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Take Five: Balance of Power

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

As its presidency of COP26 comes to a close, the future of the UK’s net zero strategy is open to question.

Balance of power – How strong will the UK’s commitment to net zero be under incoming premier Liz Truss, whose immediate priority is the impact of the energy crisis on consumers, businesses and public services? Those worried about the appointment of former climate-sceptic Jacob Rees-Mogg as Secretary of State for Business, Energy and Industrial Strategy (and as his own energy minister) should remember that predecessor Kwasi Kwarteng, as Chancellor, is in a strong position to defend his legacy of extending renewables capacity through contracts for difference and even broadening the scheme. Further, Truss committed to net zero during her election campaign, has appointed a long-time ally and head of the all-party parliamentary environment group Chris Skidmore to review options for accelerating net zero, and has presumably read the latest polls on Conservative party members’ views on options to boost energy security. That said, it’s hard not to feel sympathy for the newly-appointed minister charged with pulling together much-needed detail on climate policy while the balance of power settles in new administration.

Missing the mark – Those preparing for negotiations on accelerated climate action at COP27 in November were provided with evidence this week of the “considerable” gap between what is promised by policymakers and the rate of decarbonisation in the real economy. All G7 economies (and many beyond) are generating GHG emissions well above levels consistent with 1.5°C of climate change, with Canadian firms on a pathway to 3.1°C of warming. In contrast, European corporates improved from 2.7°C in 2020 to 2.4°C in 2022, due to widespread adoption of science-based targets during 2021 and the European Commission’s world-leading, if imperfect, legislative agenda. Meanwhile, the International Energy Agency underlined the economic benefits of investment in low-carbon transition, noting that clean energy accounts for half of all energy employment globally.

Getting out of reverse gear – If progress is uneven on climate commitments, geopolitical developments are throwing efforts to achieve the UN’s 17 Sustainable Development Goals into reverse in many cases. A new report marking the halfway point to 2030 calculates that the funding gap for reaching SDGs has recently widened by 35% to US$135 trillion, with the overall need growing by 15%-25% to US$134-176 trillion, driven by factors including “a persistent gap in official development assistance funding and a shortening window”. According to the Force for Good initiative, there are more than 100 million more people in extreme poverty since 2019, with around 210 million more people experiencing acute food insecurity. Its report also highlights the “building blocks” for funding a sustainable future, noting the key role of the finance sector as “custodian of 90% of the world’s capital” and the increasing evidence of alignment between higher shareholder returns and engagement on sustainability.

Diversity in EC3 – Largely concentrated in a small corner of the City of London, the UK insurance market is not known for its rapid embrace of change, and traditionally speaking this goes double for its non-executive directors, or NEDs. Having accepted an invitation to speak to a group of NEDs on nature-related risks, my assumptions were undermined by the diversity of thought and background around the table, with attendees particularly strident on issues around diversity, equity and inclusion. The assembled NEDs were frustrated at the pace of change in their industry, as well as the variety of metrics and measures for monitoring environmental and social performance. But they were determined to play their part in holding managers to account and making the business attractive to the next generation of underwriters.

Green Queen – “None of us underestimates the challenges ahead: but history has shown that when nations come together in common cause, there is always room for hope … It is the hope of many that the legacy of this summit will describe you as the leaders who did not pass up the opportunity; and that you answered the call of those future generations.” Queen Elizabeth II’s message to world leaders at COP26, given by video message last November. 1926-2022.

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