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Commentary

Take Five: Autumn Mist

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

There were mixed signals and missed opportunities on sustainable investment in the UK’s latest fiscal statement.

Autumn mist – UK Chancellor Jeremy Hunt provided investors with a range of opportunities for disappointment in his Autumn fiscal statement. Overlooked in most reports was HM Treasury’s conclusion that “any policy intervention from government to change fiduciary duty would be undesirable”, despite its acknowledgement of “a lack of clarity” around how the concept interacts with “sustainability and climate change considerations” among pension trustees. It was contained in the UK government’s verdict on its call for evidence on trustee skills, which concluded that current regulations and guidance are “generally fit for purpose” given that they present no barriers to the pursuit of the highest possible returns. Regulations may be set in stone, for now, but guidance could yet evolve. The government admitted that some respondents would welcome further guidance on alternative assets, while others sought a steer from The Pensions Regulator on how trustees should “take account of” long-term ESG factors. Further, the UK’s Green Finance Strategy, updated in March, tasked the Financial Markets Law Committee with examining the potential need for change. The UN Principles for Responsible Investment has fought a long campaign both in the UK and other major jurisdictions to allow investors greater freedom to pursue sustainability impact alongside risks and return, and it would be a surprise if the FMLC does not come out in favour of greater latitude.

Transatlantic divide – New evidence was released this week on the causes and extent of voting and engagement misalignment between asset owners and managers. Rigorous analysis is much needed after a 2023 voting season in which differences widened to a chasm, with the number of climate-related resolutions increasing, while levels of support diminished. Professor Andreas Hoepner’s report into misalignment between the views of UK asset owners and their typically global asset managers suggested growing transatlantic misalignment. Asset owner and manager voting patterns at European oil and gas firms are broadly in step, but the level of deviation in votes at US fossil fuel firms indicates “not only a substantial misalignment” between clients and service providers, but in some cases “a fundamental disagreement … as to what kind of AGM resolution is desirable at all”. While Hoepner chooses his words carefully, it’s hard not to see the impact of the US political climate in his findings, as well as the conflicts of interest and cultural issues he identifies. Having recently visited managers in Boston and Paris, the frustrations of the former are evident at the reception they can face, particularly in ‘red’ states, when carrying out their fiduciary duty to appraise clients of financially material risks.

Appetite for engagement – Voting on shareholder resolutions has a complex relationship with the wider practice of engagement and stewardship, as the above-mentioned research suggests. And the impact and practice of engagement remains an area of study and debate among institutional investors, even after some have reached the end of the road with the fossil fuel sector. Overall, it appears investor appetite remains undimmed, with institutions responsible for US$11 trillion signing up to a global collaborative initiative to promote “a socially and environmentally responsible mining sector” by 2030. The mining sector’s record is as chequered as any, across governance, social and environmental issues, but its critical role to the renewable energy transition should lessen the temptation on either side to walk away.

Change the record – Also published this week, the title of the UN Environment Programme’s Emissions Gap Report 2023 – ‘Broken Record’ – nodded both to unprecedented temperature levels and the repeated implicit message to policymakers ahead of COP28. And beyond its headline conclusion that we’re on track for only limiting climate change to 2.9°C, with severe implications for adaptation plans (described by FTSE Russell as “ill-suited”), the report’s analysis of nationally determined contributions bears comparison to UN Climate Change’s synthesis, mentioned in last week’s blog. UNEP did at least try to change the mood by also examining solutions, specifically traditional, land-based and less-proven newer forms of carbon removal. Recognising the technical, economic and political barriers to large-scale adoption, the report nevertheless suggests newer techniques will inevitably have to play a larger role in future, not only due to the slow pace of emissions reduction but also due to the risks to land-based removals, including land competition, protection of Indigenous Peoples’ land tenure and rights, and “sustainability, biodiversity and permanence risks”. For these reasons, and no doubt less worthy ones, policymakers will continue to leave the door open to “hocus-pocus”.

One tiny leap – A small but significant step was taken this week toward the European taxonomy finally having broader environmental scope, rather than being a framework for assessing and categorising economic activity according to its impact on climate. The publication of the Environmental Delegated Act in the Official Journal of the EU confirms the application from January 2024 of technical screening criteria relating to sustainable water use, pollution prevention, protection of biodiversity and ecosystems and transition to a circular economy. There are many steps left to take, for the taxonomy, Europe and other jurisdictions, but it marks a watershed for sustainable finance policy and a further incentive for investors and corporates to get to grips with their nature-related risks, impacts and dependencies.

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