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Take Five: Breaking Point

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

Across the sustainable investment landscape, resources, patience and credibility are all being stretched.

Lesson learned? – Asset managers are hiring ESG and sustainability staff, you won’t be surprised to learn, and they’re almost certainly not alone. According to Russell Investments’ ninth annual ESG Manager Survey, 75% of 169 survey respondents have been recruiting ESG personnel, largely to dedicated sustainable investment teams, but their compliance and data integration & analytics functions are also expanding. In the UK, pension funds have been feeling pressure from ESG reporting burdens for a number of years, but – with fewer resources than asset managers – they’re less able to throw bodies at the problem. The large ones are encouraging regulators and standards-setters to rationalise their ‘green tape’; the smaller ones are finding ways to share the burden (UK Chancellor Jeremy Hunt has his own ideas). With both nature and social risks and disclosures following rapidly on the heels of climate, many hope the lessons of mandatory TCFD disclosure rules – which required asset owners to report before asset managers and corporates – will be learned, while keeping their fingers crossed that there’s an upside to AI after all.

Autumn’s green leaves – The wait for the UK environmental taxonomy has lasted so long that some have begun to doubt the government’s commitment to delivering on this particular pillar of its Green Finance Strategy. The UK’s second mover advantage had at times been promoted as a ‘Brexit dividend’, allowing the UK to learn from Europe’s example, although its apparent intention to include nuclear opened this to question. An updated Green Finance Strategy, published in March, reconfirmed the government’s commitment, including a consultation this autumn, but things have been ominously quiet since, while the independent Green Technical Advisory Group has churned out advice on its usage, also calling for more urgency. At last, Monday saw movement, with Treasury Minister Gareth Davies again confirming the Autumn taxonomy consultation, noting the government’s wish to provide “transparency and clarity for investors”. With the King’s Speech and the Chancellor’s Autumn Statement both due next month, not to mention the next stage in the FCA’s proposed Sustainability Disclosure Requirements, it’s possible the UK’s sustainable investment landscape could soon look a lot different, in time for Finance Day at COP28, where admittedly debate is likely to focus more on the climate finance challenges facing the Global South.

Betting on black – Just as worryingly, COP28 will also provide a test case for the power of the oil lobby, with hopes for progress on climate action tempered by expectations of a focus on reducing emissions, rather than outright cuts in fossil fuel output (despite the IEA’s latest outlook). US oil firms will be feeling particularly bullish, following news this week of a second mega-merger that could well spark further consolidation, notably among firms focused on hydrocarbons and eschewing green energy investments. It has also been reported that UK public-sector pension funds still hold around £16 billion in fossil fuel assets, although much of this is in European firms with at least some renewable energy credentials. But when the largest players’ strategies are so wholly focused on dirty revenue maximisation – campaign Follow This called Chevron’s purchase of Hess a bet that Paris would fail – is there any justification for engagement over divestment? At the very least, investors should pursue a policy of engagement with consequences.

Call of duty – Those oil and gas sector firms might convince themselves they are serving the interests of shareholders by doubling down on fossil fuel revenues, but recent research from McKinsey tells a different story. Leaving aside the dubious value-creation benefits of M&A activity, the report suggests innovation and investment in people and technology are the strongest drivers of long-term growth. Unsurprisingly, sustainability also plays a role in sustainable business growth. “Companies that achieve stronger growth and profitability while improving sustainability and ESG scores have two percentage points higher excess total shareholder return than companies that excel only on financial metrics,” the report found. This was lent some academic support this week, in a lecture by Nobel prize-winning economist Oliver Hart, who made the case for shareholder welfare maximisation. “If your beneficiaries don’t just want to maximise financial return, but care about other things, if you don’t put any emphasis on these other things, then you’re violating your fiduciary duty,” said Hart.

Peace talks – Has harmony broken out in the world of sustainability disclosure standard-setting? There’s been an uneasy co-existence between the International Sustainability Standards Board (ISSB) and the Global Reporting Initiative (GRI), purveyors of financial and impact materiality-focused standards respectively, since the former was created in November 2021, subsuming several existing reporting bodies. Some purists even referred dismissively to the I?SB. Even after agreement on a ‘two-pillar’ approach – under which the two agreed to collaborate and coordinate, for example by aligning terminology and guidance – friction remained. But as asset owners warned that standards based on enterprise value were “too narrow”, ISSB and GRI participated in initiatives of shared interest such as the TNFD’s nature-focused disclosure standards and the ESRSs underpinning Europe’s Corporate Sustainability Reporting Directive. Signs of a thaw emerged at the beginning of the year when ISSB included ESRSs as a source of guidance for firms reporting under its general requirements standard, followed by GRI’s CEO imagining in July the future possibility of a merger between the two. And this week, Carol Adams – once an early ISSB sceptic but now, as Chair of GRI’s Global Sustainability Standards Board, an active interlocutor – thanked her ISSB counterparts for recent positive dialogue on the common cause of enhancing the “quality, consistency, comparability and credibility” of sustainability reports.

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