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President Biden’s carbon-reduction agenda is coming into sharper focus with the release of a plan to spend more than $2 trillion on infrastructure by 2030. While much can change as Congress takes up the the tax and spending components, which include investment in roads, bridges, public housing, water and manufacturing, several climate-related proposals stand out:
• $111 billion for improvements that include upgrading the US electric grid, in addition to establishing a standard in order to increase electricity generated from sources like nuclear and hydropower. It further seeks to eliminate certain tax preferences in the fossil fuel industry.
• A push into electrical transport is notable, with a proposed $174 billion package of incentives and grants to support domestic production of electric vehicles (EVs) and build-out of a network of 500,000 EV charging stations. There are currently over 100,000 public EV charging outlets installed in the US. A charging station has multiple outlets.
• A 10-year extension and phase down of an expanded direct-pay investment tax credit and production tax credit for clean energy generation and storage.
• A $35 billion investment in clean energy technologies and climate-focused research, including carbon capture and storage, floating offshore wind, and EVs.
These plans advance the administration’s federal government-wide approach to addressing climate change.The tax increase proposals likely will need the support of all 50 Democratic Senators and nearly all House Democrats. Moderate Democrats may seek to scale back some of the proposals and may seek to block others when Congress is expected to consider tax increase legislation later this year under “budget reconciliation” procedures. PwC’s Tax Insightsanalyze the corporate tax increase proposals, which include increasing the corporate tax rate from 21% to 28%, and the numerous ESG proposals in the plan.
In addition to potential legislative change, regulatory agencies will play a big part in implementing Biden’s climate goals. The Securities and Exchange Commission (SEC) has a new heightened focus on disclosures about climate change, signalling a likely shift toward more standardized climate change disclosures for public companies. Treasury secretary Janet Yellen has asked the Financial Stability Oversight Council to address the economic and financial risks of climate change.
The administration is targeting carbon pollution-free electricity by 2035 and a net zero emissions US economy by 2050. Beyond regulation, Biden is deploying other policy tools, including: executive orders, a push to integrate climate resilience into infrastructure bills, and rejoining global efforts to fight climate change. As companies pivot toward more climate-resilient business models, here’s what they need to know about ESG reporting and how climate risk and opportunities tie into business strategy.
1. Stress test the business against a broader set of risks and opportunities
The Covid-19 pandemic has increased the urgency to tackle connected global risks. The target goal established by the Paris Agreement to keep average global warming in this century below 1.5° Celsius (2.7° Fahrenheit), compared to pre-industrial temperatures, lowers the risk of negative impacts, although it won’t reverse climate change.
Investors and other stakeholders increasingly expect companies to disclose their plans for how their business models will be compatible with limiting global warming to the threshold agreed upon by 189 countries. Companies are facing evolving global reporting guidance for enhanced climate change disclosures. But without any US enforcement standard (yet), where do you begin?
A good starting point is the Task Force on Climate-related Financial Disclosure (TCFD) supported by more than 1,500 companies and the New York Department of Financial Services (NYDFS). The NYDFS expects all regulated organizations to use the TCFD framework in developing their approach to climate-related financial disclosures. The TCFD recommends broad analyses of climate risks, far beyond the immediate physical risks many companies prepare for, e.g. operational and business impacts from hurricanes and wildfires.
• Physical risks, including acute as well as the chronic shifts that are underway. For example, assess how changing weather patterns are disrupting agriculture production or transmitting diseases.
• The transition risk from moving to a net zero economy, for example, pricing of GHG emissions and disruption risk of low-carbon technologies.
This is not just a defensive exercise; companies can seize transformational opportunities by structuring operations and strategies to better respond to climate change.
2. Evaluate the financial impacts on business of shifting to a low-carbon or net zero economy
Transitioning to a low-carbon economy, or even carbon neutrality, will impact every company in a different way. Here are some examples:
• An energy company recognizes that continued carbon-emissions will likely incur more costs in the future through a carbon credit trading scheme or a similar policy tool. The company should update its cash flow forecasts and calculate the reduction in its operating margin because of the incremental cost of acquiring additional carbon-emission credits.
• A supermarket retailer is promising that all store-branded products will be sourced from carbon-neutral certified farms within 10 years. The company should adjust the gross margins in its forecast models based on the projected input cost increases and the higher prices customers would be willing to pay.
• A diversified consumer goods company has identified that one revenue stream faces a particularly high risk of being adversely impacted by climate change in the medium term. If the risk profile of this revenue stream is significantly different, the company should disaggregate it from other revenue streams for disclosure purposes.
Estimate top-line and bottom-line effects
3. Build your roadmap to climate disclosure
Most companies, including those that support TCFD guidelines, do not have a comprehensive climate strategy. Here are five steps you can take to immediately address investor and consumer demands for climate disclosures – and be ready to meet requirements as new regulations roll out.
• Conduct a gap assessment around your chosen framework: Evaluate how to bring your house in order so you can take action to receive a score for Carbon Disclosure Project (CDP) or communicate your climate narrative based on TCFD’s recommendations.
• Prioritize climate change impacts on your business: Identify relevant data and assumptions to work toward a quantitative scenario analysis of the 1-3 most significant impacts. Your first report may not satisfy all the guidelines. This exercise is useful in setting strategy, even if you don’t plan to immediately disclose this information.
• Build a cross-functional advisory team: Climate risk and opportunities affect all parts of the organization from strategy and investor relations to risk management, legal and finance.
• Be responsive to governance trends: Investors expect “climate competent” boards to have oversight of climate strategy and risk management. Be prepared to show greater accountability, e.g, a continued trend toward tying executive compensation to climate metrics.
• Prepare for more rigorous analyses of the intersections between social inclusion and environmental sustainability: The Biden administration is making environmental justice a focal point of its climate policies noting that environmental harms disproportionately impact low-income and minority communities.
Climate strategy requires a cross-functional approach
After a period of deregulation under the Trump administration, the regulatory pendulum is swinging toward investor and consumer protections. Stakeholder and regulatory expectations are converging around a coherent framework for ESG disclosure that gives a clear picture of companies’ long-term performance. Companies charting their ESG journey should also note the growing emphasis on the interconnectedness of ESG issues. For example, a report from the National Academies of Sciences, Engineering, and Medicine is calling upon the Biden administration to increase social spending to assist Americans hurt by the clean-energy transition. As expectations continue to increase about business’ environmental and social stewardship, rules and enforcement will revolve around not only compliance, but seek to cement change in the way companies operate and create stakeholder value.
To develop a tangible and practical ESG plan that your business can act on, learn more.
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Making sense of ESG
A guide for business leaders on addressing environmental, social, and governance issues