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Take Five: Immediately and Gradually

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

Pillars of the post-WW2 global financial system are not yet on the same page for climate risk and sustainable development.

Immediately and gradually – The IMF’s latest World Economic Outlook calculated that keeping on track to meet the goals of the Paris Agreement by 2030 would cost between 0.15-0.25% of GDP growth and an additional 0.1-0.4% of inflation a year. “If the right measures are implemented immediately and phased in gradually over the next eight years, the costs will remain manageable and are dwarfed by the innumerable long-term costs of inaction,” it said. As well as outlining the negative consequences of waiting, an accompanying blog noted the costs will be highest for fossil-fuel exporters and energy-intensive emerging market economies, requiring countries to “cooperate more on finance and technology needed to reduce costs – and share more of the required know-how”. Ahead of next week’s IMF and World Bank annual meetings, ex-White House advisor Lawrence Summers called for a “reinvented” World Bank that would prioritise sustainability, supporting global public goods such as climate adaptation, partly via expanded partnership with the private sector. Revelations about continued fossil fuel financing by the bank are likely to further increase calls for change, starting at the top.

From black to red – There were mixed signals on the pace of the renewable energy transition this week. Energy think tank Ember revealed that global growth in electricity demand (389 TWh) was met entirely by renewable sources in H1 2022. This avoided US$40 billion in fuel costs and 230 Mt CO2 in emissions, but coal and gas use grew in July and August, partly due to drought impacts on hydro and nuclear capacity. As Europe heads for an uncertain winter, the fossil fuel sector is piling it on black, with coal firms planning to increase thermal coal production by a third, OPEC+ hiking oil prices with a new production cut and the UK putting its net zero targets in jeopardy by offering new oil and gas licences. Meanwhile, fossil fuel companies are finding their insurers are withdrawing and their banks offering transition advice to reduce portfolio emissions. Will their auditors be next to blow the whistle?

Unfinished business – Europe announced its eighth round of sanctions against Russia, following similar actions by the US, UK, Canada and Australia in the wake of the annexation of four Ukrainian territories. The measures serve as a reminder of the long-term consequences of the invasion, for human rights on the ground, and for business and investment ties further afield. Divestment from Russian investments was a complex affair and an incomplete one. New research finds that many major firms are sending mixed messages on their withdrawal, while reports elsewhere suggest firms including weapons manufacturers continue to evade sanctions.

Deforestation dashed – The week started with news that Brazil’s President, Jair Bolsonaro, will face a run-off against predecessor Luiz Inácio Lula da Silva on 30 October, after a surprisingly tight first round result. The future of the Amazon is at stake with Bolsonaro seeing its economic exploitation as central to his growth agenda; Lula’s return could avoid 76,000 km2 of rainforest loss over the next decade, partly through tougher action on illegal deforestation. Recent PRI-backed analysis suggests Bolsonaro’s re-election would dash hopes of ending deforestation by 2030, despite actions across the public and private sector to eliminate proceeds from supply chains.

Engaged in impact – Two major surveys highlighted the drivers and practice of sustainable investing by asset owners. FTSE Russell revealed an interesting shift in tactics with asset owners moving away from broad ESG integration and negative screening in actively managed portfolios, with a preference for engagement-led and thematic/impact-driven strategies most striking in fixed income; similar trends were evident in passive portfolios. Morningstar’s Voice of the Asset Owner survey, which mixed qualitative and quantitative approaches, found voices in support of proactive strategies (“It’s about making positive returns, but also having a positive impact”; “We’ll go for engagement and not for exclusions”), but also notes of caution, with returns, product availability, and stakeholder reluctance cited as barriers. UK regulators and Australian investors also backed patient engagement this week, while appetite for impact appears strong and growing among UK asset owners.

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

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