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Commentary

Take Five: Bubbling Under

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

Three weeks from COP28, the impact, influence and future of the fossil fuel sector is rarely far from the surface.

Multilateral momentum – The week started on an optimistic note with agreement on a list of recommendations for implementing the Loss and Damage Fund to be finalised at COP28. Progress has been painfully slow since a surprise breakthrough at COP27, with limited movement at the Bonn Climate Conference and “deadlock” reported on funding last month. A meeting of the Transitional Committee, chaired by the UNFCCC, established agreement on operational recommendations on Sunday. “As we have shown in Abu Dhabi, multilateralism works,” said COP28 President Dr Sultan Al Jaber, perhaps pre-emptively.

Too little, too late? – With an excellent sense of timing, the Network for the Greening of the Financial System has published its updated and new climate scenarios – ideal light reading for COP28 negotiators trying to avoid catching the eye of oil sector lobbyists. Particularly timely is the release of its new ‘too-little-too-late’ scenario, which illustrates the adverse consequences of delayed and divergent climate policy ambitions globally, in which countries with net zero targets achieve them only partially (80%), while other countries follow current policies. Even the NGFS’s ‘orderly’ scenarios are less orderly, reflecting “climate policy delays and recent developments in energy markets”. Another new ‘low demand’ scenario shows the steep and systemic changes required to still reach net zero by 2050 (and thus implying no need to move the 1.5°C goalposts). But the general message is that the longer policymakers wait, the more costly and disruptive change will be; already the NGFS says a shadow carbon price of around US$200/tCO2 would be needed in the next decade to incentivise the net zero transition. Climate scenarios used by the finance sector have been widely criticised for underplaying the risks and impacts, with some investors developing new partnerships to come up with more realistic forecasting frameworks. The NGFS’s new scenarios go some way to correcting these issues, but there seems much more to be done, given this fourth iteration is the first to cover droughts and heatwaves in its physical risk modelling.

No winners – Insurance firms were under scrutiny this week with the publication of the seventh annual Insure Our Future scorecard, accompanied by a list of the top ten providers of fossil fuel insurance by revenue, which goes some way to explaining the reluctance of many insurers to restrict cover to oil and gas firms and projects (unlike property owners in vulnerable US states). This year’s scorecard left its first three places blank to reflect the compilers’ dismay at the lack of 1.5°C-aligned policies, not least at the willingness of almost all firms to insure new gas power plants and LNG terminals, potentially helping to lock in fossil fuel consumption way into the future. It also noted the absence of transition plans and net zero targets among former members of the Net Zero Insurance Alliance, calling – along with 18 other NGOs and civil society organisations – for Europe’s Solvency II prudential regulatory framework to include a tailored transition plan provision which would require insurers to outline quantifiable targets and processes for reaching net zero by 2050 (albeit in line with CSRD requirements to avoid duplication of effort).

Transition travails – Transition finance is seen as critical to net zero ambitions, so much so that some European regulators this week backed revisions to SFDR that create a new category for transition products. But there were also mixed signals on how easy it will be for financial institutions to identify firms with credible transition plans and channel finance to them in a way that rapidly reduces emissions. On the one hand, a project led by the Climate Bonds Initiative found that the 13 transition frameworks so far developed largely shared common core principles for setting authentic targets, devising actionable strategies, and ensuring robust accountability, albeit with “limited and variable” guidance on how to integrate other social and environmental aspects. On the other, there remains a distinct lack of detail from corporates on their transition plans at present, rendering the merits of assessment frameworks somewhat moot. Analysing 1,000 corporates, largely in high-emitting sectors, the Transition Pathway Initiative found a distinct lack of relevant data – on Paris-aligned future capital expenditures, quantified plans to meet GHG targets, the role of carbon assets – causing its research director to note that firms had “yet to come up with the detailed, quantified and costed transition plans”. Further, a new approach proposed by GFANZ to tracking reductions in institutions’ financed emissions – based on those avoided via the transition plans of investees and clients – has attracted fierce criticism. GFANZ is due to respond to concerns – that the Expected Emission Reductions methodology would greenlight continued allocation to high emitters without engagement to ensure implementation of credible transition plans – in an updated document before COP28.

The King’s Speech: part one – Sustainability-focused investors may have been as perplexed by what was left out of the King’s Speech – outlining the UK government’s priorities in the last parliament before a general election – as by the measures included. Top billing went to an unnecessary and politically-motivated mechanism to issue new North Sea oil and gas licences every year, based shakily on energy security grounds, with low-emissions guide rails. This continues the trend of both governments and fossil fuel firms ignoring science – and often their own stated policies – by searching for more reserves than can be justified by forecast demand. They also appear to be ignoring the economic logic of over-supply for their business models and investor returns, at a time of increasing evidence that power grids are shifting inexorably to renewables. Missing in action were long-awaited audit and pension reforms with the potential to boost investor confidence, protection and room for manoeuvre on sustainable investments. The Financial Reporting Council described the absence of primary legislation to modernise the regulation of audit, corporate reporting and governance as “disappointing”. It then compounded the sentiment by ditching many of its plans to revise the Corporate Governance Code, including guidance on the ESG-related responsibilities of audit committees. Observers were similarly non-plussed about the non-mention of the Chancellor’s much-vaunted ‘Mansion House’ reform package, which has the potential to support greater investment in sustainable infrastructure, but progress may still be possible via the upcoming Autumn Statement. Looking further forward, it will be interesting to see whether King Charles III’s speech at the opening ceremony of COP28 diverges from the script handed to him on Tuesday or the curious line on emissions spouted this week by Net Zero Minister Graham Stuart.

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