Commentary

ICYMI, Everyone’s in the Firing Line

Financial institutions faced the flak this week, with investors among the casualties.

Many organisations found themselves on the sharp end of a rebuke this week for failing to adequately prioritise sustainability, and particularly climate-related, risks.

Banks were hit by a double salvo for continued financing of fossil fuel firms in the face of widely accepted net zero roadmaps and the commitments made at COP26. UK-based NGO ShareAction flagged that leading European banks have financed upstream oil and gas expansion to the tune of US$400 billion since 2016, including US$38 billion since the launch of the Net Zero Banking Alliance.

Campaign groups led by Urgewald and Reclaim Finance reported that commercial banks channelled US$1.5 trillion into the coal industry between January 2019 and November 2021, while institutional investors maintained coal holdings worth US$1.2 trillion. Twelve banks accounted for 48% of the lending and two dozen institutions shared 46% of the investment, the report found.

Whether the finance sector is attracted by demand-driven short-term profits or persuaded by distraction tactics, it is clear that long-entrenched relationships and behaviours are hard to break. Academic research also showed that passive investors’ effectiveness as agents of change, rather than “stewards of the status quo”, still has some way to go.

Pension funds were under fire too. Releasing a report that underlined their collective heft, Roger Urwin, Co-Founder of the Thinking Ahead Institute, said pension funds’ net zero plans were not yet “fit for purpose”.

Urwin’s undoubtedly right, overall, but there are increasing signs of asset owners walking the walk. France’s CNP Assurances (US$337 billion AUM), announced a policy committing it to ending new investment in oil and gas projects, while Dutch pension fund PFZW (€277.5 billion) said it would only remain invested in fossil fuel companies with credible and verifiable transition strategies by 2024.

Compatriot fund APG (€627 billion AUM) wrote this week to ten South Korean firms – including Samsung Electronics, Hyundai Steel and LG Chem – calling for “ambitious climate and carbon reduction strategies and commitments”. The Canada Pension Plan Investment Board (US$432 billion) outlined plans to achieve carbon neutrality by 2050 via active engagement.

None of these funds would claim to have alighted on the perfect path to net zero and the UK continues to provide a country-based case study of non-linear progress. Having been identified as the only top 20 CO2 emitter on track for carbon neutrality by 2050, the UK’s Office of National Statistics revealed a flatlining green economy, in terms of revenue and jobs.

This has to count as a failure of policy, offering a hostage to fortune to those who see jobs in fracking. But green jobs are coming to former industrial heartlands and one can hope more will follow from the UK National Grid’s decision to procure grid stability services from renewable power generators.

Making and measuring progress in driving environmental change remains difficult (harder still are the challenges around social-related metrics) and the thirst for insight can lead to information overload, rather than enlightenment. Regulatory intervention may be about to help investors by shedding more light on the methods and the meanings behind ESG ratings. But overall regulators lag investors and even consumers in recognising the materiality of accurate information on firms’ climate and ESG performance.

The complexity of mapping a credible route to net zero can also lead to dissent and frustration among those trying to do the right thing. At such times, it is worth retaining a sense of perspective, as there remain plenty of influential voices willing to use their platforms to willfully provoke and confuse.

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