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ICYMI, ‘We Have no Clue What is Coming at us’

Strap in for a bumpy start, both to the year and the journey to a green and equitable future.

At ESG Investor, we’ve characterised 2022 as the year of delivery, a critical period in which net zero commitments and pledges to support UN Sustainability Development Goals are turned into action and impact.

Chris Stark is on board. In a blog this week, the Chief Executive of the Climate Change Committee said its focus “must shift to the real world”, ensuring the UK government’s net zero strategy is “delivering real change on the ground”, rather than identifying policy gaps.

Regulations are coming into force. Corporates and financial institutions are beginning to report on their eligibility and alignment with the EU’s Green Taxonomy, even as the row about inclusion of gas and nuclear energy shows no sign of letting up, with the concerns of investors unlikely to overturn political priorities. Arguably, the regulatory reform process is gaining momentum, with the UK expanding the scope and depth of sustainability disclosures.

And institutional investors are voting with their feat, even those with mixed track records. This week, CEO Cyrus Taraporevala warned that State Street Global Advisors will vote against directors of investee firms which do not provide expected disclosures on climate risks, emissions targets and transition plans.

But perhaps we’re getting carried away on delivery. Perhaps, as suggested by Victor Verberk, Robeco’s CIO for Sustainability, it’s the year of the unknown (again). “We have no clue what is coming at us,” he observed recently, highlighting the sheer unpredictability of net zero trajectory and the “radical change of behaviour” likely to be required in his industry and others.

We have to admit, he’s got a point. Certainly, January is underlining the potential for conflicts and risks, suggesting a bumpy start both to the year and the journey to a green and equitable future.

The courts will be a key arena. Having successfully forced Shell to improve its carbon reduction targets last year, environmental campaign group Milieudefensie this week threatened to drag 30 more firms through the Dutch courts if they don’t publish comprehensive emissions-cutting strategies. This follows the start of legal action against the UK government over the inadequacy of its policies to meet net zero targets. Institutional investors are far from safe from litigation risk either.

Geo-political tensions will also play a part. As discussions over the future of Ukraine continue in Geneva, the role of Russia in the European energy gas crisis was emphasised this week by Fatih Birol, Executive Director of the International Energy Agency. Admitting the need for increased gas storage capacity in the short term to protect against price volatility, Birol called for “stronger investment in low-carbon energy technologies” as the long-term solution, a point echoed by industrial energy users.

Much of the heat will be felt in the boardroom, if not the AGM, as investors seek to use their voting rights to force the pace of change. The release of new case studies from asset owners and managers by the Investor Agenda demonstrated the importance of shareholder engagement. None echoed the approach of Terry Smith, the veteran UK fund manager who lambasted Unilever’s obsession with “publicly displaying sustainability credentials” after the consumer food group contributed to the Fundsmith Equity Fund failing to beat its MSCI benchmark.

Difficult conversations will be common, but most of the pain will be felt away from the corridors of power, of course. According to Munich Re, 2021 was the second most expensive ever for insurers, with natural disasters causing US$280 billion in damages to homes and businesses, and the US bearing the brunt, accounting for US$145 billion, due partly to Hurricane Ida. 2021 was also the fifth-hottest year on record and part of a record seven-year run. Perhaps we can predict one element of 2022 with some certainty after all.

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

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