Defining ‘Brown’ Practices May Be A Sticking Point In Establishing ESG Standards
What’s happening? Defining environmentally harmful – or "brown" – activities can often be harder than defining "green" practices, according to a report from Fitch Ratings. The rating agency noted it will most probably be difficult to come to a global consensus on what constitutes a "brown" activity, "given the starker economic trade-offs for more carbon-intensive economies”. Should a common definition of "brown" activities be established, Fitch said it will likely have a substantial impact on how asset managers make investment decisions, noting negative screening of problematic assets is the most commonly deployed ESG strategy by these firms.
Why does this matter? While creating a universal “green” taxonomy has proved incredibly difficult, defining what constitutes an environmentally harmful activity, liable to disincentives, may well be an impossibility.
As the above article notes, it’s highly likely that nations with carbon-intensive economies will be reluctant to adopt definitions necessitating restrictions are placed on domestically important industries. There is also a grey area surrounding how some problematic activities are seemingly necessary for the transition to a low-carbon economy.
The push towards greater electrification, for example, will require the increased mining of metals such as lithium, cobalt and copper. Such practices obviously have environmental consequences. Defining them as “brown” and liable to restrictions could hamper efforts to reduce carbon emissions.
Additionally, the development of alternative fuels also involves certain activities that may be frowned upon. It’s been reported carbon-neutral calculations for biofuels, for example, usually exclude emissions from used fertilisers and from fossil fuels burned during the collection and transportation of biomass. In some cases, biofuels have been shown to emit more carbon than the fuels they substitute.
Further thought from Curation – It’s worth noting that stakeholders have recently been turning their backs on “green” offerings from corporates involved in problematic industries.
Shipping firm Teekay, for example, issued green bonds in 2019, the proceeds of which were to be put towards retrofitting its fleet to run on liquefied natural gas. Investors, however, balked at the issuance, noting the company’s ships were being used to transport crude oil.
Nick Finegold is Founder & CEO of Curation Corp, an emerging and peripheral risks monitoring service.
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