ESG Briefing, February 27th: Court rules Canadian federal carbon tax unconstitutional

The latest developments in sustainable finance

The expansion plans of London’s Heathrow airport were ruled unlawful today (February 27) by the UK Court of Appeal in a landmark ruling, which said the government did not take into account the impact on the country's commitment to tackle global warming under the Paris Agreement. The UK government has not lodged an appeal. Natasha Landell-Mills, head of stewardship at Sarasin & Partners, said: “The Court of Appeal’s decision on the Heathrow expansion today is game-changing. No longer can governments disregard their own commitments under the Paris Climate Agreement when approving major infrastructure projects. Critically, this should also make investors sit up. Investors putting capital to work in carbon-intensive activities risk bearing the cost of similar litigation and resulting stranded assets. This decision is thus a vital step in helping to shift capital away from activities harming our climate, towards those stabilising it.”

Hungary is discussing a 3-5 year sovereign green bond issuance with investors in Japan and China, Finance Minister Mihály Varga said on Monday. The minister said that Japanese players in particular had come forward as possible partners for the issuance – which Prime Minister Viktor Orbán first spoke of earlier this month. Varga also said the government was considering making the bond available to resident retail investors, but that the securities would first be issued to institutional investors. A framework is expected to be published mid-year. Mexico, Spain and Egypt are also expected to issue their debut sovereign green offerings this year. 

In Canada, an Alberta court has ruled the controversial federal carbon tax as unconstitutional, after almost a year of the province resisting the measure. The federal government said in June 2019 that it would impose carbon pricing on Alberta, after Premier Jason Kenney said he would axe the province’s former tax on carbon. In January 2020 the province changed from the Alberta model, which priced carbon at $30 per tonne with no plans of an increase, over to the federal model, which is expected to increase from the current $20 per tonne to $50 per tonne by 2022. The Alberta Court of Appeal ruled 4-1 on Monday that the federal carbon tax infringes on provincial jurisdiction. “The act is a constitutional Trojan Horse,” said the decision written by the majority justices. “Almost every aspect of the provinces’ development and management of their natural resources…would be subject to federal regulation.” Ontario, Saskatechwan and Quebec are also resisting the federal carbon tax. 

The European Commission’s Just Transition Fund is starting to take shape with the publication of investment guidance looking at member states’ transition challenges. The analyses, part of a newly added environmental focus to the European Semester Winter Package, are the first step in establishing how the fund can support fossil fuel-reliant member states and take into account the social dimension of the climate transition. Members are to base their territorial Just Transition Plans on the guidance, and send requests for technical support to the Commission in March. The Winter Package also integrated the United Nations Sustainable Development Goals into the Semester, as part of “efforts to put sustainable development at the heart of economic policy”.

Most UK fiduciary asset managers claim to have comprehensive asset class coverage for ESG integration, but 30% in fact do not score for ESG across all asset classes, a survey from UK-based pension consultancy XPS Pensions Group (XPS) has found. The survey, FM watch – ESG Special, looks at how ESG integration varies across 16 UK fiduciary managers representing over £170bn of assets and around 90% of UK fiduciary mandates. The research also found that a quarter of UK fiduciary managers do not engage with their underlying third party managers to improve their ESG processes.

ESG is “creating a 90s-style tech bubble” as investors ignore fundamentals, RWC Partner’s Graham Clapp has warned. According to Clapp, who is Manager of the RWC Continental European Equity fund, share prices for ESG-focused companies are soaring as investors “fail to consider fundamentals in the hope of finding the long-term winners”. Clapp said: “It’s getting to the point where anything related to hydrogen or other green technologies, for example, are all up 100% in six months, despite the fundamentals not having changed…Clearly some of these businesses may well be the future, but what we are saying is investors must look at the fundamentals, or else they may suffer the same fate as investors in the early 2000’s.”

FTSE 250 power company, Drax, is to end coal power generation at the UK’s largest power station next year, four years ahead of the UK’s 2025 deadline. Part of the company’s commitment to become “carbon negative” by 2030, the changes to the North Yorkshire facility come after a comprehensive review of Drax’s operations and will lead to the loss of more than 200 jobs at the site.