The EU Emissions Trading System (ETS) continues to reward heavy polluters by granting them free allowances instead of incentivising emissions reductions, the World Wide Fund for Nature (WWF) has argued. The NGO has published a paper outlining its finding that €40 billion (US$41.9 billion) was lost to free allowances in 2023, instead of being reinvested into the decarbonisation of ETS-covered hard-to-abate sectors like steel and cement. EU-based oil refining companies received more than 73 million free allowances in 2023 – equivalent to €6 billion – the report added. Steel giant ArcelorMittal received more than €3.8 billion in free allowances in 2023. ‘Free allowances’ refer to permits issued every year under the scheme to cover some of the cost of carbon heavy-emitting industries are expected to pay. One of the main drivers behind forming the ETS was to shield the EU from the risk of industries relocating to regions not covered by the same climate rules, while still encouraging these industries to shift to low-carbon operations. WWF has argued that the existing structure of the ETS has allowed the sectors such as the manufacturing industry to lag behind, noting that it has decreased carbon pollution by less than 15% since 2013. With the ETS set to gradually be replaced with the Carbon Border Adjustment Mechanism from 2027, WWF has emphasised the importance of this application timeline remaining in place, shunning calls for a two-year delay, which the NGO has predicted would deprive the Innovation Fund of around €20 billion of resources. 

The Institutional Investors Group on Climate Change (IIGCC) has set out several core principles to help policymakers develop sectoral pathways and supporting policy frameworks to meet decarbonisation targets. According to the IIGCC, such roadmaps remain credible and useful, and that policymakers should be clear about how new policy initiatives support this transition. The organisation also stated that more transparency should be provided over planned financing mechanisms. “With countries updating their Nationally Determined Contributions this year, ensuring these are ‘investable’ is critical,” said the IIGCC in a statement. The IIGCC acknowledged that policymakers in several jurisdictions have developed sector decarbonisation roadmaps in recent years, but noted that these vary significantly in the amount of detail they provide and can also contain significant gaps in information from an investor perspective. The IIGCC said these new core principles will allow roadmaps to be “more effectively used by investors to inform decision-making and investment processes while fulfilling their fiduciary duty to manage risk and return and protect the long-term value of their assets.” The organisation added that, if done well, the roadmaps can also “better allow policymakers to attract the long-term investment required to implement ambitious climate goals”.

The Organisation for Economic Co-operation and Development (OECD) has said available ESG-related metrics are “generally not sufficient” to measure alignment with its guidelines. The body recently published a report on the collection and classification of over 2,000 metrics from eight major ESG rating products, finding that they typically rely on controversy-based metrics, which risk penalising companies simply for the presence of risks or adverse impacts in their operations and supply chains. Metrics have “very limited coverage” of policies and performance beyond direct operations – such as supply chains – and often only capture due diligence measures with respect to specific topics, the OECD said in its report. “On their own, controversy screens will generally not be sufficient to assess compliance with the recommendations of the OECD guidelines,” the organisation added. “The absence or low number of controversies can indicate a robust responsible business conduct (RBC) management process but can also be the result of limited public attention and scrutiny over a specific company, RBC issue, sector, or geography.” In addition, the OECD found that 68% of assessed ESG rating products rely on input-based metrics. It noted that this can lead to partial ESG performance assessments, with limited information on how companies are managing the associated impacts, risks and opportunities holistically beyond their disclosure practices.

Emissions-focused standards provider Greenhouse Gas (GHG) Protocol has delayed the publication of its ‘Land Sector and Removals’ guidance following the failure of its advisory committee to reach agreement on a proposal for forest carbon accounting. This guidance was initially due to be published in the first quarter of this year, but has now been pushed back to the end of the year instead. The GHG Protocol has set up new a working group to help find a resolution to this issue. “This technical working group is pivotal to the successful completion of the Land Sector and Removals Standard and Guidance. The GHG Protocol secretariat is grateful to this international group for forest carbon experts volunteering their time to help GHG Protocol reach a resolution on this critical forest carbon accounting issue,” said Matt Ramlow, Land Sector and Removals Lead. A lack of consensus also exists over the methodology for calculating emissions leakage from the agricultural sector. GHG Protocol develops international-accepted standards on land use, carbon removals and storage, biogenic products and related topics for use in the public and private sector to inform mitigation strategies, track performance and report inventories.