Planes, trains and chemical spills

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In the news

👥 Util is delighted to welcome Bridget Gleason to the team, in the newly formed role of Chief Revenue Officer. The latest in a series of senior hires, Bridget brings 20+ years of experience leading sales at high-growth technology companies. Read more on Business Wire.

🗞️ The Adani controversy continues to rage and sustainable investors to defect. Interviewed by Financial News, CEO Patrick Wood Uribe warns the spiralling saga may say more about the danger of ESG assessment “shortcuts” than it does the conglomerate itself.

From the top

🏦 It’s a tough job, but someone’s gotta do it. In the week since World Bank President David Malpass announced his premature resignation, speculation has surged about the identify of his successor. The ultimate decision lies (not uncontroversially) with the US, given its sizeable stake in the multilateral bank. The White House is expected to select a candidate for whom climate change is a priority. Increasingly, shareholders have called on the bank to avail crippling emerging-market debt and unleash its balance sheet on international green finance. Malpass, of course, did not do that. Back in September, when asked whether he believed in global warming, the Donald Trump appointee responded “I don’t even know, I’m not a scientist.” Thanks to that gaffe, Malpass is no longer World Bank President, either. His replacement — right now, odds are on Rockefeller Foundation head Rajiv Shah — will be tasked with reforming the 1944 institution to meet the challenges of a 21st Century economy. Climate crisis to the left of it, a sovereign debt one to the right, the future of the bank hangs in the balance. No pressure.

🦅 Nobody wins the ESG culture war. Last week, Florida Governor Ron DeSantis announced new legislation barring investors for state and local entities from a) considering ESG factors in any investment decision, and b) requesting ESG information from suppliers in procurement. DeSantis’s latest efforts to “protect Floridians from the woke ESG scam” may backfire. Local US banks are fighting back, as new evidence suggests blacklists drive up state borrowing costs. Bloomberg data show that Texas and Florida are paying $1.9M and $4.3M more than California on every $1B of bonds, despite having superior credit ratings. Freedom isn’t free, and nor are large underwriters with the resources to ensure low borrowing costs and institutional capital access. The backlash may have further implications for regulation. Following BlackRock CEO Larry Fink’s recent calls for leeway, the SEC is considering dropping Scope 3 emissions from its climate disclosure requirements. Things could get tricky for companies operating internationally, given the opposing routes taken by the EU and global standard-setter the ISSB.

Planes, trains, and chemical spills

The debate about Scope 3 emissions is back, resurfacing uncomfortable conversations about supply chains and the planes, trains, and automobiles that link them together. From aviation’s bold bid for green-standard taxonomy status to the EU’s ban on new combustion cars and vans from 2035, transport has been making headlines.

For once, we’re not talking exclusively about esoteric sustainable finance headlines.

Ordinarily a relative outlier in recent ESG debates — if not most investor conversations outside of Berkshire Hathaway — railroad operators have trundled into the spotlight on the back of the escalating Ohio disaster.

Driving regulation off the rails

On 3 February, a Norfolk Southern train derailed in the small town of East Palestine while on route to Pennsylvania. The train was hauling about 150 freight carriages from Illinois to Pennsylvania. Of those, around 20 were carrying hazardous materials and five vinyl chloride. Residents were evacuated, and emergency crews conducted a controlled burn of the toxic chemical to prevent further explosions. Unfortunately for residents, not to mention Norfolk Southern management and shareholders, the burning carriages released plumes of hydrogen chloride and phosgene — alternatively used as warfare agents — into the surrounding air, soil, and surface water.

The backlash has been fierce, compounded by revelations that the accident was entirely preventable. Norfolk Southern not only ignored but actively campaigned against long list of expensive preventative measures. Management spent hundreds of millions lobbying against rail safety rules; costs it recouped, presumably, by adopting a cost-saving ‘precision scheduled railroading’ model that relies on fewer staff and longer trains. Norfolk Southern accidents multiplied on the back of rising profit margins and share buybacks.

On two lobbying fronts has the company attracted particular vitriol. In 2014, Norfolk Southern fought the Obama administration on proposed safety regulations for trains carrying hazardous materials. Then, in 2017, it persuaded the Trump administration to repeal the requirement for brakes of the type that might have stopped its car from going off the rails this month.

New normal for plastic pollution

This is, evidently, a story that underscores the importance of the G in ESG. Though we sometimes rail (sorry) against the methodologies underpinning traditional ratings, here’s a situation where analysis of company-specific operational risk could have saved lives and lawsuits. But it’s not only a story about that.

Vinyl chloride is the base material for PVC. Norfolk Southern had been transporting vinyl chloride (or attempting to) on behalf of polymer and petrochemical industry customer(s). Somewhere in Illinois, as in Pennsylvania, company lawyers are breathing a sigh of relief for having escaped scrutiny thus far. The New York Times was one of the few national publications to take a swing at the plastics industry in light of the disaster.

In the US, reports Barrons, vinyl chloride is produced by Westlake; OxyChem (Occidental Petroleum subsidiary); Olin; divisions of Formosa Plastics; and Shintech, (Shin-Etsu Chemical subsidiary). Formosa Plastics and Olin claim its products weren’t involved. The others have yet to comment. For whatever it’s worth, a September 2022 press release, issued by Norfolk Southern, cites all three companies as winners of the 2021 “Thoroughbred Chemical Safety Award for safely handling products regulated as hazardous materials.” The reserve of companies that “safely transported or originated 100% of their shipments over Norfolk Southern’s rail network without a single incident in 2021,” the benchmark is nothing to be scoffed at.

The total ecosystem encompasses far more than a handful of PVC producers. The American Chemistry Council, which counts among its members subsidiaries of ExxonMobil, Shell, and BP, campaigns alongside the Association of American Railroads on everything from carbon denial to freight safety. It was in the engine room fighting railroad union action last year, as it was in involved in the 2014 and 2017 rail regulation showdowns for which Norfolk Southern has been criticised.

The mutual support of petrochemical and railroad industries makes sense. Of the c.12M freight cars that cross US railroads each year, about 2.2M carry chemical products. It’s not a new relationship, even if the material has changed. Freight and fossil fuel companies have been bedfellows for a very long time.

Renewable leaders of tomorrolololol

The purpose of a fossil fuel company is to sell fossil fuels, not to generate low-cost energy. Most assumptions otherwise are, regretfully, wishful thinking. Even as Shell fights high-profile greenwashing lawsuits (the major stands accused inflating its renewable expenditure), petrochemicals have, quietly, been claiming a ever-growing share of total company revenue. Not that they factor into Shell’s Scope 3 net-zero target, which applies only to its energy products.

The International Energy Agency claims plastic manufacturing will account for more than a third of the growth in oil demand by 2030 and nearly half by 2050, ahead of trucks, aviation, and shipping. At that point, finds the Centre for International Environmental Law, the cumulative greenhouse gas emissions from plastic could reach over 56 gigatons, or 10-13% of the entire remaining carbon budget.

For sustainable investors assessing the fallout of the Norfolk Southern disaster, the foremost concern is whether it represents an idiosyncratic or systemic event for the company and broader US railroad industry. But there’s another question attracting less interest, despite potentially larger ramifications: Is this an idiosyncratic or systemic event for the petrochemical and polymer industry?

In other words, is it a Deepwater Horizon spill — a potentially repeatable event that informs perceptions of risk and impact at a sector level — or a one-off for which the industry bears no responsibility? The academic evidence aggregated by Util’s machine-learning models is conclusive, as is evidence on the ground. Environmental and human health hazards are no aberration but a feature of plastic production.

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