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Take Five: Green Means Green

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

European regulators have ratcheted up efforts to eliminate greenwashing from the investment sector.

End of an era I – The fight against greenwashing inched ahead with the release of final guidelines for naming ESG- or sustainability-related funds by the European Securities and Markets Authority (ESMA). It had previously been possible to launch an EU environmental opportunities fund, claiming Article 8 classification under the Sustainable Finance Disclosure Regulation (SFDR), while allocating as little as 10% of assets to demonstrably green investments. ESMA has now declared that era to be over, with new guidelines and thresholds including a minimum of 80% of investments to meet funds’ environmental or social characteristics, or sustainable investment objectives. Initial reactions suggested the market has welcomed some aspects – such as definitions for what could be included in a fund with an ‘impact’ or ‘transition’ label – but is baffled by others. These include ditching plans to require funds labelled ‘sustainable’ to contain at least 50% sustainable investments as defined by SFDR – due to feedback saying this was too open to discretion – instead opting to introduce a commitment to invest “meaningfully” in sustainable investments – whatever that means.

End of an era II – Until recently, opportunistic portfolio managers could stuff their ‘green’ portfolios with tech stocks to deliver strong returns at relatively little expense to the planet. That scam has long been rumbled, but the gig is definitely up now that Microsoft – which in 2020 pledged to become carbon negative by the end of the decade – has admitted its carbon emissions jumped 30% last year, as it pursued dominance in the AI market. The upsurge – confirmed in the tech giant’s annual sustainability report this week – followed news of a deal with asset manager Brookfield to build 10.5 gigawatts of renewable energy capacity to support its plans to rely solely on clean power sources by 2030. With Microsoft having offered to relocate staff amid rising US-China tensions, its AI strategy might face as many ‘S’ and ‘G’ as ‘E’ headwinds. But a sector-wide power grab seems likely, within the context of wider demand trends, with the International Energy Agency forecasting data centres will double their energy needs to 800 terrawatts by 2026, fuelled by both cryptocurrencies and AI.

Levels of engagement – More evidence was provided this week of the varying stewardship approaches of asset owners and managers by the Thinking Ahead Institute and the UN-supported Principles for Responsible Investment. A survey designed to identify trends in stewardship resourcing also highlighted big differences in engagement priorities. Asset owners claimed to deploy just half of their stewardship resources on issuer-level engagement – well below asset managers, who reckoned they spent almost three quarters of their time facing off against portfolio companies. Conversely, asset owners spent roughly double the time that managers did on industry-level (30%) and policy-level engagement (20%). The findings certainly fit with the well-established trend of larger asset owners increasingly seeing themselves as universal owners who need to address systemic issues in order to protect long-term value in their portfolios. It also explains the increasing split in voting behaviours, with asset managers backing far fewer ESG-related proposals than owners at AGMs in recent years – perhaps due to not taking account of the bigger picture.

Better call, SAUL? – The onward march of pass-through voting took another small step forward this week in the name of stewardship transparency and control for asset owners. Both the defined benefit and defined contribution schemes of the Superannuation Arrangements of the University of London (SAUL), which collectively manage £3 billion (US$3.8 billion) in assets, will use new technology to directly vote their shares held in pooled funds on AGM resolutions. Previously, SAUL left voting in such shared investment vehicles to portfolio managers at Legal & General Investment Management, which professed itself delighted at offering this choice despite a comparatively strong track record of supporting sustainability-related resolutions at AGMs. This follows a number of similar developments, largely in the UK and US, where pass-through voting has been championed by BlackRock. Transparency issues of a slightly different kind were flagged by campaign group Follow This, which pointed out the comparative unwillingness of French asset managers to publish the rationale for their voting decisions, ahead of Shell’s AGM next week, which will include a resolution on the oil and gas major’s climate strategy. As the above-mentioned survey shows, resourcing is a critical issue for asset owners’ stewardship strategies, though some may argue the transparency called for by Follow This should make the control sought by SAUL unnecessary.

Italy’s green debt relief – Scarcity of sustainable assets was only one of the reasons for record-breaking demand for €9 billion (US$9.71 billion) of Italian green bonds this week, launched amid growing expectations of a rate cut by the European Central Bank. Dow Jones reported a spread of nine basis points above the yield of conventional Italian government debt of similar maturity, with orders from institutional investors totalling €84 billion. That success might be tinged with relief, as it follows a series of setbacks for Italian issuers in the labelled bonds sector. Power utility Enel, for example, faces higher interest payments on €11 billion of sustainability-linked bonds (SLBs) for failing to meet Scope 3 emissions targets, fuelling calls for more simplicity and ambition in a still-nascent market. Enel’s travails were followed by controversy over oil and gas firm Eni’s issuance of SLBs and sustainability-linked loans, despite plans to expand exploration – which may or may not have influenced BNP Paribas’ decision this week to rein in its participation in oil and gas sector debt.

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