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Take Five: Earthquake in the Alps

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

This week witnessed a court ruling which could have potentially seismic implications for climate policy globally.

Every voice matters – Governments are expected to revisit their climate policies after a landmark court victory this week for a group of self-described old Swiss women. The European Court of Human Rights ruled that the Swiss government had violated the human rights of 2,500 KlimaSeniorinnen Schweiz by failing to act effectively against climate change. The ruling, which cannot be appealed, is binding for the 46 signatories of the European Convention on Human Rights. But its impact could be much wider, with courts in Australia, Brazil, Peru and South Korea all currently considering human rights-based climate cases. The implication is that any government may be in breach of such laws if it cannot demonstrate that it is taking sufficient measures to protect its citizens. This could mean taking the mitigation and adaptations actions recommended by the Intergovernmental Panel on Climate Change, or publishing detailed multi-sector plans to decarbonise its economy in line with a 1.5°C by 2050 pathway. “This is not just a win for these inspirational claimants but a huge victory for those everywhere seeking to use the power of the law to hold their government accountable for climate inaction,” said ClientEarth Fundamental Rights Lead Vesselina Newman. Governments must take real action on emissions to safeguard the human rights of their citizens.” The ruling is also a victory for persistence, coming eight years after the initial 40 members held their first meeting. As UN Climate Change Executive Secretary Simon Stiell said this week, “Every voice matters. Yours have never been more important.”

Go your own way – Having recently decided to rely solely on its own resources to engage with carbon-intensive firms, JP Morgan Asset Management is now planning to phase-out dependence on proxy advisors. The idea that institutional investors are acting under undue influence has been set aside by academic research, at least in the UK context, but Jamie Dimon, CEO and Chair of the firm’s parent, begs to differ. After taking a swipe at the modern AGM (“a showcase of grandstanding and competing special interest groups”), Dimon’s latest letter to shareholders responds to what he calls the perception and reality that asset managers rely too much on proxy advice by putting his own investment house in order. First, the firm will add more portfolio managers to its North American proxy committee and increase support for diverse voting outcomes across funds. Second, JP Morgan Asset Management will eliminate third-party proxy advisor recommendations from its internally developed voting systems by the end of the year and remove them from research reports provided to the firm in time for next year’s proxy season. Third, it has pledged to tell companies how it has voted once the decision is made, rather than waiting until votes are counted. There are limits to Dimon’s belief in isolationism, however. In a section of his letter explaining why a multilateral approach is part of the bank’s world view, he makes the case for the US’ pursuing a positive influence on its partners and allies, asserting that “engagement makes the world a better place”.

Asia engages – Engagement is also being embraced by Asian investors, albeit from a low base. According to a new survey from the Asia Investor Group on Climate Change (AIGCC), covering US$76 trillion AUM, around a third of asset owners and managers operating in the region are participating in collaborative climate engagement initiatives, such as Climate Action 100+. Slightly more are including climate considerations in proxy voting policies or engagement targets, or reporting climate-related stewardship actions and outcomes. There remains much room for improvement. Among a smaller sample of AIGCC members, around half of investors are requesting net zero transition plans from investee firms, with a quarter willing to act at AGMs against firms that do not respond to climate engagement, and a fifth publishing a net zero-aligned voting policy. Speaking at the launch, Hiromichi Mizuno, former CIO at Japan’s Government Pension Investment Fund, the world’s largest pension fund, welcomed the progress, but urged Asia’s largest investors to go further, looking beyond engagement with investee firms to the assets they don’t own, and the policymakers who set the rules for all firms. “Engagement should not be limited to portfolio companies,” he said. “If the government mandate says asset owners must decarbonise their portfolios, the government should help by creating policies that push the whole economy to decarbonise.”

Taken on trust – How is asset owner engagement and action on climate risk looking in the UK? This week, The Pensions Regulator (TPR) gave some indicators on progress among pension funds with its review of climate-related disclosures by occupational schemes, introduced in 2021 to drive strategic decisions by trustees. The TPR found evidence of good practice, with trustees “articulating stewardship priorities” on climate change mitigation and adaptation, while also encouraging asset managers to engage with heavy emitters and seeking information on emissions data and climate risks beyond public equities. But it also found that few reports explained how trustees “assess the competence” of those advising on climate-related risks and opportunities. On a related point, TPR noted the variation in scenario models being used by trustees to understand climate risks, with four schemes concluding a positive impact under a ‘hot house world’ scenario, as assets would fall less steeply than liabilities. These issues were all reflected at this week’s Stewardship Summit 2024. Professor Steve Keen outlined the flawed assumptions of economists that were still informing climate scenarios, while other speakers highlighted the mistrust of finance sector intermediaries among trustees and the difficulties in obtaining actionable information from carbon-intensive firms. On the stewardship front, Andrea Tweedie, Head of Stewardship at the Financial Reporting Council, indicated a willingness to listen to those wanting its code to better address fast-emerging challenges by focusing signatories’ efforts on “material stewardship activities and priorities”.

Public enemies? – Policymakers and officials may have felt their ears burning this week with the publication of a new report outlining the extent of support for fossil fuel firms from the public sector. The claim that multilateral development banks (MDBs) and Group of 20 (G20) international finance institutions are still funnelling US$47 billion per annum into oil, gas and coal is timed to coincide with next week’s upcoming World Bank/International Monetary Fund Spring Meetings, and a G20 finance ministerial. Prompted by widespread calls for reform, MDBs have shifted at pace over the past 12 months to place sustainability closer to the heart of their mandates, but the 80th anniversary of Bretton Woods could be a pivotal opportunity to further recalibrate the global financial system.

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