Commentary

Take Five: A “Starting Point” for Sustainability Reporting 

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

This week, the ISSB delivered its long-awaited sustainability standards, to overwhelming but not universal acclaim.  

Double trouble – Undoubtedly, the most significant development in sustainable investment this week was the release of its first two standards by the International Sustainability Standards Board (ISSB). Certainly, the ISSB lined up an A-Z of sustainable investment authorities to underline its significance, some calling for global mandatory adoption from 2025. Notably, ISSB Chair Emmanuel Faber added a dose of reality, describing the release as a “starting point”. It was further left to Phillipe Zaouati, CEO of asset manager Mirova, to remind everyone of the limitations of reporting standards focused on enterprise value. “The logic of simple financial materiality is mortifying. Applied not just to the climate, but to all other environmental and social issues in the future, it means the absence of corporate responsibility for the general interest,” he said, noting the double materiality approach of the standards being developed to support the EU’s Corporate Sustainability Reporting Directive. Given the extraterritorial reach of the latter, interoperability between the two is seen as critical by many.  

On the brink – Years of environmental and financial mismanagement took the UK’s largest privatised water utility to the brink of collapse this week, with insolvency fears rising in parallel with investor concerns over lower UK listings standards. Fingers were pointed at governments, regulators, prior owners and recently-departed directors, with shareholders pondering some unappealing choices. Thames’ travails have much in common with the wider UK water industry – which has seen long-term investment deprioritised by financial engineering with severe environmental consequences – but some differences. Much of its £14 billion debt pile was built up under the ownership of Australian bank Macquarie, but its current investors – including Canada’s OMERS and the UK’s USS – have not seen a dividend since buying into the company in 2017. They’ve also agreed to fund an eight-year transformation programme to the tune of £1.5 billion – to address some of the service and pollution issues – but Thames must also refinance £2 billion of index-linked debt by 2027, with some bonds maturing in October. Several peers also have high levels of debt, gearing and exposure to interest hikes, while the sector is finally facing demands from its regulator to invest in infrastructure and balance sheet resilience. Unsurprisingly, the sector’s many problems are stiffening the resolve of many to resist a lowering of UK listings standards.  

Joined-up thinking – In its annual assessment, the Climate Change Committee said a failure by the UK government to respond to the energy crisis and build on COP26 had meant Britain had relinquished its global climate leadership position. Its stinging rebuke – which contrasted “game-changing” policy interventions from the US and Europe with unnecessary UK investment in fossil fuels – was followed by the resignation of Zac Goldsmith from the UK government, citing Prime Minister Rishi Sunak’s lack of interest in climate and the environment policy. Speaking at the Climate Investment Summit, part of London Climate Action Week, investors underlined the leading role of policy in tackling climate change, with Laura Hillis, Director, Climate & Environment, Church of England Pensions Board (CoEPB), highlighting the importance of “coherent policy incentives” in order to channel investment to net zero targets. However, research released this week suggested the problem was far from a UK-specific one, with investors struggling to influence fossil fuel firms to align with the Paris Agreement without further policy support from government.   

Tropic blunder – Alongside policy challenges regarding climate and water, research released this week showed that there had been insufficient progress on deforestation since a global pledge made at COP26. Despite marked improvements in Indonesia, the damage done in Brazil under former President Jair Bolsonaro meant that overall tropical primary forest loss worsened in 2022, according to the World Resource’s Institute’s Global Forest Watch. Brazil’s new government has committed to reversing deforestation, while on the demand side reforms are taking place in the UK and Europe. As the report authors note, “the lack of progress in slowing forest loss in the tropics underscores the need to move beyond political commitments to action.” 

Bowing out? – The ESG war in the US has many more twists in its tale, as suggested by the reintroduction to Congress of a bill to limit consideration of ESG factors in ERISA-regulated retirement plans. But one leading participant is bowing out. An “ashamed” Larry Fink, CEO of BlackRock, which has lost mandates in several red states due to its willingness to enable clients to integrate ESG into their investment criteria, says he will not use the term again. Speaking at the Aspen Ideas Festival, Fink said ESG had been “been misused by the far left and the far right”. But he also made clear that BlackRock had not been damaged in its home market through its association with “conscientious capitalism”, having secured a record US$230 billion in net inflows from US investors last year, in the eye of the anti-ESG storm. “We had … one of the best years ever,” said the defiant Fink.   

 

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