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Take Five: From Red to Green

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

Commitments to a greener policy agenda were just about discernible in China and Europe, while SNAFUs stifled the UK and US.

From red to green – President Xi Jinping’s outline for his unprecedented third five-year term, delivered on Sunday, indicated no great departures from his first decade in power, but offered welcome signals on China’s approach to renewables and nature. According to some experts, mention of plans to “speed up the planning and construction of a new type of energy system” should be interpreted as a new commitment to large-scale integration of clean energy. Pledges to promote “clean and efficient use of coal” may be less reassuring, but extended references to nature, including “environmental protection and promoting green lifestyles”, was seen as reflecting a personal commitment. “Harmonious co-existence of humans and nature should be a mission embedded in our development plans,” he said. If it had not been for China’s zero-tolerance approach to Covid-19, he could have been claiming a key role in the completion of the Global Biodiversity Framework, now set to take place in Montreal rather than Kunming.

Work in progress – The Netherlands joined Spain and Poland in announcing its intention to leave the Energy Charter Treaty, widely seen as a barrier to governments’ efforts to reduce reliance on fossil fuels. German energy group RWE is currently suing the Dutch government over its decision to end coal-fired power generation. A new treaty, agreed in June, which would still protect fossil fuel investments for a decade, is currently being ratified, with several EU members expected to abstain. Europe’s embrace of renewables remains a work in progress, notwithstanding plans for a Green Energy Corridor by France, Spain and Portugal. New research hailed a record year-on-year increase in solar and wind generation in the EU – rising by 39 TWh between March and September, saving €11 billion – which could accelerate further, depending on negotiations over the REPowerEU proposals. EU politicians may note the International Energy Agency’s estimate that an expected addition of 700 TWh in renewable capacity by end-2022 will have limited this year’s overall rise in emissions from fossil fuel combustion to just 1%.

Pressure points – While some banks were reinterpreting their net zero commitments to better fit with their existing business models, not to mention the attitudes of certain US-based stakeholders, others were being exposed for their continued links to the over-exploitation of natural resources, specifically forests. Forests and Finance found that banks have lent US$267 billion to 300 forest-risk commodity companies since the Paris Agreement, while investors currently hold US$40 billion in associated bonds and shares. Among the groups’ recommendations was greater pressure and engagement by financial institutions. “It will be the traders, the restaurants, the processors, and the retailers we’ll have to engage with, not necessarily the direct deforesters,” as one investor noted, in the latest of our COP27 features.

Escalating engagement – Of course, engagement has little impact if it is not followed up by action. Having failed to secure information on Volkswagen’s climate lobbying activities through dialogue, European pension funds and asset managers tabled a motion at the German auto firm’s 2022 AGM. When this was refused, the investors decided to test in court Volkswagen’s position, which could lead to a change in the firm’s articles of association. Could this be a signal of things to come under phase two of Climate Action 100+ next year?

Maybe tomorrow – There were more barriers to the progress of sustainable finance regulation in the somewhat dysfunctional democracies on either side of the pond. In the UK, the ongoing political omnishambles is putting multiple policy initiatives at risk, including a recently-launched review of the government’s net zero strategy, after its leader rebelled over a parliamentary vote on fracking. Order seems to have been restored temporarily, but various aspects of Britain’s sustainable finance roadmap are missing in action, including its long-awaited green taxonomy consultation and proposals for Sustainability Disclosure Requirements. This follows news that the US SEC has reopened the consultation period for its proposed climate-risk disclosure framework after it was discovered that a technical glitch caused some submitted comments to be missed, pushing finalisation of the rule into next year.

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