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Commentary

Take Five: No Half Measures

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

Whole-economy transformation was high on the agenda at London Climate Action Week and beyond.

Silent crisis – Among the more significant announcements made at London Climate Action Week (LCAW) was the unveiling of its draft ‘Global Roadmap for a Nature-positive Economy’ by the World Wide Fund for Nature (WWF). Avoiding the nature crisis requires the same whole-economy transformation needed to avert the climate crisis, the conservation organisation contends – and similar tools too, such as sector-specific pathways that plot the path to a sustainable future for governments, companies and investors. Due to be finalised and presented at the biodiversity COP16 in Colombia, the framework focuses on five pillars needed to underpin national plans for the nature-positive transition. While companies and investors are beginning to factor nature-related risks, impacts and opportunities into their decisions – as reflected in updates this week from the Taskforce on Nature-related Financial Disclosures and the UN Principles for Responsible Investment’s (PRI) Spring engagement initiative – their actions are limited by prevailing policies. To transform economies and redirect capital to nature-positive projects, resource-strapped governments need help, especially in the Global South. Speaking at the launch, Mahmoud Mohieldin, UN Special Envoy on Financing the 2030 Agenda for Sustainable Development and UN Climate Change High-Level Champion at COP27, said many are already struggling with the “silent crisis” of unsustainable debt levels. Governments that are already slashing health and education budgets rather than entering restructuring negotiations are not best-placed to realign their finance flows with the Global Biodiversity Framework. For this reason, the WWF’s draft roadmap seeks to provide that technical policy support, but it also expects change among those with the most power to influence, calling for multilateral development banks to “mainstream” nature into their decisions – especially around debt.

Plan to succeed – Transition pathways was a key theme throughout LCAW, in recognition of the work still needed to guide businesses and economies toward credible decarbonisation. The International Sustainability Standards Board (ISSB) confirmed it was assuming oversight of the transition plan disclosure resources developed by the UK’s Transition Plan Taskforce, taking the initiative a step closer to its original remit of establishing a ‘gold standard’ framework to be used across jurisdictions. For good measure, the ISSB also announced closer collaboration with other sustainability standards and reporting bodies, partly to build on its recent commitment to nature-related disclosures, but also to boost disclosure levels in emerging markets and developing economies – thereby supporting the second pillar of the aforementioned WWF roadmap. Following the recent building out of the UN-backed Taskforce on Net Zero Policy, governments are not short of advice or guidelines on ensuring their economies’ net zero transition is both ambitious and credible, with legal campaigners ClientEarth now releasing recommendations on avoiding ‘transition-washing’. Bearing in mind qualms raised over recent debt financings, the report calls for more robust external verification of transition finance instruments, stronger regulatory penalties, and mandatory thresholds for transition finance labels. As a new white paper from Aviva Investors notes, the stakes are high for both governments and investors. “National transition plans can ensure the most efficient use of public capital and make nationally determined contributions (NDCs) investable for private finance,” it said.

From Hamlet to ham-less – Far from being blueprints for whole-economy transition to net zero, most NDCs submitted by governments for COP28 were focused on the decarbonisation of the energy sector. Ahead of COP26, the FAIRR Initiative noted how few NDCs from Group of 20 countries even mentioned emissions reductions from food and agriculture. At last, this is changing – and nowhere faster than in Denmark. Already winning plaudits for publishing the first national roadmap for developing a plant-based food system, the Danish government this week broke new ground by striking a deal to pave the way for the first carbon tax for agriculture. With farming due to account for 46% of its CO2 emissions by 2030, Denmark will charge €16 (US$17) per tonne from the end of the decade, rising to €40 from 2035. The extension of carbon taxes to agriculture may well be the litmus test for the new round of NDCs, due to be submitted by next year’s COP30. Meanwhile, the country once known for its bacon and bloody royal successions is likely to see a further decline in pork exports.

Growing pains – Fund data and analytics firm Morningstar marked the 20th anniversary of the coining of the term ‘ESG’ this week, with an extended essay describing its evolution and pondering its future. Originally used in a UN Global Compact paper as shorthand for the risk factors not accounted for in traditional financial reporting, ESG has charted a path from the fringes to the mainstream of the investing world – accelerated by the Paris Climate Agreement and the UN Sustainable Development Goals – leading both to confusion through over-use as the bandwagon rolled on, and to backlash as the term became increasingly politicised in the US. One figure who has been close the flames of the ESG debate – former Obama adviser and BlackRock exec Paul Bodnar – sees both good and bad in the recent reckoning. Speaking at LCAW, Bodnar regretted the politicisation that has slowed investment in renewable energy, but saw positives in the reappraisal of “what ESG means, and what it’s good for” – including a move away from using single scores to encompass the ESG risks facing individual firms. As one might expect from a firm that has recently extended its ESG index range, Morningstar emphasised the positives, forecasting increased use of ESG as a framework for understanding the “actual costs of corporate behaviour”. Rather than less ESG, the firm predicts more: more regulations, more data, more impact, and more targeted funds… Who wanted a quiet life?

Outcomes incorporated – Bodnar and his countrymen may prefer to view ESG risks through the lens of enterprise value alone, but a more outcomes-based approach is gaining ground in most other developed markets. This week, the PRI published the final report of a collaborative programme exploring the role of investing for sustainability impact to achieve financial goals – prompted largely by concerns among asset owners that they may be breaching rules on fiduciary duty. In the markets covered – Australia, Canada, the EU, Japan and the UK – not only are there no legal barriers to pursuing positive sustainability outcomes, but failure to do so may limit investors’ ability to optimise returns. “The debate is shifting from whether investors should consider sustainability outcomes at all, to asking how investors can play their full role in addressing sustainability challenges,” the report said.

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