Commentary

Take Five: IPCC Chair Issues Spoiler Alert

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

Investors and policymakers signalled mixed progress in their support for net zero transition this week, ahead of a critical report from scientists.

Spoiler alert – One of the most influential meetings for the future of climate policy took place this week. In Interlaken, Switzerland, governments conducted the painstaking business of approving the key messages for policymakers of the latest Synthesis Report from the Intergovernmental Panel on Climate Change (IPCC), aka the world’s foremost climate scientists. The last act of the IPCC’s Sixth Assessment Cycle, which started in 2015, the summary will outline our progress, or otherwise, in fulfilling the obligations of the Paris Agreement. It will also inform the final stage of the first Global Stocktake at COP28, described by the UNFCCC as “a moment to take a long, hard look at the state of our planet and chart a better course for the future”. If all goes to plan, the key messages will be released Monday. IPCC Chair Hoesung Lee said it would become “a fundamental policy document for shaping climate action in the remainder of this pivotal decade”. He added: “Make no mistake, inaction and delays are not listed as options.”

Choose choice – In his annual letter to stakeholders (sic), BlackRock Chairman and CEO Larry Fink played the humble functionary, whose role is only to offer choice to clients. Having been accused by several red states of trying to destroy the US oil and gas industry, the world’s largest asset manager made it clear this ran to choosing to invest in fossil fuel firms, albeit not clear enough to some whether it stopped at new exploration. While downplaying his own influence, he welcomed political choices, such as President Joe Biden’s Inflation Reduction Act, for creating “attractive investment opportunities”. Fink insisted politicians be left to make such decisions, rather than asset managers acting as the “environmental police” or “engineer[ing] particular outcomes”. He did admit, however, to calling for better data on emissions and transition plans, in the interest of offering informed choices. Without directly referencing the limited choices available to investors facing systemic risks, Fink also highlighted BlackRock’s role in offering greater voting choice to investors. Seen slightly harshly by some as ducking responsibility, the firm’s extension of proxy voting to more asset owners is proving popular on both sides of the Atlantic. Current indications suggest the ESG backlash will continue to be a thorn in Fink’s side, as well as Biden’s, but when you’re that big you should accept you’ll never become invisible.

Fiscal non-event – Although the Inflation Reduction Act is now finding its echo in Europe, Britons are still waiting to find out what a green budget looks like. This week, we saw more of Brussels’ plans including with the Net Zero Industry Act and the Critical Raw Materials Act designed to make the “strategic choices” to allow Europe to produce 40% of the technologies needed for a net zero future by 2030. In Westminster, we got slightly more than the green lights for nuclear and CCUS, as mentioned by Chancellor Jeremy Hunt in the House of Commons. More policy action is promised, later this month, in an event dubbed ‘Green Day’. But still concerns persist that the UK government is failing to pull all the fiscal leavers available to accelerate the green transition, potentially even putting success stories such as offshore windfarms at risk.

Taxed by taxonomies – While we at least now know the UK taxonomy won’t be following the science, similar frameworks to guide green investment are further advanced elsewhere. In Japan, progress is even slower, admittedly, but anticipation is high. In Canada and Europe, the emphasis is on transition. Given its economy’s heavy reliance on extractive industries, it’s unsurprising that Canada’s draft taxonomy should offer cover to asset owners preferring engagement to divestment. Europe is much further down the track, with a revamped Platform on Sustainable Finance focusing its efforts on ensuring Europe’s taxonomy achieves its core objective of financing the transition in practice. But it’s worth remembering that the criteria for four of the European taxonomy’s six environmental boundaries are yet to be defined, with a preliminary deadline of June for a single delegated act.

Laws of nature – UK NGO ShareAction’s recent assessment of asset managers’ ESG performance found that none had yet set targets for biodiversity, with many citing a lack of data. Others demur, including James d’Ath, Data Lead at the Task Force on Nature-related Financial Disclosures, who noted this week a lack of understanding of how to use existing data. It’s still true that data flow from corporates on nature risks lags climate disclosures, but with asset owners increasingly setting out their priorities, the laws of supply and demand suggests managers will need to demonstrate their grip sooner rather than later.

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