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Take Five: A Design for Life

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

This week, the balance of responsibility between public policy action and private sector initiative took centre stage.

A design for life – The unquantifiable and unpredictable impact of artificial intelligence (AI) has propelled governance and regulation of the sector to the top of the agenda for investors and policymakers. If they weren’t concerned already, warning bells may have been rung by the wild claims of a certain tech entrepreneur at this week’s AI Safety Summit 2023 (although his claims about environmentalists using AI to wipe out humanity appear to have been expunged from the internet, thus proving the power of technology in the wrong hands). The summit did at least yield the Bletchley Declaration, which noted “the importance of a pro-innovation and proportionate governance and regulatory approach”, alongside collaboration between countries on “common principles and codes of conduct” and “increased transparency by private actors”. Policy action is already taking shape, with the EU’s Artificial Intelligence Act followed this week by the G7 Code of Conduct and an executive order from US President Joe Biden setting out standards for AI safety and requirements for developers and users of AI systems. Investors will make their own minds up about how they engage with portfolio firms on their development and deployment of AI, but conversations on responsible design could soon be a key part of their stewardship priorities.

Natural extension – The roles of public and private sector actors were also to the fore at yesterday’s Nature Data for Institutional Investors event, hosted yesterday in London by ESG Investor, as speakers considered nature risks and impacts in light of the TNFD’s voluntary disclosure recommendations. FCA Head of ESG Alicia Kedzierski called for “leadership and collaboration”, arguing that implementing the right incentives, people and processes could help firms transition to “a more sustainable and nature-positive future” – noting that regulators globally stood ready to act, with work on nature-based solutions to climate change a “natural extension” of recent priorities. Following on, James d’Ath, the TNFD’s Head of Nature Data, warned that regulators were already beginning to “move away from self-regulation to more government-led requirements, due to concerns over greenwashing”. This makes it incumbent on private sector players to reach an understanding on their goals and means in relation to understanding nature risks, d’Ath said, flagging the next stage of work toward a public data facility. “You may have finite resources, capacity constraints, onerous procurement processes, and limited in-house expertise,” he acknowledged. “But these are not insurmountable hurdles” in the context of the proven and growing appetite for firms to “engage collaboratively”.

Gensler’s waiting game – To the surprise of some but not others, October came and went without the release of the US Securities and Exchange Commission’s climate risk disclosure rule. Subject to multiple delays and adjustments, it now seems likely the rule will not be published in its final form until the first quarter of 2024. The compelling logic would seem to be that release next year would set the clock for enforcement in 2026, in parallel with California’s recently-passed climate disclosure rules as well as the roll-out of European Sustainability Reporting Standards under its Corporate Sustainable Reporting Directive. At least part of the calculation by SEC Chair Gary Gensler, as suggested in a recent interview, would be that further delay would reduce the threat of lawsuits, on grounds that the SEC would not be asking firms to disclose much beyond what they were already reporting – or preparing to.

Common ground – Everyone on the supply or demand side of sustainable investing has been frustrated or inconvenienced by the shifting sands of the sector resulting from imprecise and evolving definitions. Much of this is inevitable in such a dynamic and innovative environment, but the problems can be significant, not least when seeking to accurately track fund performance, impact and demand. This means many will be interested in the work released this week by the Principles for Responsible Investment, CFA Institute and Global Sustainable Investment Alliance, to define the “essential elements” of five responsible investment approaches: screening, ESG integration, thematic investing, stewardship and impact investing. Responses to GSIA Chair James Alexander’s LinkedIn post on guidance have not all been favourable, but the initiative and the debate should lead to much-needed common ground, eventually.

Blowing the budget – There remains little common ground in evidence on the path to COP28. Europe’s Climate Action Commissioner, Wopke Hoekstra, has made his opposition to a deal that represents only partial progress. He said this week the EU would reject an outcome in Dubai which only marked progress on increased use of renewable energy, without agreement on phasing out fossil fuels. Others have noted with concern the approach to emissions reductions of countries heavily reliant on fossil fuel revenues. Against this backdrop, researchers from Imperial College London released a study which estimated the remaining carbon budget is on course to be exhausted by 2029, locking in 1.5°C of climate change.


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