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Take Five: Bound by Destiny

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

Public and private sector coordination provides the theme – and events of Nairobi, London and Rio de Janeiro the backdrop – for this week’s digest.

Natural allies – Just ahead of this year’s UN International Day for Biological Diversity, delegates gathered in Kenya for the first review of the implementation of the Global Biodiversity Framework (GBF) since its adoption at COP15 in December 2022. A key task during the nine-day summit is to assess how well parties’ national biodiversity strategies and action plans (NBSAPs) support the 23 targets of the GBF. For the record, just nine countries, plus the European Union, have submitted updated NBSAPs since all 196 parties committed to the framework in Montreal. “The challenge is to ensure that the global aims are translated into nationally relevant targets that consider the context and the biophysical realities of each country,” said David Cooper, Acting Executive Secretary of the UN Convention on Biological Diversity. Delegates will also discuss the means of implementing the GBF, including capacity-building, technical and scientific cooperation, and resource mobilisation – the last of these being the trickiest given an estimated annual biodiversity finance gap of US$700 billion. Investors will be paying close attention to progress on the GBF’s fourth overarching goal, the alignment of financial flows. According to a recent blog by Emine Isciel, Co-chair of the Finance for Biodiversity Foundation, a critical factor will be reducing existing harmful financial flows. As well as robust private-sector disclosures, via standards such as those outlined by the Taskforce on Nature-related Financial Disclosures, this requires public policy reforms to redirect US$542 billion in annual agricultural, fishing and forestry subsidies that damage nature, while also misdirecting private investment. “By fostering innovations, aligning incentives and setting clear boundaries, [finance ministers] can steer sectoral pathways towards reducing negative impacts, increasing positive impacts and catalysing private finance at scale,” she said.

Two figs – Alignment of finance flows with nature goals was also front of mind at the City Week event in London, with Karen Ellis, Chief Economist of the World Wide Fund for Nature UK, flagging two areas of opportunity. To avoid the nascent market for biodiversity credits making the same mistakes as the voluntary carbon markets, she said, governments could grasp the chance to create compliance markets. These could link the supply of financial incentives to the private sector for the protection and conservation of nature to meeting targets contained in the soon-to-be-delivered NBSAPs mentioned above. In addition, Ellis, also a member of the UK’s Transition Plan Taskforce, urged firms to create “holistic” transition plans that outline how they would move toward nature-positive as well as carbon-neutral business models, echoing predictions of a single sustainability reporting framework in the UK made earlier in the day by Sacha Sadan, the Financial Conduct Authority’s Director of ESG. Many of the potential building blocks are already in place, suggested Ellis, adding that existing sector-specific nature-positive pathways, such as those developed by the World Business Council for Sustainable Development, needed to be translated to local requirements. As a counterpoint, Sonja Laud, Chief Investment Officer, Legal & General Investment Management, earlier noted the extent of the “reskilling” that would be needed in the asset management sector to accurately assess the financial materiality of portfolio companies’ transition plans over the long and short term.

Joined-up commitments – If asset managers are likely to struggle to interpret firms’ holistic transition plans, how are they going to handle “meaningful, non-greenwashed, accountable, achievable net zero commitments”? Former US Deputy Treasury Secretary Sarah Bloom Raskin told the City Week audience she was due to deliver to Simon Stiell, Executive Secretary of the UN Framework Convention on Climate Change (UNFCCC), seven recommendations to improve the transparency and accountability of net zero pledges, building on COP27’s Integrity Matters report and the UNFCCC’s Recognition and Accountability Framework, unveiled at last year’s Bonn Climate Change Conference. One recommendation, apparently, will involve linkages between the commitments of non-state actors and the nationally determined contributions of countries, and another concerns the role of the UNFCCC’s Global Climate Action Portal. What this bodes for the Net Zero Data Public Utility we shall soon find out, in Bonn probably.

Wet, wetter, wettest – London was bathed in spring sunshine earlier this week, as other parts of the UK suffered further downpours, compounding the damage done by the second wettest winter on record. Many regions are having to adapt to the realities of warmer, wetter, slow-moving weather systems, among other physical impacts of climate change. Sodden fields, mudslides and burst dams are the most visible evidence, but urban environments face disruption too. Mass transit systems, especially those underground, can expect regular disruption from heavy rainfalls if they don’t adapt, warned Baroness Brown of Cambridge, Chair of the UK Climate Change Committee’s (CCC) adaptation sub-committee, who used her City Week platform to underline the CCC’s underwhelmed assessments of the UK government’s response to the adaptation challenge. Whether adaptation is on the ballot in the UK’s upcoming general election remains to be seen, but adaptation finance is on the agenda in Brazil – which has suffered more than most this year – having hosted a summit in Rio de Janeiro on leveraging finance this week, as part of efforts to incorporate the issue into its Group of 20 presidency.

No surrender – For large finance sector organisations, there is no net zero transition path that can win universal acclaim. Previously chastised for not divesting fossil fuel holdings, US pension scheme CalPERS this week responded to a Wall Street Journal leader that characterised as “agitators” the shareholders planning to vote against Exxon at next week’s AGM, in protest at the fossil fuel major’s attempts to limit investor influence via legal action against Arjuna Capital. Seeking to maintain engagement with oil and gas firms is an often thankless task, fraught with difficulties, as reflected in the outcomes of climate votes at Shell’s AGM this week. Bruce Carnegie-Brown, Chair of Lloyd’s of London, which was the target of an 800-strong blockade by climate activists in February, reminded City Week delegates that the insurance market also takes flak from the other side. Insurance commissioners from 13 US states wrote to him in response to guidance from Lloyd’s suggesting the market gradually reduce the percentage of underwriting business with fossil fuel firms in favour of renewables. “I got letters … telling me that if I’m thinking about doing less fossil fuel underwriting in the states of Texas, California, Florida, I can think about having my licenses revoked for providing any insurance in those states,” he said. Criticism and pressure will increase, Bloom Raskin warned, predicting a rising “crescendo” of lobbying against the net zero transition. Investors and policymakers alike should resist “intellectual surrender” to fossil fuel interests, she said.

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