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Take Five: Balance of Power

A selection of the major stories impacting ESG investors, in five easy pieces. 

A stark message in Bonn underlined the tensions between electoral cycles and long-term sustainability.  

Climate “collusion” – Republican politicians faced off against US institutional investors on Capitol Hill this week, in the latest round of the war on ‘woke’ capitalism. Having published a report claiming “bullying” of members by the investor-led Climate Action 100+ (CA100+) coalition, the House Judiciary Subcommittee on the Administrative State, Regulatory Reform, and Anti-trust heard from investor network Ceres, shareholder advocacy group As You Sow and CalPERS – the US’s largest public pension fund. Ceres CEO Mindy Lubber opened her testimony asserting: “Climate change, water scarcity and pollution, and nature loss … pose material financial risks to investment portfolios, business operations and supply chains, thus to the long-term stability of our markets and the economy.” As a member of its global steering committee, Lubber was also representing CA100+, which insisted its members “act as independent fiduciaries, responsible for their individual investment and voting decisions”. The stated purpose of the hearings was to decide whether current laws are sufficient to “deter anti-competitive collusion” to promote ESG-related goals in the investment industry. A legal memo recently secured by the US Sustainable Investment Forum found that firms and investors acting in concert on climate risks “are not violating fiduciary duty and are at negligible risk for anti-trust claims”. Even so, the hearings could be contributing to rising outflows from sustainable investment vehicles, with investor behaviour in the US diverging from elsewhere. Among the evidence cited for reduced appetite was the closure of several funds by BlackRock, some sustainability focused, others – less so, including one targeting opportunities arising from remote working. But it’s far from clear whether the world’s largest asset manager has given up on sustainable investing, given its launch this week of a series of climate transition-focused exchange-traded funds.

Slightly right – The rightward shift of the European Parliament following last week’s elections has prompted divergent views on its implications for the Green Deal that MEPs spent much of the past five years constructing. Centre- and far-right parties swelled their presence largely at the expense of the Greens and the moderate liberal Renew grouping – albeit with voting outcomes contrasting vastly across member states. There is scope for this new cohort to weaken some measures that are still being finalised, such as the Nature Restoration Law, or delay or dilute others in the process of implementation – including the Corporate Sustainability Reporting Directive and the Corporate Sustainability Due Diligence Directive. While many say the urgency of the climate and nature crises mean this is no time to pause, others wonder whether Europe’s slightly rightward turn might instead help to include on the transition journey more of those who currently feel left behind. Across the Channel, the UK’s July general election might see a greater shift in green policy, with all the parties looking to profit from the Conservatives’ collapse including in their manifestos plans for accelerated climate action. While the cautious Labour Party’s vision for a publicly owned renewable energy utility is the most likely to be realised, smaller parties are floating ideas whose time may yet come – from the Liberal Democrats’ plans for increased alignment of pension schemes with the Paris Agreement, to the Greens’ mandatory divestment from fossil fuel assets by 2030 for pension and investment funds.

Plans for power – As has been seen during election campaigns in India, Europe and the UK, climate and other sustainability themes are playing a growing role in political discourse – if not yet a deciding one. Few would-be leaders are planning their rise to power on the strength of their nationally determined contributions (NDCs) to the Paris Agreement. But NDCs are going to creep up the political agenda over the next six months, alongside NAPs (National Adaptation Plans) and BTRs (biennial transparency reports), following only “modest” progress at the Bonn Climate Conference, which wrapped up yesterday. COP29 Lead Negotiator Yalchin Rafiyev told delegates that delivering these ambitious blueprints would be vital in the coming year to “build trust as well as guide investment”, mapping out in detail countries’ paths to 2030 and beyond. To assist governments, UN Climate Change launched the NDC 3.0 Navigator in Bonn – an interactive tool designed to identify “nationally relevant” approaches to preparing the third iteration of countries’ NDCs, after the previous ones were found to be falling short at COP28. But Executive Secretary Simon Stiell told delegates there’s only so much support his team can provide. “Our process is about finding solutions,” he said. “And we can still do it. Whether we do is up to all of you.”

Pay attention – With the sheer number of shareholder resolutions around environmental and social risks filed during this year’s proxy voting season, one could be forgiven for thinking that investors had lost sight of executive pay – a key indicator of sound corporate governance. But that is very far from being the case, with at least some asset owners examining individual deals and partnering on collective measures. Despite Elon Musk’s protestations to the contrary, for example, not all major shareholders were on board with the Tesla CEO’s recommended compensation package, initially valued at US$56 billion, let alone his plans to incorporate in Texas following a ruling against the deal by the Delaware Court of Chancery in April. NBIM, the world’s largest sovereign wealth fund, voiced concern about the size and structure of the deal, while Amalgamated Bank, the New York City Comptroller and CalSTRS indicated their intention to vote against it at this week’s AGM. Fellow Californian public pension scheme CalPERS, owner of 9.2 million Tesla shares, said the “exorbitant deal” rewarded short-term growth rather than sustained profitability, noting the electric vehicle manufacturer’s market value had more than halved since 2021. Nevertheless, the pay package – the largest-ever granted to an executive at a US-listed company – was voted through despite opposition from proxy-voting advisory firms Institutional Shareholder Services and Glass Lewis. The issue is far from the only one concerning Tesla shareholders –  nor is Musk the only chief executive facing scrutiny from investors on pay, with UK food retailer Tesco’s CEO, Ken Murphy, facing shareholder questions this Friday over his (comparatively modest) £10 million pay package.

Separation of powers – Following the recent controversy surrounding proposed revisions to the treatment of carbon credits, the Science Based Targets initiative (SBTi) this week took steps to get its governance in order. Specifically, it announced progress toward the separation of its standards-setting and target validation activities. Now incorporated as a UK charity with a subsidiary to house its target validation services, the SBTi has created an independent technical council, introduced a standard operating procedure (SOP) for standards development, and established compliance processes. It also announced the appointment of a five-member independent validation council and issued a call for non-executive directors to join the board of the validation services entity. Once appointed, the board will oversee the development of strategic direction and plans and establish the company’s governance framework, including a compliance framework. The SOP, designed to ensure no one group or individual has sole decision-making authority over the content of a standard, is being trialled in the revision of SBTi’s Corporate Net-Zero Standard, launched in May. A draft revised standard for public consultation is expected by the end of the year.

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