Listen: What do updated climate disclosure rules mean for industry?

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Vincent Valk:
Hi, and welcome to the Chemical Week Podcast. I'm Vincent Valk, and before we get to today's episode, I'll be bringing you some of the upcoming stories and events we've got our eye on for the next couple of weeks.
With the July 4th holiday having just ended here in the US, we're in a bit of a summer lull, but second quarter earnings season gets underway towards the end of next week. Coatings maker PPG Industries reports on July 18th kicking things off. Other producers will report later in July. If first quarter results and recent commentary is any guide, the operating environment has improved so far in 2024, but the optic is modest. This is, as of now, widely expected to continue, but we'll surely have more coverage as Q2 results come in.
Our most recent print issue featured a cover story on ACC's Responsible Care program, which has continued evolving with AI tools and a greater commitment to sustainability. Our next issue on July 22nd will feature a cover on clean ammonia, and we've got a clean ammonia episode of the podcast lined up for that week too. A lot is happening in that space, so keep an eye out.
But this week, we bring you a conversation I had with Sophie Casenave of environmental commodities trader, STX Group. We talk about some updated climate disclosure rules in the EU and the US, as well as the rollout of the Carbon Border Adjustment Mechanism or CBAM in the EU and the UK. This figures to have a big impact on industry in the coming years, and Sophie and I chatted about how it plays into major trends around decarbonization, green technology, and European competitiveness. Let's give it a listen.
Our guest today is Sophie Casenave, policy affairs manager at STRIVE by STX Group, an environmental commodity trader and climate solutions firm. And we are going to talk a little bit about some newly or relatively newly released climate disclosure and sustainability reporting rules, particularly in Europe and the UK. Hi, Sophie.

Sophie Casenave:
Hi, Vincent. Very nice to be with you.

Vincent Valk:
Great, and thanks for coming onto the podcast. So want to get into the meat of my questions shortly, but if you could maybe just for the listeners who aren't familiar with STX give a sort of brief elevator pitch on what STX Group is and what you do.

Sophie Casenave:
Yeah, sure. So STX Group is a leading global environmental commodity trader and a climate solution provider for corporates. And we have more than 25 years combined experience in climate solution and environmental commodities trading. We are now presenting 13 offices worldwide. We have over 500 employees. And we serve about, a bit more than 7,000 corporates globally. The product we trade includes environmental attribute certificates, biogas, biofuel products, voluntary carbon market, et cetera, et cetera.

Vincent Valk:
Got it. And just to clarify, when you say climate solutions provider, what do you mean by that?

Sophie Casenave:
So what we mean is that we help corporate decarbonize. So part of the offer we have with our STRIVE by STX division, we offer advisory consulting for our corporates, and then we also provide them the solution for them to decarbonize. So we don't just give the advice, but we also have solutions to provide, which include some commodity trading that we happen to have. But we can basically really take a corporate from the very start of the journey when you look at putting a plan together to implementing this plan.

Vincent Valk:
Got it. That makes sense. So shifting now to what we wanted to talk about today. I know there have been some new rules released in the European Union regarding sustainability reporting, the CSRD directive in the acronym soup of, I suppose, EU regulations, it's called that. So what are the key differences between CSRD and previously existing EU rules on sustainability reporting? Because I know certainly covering the chemical industry, companies based in Europe have had pretty robust sustainability reporting for a while. So what is changing with CSRD?

Sophie Casenave:
So basically to continue with the alphabet soup, the CSRD replaces the NFRD, so the Corporate Sustainability Reporting Directive replace the Non-Financial Reporting Directive. And I guess you could put the two main difference between the numbers of company that are going to be covered and the level of details it has to go through.
In term of numbers... So the CSRD is now operating. It's going to be phased in. So the first group of companies that have to apply or comply to the CSRD are the large-listed company, large companies that are listed on a European stock market. They have to provide their first reporting using CSRD methodology by 2025 on 2024 activities. And then it will continue with large companies that are non-listed with some listed SMEs. And it will also even cover some third country companies that have significant business in Europe. In term of numbers, it's expected that the CSRD will cover approximately 50,000 companies. The NFRD before was covering around, a bit less than 12,000. So it's almost multiplying by four the scope of companies who will be covered.
In term of details, so the CSRD covers these 12 different standards. So the standards are called the ESRS, European Sustainability Reporting Standard. They are the standards that company need to follow when they comply with the CSRD. So it's been... There is now a very clear direction on how you're supposed to report, and this is to ensure transparency and the fact that you can then, for an investor, they can really compare companies within each other because they are measured and they are disclosing their ESG parameters following the same methodology.
So in term of standard, I said it's 12 different standards covering various points, climate, but also social governance, et cetera. And in term of climate, which is the one that we have the most experience with, just the climate standard has around 200 data points that company will need to fill to disclose their emission, their internal carbon price, what kind of energy mix they are using, what is their strategy to reduce emissions, for example.
So yeah, and this is probably the one where at STX we have most experience with because this is what our corporates can call on us to help them navigate.

Vincent Valk:
So one piece though that I thought was interesting is that... So this is going to apply not just to European-based companies, but to companies with significant operations in Europe. Is that the case for the set of rules that the CSRD is replacing?

Sophie Casenave:

So no. Currently, the NFRD was not covering them, so that's kind of new. There will be specific standard though. So it is the EU Commission still have to approve the set of standards that will be applied for third country companies. So it's probably not exactly the same than what European companies have to do. But yeah, they will have to report. As long as they do significant business in Europe, they will have to report their climate impact.
So one other interesting thing is obviously CSRD works on what is called a double materiality principle. So not only a company has to assess the impact that climate change can have on its activity and the kind of risk-related climate change, but it also need to assess the impact that it has on climate and all these questions around how do I contribute to climate change by my emissions, by my energy usage, et cetera, et cetera.

Vincent Valk:
Yeah, and the other thing that I was curious about here is, so significant business in Europe, do you have any sense as to what that threshold is?

Sophie Casenave:
The level of revenues? I can't remember if it... I would say 40 million, but might be wrong.

Vincent Valk:
[inaudible 00:08:42] revenues.

Sophie Casenave:
But yeah, it's based on revenues that is being done in the EU.

Vincent Valk:
And so want to now talk a little bit about CBAM, and that being the Carbon Border Adjustment Mechanism. And I have a question here about the differences between the CBAM policies between the EU and the UK. But before I get to that, could you just very briefly, Sophie, maybe in 30 seconds or so just describe what a Carbon Border Adjustment Mechanism is in case anyone listening? I feel like it's a phrase that a lot of people have heard of, but maybe not necessarily sure exactly what it means.

Sophie Casenave:
Yeah. So basically what a Carbon Border Adjustment Mechanism is, it's basically it's a tool that will adjust, will put a price on the carbon embedded into goods that are imported into a certain country. In that case, for example, the EU or the UK. So it's something that is set at the border. And yeah, it usually goes hand in hand with an emission trading system like it is in the case in EU and UK. And so companies that are producing in Europe, for example, they have to comply with ETS regulation and they have to price their carbon emission and they have to cover, well, buy certificates, allowances to cover their carbon emission. So in order to adjust this kind of carbon price paid or by producer producing in Europe, in order to have a level playing field and to make sure that imported goods don't get favorable treatment, then alongside an ETS, you put a CBAM which readjust the carbon price at the border.

Vincent Valk:
Got it, got it. So a company can't import something that emitted the same amount of carbon and benefit from not having to pay into the emission?

Sophie Casenave:
Exactly, exactly. And this is really the goal of CBAM is to avoid what people call carbon leakage because the fear is, especially when the EU has in mind that they will... Currently, for some businesses they give some free allowances, but there is this idea that they are going to reduce and then at some point in 2034 completely phase out the free allowances. So suddenly people produce in Europe will face significant cost of carbon. So what the EU want to prevent is that some companies decide to produce somewhere else or import their goods from somewhere else outside the EU and just import that into the EU.

Vincent Valk:
Got it. And so coming back to the initial question here, so what are the key differences between... I know the EU and the UK both have implemented or are implementing CBAM policies, so what are the key differences between the EU and UK policies?

Sophie Casenave:
So one of the key difference is timing, because the EU CBAM is already operation, although it is in a kind of transitional phase, they call it. It started on October 2023, and it will be in this transitional phase until 2026. January 1, 2026, it start its normal operational phase where people really have to start paying for a price for the imported carbon.
If you look at the UK one, it has been announced by the government in December last year, and they are still working out the detail, the implementing, well, yeah, implementing details. There's been a consultation that is open until 13th of June. So probably by the time this podcast released, the consultation will have closed. And the government also has been doing some kind of consultation round table to which STX has been invited. So we could share the experience we have of the EU ETS, particularly through our sister company Vertis, and we could share this experience of CBAM and how CBAM is being put together and works with ETS with the UK government. So that's the first big difference, the timing.
Difference is the sectors covered. Some sectors are not covered in the UK CBAM and some sectors are covered in addition that are not into the EU CBAM. So the UK CBAM doesn't include electricity, which is covered in EU CBAM, and instead the UK has included ceramics and glass, which are not currently included into the CBAM.
Then there is some slight difference into the pricing mechanism. In Europe, people importing goods will have to buy what is going to be called CBAM certificates that covers to the amount of carbon that is being imported and the price will be aligned with the average weekly price of the ETS allowances at the time of import. So price is being very much linked between the EU ETS and the EU CBAM.
The UK is going to do it slightly differently. The UK is going to set different rates per sector that are going to be updated on a quarterly basis and that are going to be partly determined by the UK ETS price, but not completely linked. So that's one of the difference. Oh, and also one difference, the EU CBAM ask for the carbon emissions to be calculated using the Scope 1 emissions and Scope 2 in certain cases when the UK CBAM want importers to report the Scope 1 and Scope 2 embedded in the goods for all the sector.

Vincent Valk:
So want to focus a little bit on chemicals here. CBAM in both the UK and the EU initially doesn't seem to apply to most chemicals. It looks like hydrogen and fertilizer products are exceptions. Do you have a sense of when or if these CBAM policies might be expanded to include petrochemicals, polymers, and specialty chemicals?

Sophie Casenave:
There were rumors actually about inclusion of some polymers or other chemical in CBAM before it started. What is sure is obviously the EU Commission launched the CBAM with the current sectors, and as you said, hydrogen and fertilizer are included. But the EU Commission always said they will review the scope of the sectors covered by the end of the transitional period, so by the end of 2025, and they will use some data that they have collected during the kind of transitional period to review and evaluate the possibility to expand the CBAM to other goods, to other sectors. And they will obviously look at goods and sectors that are covered by the ETS currently and, well, the most at risk of carbon leakage. And I think the ultimate goal is to try to align as much as possible the sectors between ETS and CBAM because these mechanism really work hand in hand.
So I think industries in sectors that you mentioned, in chemical sectors that are covered by ETS, they probably should start thinking or preparing and the fact that they are likely to be covered at some point. And there are plenty of arguments for covering the chemical sector because it's a very highly emitting sector. It's the third emitting sector, industrial sector according to the IEA. I think it's 4% of the global greenhouse gas emissions. And of course, we all know that demand for chemicals is likely to rise. So there is definitely a need to try to limit the emissions produced by the sector in Europe. But if you do that by increasing the carbon price of their emission, if you want to not destroy your chemical industry in Europe, you have to make sure that you cover a CBAM as well. So that could be the argument for doing it.
It's going to be a difficult task though because the chemical sector has a very difficult, well, very complex supply chain, and one difficulty with all these CBAM is what do you exactly cover in term of goods? Because if you only cover, for example, the upstream material, then it's very easy for a company to shift and to move from being a producer to being a purchaser. So what is currently going to be into their Scope 1 emission. They could just buy it somewhere else. They become their Scope 3 so they don't have to report it, that they don't have to pay the carbon price on it. So it's going to be critical to really define what is covered in term of CBAM and how far you go in the supply chain upstream and/or downstream.

Vincent Valk:
Yeah. So the scope of it is going to have to be really, really well...

Sophie Casenave:
Carefully crafted.

Vincent Valk:
Yeah.

Sophie Casenave:
Yeah.

Vincent Valk:
Yeah, yeah. I mean, and interesting too to me that you kind of brought up the idea that that can be a real challenge for the European industry in terms of being a competitive disadvantage I guess, that there would be these carbon prices and materials could be imported from places that don't have a carbon price.
Do you have a sense of how Europe feels about or European industry chemical specifically, but more broadly if you're more comfortable answering it that way, how European industry feels about the implementation of a lot of these policies considering the real challenges that we've seen in industry in Europe in the past couple of years with the energy cost crisis, with the fact that European economic growth is not as robust as it is in a lot of other parts of the world? Do you have a sense of how policymakers and businesses are thinking about that?

Sophie Casenave:
Yeah, I mean, if you specifically talk about CBAM, for example, a lot of, well, a lot of players in the industries that are covered afraid of two kind of effects that reinforce each other. First, they are afraid of dumping. So some producers that are producing outside of Europe that used to sell on the European market but now might find it a bit more difficult because there is a carbon price to pay, they might just dump their goods into other market who don't have a CBAM price to pay.
And in combination to that, the producers in Europe say that the CBAM is really helpful for maintaining a level playing field within Europe, but what happens outside? When their free allowance are going to be phased out, so they will certainly start feeling the cost of carbon emissions, and then they will have to sell outside where there is no ETS, no CBAM. They feel they are going to be at a disadvantage. That's definitely something that is a worry for the industries that are covered.
If you look more generally about all these regulation, I think one of the issues sometime is the unclarities of the rule or the misalignment of the rule, that the more rules you put on top of each other, if they don't exactly have the exact definition of what you can use to decarbonize your Scope 2, for example, your electricity, or if they don't have the same usage for buy gas certificates or Scope 1 instrument, for example, it can be very, very difficult to navigate for companies inside EU, for example, who have to comply with many regulation.
Same thing for anyone. If they have to comply to the EU CBAM and the UK CBAM and probably another carbon tax somewhere, and if every country start figuring out their own rules, it's a bit of a nightmare for a company who is trying to export globally to try to either comply, have one product that comply with all the rules or start having different product for different market. It's not really efficient. So that's one of the issue.

Vincent Valk:
Sure. Yeah, I definitely can see how that would be an efficiency or maybe an operational challenge, especially if you're manufacturing stuff.
Want to talk a little bit about the US here. I know in the US the Securities and Exchange Commission, the SEC recently updated its guidance for sustainability reporting. What are some of the key elements of this?

Sophie Casenave:
The first important thing to say is that so indeed the SEC, the Security and Exchange Commission, they had published their kind of climate disclosing rule in March, but this rule is now paused. It was voluntarily paused by the Security and Exchange Commission because of the ongoing legal challenges. They still stand by the rule's merits and they plan to defend it against all these challenges, but that's why they have been pausing the implementation.
Initially, it was supposed to target companies filling their reports in the US as large accelerated fillers, the accelerated fillers and some companies below that with different requirement depending on the size of the company. So for example, they were to disclose their climate emissions, well, their greenhouse gas emissions, sorry, if they are using a carbon price, their targets and the strategy to reach these targets. These were the sort of questions that were asked.
The SEC rule was quite relaxed about the standard, so it's not as formalized or standardized on the CSRD's in Europe. So it was, for example, asking company to disclose their emissions, but they had a little bit of leeway on which kind of standard they were applying to report their emissions.
One thing as well, a key difference was this concept of materiality. As we mentioned earlier, the CSRD works on this double materiality principle. The SEC climate guidance was mainly regarding what impact climate change can have on the business and what kind of risks are related to climate change. And it was really just looking through the lens of investors and should I put my money in this company given these risks that they have?
So yeah, currently the rule is paused, but it doesn't mean... I mean, first, obviously will go through all the legal challenges and the SEC is going to work through that. But in the US you also have other state, for example, California that are looking at their own disclosure rules.
So I think if you're an American company, you can't just wait and think that this is just going to disappear by change of different legislature or different leaders in the country because some of the states are obviously looking at that. And as we said, American companies that are exporting in other countries might fall into some of the rules, like the CSRD for example. A lot of countries actually everywhere in the world are starting to put this kind of disclosure principle. So it's very likely that American companies are going to be covered one way or the other. So they do need to prepare.
It's not completely new territory for many of the American companies because a lot of them are actually already voluntarily disclosing. So they are using platform like CDP, formally the Carbon Disclosure Project, SBTI. I think it was in one of your S&P Commodity Insight. There was this... One of your colleague mentioned this number. I think it's like 70% of the world's top 100 chemical producer pledged to reach carbon neutrality by 2050. So that means likely they have an SBTI target. If they have an SBTI target, they need to disclose. So actually these companies shouldn't be... Nothing is going to be new for them when they're asked to disclose their emissions and all kind of climate-related data.

Vincent Valk:
Sure. Yeah. I'll put in a little bit of a plug here because what you just referenced there with that 70% figure comes from Chemical Week's net zero tracker, which is put together by my colleague Jameson Croteau, and we actually, I did a podcast with Jameson...

Sophie Casenave:
Exactly.

Vincent Valk:
... in May. So if anyone listening wants to learn more about that, you can go back into our archives and download the episode where we talk a little bit about Chem Week's net zero tracker. As I said, it was released sometime in May.
Wanted to ask something a little bit more broad and strategic kind of. Most chemical makers in Europe, and as you correctly pointed out, Sophie, in the US or at least the major chemical makers have published sustainability reports, net-zero targets, and undertaken various levels of sort of decarbonization initiatives. In light of some of these updated regulations, do you think companies are going to need to rethink these strategies and if so, how?

Sophie Casenave:
I think a lot of these strategies are, especially for chemical industry, which is one of these hard to abate sector, a lot of the strategies that have been put together are really based on a technological approach. So development of green hydrogen, carbon capture utilization and storage, all this technology or other form of carbon capture. All these technologies are still being developed and they are not available at scale. And any delays in getting this technology to scale is obviously having an impact on chemical companies to reach their target. So they obviously have to be careful with that.
However, in a way, a lot of policy developments also is supposed to help bringing these technology at scale. There is the Inflation Reduction Act in the US that is really helping with the development of hydrogen. In Europe as well, we have the RED III, what we call the RED III, so the Renewable Energy Directive, the third version, which are definitely impacting but helping the chemical industry's decarbonization effort.
So I think overall... At STX, we would advise our, well, we advise our clients in the chemical industry not to wait. Obviously, they can start with the low-hanging fruit, so the solutions that are already there. So it could be things like energy efficiency. That's the first thing you need to do. So obviously there are more and more wide-certificate mechanism, for example, that incentivize energy efficiency measures that has been existing in France for years, but now it's in Spain, it's in Italy, for example. All these thing can help companies start on the decarbonization journey.
We also see companies electrifying their processes because electricity is obviously much easier to decarbonize. Now you have instrument mechanism like the Guarantee of Origins or the RECs in the US. It's easily available. People have been developing PPAs. So all this can be done.
Obviously then there is a move to starting using more bio-based feedstock. For the chemical company would be things like biofuel, biogases. One issue might be that there is currently, at least on the regulatory side, no clear incentive to ensure a lot of bio-based material into your feedstock. But on the voluntary side, because we're talking about that, SBTI actually has just released a draft guidance on the chemical industry and they have a proposal to actually set some non-emission targets, which would be a kind of target on how much bio-based material, carbon material you can put into your feedstock.
So although these are, it's like "Oh, an extra rule," but it also help companies to move together at the same speed because one thing I think that is difficult for companies who want to do the right thing is being the first one costs more and you feel that you're not playing fairly with the other. You're trying to do your best and the other can continue polluting. So I think all these rule actually also ensure there is some sort of level playing field, which makes it easier for company to all move together.
So overall, I think it is a good time to... I mean, companies should have started. If they haven't, it is still a good time to start. But yeah, they should not just rely on the fact that at some point there will be green hydrogen and CCUS and everything will be solved. They need to start acting now.
One thing, one topic where they can also need to, well, they need to start looking now is to achieve this net-zero targets that they have all set, they will need at some point to compensate their residual emissions. So the share that they can't decarbonize. And that means usually using instruments on the voluntary carbon markets. And these things, this project takes time to be started and to start really compensating the carbon. If you think about a reforestation project, it takes time for the trees to compensate the carbon that you're doing.
So if you've set up a target, it's going to come quickly. So that's, again, something we advise company. Don't wait until just doing your decarbonization now and then at some point you will start looking at compensation. You need to start looking at these in parallel.

Vincent Valk:
Yeah, yeah. Got it. I mean, a tree doesn't grow overnight.

Sophie Casenave:
Yeah. Yes, exactly. And also, I can't remember, there is a statistics on how much... I think a tree needs to be like 15 years old or something before it start capturing enough carbon to compensate what has been using or whatever. I'm not...

Vincent Valk:
So for net-zero by 2050, get those trees planted by 2035.

Sophie Casenave:

Probably something like that. So start looking at which project you want to do by 2030. So start thinking about it and budgeting now.

Vincent Valk:
Got it. Got it. Thanks very much for your time, Sophie. And this is Vincent Valk signing off for Chemical Week.