ESG regulation is risk for commodities, warns Jefferies

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.”

NEWS ROUNDUP

Tariffs | The EU plans to introduce an additional 9% tariff on Teslas imported from China, as it notified automakers of its draft decision to move forward with definitive tariffs on electric vehicles shipped from the country.

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.