Japanese banks prepare for battle over directors’ climate qualifications

Welcome back. In a major development yesterday, our Brussels colleagues reported that the Biden administration has asked the EU to delay its deforestation rule that is set to go into effect at the end of the year. We will be watching to see how Brussels responds.

For today, the season for companies’ annual general meetings might be winding down, but there is still significant action in Japan. As I report, three of the biggest Japanese banks are facing novel climate shareholder proposals that could have implications beyond the land of the rising sun.

And Lee has a piece about ocean-based carbon removal. Will it sink or swim in the eyes of investors?

Thanks for reading. — Patrick Temple-West

Companies’ efforts around diversity, equity and inclusion are under fierce scrutiny from rightwing politicians and social justice campaigners alike. In the latest Moral Money Forum deep-dive report, published today, we explore how businesses can build an approach to DEI that really works.

Shareholder activism

A boardroom showdown in Tokyo

In Japan, where the nation’s biggest banks are scheduled to hold their annual meetings next week, a significant battle has erupted over whether the groups’ board directors have sufficient climate expertise.

Mizuho, MUFG and Sumitomo Mitsui are facing shareholder proposals that call for some of the banks’ board directors to have specific climate change qualifications. The proposals ask for the banks’ articles of incorporation to adopt processes for nominating board members who can ensure climate risks are “embedded in the company’s core management strategy”.

The climate activists who brought the shareholder proposals — Market Forces, Rainforest Action and Kiko Network — said board directors need to be held accountable for inadequate risk control in their companies.

“In a world first, the Japanese megabanks face shareholder proposals requesting that the companies disclose the competencies of their board directors” in assessing climate risks, Eri Watanabe, the Japan energy finance campaigner at Market Forces, told me.

It is unclear how shareholders will vote on these board director proposals, in part because the biggest proxy advisers have split their recommendations.

Glass Lewis has recommended investors reject them, saying it is convinced that the banks’ current board members have sufficient climate expertise.

But proxy adviser Institutional Shareholder Services has recommended shareholders vote for these proposals. Shareholders would benefit from the change “given the climate risk and other environmental impacts of the company’s current strategy”.

And the banks are not pleased. In recent days, all three banks have fired back at ISS, saying its board members do have sustainability experience, including on environmental issues.

They have also argued that changing board member requirements could limit their ability to find good directors.

The proposed change “restricts the authority of the nominating committee in the selection of candidates for the board of directors,” SMBC said in a June 12 letter to shareholders.

Mizuho warned about mission creep. Board members need to handle a wide range of issues, “not only those related to climate change”, the bank said.

Board oversight of climate issues is becoming common. In Europe, more than 4,200 companies have board-level oversight of climate-related issues, CDP said in April. The US Securities and Exchange Commission initially proposed board oversight for climate issues, but ultimately dropped the requirement in its final climate disclosure rules issued earlier this year.

Attacks on board directors have higher stakes than your average shareholder petition. While the latter can typically be shrugged off, attacks against directors can get personal, and companies don’t take them lightly.

As climate shareholder petitions flounder in other parts of the world, climate campaigners will be closely watching the outcome of the proposals at Japanese banks. If these board proposals win strong support from shareholders, they will almost certainly be replicated in other countries in 2025. (Patrick Temple-West)

Carbon removal

How to make liquid markets for carbon removal

Carbon dioxide removal is all the rage with the world’s most cash-flush businesses. Tech companies and ecommerce giants are paying a premium to grow a market they hope will one day help offset their emissions by sucking carbon out of the air.

But “direct air capture” remains niche and expensive, so far producing results at a tiny fraction of the scale that the Intergovernmental Panel on Climate Change says will be needed to limit global warming.

Enter ocean-based carbon removal. The ocean already absorbs huge amounts of carbon dioxide from the atmosphere, and a handful of start-ups are pitching their ability to enhance that process. One approach is to use the deep sea to bury biomass, such as woodchips, that would quickly emit CO₂ if left to decompose on land. Another is to add alkaline materials such as crushed rock to seawater, increasing its capacity to trap carbon from the air.

Promoters say the ocean’s natural properties make marine CDR more likely than rival methods to supply the volume of carbon removal credits that businesses will need to cut their most stubborn emissions — if the world is to get on track to net zero. But the market currently faces significant uncertainty. All types of CDR will struggle to grow, some argue, unless governments step in to prop up demand.

Take Running Tide, which was until recently a leading provider of ocean CDR credits. The Portland-based start-up, founded in 2017, raised more than $50mn from private investors and won the coveted backing of companies including Stripe and Shopify that have agreed to pay well above market rates for removal. It inked a deal last year with Microsoft to remove the equivalent of 12,000 tonnes of CO₂ — roughly equivalent to the annual emissions from 2,900 gasoline-powered cars.

Last week, Running Tide announced that it would shut down due to lack of demand. When Running Tide launched, founder Marty Odlin told me, “I thought we were on the cusp of a Manhattan Project-style repricing of nature — bringing nature on to the balance sheets of the world.”

Instead, he found, Microsoft accounted for the majority of demand. “That’s not a market,” he said. The government should have stepped in, he said. He proposed “cost-plus contracts, like they do in defence”, among other potential policy options, such as forcing polluters to pay.

There are fledgling government-led efforts to support CDR. The US Department of Energy last month named 24 groups that will receive $50,000 each to accelerate the technology. One of the winners, California-based Equatic, thinks it has cracked the code to make ocean CDR profitable. It uses a patented two-in-one machine that can remove atmospheric carbon and produce green hydrogen.

Equatic runs an electrical current through seawater, splitting it into two streams, one acidic and one alkaline, as well as hydrogen and oxygen gas. The alkaline liquid is exposed to open air and used to trap atmospheric carbon. Crushed rock is added to the acid stream, to neutralise the acidity. Then the liquids are combined and discharged back into the sea, containing carbon that Equatic says will remain securely stored for at least 100,000 years.

Equatic announced this week that it has begun engineering a commercial-scale plant in Quebec, aimed at removing 100,000 tonnes of CO₂ per year. For every 220 cubic metres of seawater processed, the plant would produce 30kg of green hydrogen and remove 1 tonne of CO₂, chief operating officer Edward Sanders told me.

The hydrogen makes the project financially viable, Sanders said. A pilot project cost $1,300 per tonne of carbon removal, but he believes the Canada plant can cut costs to $100 per tonne, with hydrogen sales bringing down the cost of the CDR production.

The project has attracted buyers such as Boeing, which has committed to purchase Equatic’s carbon removal credits and its hydrogen for sustainable aviation fuel.

It is a sign of the times for Equatic to market itself as a company with an intangible offering — carbon removal — and a physical byproduct — green fuel. Why didn’t they opt to market themselves the other way around — as a green hydrogen company that also happens to offset carbon?

“We’re not the best way to make green hydrogen,” Sanders explained, since their process is about 30 per cent less efficient than state of the art hydrogen electrolysers. But, he added, “now that you’ve got two markets, both of which have got good demand and reasonable liquidity, it makes sense to have them together.”

Phil De Luna, head of engineering at Deep Sky, a Canadian carbon removal project developer that is partnering with Equatic on the Quebec plant, had a different perspective.

“The hydrogen piece we’re not necessarily that interested in, because our business is carbon removals,” he said. The provincial government of Quebec is an equity shareholder in Deep Sky, he said, and Canada supports carbon capture through a tax rebate on capital expenditure. But for the carbon removal market to take off, governments will need to do more to set the world on a pathway to net zero, De Luna said. He was unabashed about that need.

“Our business is incredibly dependent on government support at this stage. Most new industries are.” (Lee Harris)

Smart read

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