Commentary

ICYMI, More of the Same is not Enough

Calls grow for new tools and new approaches to accelerate the low-carbon transition.

The ESG circus came to (London) town this week with two conferences focused on the challenges of driving real business and industrial change against a backdrop of geopolitical turmoil, macroeconomic uncertainty and anthropocene destruction and degradation.

All were quick to acknowledge the progress made since the last time such sustainable investment get-togethers were done face to face. Almost as rapid was the admission that corporates, policymakers, investors and civil society have much further to go.

The message was that more of the same is not enough. An emphasis on new tools and new approaches was evident on the first day of City Week 2022, held at London’s Guildhall, dedicated to climate and ESG themes.

Sarah Breeden, Executive Director for Financial Stability Strategy and Risk at the Bank of England, pointed to the need for sustainability-related disclosures to flag future risks to investors, by focusing on “the strategic as well as the static”.

Speaking on the day the UK outlined plans for a mandatory Transition Plan Disclosure Framework, Breeden noted: “Efficient transition requires efficient allocation of capital to assets that are green now and that need greening, and the responsible retirement over time of assets not compatible with a net zero outcome.”

To divest from carbon-intensive firms without understanding their future plans, she warned, risked a “paper decarbonisation”, rather than real reductions in carbon emissions.

The continuing need for new solutions to the question of “static” sustainability and climate-related disclosures was underlined by the presence of Emmanuel Faber, making one of his first high-profile appearances as Chair of the International Sustainability Standards Board (ISSB), and claiming the organisation could be a “game-changer” through provision of a global baseline for disclosures on which others could build.

Faber made no apology for the ISSB’s focus on financial materiality, arguing that prioritising the needs of investors and other market participants would deliver transition by realigning finance “with the needs of the economy and society”.

But he also made the case for consensus and collaboration in developing new solutions, calling on his audience to respond to the ISSB’s current consultations, notably on ‘category 15’ financed emissions, and pointing to the ISSB’s recent ‘two-pillar’ strategic agreement with the Global Reporting Initiative and plans for a working group to ensure compatibility across jurisdictions.

This message found some echo across the water in Bankside on Tuesday, at the Sustainable Investment Forum Europe.

Caroline Le Meaux, Global Head of ESG Research, Engagement and Voting at Amundi Asset Management, warned that engagement by investors “can’t only focus on the big issuers”, nor can it only involve siloed ESG specialists. Net zero transition requires engagement with second and third-tier firms, she said, as well as climate considerations being factored in by every portfolio manager.

Olivier Rousseau, Executive Director at Fonds de Reserve pour les Retraites, France’s public pension fund (€26 billion AUM), encouraged investors in the low-carbon transition to look beyond renewable energy suppliers to also address the challenges facing electricity transmission systems. “Put your dollars in research,” he said.

But do these evolutions need a revolution, or at least a rethink of existing investment models and frameworks? ShareAction CEO Catherine Howarth and Pensions for Purpose CEO Charlotte O’Leary seemed to think so. Both noted that investors were increasingly, if discreetly, willing to balance risk/return calculations against wider considerations, arguing that they are often restrained by legal definitions of fiduciary duty. While negative externalities were once regarded as an inherent feature of capitalism, it’s time to put “impact at the core”, Howarth said.

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