Take Five: A Critical Turning Point for the US

This week’s major stories impacting ESG investors, in five easy pieces.  

A long hot summer is doing little to slow the pace of change for those at the sharp end of sustainable investing.   

A ‘critical turning point’ – The week started with a collective sigh of relief. It emanated first from the US Senate, late on Sunday, but soon rippled around the world, swelling to a round of applause by the time it reached Europe. Having placed climate at the heart of his policy agenda, US President Joe Biden can at last point to meaningful legislation aimed at shifting the American economy decisively toward renewable energy. The package, described by The Economist as ‘flawed but essential’, will direct US$386 billion to decarbonising power and transport, as well as investments in clean energy projects and technologies, energy efficiency, and climate resilience. Former US Vice-President Al Gore said the deal was a “critical turning point”, but there were no congratulations from Beijing, however, after China suspended cooperation with the US on climate policy in response to US Speaker Nancy Pelosi’s visit to Taiwan.   

Hot off the press – As large swathes of Europe swapped desks for deckchairs, or at least those that could stand the soaring temperatures, the building blocks of sustainable finance were still being put in place. The deadlines passed for responses to the proposed disclosure standards of the International Sustainability Standards Board (ISSB) and the draft European Sustainability Reporting Standards for the EU’s Corporate Sustainability Reporting Directive. Spare a thought, as you sip your spritz, for those who must read through the 2,000-plus responses across both consultations, considered vital in providing asset owners with comparable and reliable information on the sustainability risks, performance and impacts of large corporates. Also bear in mind the recent findings of UK financial regulators, which noted a disconnect between the climate-related and traditional financial reporting of large UK-listed firms.   

Running out of excuses – Banks and other financial institutions were presented with a further reason to feel hot under the collar over the summer, in the form of new guidance on ridding their lending books and investment portfolios of climate risks. GFANZ, the 500-strong finance sector umbrella group, proposed an “illustrative credibility framework” to help institutions assess the net zero plans and targets of portfolio companies, in recognition of “current gaps in portfolio alignment metrics”.  This follows a ramping up of UN criteria for all organisations’ decarbonisation efforts and GFANZ’s own outline for credible net zero transition plans for its members. Following also on the heels of the IIGCC and TPI’s guidance on assessing banks’ transition plans, this broadly welcomed consultation means institutions can get down to business well before the aforementioned corporate sustainability reporting standards come into force.  

The heat is on – Guidance and metrics for measuring social risks are nowhere near as advanced as for climate risks, but that will not stop their continued rise up the investors’ agenda. Recent years have seen mounting evidence both of the critical need for businesses to nurture their human capital and of the willingness of firms to cut corners on pay, conditions, and wellbeing. Investor efforts to reduce use of arbitration mechanisms is just one example of employee-related issues being brought to the attention of Tesla’s management. The combination of below-inflation pay offers, mounting food and energy bills and regulatory pressure on pension trustees to manage social risks will keep the heat on HR departments and boardrooms.   

Water, water everywhereDroughts (and leaks) in the UK, floods in Kentucky and wildfires in California and France. Our relationship with water has been front page news throughout the northern hemisphere summer. Water security, quality and availability was already an increasing priority for investors, due to growing awareness of the risks and the solutions. But developments in recent months mean the issues have really hit home, literally for those in developed markets experiencing shortages and bans. In the UK, the financial structures and pollution records of water utilities have long cast questions over the industry’s regulatory models, while corporate use also demands greater scrutiny across all regions. The UK government read the riot act to water bosses, but policymakers here and elsewhere might do as well to take a long look at their reflections.  

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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