Week in Impact

Food for thought

The EU sets the (regulatory) tone. Corporate net-zero pledges lack credibility. Society gets dirty to go green. Plus, do food systems have time to reset before climate calamity?

In the world

🇪🇺 The EU Commission is firing on all (regulatory) cylinders. Having published an updated draft of its European Sustainability Reporting Standards (ESRS) last Friday, it introduced a package of measures this week — and to much fanfare — aimed at strengthening the EU sustainable finance framework, including new criteria for the EU Taxonomy and proposals for ESG ratings regulation. With IFRS standards impending, could first-mover advantage help the EU set the tone for global disclosures? Depends on how the US feels about it.

🗺️ Corporate net-zero pledges lack credibility, according to a new report. Having canvassed decarbonisation strategies across countries and companies, the Net Zero Stocktake 2023 concludes targets must urgently improve to make any dent on fast-unfolding climate change. While supranational organisations progress at a glacial pace, how can investors move the needle? The answer, argue researchers in a comprehensive new study, may lie in not divestment or engagement but “field building.” (Or, you know, sue.)

🗺️ Society must get its hands dirty to go green. We love to talk about the dilemma at the heart of sustainable economic activities. In short, there’s always a tradeoff — and it got plenty of airtime this week. Speaking to Bloomberg, author Ed Conway discusses the inconvenient truth about net-zero and the commodities on which it depends. Another “progress over perfection” story under the Moral Money microscope this week is contentious carbon offsetting, which may prove unavoidable for industries eluded by decarbonisation. 

In the headlines: Food for thought

Notwithstanding concurrent inflationary pressures and slowing growth, the EU has long made clear that sustainability is a priority in even challenging economic times. To that end, it isn’t messing around.

Recently (and not without controversy), the EU introduced its Deforestation Regulation requiring companies to undertake due diligence into a broad range of commodities to ensure their supply chains are free of deforestation. Investors are rattled, according to Reuters, which reports that several major institutional investors are exiting consumer goods firms in anticipation of the new rules coming into effect in 2024. 

Could food and agriculture be next?

The industry tends to fly under the radar in terms of environmental impact, eclipsed by more obvious offenders such as energy and transport. Unsurprisingly, however, it takes a lot to feed 8 billion people. Crop irrigation accounts for 70% of global water consumption, while food systems are responsible for a third of anthropogenic greenhouse gas (GHG) emissions. Nonetheless, the Climate Policy Initiative recently found that just 4.3% of climate finance was spent on agrifood systems in 2019 and 2020.  

The EU is trying to change that with its impending Sustainable Food Systems Law, which — according to ESG Investor — “has the potential to revolutionise the food value chain as we know it” by laying out criteria for sustainable labelling, food procurement, and supply chain management. For many companies operating in the EU, this is the latest unwelcome invitation to redirect resources towards areas it may not consider “material.”

The response, particularly emanating from the US, reinforces that view. Treasury Secretary Janet Yellen has raised concerns about the potential “negative, unintended consequences” of EU efforts to force corporations to screen their supply chains for environmental and social risks. “Double materiality” is often derided as anticapitalist — but as the EU seems to understand and as unfolding climate events highlight, corporate impact is anything but “non-financial.”

Nestlé Holdings, 2022, Util data.

The reason to challenge a company like Nestlé, above, is not as simple as “fertiliser bad 😾” but because it makes long-term business sense. Nestlé should address — is actively working to address — its supply chain impacts, not least because it will be direct collateral of those impacts. We don’t need a crystal ball to predict what that could look like. It’s already here. 

The company is right now bracing for an El Niño event of epic proportions: one that could send global commodity prices soaring, compressing Nestlé’s margins in the process. While El Niño isn’t itself a function of climate change, the breadth and depth of its weather extremities (this time around) have been exacerbated by a warming planet: one with fewer forests to suck up atmospheric emissions. 

It’s also a function of what’s to come. El Niño (and the associated 1.5C temperature threshold we’re about to push past) is temporary. Longer-term climate change — and the associated commodity inflation it will bring — is not. “Double materiality” may be dismissed as a fluffy term by investor relations teams. “Economic disruption and displacement,” less so.