Public companies with pollution-intensive assets such as coal, oil and gas projects (polluting assets) are coming under increasing pressure from institutional investors with ESG concerns. Certain issuers have sold polluting assets or are contemplating doing so. When these polluting assets are sold to private enterprises, investors are concerned about the lack of disclosure that results. In response to BCGEU’s 2022 proposal, RBC stated it takes a holistic view to evaluating risk, and that projects/transactions with potential environmental impacts are evaluated against these standards through its enhanced due diligence process. RBC’s response fails to grasp the challenge of facilitating the movement of polluting assets from public companies to private enterprises.
This challenge was outlined by the UN Principles for Responsible Investment (PRI) in a recent publication discussing divestment of polluting assets by public companies1 : While a listed company spinning off a polluting asset may eliminate emissions from its balance sheet, it is unlikely to translate to a reduction in real-world emissions. In fact, it may reduce transparency and accountability over how the asset is managed, result in higher absolute emissions from more intensive exploitation of the asset, and shift risk onto governments and taxpayers.
A March 2022 paper by the European Corporate Governance Institute (ECGI) labels this phenomenon as “brown-spinning”2: [T]here has been a concerning recent phenomenon known as brown-spinning whereby public companies sell their carbon-intensive assets to players in private markets (including private equity firms and hedge funds). This helps divesting companies to reduce their own emissions but does not result in any overall emission reduction in the atmosphere. [H]aving carbon-intensive assets going dark where they are not subject to the usual strict scrutiny of public markets is worrisome from the perspective of lowering emissions. RBC’s Policy Guidelines for Sensitive Sectors and Activities acknowledges that certain sensitive sectors and activities require focused policy guidelines, as it will not provide direct financing for certain projects/transactions and other controversial projects will be subject to enhanced due diligence3. A similar approach is needed for the bank’s involvement in brown-spinning transactions, in an attempt to bridge the disclosure gap between public and private enterprises. ECGI describes the benefits of improved disclosure from private entities, stating: “the uneven playing field between public and private companies would be levelled, thus eliminating the classical problem of avoiding regulatory obligations tied to being public by staying private (i.e, removing incentives to remain private longer to avoid sustainability disclosures).”