Jefferies Warns of New Risk Tied to Commodities: ESG Regulation

(Bloomberg) — Investors should review their portfolios as new European Union rules targeting deforestation are set to reverberate through companies exposed to key commodities, according to analysts at Jefferies Financial Group Inc.

Companies whose goods incorporate raw materials such as rubber, palm oil and cocoa or livestock products such as beef are potentially in the crosshairs, as the EU enforces regulations designed to slash global deforestation. The bloc, whose rules affect all investors and companies doing business with and in the EU, has set a goal of stopping 10% of deforestation and reducing CO2 emissions by at least 32 million metric tons a year.

Companies found to have inadequate policies addressing deforestation and biodiversity risk being caught out by “the increased due diligence requirements” that follow as a result of the EU’s Deforestation Regulation (EUDR), Jefferies analysts led by Luke Sussams said in a note. 

Among companies that Jefferies says may be impacted are DN Automotive Corp., Hankook Tire and Technology Co., Kuala Lumpur Kepong Berhad, Nexen Tire Corp., Golden-Agri Resources Ltd., Darling Ingredients and SD Guthrie Berhad.

EUDR requires companies to trace raw materials used in products entering the EU right back to their place of origin. Corporations need to document that their goods weren’t made using commodities sourced from deforested land and that no human rights were violated. Such checks need to go as far back as Dec. 31, 2020, with failure to do so leading to potentially hefty fines.

The regulation is already having an impact. Amid concerns about a squeeze in coffee supplies, futures for September delivery versus December contracts surged earlier this month in New York, leading to the widest spread since trading started in January 2022. In July, US papermakers warned of higher prices for diapers, sanitary pads and other hygiene products, due to EUDR.

Companies and government officials, including from the US, have asked the EU to delay passage of the regulation, citing its broad scope. But the EU has so far declined to amend its rollout. EUDR is due to take effect on Dec. 30, with a six-month grace period for small businesses. 

“Despite numerous strong calls for delays and changes from producer countries and industry stakeholders,” Jefferies said it expects the regulation to “go ahead as planned.”

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China | China has launched an anti-subsidy investigation into dairy imports from the EU, the latest development in a tit-for-tat trade dispute between the two sides. 

Fed | Federal Reserve Chair Jerome Powell recently attended a closed-door meeting with a group of big-bank CEOs, encouraging them to work with the Fed to avoid a years-long legal battle over the Biden administration’s landmark capital proposal.

Legal Obligation | The International Court of Justice said on Aug. 16 that it will begin public hearings in December, as it forms an advisory opinion on states’ obligations under international law to protect the earth from emissions and the compensation injured parties can expect.

Catastrophes | Caribbean heads of government within the group known as Caricom will be seeking “an examination” of catastrophe bonds and other insurance-linked securities. They want the region’s finance ministers to take a closer look at which markets governments should choose and which they should avoid.

Capital Relief | NatWest Group Plc is turning to securitization to free up capital for investments in green energy. The UK lender is selling a bond to help de-risk a £1.1 billion ($1.4 billion) portfolio of renewable energy project-finance loans.

Financed Emissions | Global banks aren’t living up to targets to cut their financing of activities that are directly fueling climate change, according to a study by the World Resources Institute.

India | India’s market regulator intends to expand the scope of its sustainable finance framework to include more products, a potential boost to ESG-labeled instruments in Asia.

CA100 | The asset management unit of Goldman Sachs Group Inc. left the world’s biggest climate alliance for investors, marking the latest in a string of similar defections amid continued Republican Party attacks on green finance.

SFDR | Funds in the darkest-green Sustainable Finance Disclosure Regulation cohort may have to rebrand or drop their sustainable label as EU scrutiny heightens in the coming year. Though 87% of Article 9 funds claim 80% sustainable investment, just half report on key indicators and only a third have carbon-cutting targets. (Bloomberg Intelligence)

Utilities | RWE AG, EDP SA and other EU utilities’ earnings-growth scope may be jeopardized in the US if Republicans win the White House and Congress, repeal the Inflation Reduction Act (however unlikely) and make renewable-asset returns uneconomical, constraining EU developers’ largest investment backlog outside of Europe. (Bloomberg Intelligence)

Clean-Energy Tax Incentives Likely to Be Preserved

Japan | Japan’s evolving regulations on ESG reporting may further boost disclosure scores for members of the Nikkei 225. (Bloomberg Intelligence)

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Power Sector | How much does the power sector need to clean up its act to reach net zero? (BloombergNEF)

EV Chargers | Ultra-fast electric vehicle chargers are being deployed at lightning speed in Europe, lowering a key hurdle for prospective EV drivers: charging anxiety. Drivers worried about being able to recharge on the go now have some 89,000 ultra-fast chargers – which can can charge an EV to 80% in roughly 20 minutes. (BloombergNEF)

Carbon | Petrochemicals is one of the most complex and costly sectors to decarbonize. Even in the EU, which has some of the highest carbon prices in the world, there is still no economic incentive to reduce emissions. Policy has focused mostly on encouraging greater recycling, reuse and reduction of plastics, but without more funding for low carbon production, this sector will remain a large source of emissions. (BloombergNEF)

Coal | There’s little doubt that avoiding the most dire effects of climate change requires phasing out power stations that burn coal, the biggest source of carbon dioxide emissions. Yet the opposite is happening.

DEI | Since Vice President Kamala Harris emerged as the Democratic Party’s new candidate for the US presidency, Republicans have labeled her a “DEI” hire, implying that her race and gender, rather than her intellect or capabilities, made her ascent possible. Tesla Inc. Chief Executive Officer Elon Musk, who backs the Republican nominee, former President Donald Trump, has even shared a fake ad on his social network, X, in which doctored audio of Harris’ voice calls her “the ultimate diversity hire” because she’s both a woman and a person of color. The voice in the video goes on to say that she “may not know the first thing about running the country.”

Transition | Never before has natural gas played a bigger role in fulfilling the world’s energy needs. While consumption of oil and coal are poised to peak, demand for gas is rapidly growing, setting it up to be the last fossil fuel standing as nations adopt cleaner sources in an effort to avert the worst consequences of climate change.

US Grid | The US power grid is under stress. Outages are much more common than they were two decades ago, even as electricity consumption has remained little changed. One culprit is the extreme weather brought on by human-caused climate change. Another is the age of the grid, much of which was built in the 1960s and ’70s.

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