious of the amount of electricity that you use and the amount of carbon that you emit? And does Microsoft keep track of that information?

On Page 19 of Microsoft’s 2021 Environmental Sustainability Report, the firm’s “Scope 3 Emissions By Source” disclosure explains that “Use of Sold Products” accounted for 28.07% of its total firm-wide emissions. In other words, customers like you accounted for more than one quarter of its total Scope 3 emissions.

How does Microsoft know that? Does the firm embed tracking devices in our devices to quantify Scope 3 emissions from the use of sold products? Page 98 of the 2021 Report explains:

> The reported emissions ... represent an estimate based on assumptions ...

> As the product life cycle assessments ... continue to be improved, the emissions calculations (and) … energy use assumptions have been updated to reflect our latest understanding of device use via telemetry.

> Overall increase … is driven by an increase in sales and usage of devices.

Scope 3 disclosures are thus derived from a combination of assumptions, assessments, and understandings. Interestingly, though, “telemetry” does imply some remote data transmission.

This is why it’s so important to attend conferences like our INTEGRATE event. Our Pillar 5, addressing integrated reporting and advocacy, will address data collection protocols and reporting processes for Scope 3 emissions and other ESG outcomes.

Please join us at the conference. As you learn more about the practices of firms like Microsoft, you’ll become increasingly empowered to develop suitable practices for your own firm.

Is The Federal Reserve’s New Climate Project A Stress Test?

Written By: Michael Kraten, PhD, CPA - https://www.linkedin.com/in/michaelkraten/

One purpose of attending our upcoming INTEGRATE conference is to engage in conversations with thought leaders about: (a) the direction of the economy and (b) how Regenerative CFOs must navigate it. As you know, we have always emphasized this topic in our conference content.

Another purpose of attendance is to obtain information about technical developments in the sustainability sector. One such matter, for instance, is the Federal Reserve Board’s recent announcement of its climate scenario analysis project with America’s “Big Six” global banks.

Scenario analysis? Isn’t that the core component of the capital stress tests that the Fed mandated for banking institutions during the Great Recession? Yes, but those stress tests did not explicitly address “the ability of supervisors and firms to measure and manage climate-related financial risks.” The current project focuses on that issue.

To be sure, the Fed emphasizes that its climate project is an exploratory activity that will not impact the capital requirements of the Big Six. It will not release any individual bank results; it will only share aggregate information.

Nevertheless, the Fed does promise to “publish details of the climate, economic, and financial variables that make up the climate scenario narratives” during the project’s launch in early 2023. Those variables will likely become primary factors in all financial climate risk calculations.

We’ll share information about this project during the INTEGRATE conference. We’ll also provide opportunities for participants, technical experts, and thought leaders to discuss relevant applications. Of course, we’ll continue to provide guidance as we move past the conference and into next year.

In the meantime, let’s remember that the SEC’s proposed climate regulations are not the only important regulatory development on the Regenerative CFO’s agenda. We look forward to discussing all important developments with you when we meet in New York!

The Promise of King Charles III

Written By: Michael Kraten, PhD, CPA - https://www.linkedin.com/in/michaelkraten/

As the British people turn from Queen Elizabeth II to King Charles III, many are already questioning the new British head of state's ability to rally public support for international initiatives and institutions. Some express worry for the future of the British Commonwealth, while others speculate that the United Kingdom itself may fall apart into separate English, Scottish, Welsh, and Irish components.

One reason for optimism, though, may be found in the new monarch's staunch pro-sustainability record. A visit to the current home page of the London based organization Accounting for Sustainability, for instance, presents King Charles in one of the three rotating photos at the top of the screen.

However, no other image on the home page presents him and no text mentions him. His limited presence is startling, given his service to the organization.

The King, in fact, established Accounting for Sustainability in 2004 "to transform finance to make sustainable business, business as usual." The entity provided him with a platform to support the development of integrated reporting initiatives and the sustainable finance sector.

Earlier in his career, in the early 1990s, Prince Charles "started one of the first organic and locally sourced food companies in the world." And he has implemented the principles of the New Urbanism school of city planning and social design by spearheading the construction of experimental communities and other residential and business construction projects.

Of course, all new heads of state -- and leaders of all organizations, for that matter -- quickly learn that they may need to temper their words and actions to conform to the constraints of governance. Nevertheless, given King Charles' long and passionate devotion to the causes of sustainability, the supporters of the movement -- including those focused on accounting, public reporting, and sustainable finance -- should feel hopeful about his ascension.

Elon Musk v. Twitter: What Twitter’s ESG Report Reveals

Written By: Michael Kraten, PhD, CPA - https://www.linkedin.com/in/michaelkraten/

As the Musk / Twitter dispute marches on towards the trial phase, Musk continues to accuse his former target of being unable or unwilling to produce accurate management accounting metrics. But could Musk have done anything to assess this concern before launching his bid?

He could have visited the "Twitter For Good" page on the firm’s site. He could have clicked on the download link for its 2020 Global Impact Report. He would have seen (on the Report’s final page) that Twitter has only chosen to report on the TC-IM-130, 220, 230, 330, and 520 series from SASB’s Internet Media & Services standards.

What is missing from that TC-IM list of SASB metrics? The TC-IM-000 series requires the disclosure of an “entity defined measure of user activity.” According to SASB, “The entity shall define and disclose a basic measure of customer activity suitable for its business activities. This may include ... monthly active users ... or page views.” By excluding TC-IM-000, Twitter selectively ignored a fundamental SASB disclosure.

There are other oddities in Twitter’s Report. For instance, on the final page, Twitter notes its disclosure of “(1) Total water withdrawn, (2) total water consumed, percentage of each in regions with High or Extremely High Baseline Water Stress.” It refers the reader to its Report section named “Planet: Energy Management” for the data. However, that Section offers no such data.

Finally, on Page 5, Twitter expresses pride in producing a 2020 Global Impact Report that explicitly relies on the SASB and GRI frameworks. However, the GRI is not mentioned anywhere else in the Report, and there is no 2021 version of the Report.

Had Musk glanced at Twitter’s ESG report before launching his acquisition effort, he might have noticed that the firm produced a document with many serious flaws. It’s a clear indication that, when one ignores publicly available ESG reports, one does so at one’s own risk.