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Take Five: Into the Stratosphere

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

ESG’s favourite spaceman was brought back down to earth this week – at least temporarily.

Into the stratosphere – The walking ESG case study that is Elon Musk was stuck on the ‘G’ this week, for a change. The Tesla CEO has long sought to prove that rules do not apply to him, despite his electric vehicle manufacturer’s publicly listed status. Can he do whatever he wants, even ask his board to grant stock options that turn out to be worth more than US$55 billion? In a case brought by investor Richard Tonetta, the Delaware Court of Chancery ruled that the 2018 compensation deal – the biggest in US corporate history – did not satisfy its test of fair price and process, asserting that Tesla’s board had no need to offer the 21.9% owner of the firm any additional incentives to maximise shareholder value. An important point for Judge Kathaleen McCormick was that investor backing for the package had been achieved through opacity, as “the proxy statement inaccurately described key directors as independent and misleadingly omitted details about the process”. The ruling should see the loot returned. But as Bloomberg columnist and professional Musk-watcher Matt Levine noted, reincorporating in Texas – something the SpaceX boss has threatened to do – would place Tesla in a more friendly judicial environment, allowing him to ignore more rules in the future. Compensation packages in the US and elsewhere have been getting out of control – despite some investors’ efforts – for some time. But this ruling will do little to change that, proving Elon to be exceptional again. “I don’t think this decision is going to threaten very many corporations,” said Columbia University Law School’s Professor John Coffee.

Negligible impact on SDGs – The need to close a massive financing gap to achieve the UN Sustainable Development Goals (SDGs) is well established. Last September, the UN marked the halfway point to their 2030 deadline with a special conference – which rallied support for a US$500 billion per annum stimulus plan – while world leaders also sought to identify and clear blockages in the international finance system in Paris. Many of the difficulties stem from how multilateral development banks (MDBs) operate and interact with the private sector, but one channel for private investment flows was also flagged as problematic this week. The European Markets and Securities Authority (ESMA) released an analysis that noted the “absence of harmonised and standardised reporting requirements” for private sector actors against SDG targets, and concluded that most funds claiming to contribute to SDGs neither explained clearly how they aligned, nor invested any differently to non-SDG funds. Regulators are already pushing back against the risk of greenwashing with a range of fund disclosure, naming and labelling rules. With ESMA flagging a tripling in the size of the SDG fund market between 2020 and 2023, impact-washing is also in their sights.

MDBs on learning curve – MDBs have been under increasing pressure to provide greater support to sustainable development, using their influence, knowledge and balance sheets to better link supply and demand for financing across the Global South. Observers welcomed the changes signalled at last year’s World Bank-International Monetary Fund annual meetings in Marrakesh, which were backed up with initiatives unveiled at COP28 in December. These included the MDB-led Task Force on Credit Enhancement of Sustainability-Linked Sovereign Financing for Nature and Climate and a joint statement, which committed to greater support for climate adaptation financing via risk assessments, financing mechanisms and capacity building. This week saw even more evidence of change, with the European Investment Bank backing a public-private fund designed to finance 70 solar energy projects across Africa, Asia and Latin America. Perhaps more significant was the African Development Bank’s US$750 million issuance, which attracted 275 investors. This first sustainable hybrid capital issuance by an MDB is an example of innovative efforts to finance developing economies’ efforts to handle the impacts of climate change. The structure’s flexibility and investors’ appetite are positive signs, but all parties are on “a big learning curve”, as bookrunner BNP Paribas told Reuters.

Climate litigation: the prequel – California’s planned climate disclosure laws ran into further trouble this week when business groups started legal action to overturn the measures that would require some firms to report Scope 3 emissions. The planned legislation was already facing challenges, due to the state’s precarious public finances, and the suit reflects a very different attitude to climate policy to the supportive stance taken by several high-profile global firms as the legislation was being passed. This may reflect the growing disconnect in US companies’ climate lobbying activities, and it certainly cements the place of the courtroom as a key climate battleground. More than anything though, it foreshadows the challenges that the Securities and Exchange Commission can expect when it finally publishes its climate disclosure rules.

Blue, red or green – In the UK, the firmness of the ruling Conservative Party’s support for net zero has been a long-running concern –  including for investors – which recently culminated in the announced departure of the minister who signed its legally-binding commitment into law. It has been barely less clear whether this would change dramatically if the Labour opposition took office, with the party prevaricating over a £28 billion-a-year (US$35.7 billion) green investment pledge. Several observers struggled to identify much greater certainty when Labour unveiled its plan for the UK finance sector this week. But Shadow Chancellor Rachel Reeves did earn applause from the UK Sustainable Investment and Finance Association when she recognised “the potential for private capital to finance a significant portion of the UK’s transition to net zero”.

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