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Take Five: Hope Springs Eternal for World Bank-IMF

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

Signs of much-needed change to the international finance infrastructure were in evidence in Washington.

Hope Springs – This week, many of the right noises were heard at the World Bank-International Monetary Fund (IMF) Spring Meetings about the need to place climate more firmly at the heart of development finance policies and actions. Major shareholder Janet Yellen, US Treasury Secretary, called for “additional reforms” to build on existing balance sheet changes and the World Bank’s Evolution Roadmap, launched in January to “better address” development changes including climate change, pandemics and progress on UN SDGs. IMF Managing Director Kristalina Georgieva identified the need for a “step change in our financing approach to redirect trillions of dollars towards meeting the climate challenge”. In a joint statement with COP28 President-Designate Sultan Al Jaber and UN Special Envoy Mark Carney, Georgieva flagged specific measures to better mobilise private finance alongside public funding sources to support a clean energy transition, especially in EMDEs, including: a more conducive investment environment for climate finance, removal of specific obstacles to private finance and the development of new tools and instruments to support blended finance. The context is not promising, with the IMF’s World Economic Outlook predicting weak global growth over the next five years, and many low-income countries struggling with chronic debt burdens as interest rates normalise. But changes are taking place: alongside Evolution, the World Bank is developing a joint approach to Paris alignment for multilateral development banks; while the IMF’s Resilience and Sustainability Trust demonstrates innovation, and the work of its High-Level Advisory Group (HLAG) on Sustainable and Inclusive Recovery and Growth emphasises the need for coordinated action to achieve “transformational changes”. Long demanded actions – like making the World Bank’s emerging markets database more accessible to private investors – are still in the works but a packed finance diplomacy diary ahead of COP28 should help outsiders to assess real momentum.

So long, soy – The grindingly slow pace of change on sustainability at the corporate level has been highlighted by new reports which also emphasised the importance of supply chain scrutiny in accurately understanding risks and impacts on the environment. A joint report by Sky News and Mighty Earth used satellite data to track the journey of soybeans from illegally deforested lands in Brazil to livestock farms globally and onto UK supermarket shelves, including those of firms with deforestation commitments. A separate WWF report exposed the role of manufacturing industry in Europe, US and China in mining-related deforestation across the Global South. Neither story will have raised eyebrows, but they raise questions over the effectiveness of corporate commitments without the backing of legislative mandate. As ex-BBC Science Editor David Shukman noted, Cargill – the firm at the centre of the soybean supply chain in the Sky story – have been promising to eliminate illegal deforestation for years. With investors increasingly searching for answers from corporates on nature risks, it’s no wonder the passing of the EU’s deforestation law – demanding proof of provenance for imports of 15 key commodities – was so welcomed.

Social support – Given the need for legislative action to raise ambition in the private sector, investors have been readjusting the balance of their engagement with policymakers and investee corporates. They appear to be finding willing partners, at least among regulatory bodies. In recent months, asset owners and managers have intensified their focus on social and in particular workplace themes, ramping up engagement initiatives and shareholder resolutions, partly in response to the cost-of-living crisis and its impact on worker satisfaction and productivity, and ultimately shareholder value. In parallel, the UK’s Financial Conduct Authority recently signalled its willingness to support investors in addressing such systemic risks, while the Department of Work and Pensions is exploring social factors in pension investment, and this week the European Supervisory Authorities recommended a notable increase in the social indicators that must be reported by SFDR-regulated funds.

Joined-up thinking on lobbying – The battle for policymakers’ attention is ongoing and multilayered, especially when it comes to accelerating the net zero transition. While intensifying their own efforts, asset owners have increased their vigilance over the climate lobbying activities of investee firms, with frameworks such as the Global Standard on Responsible Climate Lobbying being augmented by guidance from investor networks and the work of NGOs. But a new paper from the Net Zero Asset Owner Alliance (NZAOA) claims they’re not yet fully factoring lobbying into selection, appointment and monitoring processes for asset managers. The NZAOA is not suggesting managers are indulging in the kind of covert anti-climate lobbing of certain carbon-intensive industries, but its position does reflect rising expectations of joined-up thinking and enterprise-wide consistency and focus.

Limited ambition – The effectiveness of investor action on climate change is often subject to scepticism and the debate continued this week following the launch of a US-focused US$2 billion Climate Action ETF by German asset manager DWS. On the one hand the record-breaking size of the passive fund, and its support from Finnish investor Ilmarinen, a member of the Paris Aligned Asset Owners initiative, suggests strong demand in a market where climate risk is still considered controversial. On the other, the tech-and-healthcare focus of its main holdings and the inclusion of a minor Chevron stake would appear to suggest a lack of ambition, to put it mildly, even considering the need to deliver in line with its benchmark.

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