Commentary

Take Five: Little by Little

A selection of the week’s major stories impacting ESG investors, in five easy pieces.

Delays, compromise and prevarication were widely evident this week; progress too, if you looked close enough.

Lucky thirteenth – One of the most significant events of the week for sustainable investors was also one of the last. The lucky thirteenth item on the agenda at this week’s three-day meeting of the European Council was an “analysis of the final compromise text with a view to agreement” on the Corporate Sustainability Due Diligence Directive (CSDDD), which follows several delays. The Belgian Presidency had worked overtime, proposing higher thresholds, the French were seeking further concessions, and pressure was increasing on Italy to back the directive, ahead of the last viable opportunity to reach compromise before June’s EU-wide elections. Inevitably, a deal was struck, despite Germany’s abstention. The compromises needed to reach consensus shrank the number of firms impacted by the new rules, with carve-outs further weakening its scope and coverage. But it should still mark a step change, offering new oversight to investors. “Today’s vote marks a watershed moment for corporate accountability, ushering in a new era where businesses will be required to take action against labour abuses and environmental pollution,” said Isabella Ritter, EU Policy Officer at ShareAction.

France acts fast – France might have its reservations about the CSDDD (see above), but the government is fully behind efforts to wean the country off fast fashion. In the home of haute couture, legislation designed to penalise irresponsible producers received strong backing this week. The lower house of the French parliament voted almost unanimously in favour of a bill which would ban advertising of fast fashion ranges, while also imposing penalties, up to a maximum of €10 per item, to cover the environmental cost of low-cost clothing. As a further measure to tackle textile waste, France will also back an EU ban on the export of used clothes, which has led to mountains of fast fashion landfill in Chile and elsewhere. Investors have increased their due diligence of the sector, to minimise both environmental and social harms, but would have greater oversight if there was more joined-up thinking from policymakers.

More defence, less climate – Much attention has been paid to the implications of a Trump presidency for the US’ net zero trajectory, but elections are also casting a long shadow over climate policy in Europe. Keen to ward off the populists, Europe’s main right-of-centre bloc has sought popularity at the upcoming polls by rowing back on pesticide restrictions and watering down the Nature Restoration Law. This week, European Commission President Ursula von der Leyen’s candidacy for another five-year term was hit by friendly fire, as electioneering got underway a few days after her official endorsement. Criticisms of ‘Queen Ursula’ often focus on style rather than substance, but it’s worth noting her bloc’s manifesto was summarised recently as ‘more defence, less climate’. Leaving aside the meaning behind the intention to prioritise “pragmatic solutions, not ideological ones” to the climate crisis, von der Leyen has pledged to “turbocharge our defence industrial capacity”, should she win a second term, a pledge that could force yet more investors to grapple with the nuanced arguments already being rehearsed over the ethics of funding military technology.

Pick up the pace – Climate adaptation was back on the agenda in the UK and Europe this week. Or rather the lack of it. The Climate Change Committee (CCC) told the UK government its Third National Adaption Programme (NAP3) had failed to provide a “credible vision” for a resilient and adapted future, despite being a marked improvement on previous iterations. Similarly, the European Environment Agency warned that Europe’s policies and adaptation actions “are not keeping pace” with the rapidly growing risks. Investment was one of three “critical issues” raised by the CCC, which said NAP3 had not tackled barriers such as low perceived urgency of adaptation, lack of clear targets and limited understanding of adaptation actions. Act now, it urged, and the UK could build resilience into the Environmental Land Management Scheme. Move quickly, and it could use new price control periods for energy, water and rail to incorporate effective resilience standards to manage future climate risks. Alas, such alacrity is unlikely from a zombie government sleepwalking to near-certain defeat at the polls. Certainly, anything complicated, like the transition to heat pumps, is being kicked into the long green grass.

Slow to fade – The pace and direction of the energy transition continued to provide uncertainty to investors this week. In the UK, the government backed the building of new gas-powered capacity, to handle renewable intermittency, with the country’s second chamber instead urging rapid action on long-duration technologies to better harness clean energy sources. This came as Europe readied to rubber-stamp power market reforms that have been welcomed for supporting new renewable energy investment and greater transmission grid flexibility, while still enabling a limited future for coal. One consistent message, however, is that decisive action from government is the best hope for consigning harms to history; without it, practices continue out of habit. Coal still provides one of the prime examples, remaining the second largest contributor to methane emissions, despite its dwindling use in many major economies.

 

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