Take Five: Adapting to Reality

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

Will COP27 delegates be inspired or burdened by the expectations of billions?

Adapting to reality – The findings of the UN’s Adaptation Gap Report 2022 should ensure the topic commands attention throughout COP27, which starts Sunday (as if a year of record-breaking droughts, floods and heatwaves wasn’t enough). Its key headlines – that adaptation finance flows to developing countries are 5-10 times below estimated needs and that overall annual adaptation costs could reach US$160-340 billion by 2030 – have implications for COP27 negotiators and investors. For the policymakers, it should spur efforts to meet and exceed the long-held US$100 billion climate finance pledge to developing countries. For investors, it should further concentrate minds on what was described as an “underdeveloped area” in a recent analysis of climate-focused blended finance transactions. Innovation in blended finance is accelerating, but perhaps a more fundamental reform of the global financial architecture, as advocated recently by Aviva Investors, is needed.

Scrutiny COP – Adaptation is far from the only item on the COP27 agenda, of course. The UK has delivered its account of the progress made under its COP26 presidency, but with only 26 countries having made good on the Glasgow commitment to resubmit nationally determined contributions before arriving in Sharm El Sheikh, evidence is inconclusive. Largely unforeseen last November, Russia’s invasion of Ukraine, with its implications for energy and food security, have made it harder for countries to meet COP26 commitments to phase out fossil fuel subsidies and phase down coal usage. But from Australia to India to Gabon, there are examples of ambitious policy action in 2022. And even though China and the US have suspended bilateral climate cooperation, they are separately letting their actions do the talking. Billed as ‘implementation COP’, this may also be ‘scrutiny COP’, with the UN High Level Expert Group announced in Glasgow due to make their first recommendations.

SLB-washingSustainability-linked bonds took an unexpected leap toward inclusion in the common lexicon this week when they were fingered by the Bureau of Investigative Journalism as the latest example of greenwashing. The bureau highlighted three deals facilitated by HSBC, the terms of which included “paltry” penalties for missing targets and far from robust oversight of use of proceeds. Issues around incentives and conflicts of interest are well known in the SLB market, with some advocating a greater role for independent advisors and reviewers. It’s not clear whether these weaknesses explain the recent fall in SLB activity, but the nascent market is still maturing. As one portfolio manager noted recently, investors are paid to identify the strongest of offerings and typically support only the darkest of green bonds.

Not so green – Oil and gas firms came under fire this week for continued duplicity in their efforts to reduce emissions and align with the goals of the Paris Agreement. UK think tank InfluenceMap highlighted the extent of major energy producers’ anti-climate lobbying activities, while Carbon Tracker flagged the use of remuneration targets that directly or indirectly incentivise production growth, potentially compromising their ability to meet emissions pledges. Elsewhere, Greenpeace France has accused TotalEnergies of underestimating its emissions by four times.

ESG is on the ballot – Does an anti-ESG stance win elections? Evidence suggests not, but some Republicans are giving it their best shot and the outcome will be known soon after the polls close for the US mid-term Congressional elections next Tuesday. Republican-run states have recently initiated legal proceedings against the US’s six largest banks over their membership of the Net Zero Banking Alliance, having already sought to ban their public pension funds from incorporating ESG factors (with limited success, at least in the case of Alabama, Indiana and Kentucky). There are concerns that Republican success on Tuesday could restrict funding for the Inflation Reduction Act and disrupt the SEC’s climate risk disclosure proposals.

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