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Take Five: No Mean Achievement 

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

COP27 did not deliver on all fronts, but momentum is being maintained, with the prospect of radical change ahead.  

No mean achievement – This time last week we didn’t know whether there would even be a deal at COP27, let alone one dominated by an agreement to create a fund to pay loss and damages to countries suffering from the physical impacts of climate change. After UN Secretary General Antonio Guterres’ opening speech in Sharm El Sheikh warned that we were still on the ‘highway to climate hell’, some argued that, two weeks later, we still had our foot on the accelerator but at least had fitted some airbags. In the circumstances, others noted, preventing backsliding from COP26 was no mean achievement, nor were the efforts of Indonesia and India to maintain the G20 leaders’ commitment to climate action last week in Bali. ESG Investor’s own wrap of the main takeaways from COP27 sides with the optimistic realists, while underlining the need for continued momentum, not least in Montreal, where the Global Biodiversity Framework is expected to be signed.  

Financing transformation / transforming finance – Alongside the loss and damage fund, another first in the Sharm el-Sheikh Implementation Plan was the observation that funding the global transition to a low-carbon economy would require “a transformation of the financial system and its structures and processes, engaging governments, central banks, commercial banks, institutional investors and other financial actors”. The need for reform of the global financial architecture has been building, and was acknowledged in October’s annual World Bank / IMF meetings. According to Aviva Investors, this goes beyond reforming multilateral development banks to an overhaul of supervisory priorities, with radical implications for the cost of capital, via a new Bretton Woods. Initiatives such as those around investment in illiquid assets by UK pension schemes may be seen as a sign of much bigger changes ahead.  

Green means green – The US SEC’s action against Goldman Sachs Asset Management – resulting in a US$4 million settlement for ESG-related process and policy failures – provided further evidence of major regulators’ efforts to ensure investor appetite is met by legitimately sustainable products. The US Department of Labor acted this week to fuel demand by allowing ERISA-regulated pension plans to incorporate ESG factors, marking a further step forward in the country’s somewhat on/off approach to ESG investing. Asset managers will also feel more pressure to deliver on green promises now that the European Securities and Markets Authority is consulting on ESG fund-labelling practices, joining both the SEC and the UK’s FCA. At least in Europe, managers can look forward with greater certainty to comprehensive sustainability reporting from corporates, if not necessarily their supply chains 

Pivot from equities – Sustainable investing has long been seen as an equities-led field, with investors often taking their stewardship and engagement responsibilities from their ownership stakes in major corporates. In comparison, bondholders have flown under the radar, despite the leverage they hold as critical sources of refinancing capital in a larger but far less liquid global fixed income market. One need only look at Liz Truss’s tenure as UK prime minister to witness the wrath of the bond markets, a power which advocates such as the Climate Bonds Initiative have long argued can be used to address systemic risks like climate change. The launch of a new book on responsible investment in the fixed income markets this week may help to mobilise this latent capacity for change. With ClimateAction 100+ actively reviewing its strategy, we may see a more balanced approach to investor engagement in the future.  

B is for… – Boohoo, the British fashion retailer, was again under the spotlight after a reporter from The Times spent a month undercover at one of its distribution centres. Suffice to say the journalist found that little had changed in the firm’s practices since it hit the headlines for paying suppliers beneath the minimum wage. Fashion’s struggles to become sustainable are well known, while governance issues are evident across sectors, nowhere more so than in technology and social media, especially since Twitter’s recent takeover. More companies are using the B Corp badge to demonstrate their sustainable credentials, including asset managers. Perhaps some among the latter should consider launching a B Corp-only fund.  

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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