Shifting Conversations: Updates on ESG, Part 2

Learn how Environmental, Social, and Governance (ESG) regulations are changing, with insights from Carol Ho, Executive Director of Environmental Services at E3. Carol and podcast host, Al Rettenmaier, Managing Director of Oil, Gas, Chemicals, CCS, and Hydrogen discuss the SEC's new climate disclosure rule, upcoming legal challenges, and how it might affect businesses. Carol also explains how the Inflation Reduction Act is reshaping project financing with incentives and tax credits, especially for environmental reviews. Carol and Al also discuss global efforts like the Equator Principles to standardize ESG practices and examine the role of ESG scores in business performance.

Additionally, they explore why ESG metrics are becoming essential in business strategies and investments, especially in renewable energy projects. Carol shares advice on evaluating social and environmental impacts, from supply chain sustainability to risks like flooding and wildfires. The episode also highlights the EU's new Corporate Sustainability Due Diligence Directive, signaling a global move toward mandatory ESG assessments. As ESG factors become key in business decisions, this episode offers valuable insights for anyone navigating the changing ESG landscape. For more, visit our website at www.e3co.com.

Chapters

• 0:08 E3 Podcast on ESG Regulations
• 12:56 ESG Impact on Projects and Investments

Transcript

Al Rettenmaier: Welcome to the Top 3 by E3 podcast about the intersection between engineering, energy and project finance. I'm Al Rettenmaier, a managing director at E3 and I'll be your host today. Today I'd like to introduce Carol Ho, who's an executive director of Environmental Services at E3. Welcome, Carol.

Carol Ho: Thanks, Al. Happy to be here.

Al Rettenmaier: Great.

Carol Ho: Well back overlap with the others.

Al Rettenmaier: Great, great. Well, you know, there's been some sort of bad press about environmental, social governance or ESG, and I thought I'd open that topic up and see what, what your thoughts are on it. I know there's companies that have, you know, advertised their scores, there's rating agencies that advertise scores. How does, how does all that play into this, this overall topic?

Carol Ho: Yeah, well, ESG is controversial because I think it tries often to oversimplify the broad range of environmental and social and governance issues. And some are more important to some stakeholders than others. Coming up with a single score can seem unfair or misleading about how a company is performing. In maybe one area they're performing better than another, but their score doesn't really reflect the efforts that are being made. So the, the SEC has tried to standardize or quantify the metric when it comes to climate related impacts. Where, when companies are doing business, how they are impacting climate change and then also how climate change is impacting their business. We sometimes forget that part where company might be subject to changes in extreme weather, events, flooding, that kind of thing. So it's, it's also about how climate change could impact a business investment decision, say. So SEC has tried to come up with some standard procedures for quantifying those greenhouse gas impacts. So it's controversial and it's not perfect by any means, but that's part of the idea.

Al Rettenmaier: Well, it sounds like there, it's still a bit up in the air. Some of these things are still settling in and so forth.

Carol Ho: Yeah. And when it comes to climate change, people do ask, well, wouldn't that be included under NEPA review? And you would think so because it's called Environmental Policy Act. But for as long as a NEPA report can be, it doesn't, they don't always include climate change impact. The Council on Environmental Quality is the group that issues the guidance. They issued a climate change guidance in 2016 and then with political pressures, it was rescinded in 2017 and replaced in 2019 with a softer guidance and then replaced again in 2023. This latest guidance has a fairly specific list of what an agency should do, what they should look for so there's maybe not a lot of teeth to it, but they should quantify the proposed actions, greenhouse gas emissions, place the emissions in appropriate context and disclose relevant climate impacts and then identify alternatives and mitigation measures to avoid or reduce greenhouse gas emissions. So that's the quotation from the guidance itself. But there's not a sign, there's not a specific emissions threshold like there would be like an air permitting you have. If you emit a certain tons, you have to do certain things. This is a little more loosey goosey about reviewing the impacts and you know, for it is hard to quantify a specific project's impacts on climate change because it's such a global issue. Sea level rise, temperature changes, ocean acidity, wildfires, drought and even human health effects are pretty impossible to pin down to an individual NEPA decision or individual project.

Carol Ho: There are some changes to NEPA that are intended to make it faster and more simplified. These include page limits of 75 pages and 150 pages for EAs and EISs respectively, as well as deadlines of one and two years for reviews and decisions for EAs and EISs as well. While there may be loopholes to those limits, like you could take a bunch of that information, put it in an Appendix, at least they send the message that NEPA reviews should stay focused and done in a reasonable timeframe.

There's another category for actions or projects that would not typically have a significant impact and these are called categorical exclusions or (CATX.) So it's excluded from going through an NEA process if a project meets a specific criteria, not necessarily based on size but based on impact. And just recently there were some changes to Categorical exclusions (CATX). They're issued by the lead agencies. So the Department of Energy has its set of CATXs and they made it so that other agencies can piggyback off the CATX policies of other agencies. So that is that making them more available. And they're also just changing some language. So that they're more applicable to certain projects. Like the categorical exclusion for upgrading and rebuilding power transmission lines had language in it about 20 miles or less and they removed that language so that on a case-by- case basis the transmission line might qualify regardless of its distance. So it's interesting to see how this is all changing.

Al Rettenmaier: Right? Yeah, it's a very complex subject and it all seems new and I'm sure people are trying to figure it out. It's certainly been brought up in a lot of public commentary. You see this on TV and on YouTube that nature.

Carol Ho: Yes it's definitely part of the discussion. It's just difficult to quantify and compare apples to apples.

Al Rettenmaier: Right, right. Well, one of my favorite subjects is Equator principles and I'd like to get your take on what are the differences in the new equator principles rules and, and what's going on with equator principles. It used to be something that was really a simple exercise and now it's something different.

Carol Ho: Yeah, that's right. And the difference there is that what they called high income OECD countries were exempt from having to go through the separate equity principles review under the international performance standards because their home country rules were considered to cover it to be at least as good or better than the international standards. But that has evolved over the years and changed. And so now it doesn't matter where you're located if your project has a certain criteria of impacts. So there are different categories. Category A, most impactful, B, impactful, but can be mitigated, and C is the most benign projects, but projects that we typically see, we would consider category B, certainly category A projects. They need to have specific assessments done. They need to talk about their climate change risk and they also need to talk about their human rights risks. So even if you're not doing those as part of your permitting or you don't have, let's say you don't have to go through NEPA, this is something that an investor will need to include in their investment decision. So it's something that we do try to bring to the attention of our clients and it's something that we can assist with and we also have experts that we can bring on board to help us out with that. And this is coming up more and more in the renewable energy projects, especially with supply chain human rights issues. You know, you know, where do the minerals come from that are used in solar panels and energy storage systems?

Al Rettenmaier: Fantastic. Okay, so really any, it's going to be, any large project is going to be, you know, scrutinized for the climate change impacts, whether it's a renewable project or a fossil fuel project. It sounds like.

Carol Ho: Yeah, it depends on the size of the loan and the type of loan or refinance. That's all in the equator principal scoping section, which is online. But yeah, most large projects that, that we see would. And it, and also if the lender is, has committed to the equator principles as well, which more and more have, I think it's up to 140 some financial institutions that have, have signed on to it.

Carol Ho: There are four large US Banks that have withdrawn from Equator Principles that were longtime members. I don't have any insider information as to why, but they do say that they will rely on in house standards. So hopefully their own internal standards are just as robust as the Equator principles when it comes to them doing their own due diligence for their investment decisions.

Carol Ho: So one way or another it's, it will be hard to avoid doing some kind of climate change assessment on a, on a large project.

Al Rettenmaier: I would say I should tell the listeners that you and I work together on projects and it's a real luxury to be able to just say, hey Carol, can you handle this? And you just handle it all. And I know it's a new normal for you. It's still new for the industry, but it's very important. In the top three by E3, we try to come up with three takeaways, things that people can take away and think about on their own or refer back to our podcast. What would you say are the three takeaways that folks should take away from this conversation?

Carol Ho: Yeah, thanks. And also, I don't just do all that myself. I do have some great help, especially on the social impact side of things. So the first takeaway would be that a company or development is likely going to be needing to look at this in one way or another. I would also just mention that the European Union is moving in this direction as well. They just adopted the Corporate Sustainability Due Diligence Directive which applies to not only companies based in the eu, but that do a certain threshold of business there as well. So that could apply to companies here. So that would be my first point is that there may be some assessments needed that have not otherwise been done on projects. In a similar vein, don't ignore the social impacts, in particular for supply chain issues of materials used in renewable projects. And third, regarding climate change, even projects that don't have emissions and you know, don't contribute to climate change may need to consider climate change risks on their project and address things like flooding or tidal rise or wildfire risk. I think those are the most important considerations. I'd say this field is becoming more than just a checkbox and we are really seeing ESG metrics being integrated into businesses, business decisions and project investments.

Al Rettenmaier: Well, great. This has been very educational for me and hopefully our listeners got some good information and if they have follow up questions they can contact us. Please go to our website which is www.e3co.com and you should find a contact capability through there. Well, thanks a lot Carol. It's been fun doing this with you and I think you've transferred. Some very valuable information to our listeners.

Carol Ho: Absolutely. Thanks, Al. We'll talk to you soon.