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UK Circular Economy on the Rise

The number of UK-based circular economy-related investments increased by 30% in 2023, significantly outperforming the country’s M&A market, which saw a 17% drop last year. A new report published by accountancy firm BDO also noted that the deal value for circular economy-focused investments increased to £1.3 billion (US$1.6 billion) last year, from £879 million in 2022. Venture capital accounted for 58% of all 2023 transactions, followed by mid-market private equity, which accounted for one in five investments. “We’re excited by the level of activity in the sector and its future potential as businesses continue to create value, reduce waste and drive inefficiencies, as well as drive wider benefits for society and deliver against environmental goals,” said Rory McPherson, Deal Advisory Partner at BDO. Industrials and manufacturing benefitted the most from these investments, representing over a third of the deals in 2023. “ESG continues to move higher up the agenda for investors as they seek strong returns that also make a positive environmental impact,” said Todd Mills, Assistant Director for Circular Economy and M&A at BDO. “The economic benefits of investing in the circular economy are clear and compelling. Looking ahead, we expect to see increasing interest from trade investors, with high-quality businesses attracting premium valuations as the competition for assets hots up.” 

People

UK Chair to Oversee ISSB Implementation

Sally Duckworth has been appointed by the UK government to lead a new advisory committee that will provide guidance on the country’s implementation of International Sustainability Standards Board (ISSB) disclosures. The UK Sustainability Disclosure Technical Advisory Committee (TAC) will meet monthly to provide rigorous technical analysis of the ISSB’s corporate reporting standards, assessing whether the UK’s endorsement of these standards would be beneficial to the country. The Financial Reporting Council will support the TAC by serving as the secretariat. Duckworth is currently Non-executive Chair of data storage company StorMagic, Audit Chair of JPMorgan’s Japanese Investment Trust, and Non-executive Director at Molten Ventures. She also serves as Audit Chair for the Mobeus Income & Growth 2 venture capital trust, but will step down from that role this summer. A qualified accountant, Duckworth brings a wealth of business experience in early- and growth-stage companies and considerable investment management experience, having held various C-suite roles. “I feel privileged to be able to join forces with a committee that brings together a wealth of expertise and diverse perspectives, essential for evaluating the extensive reporting requirements under the new IFRS S1 and IFRS S2 standards,” she said. “These standards, which cover governance, strategy, risk management, and metrics and targets, are pivotal for advancing sustainability and transparency in financial practices.” An additional 14 members have also been appointed to the committee and will work alongside Duckworth to discuss UK sustainability reporting standards and agree on recommendations. Yesterday, the government also published guidance on the development of UK Sustainability Reporting Standards, providing a framework for the implementation of IFRS Sustainability Disclosure Standards in the country. “Although the issuance of the ISSB’s first standards is a welcome milestone towards the provision of globally comparable sustainability-related information, it is only the first step to ensuring the delivery of decision-useful information on sustainability matters,” the statement read. “National governments, regulators, and standard-setters have a vital role in considering how to best support the application of [the standards] in a local context, whilst supporting the ISSB’s objective to deliver a common language for companies to report on sustainability-related risks and opportunities across jurisdictions.”

UK Needs Supportive Sustainable Finance Policy

Research by the UK Sustainable Investment and Finance Association (UKSIF) has found more favourable policies could help shift up to £100 billion (US$126.6 billion) in AUM towards sustainable finance in the UK. UKSIF surveyed 100 financial services organisations representing more than £200 billion in green investments in the UK. The organisations flagged a lack of government clarity and policy to create a clear direction of travel, with 65% saying they already have or plan to move investments out of the UK to a market more supportive of their sustainability goals. UKSIF called for supportive policies and regulation in three key areas: delivering a clear sustainability disclosure regime, empowering investors by clarifying the fiduciary duty of pension schemes, and embedding biodiversity into the regulatory framework. UKSIF argued this would create a more attractive environment for the growth of sustainable finance and private investment at large. “The UK is facing a crucial inflection point that could see it either close the remaining gaps and benefit from the great strides we have taken in our global leadership on sustainable finance to date, or lose its hard-won position as a leader,” said James Alexander, CEO at UKSIF. “The recent flipflopping on wider sustainability policies and continued absence of detailed policy frameworks for various sectors, alongside secondary factors such as a lack of clarity from policymakers, is helping drive away much-needed private capital into the UK that can help progress the country towards net zero.”

China Leads Way on Green Bond Issuance

China remains the biggest green bond market for the second consecutive year, according to the Climate Bonds Initiative (CBI). Green bonds for both onshore and offshore deals amounting to US$131 billion originated from Chinese issuers in 2023. Although this represented a 3.5% decrease in volume compared to 2022, the CBI noted that both the quality and credibility of green bonds increased, with 63.6% of these deals included in the Green Bond Database (GBDB) – an increase from 57.3% the previous year. “We expect debt instruments to play a more prominent role in China’s green transition and expect a credible transition finance market to provide additional funding for the decarbonisation of high carbon-emitting sectors, such as power, steel, chemicals and agriculture,” said Sean Kidney, CBI’s CEO. “Financing climate resilience will become the top priority on the agenda.” Germany came second in the ranking, having issued US$67.5 billion in green bonds, while the UK moved up from seventh to fourth with US$32.6 billion. Hong Kong logged the single largest increase, having grown by 173.3% year-on-year. For hard-to-abate sectors, China also maintained its status as the most frequent sustainability-linked bond (SLB) issuer, issuing 53 last year worth a total of US$5.7 billion of debt. “There is still a lot of demand and investment opportunities for climate finance, and we look forward to seeing China continue to maintain its world leadership in sustainable finance in terms of policies, standards, product innovation, and capacity building,” said Kidney. “This will not only help [the country] achieve its dual carbon goals, but also contribute to the global response to climate change and the goals of the Paris Agreement.”

Fund Solutions

Border to Coast Raises £1.2bn for Climate Investments

The UK’s largest local government pension scheme (LGPS) pool, Border to Coast, has raised a further £1.2 billion (US$1.52 billion) to invest in global climate solutions that aim to “turn the tide” on climate change, and support its ambitions to reach net zero carbon emissions. Based in Leeds and co-owned by 11 LGPS partner funds, Border to Coast counts over a million members and directly manages £40.3 billion in assets. The latest commitments take the total size of its Climate Opportunities portfolio to £2.6 billion, building on the £1.4 billion already invested since launch in 2022. With the new funding, Border to Coast will target investments in renewable energy, battery storage, electric vehicles and carbon capture projects, as well as in sustainable food production and low-carbon cement and steel production. “The need for the development of technology and infrastructure to support the transition to net zero marks a significant investment opportunity,” said Joe McDonnell, Chief Investment Officer at Border to Coast. “Capital markets need to play a critical role in meeting the challenge of decarbonisation by providing funding to support the development of climate solutions.” The Climate Opportunities portfolio forms part of Border to Coast’s wider private markets programme, which now totals £16 billion in commitments from LGPS partner funds – of which approximately £12 billion have been deployed. The programme also includes the asset owner’s UK Opportunities proposition, which has raised £0.5bn since launch in April 2024 and targets new-build housing, commercial properties, regeneration projects, renewable energy development and grid infrastructure in the UK.

AUM in Action

CalSTRS Outlines Net Zero Progress

The California State Teachers’ Retirement System (CalSTRS) has provided an update on progress against its pledge to achieve net zero emissions in its investment portfolio by 2050 or sooner. CalSTRS’ net zero pledge is structured around three pillars: measuring and reducing portfolio emissions, increasing exposure to low-carbon investments that meet risk-return goals, and using influence to accelerate the integration of net zero considerations across global financial markets. The firm’s global equity portfolio has reduced its emissions by 9.4% over the past year, while fixed income witnessed an 11% drop. The US pension fund also operates a sustainable investment and stewardship strategies private portfolio, which has deployed more than US$2 billion in low-carbon solutions to date. CalSTRS flagged its continued engagement efforts – including with Climate Action 100+ – and its heightened focus on methane reduction. The pension fund has called on eligible portfolio companies to join the Oil and Gas Methane Partnership 2.0, a UN-led framework committed to the measurement, reporting and mitigation of methane emissions. Getting accurate and consistent data has been a priority for CalSTRS, and presents a persistent challenge for reaching net zero, it said.

Technology & Data

PwC Co-launches EU Sustainability Standards Course

The American Institute of Certified Public Accountants (AICPA), the Chartered Institute of Management Accountants (CIMA) and PwC have put together a course to help accounting and finance professionals comply with European Sustainability Reporting Standards (ESRS). The ESRS underpin the Corporate Sustainability Reporting Directive (CSRD), covering the full range of ESG issues – including climate change, biodiversity and human rights – and providing investors with information to understand the sustainability impact of portfolio companies. The standards also take into account disclosure requirements under the International Sustainability Standards Board (ISSB) and the Global Reporting Initiative (GRI), aiming to ensure a high degree of interoperability between EU and global standards and to prevent dual reporting by companies. The course is compliant with the National Association of State Boards of Accountancy (NASBA) and offers three initial modules: introduction to cross-cutting standards (ESRS 1 and 2); introduction to environmental standards (ESRS E1–E5); introduction to social and governance standards (ESRS S1–S4 and G1). “We believe that knowledge on sustainability reporting, particularly on the requirements in Europe, will be essential for finance professionals within and outside of the European Union,” said Gabor Balazs, Corporate Reporting Services Partner at PwC Central and Eastern Europe. “PwC is proud to provide upskilling on this crucial topic – sharing insights and contributing to the increase of knowledge on this new frontier in corporate reporting.”

Fund Solutions

Invesco Launches Climate Adaptation Fund

US asset manager Invesco is seeking to raise US$500 million from institutional investors to fund climate adaptation projects in developing countries. The Invesco Climate Adaption Action Fund (ICAAF) will invest in public and private placement bonds issued with the purpose of funding projects aiming to counter the effects of climate change. The UN Environment Programme (UNEP) has cited climate adaptation as a key pillar in the global response to climate change alongside mitigation, with an estimated cost of as much as US$387 billion a year. But it lacks funding, with UNEP estimating the finance gap between US$194 billion and US$366 billion per year – with the need greatest in developing countries. The ICAAF will invest in bonds funding areas such as food security and agriculture, coastal zones, urban infrastructure, water collection and management, energy and nature-based solutions. The fund’s term is 12 years, comprising a seven-year investment period. It is made of two parts: the junior share – around 25% – which  is aimed at the public sector with a targeted return of 11.75% per annum; and the remainder, which will target private sector investments with annual returns of 8.1%. Invesco said it would work with the Global Centre on Adaptation (GCA) to find “compelling and effective investment opportunities”. “We believe there is an enormous opportunity to transform how climate adaptation is funded and have created [the] ICAAF to enable institutions to invest to accelerate the scale-up of solutions – an approach we believe will create the most impact,” said Hamid Asseffar, Head of EMEA Sustainable and Impact Investing at Invesco.

Fund Solutions

ESMA Issues Fund Names Guidance

The European Securities and Markets Authority (ESMA) has published its final report on guidelines for fund names using ESG- or sustainability-related terms. ESMA’s goal with the guidelines is to ensure investors are protected from “unsubstantiated” or “exaggerated” sustainability claims, and to give asset managers clear and measurable criteria to assess their ability to use ESG- or sustainability-related terms in their funds’ names. To do so, they will need to meet a minimum threshold of 80% of investments with environmental, social or sustainable objectives – similarly to the US Securities and Exchange Commission’s Names Rule. “Competitive market pressures create incentives for asset managers to include terminology in their funds’ names designed to attract investor assets,” ESMA said in a statement. “This increasing demand has led to concerns. Misleading sustainability disclosures may give rise to risk of ‘greenwashing’.” The report will now be translated into other EU languages and published on the ESMA website, with the guidelines due to come into effect three months later.

AUM in Action

Non-State Shareholders Back Equinor Climate Proposal

An estimated 32.1% of non-state shareholders (6.46% of total votes) were in favour of a shareholder proposal calling for petroleum refining company Equinor to align its climate strategy and capital expenditure with the Paris Agreement. The resolution – which was filed by Sarasin & Partners, Sampension, Achmea Investment Management and West Yorkshire Pension Fund –asked the company to specify how its plans for new oil and gas reserve development would be consistent with climate goals. Investors including Storebrand, Robeco and Railpen voted in support of the resolution. “Equinor’s non-state investors are extremely concerned that the company lacks the ability and willingness to align with global temperature goals,” said Martin Norman, Investor Engagement Lead at the Australasian Centre for Corporate Responsibility (ACCR). “The Norwegian government – Equinor’s majority shareholder – has already made it clear the company needs to implement Paris-aligned targets and measures in the short- and long-term, and now a large number of its remaining shareholders have shown they expect a similar strategic shift.” In addition, an estimated 16.4% of non-state votes (3.22% of the total) were cast in favour of a separate resolution calling for Equinor to ensure at least half of its board members are competent on addressing matters such as energy transition and sustainability. “This should be a wake-up call for Equinor’s board and management,” said Norman. “The pressure on them to deliver real reductions in emissions will only increase from here.”

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