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Take Five: Levelling up (or Down)

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

In the two weeks since our last blog, concepts of leadership on climate and sustainable investing have been further reshaped.

Green kingdom – Late last week, Saudi Arabia unveiled its Green Financing Framework, which seeks to attract funding for a range of sustainable investment opportunities, aligned with Prime Minster Mohammed bin Salman’s Saudi Vision 2030 programme for economic diversification. As the world’s largest oil exporter prepares to issue its first green bonds, investors will have many questions. The eight categories of eligible projects include clean transportation, renewable energy, carbon capture, green hydrogen, and climate adaptation, intended to help Saudi Arabia to cut greenhouse gas emissions by 278 million tonnes per year by 2030 on a path to net zero by 2060, an ambition announced in October 2021. Existing purchasers of green bonds issued by Public Investment Fund (PIF), the country’s sovereign wealth fund, may well be tempted by the Ministry of Finance’s issuances in due course, although the compatibility of the new framework with PIF’s programme is not yet entirely clear. Nor are the synergies with Saudi Aramco’s troubled accelerated carbon capture and storage project. The breadth of the eligible schemes could even mean the kingdom is attracted by recent developments to the sustainability-linked bond market.

Transformative impact – The test of Saudi Arabia’s new framework will come when more detail emerges as to how the proceeds of its green bonds are spent, as Japan’s government has found to its cost. Launched in February, the world’s first sovereign transition bonds have faced accusations of greenwashing, with investors concerned that projects will either fail to deliver on decarbonisation or even prolong the transition. Perhaps less controversial than its Green Transformation (GX) strategy, Japan’s impact ambitions have also taken a step forward recently, with the final release of the Financial Services Agency’s (FSA) guidelines for impact investing. By identifying and defining core principles, concepts and processes, the regulator aims to “encourage investment practices and dialogue among investors, financial institutions and companies”. Only time will tell if Japan is more successful fostering impact investing than transition finance, but similar initiatives to create understanding and supporting ecosystems in Brazil and India already appear to be bearing fruit.

Just, in time? – Another country with a mixed record on climate policy has made significant strides in the past couple of weeks. Australia’s government introduced mandatory climate reporting for large firms and financial institutions via the Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Bill. The country’s “rigorous, internationally‑aligned and credible climate disclosure regime” will include Scope 3 disclosures, unlike other jurisdictions making similar moves, albeit with a 12-month delay. On the same day, the government introduced legislation to establish the Net Zero Economy Authority, with a remit to promote an orderly, positive and just transition focused on “supporting workers, communities, regions and industry to realise and share in the benefits of the net zero economy”. Even before these two bills were introduced, investor sentiment on Australia’s climate policy had soared, providing further proof in this year of many elections of the difference a change of government can make.

Lost leaders – In contrast to the above, governments which previously sought to demonstrate leadership on climate and sustainability have faltered ahead of going to the polls. These challenges have been most evident in Europe, where the dramas of getting the Corporate Sustainability Due Diligence Directive over the line were repeated for the Nature Restoration Law, with a postponed EU Council vote throwing into question Europe’s ability to deliver on commitments to the Global Biodiversity Framework. There is still hope for progress after upcoming EU-wide elections, but upcoming polls cast a different shadow in the US, where the Securities and Exchange Commission’s watered-down climate disclosure rule has been stayed pending completion of judicial review of petitions to the Court of Appeals, the country’s leading asset manager has eschewed use of the term ESG, and new evidence has confirmed reluctance to back ESG-related resolutions at investee firms’ AGMs. Meanwhile, pre-election tinkering with rules on the phasing-out of petrol and diesel cars has had predictable consequences for electric vehicle sales in the host country of COP26, although the attention of UK investors and sports fans might have been more focused recently on environmental risks along the Thames.

Climate intelligence – Faced with the fluid environment above, investors and other financial institutions will likely welcome the UN Environment Programme – Finance Initiative’s latest Climate Risk Landscape Report, aimed at helping firms use climate-related data, solutions and services to enhance their climate risk management capabilities. A key theme in the update is the role of AI which it says could offer “precision-driven predictions” when data are either unavailable or inaccurately recorded. Even in cases involving data without any historical precedent, it suggests AI modelling could provide valuable projections. But the report also notes that action is needed to ensure AI has impact where it is most needed. Countries such as Iran, China, India, and Malaysia are already using it to inform climate risk assessments, partly driven by vulnerability to the physical risks of climate change. However, “infrastructure challenges affecting countries in the Global South” could restrict both the advancement and application of AI more broadly.

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