Commentary

Take Five: No More Hot Air

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

COP28 got off to a promising start, boosting hopes that the Global Stocktake will lead to a global leap in ambition.

Early doors – Business got off to a brisk start at COP28, with agreement on operationalising the Loss and Damage Fund, suggesting President Sultan Al Jaber knows plenty about the importance of momentum. Separate from the US$100 billion per annum in climate finance pledged by rich countries, the Loss and Damage Fund was the surprise hit of COP27, agreed with the aim of compensating the developing countries most at risk from the physical impacts of climate change already ‘locked in’. Progress had been grindingly slow until a breakthrough in the run-up to COP28, which paved the way for a deal on the opening day, effectively giving the green light for grant-based funding, facilitated initially by the World Bank, raising transparency concerns for some. The announcement was followed by commitments from countries to contribute to the fund, totalling US$420 million. “Pledging will continue,” insisted Simon Stiell, UNFCCC Executive Secretary, but for now the total is somewhat put in context by an innovative SDG-focused fund and IFC-led social bond unveiled this week. It’s also a good deal short of the UN Environment Programme’s latest estimate of the climate adaptation finance gap facing EMDEs, standing at between US$194-US$366 billion a year. That didn’t stop Al Jaber making a pledge of his own, to the deliver the “highest-ambition response to the Global Stocktake” before the final gavel drops.

In the balance – The pre-COP28 auguries had not been promising. Not only was Al Jaber accused of using his COP28 presidency to generate more fossil fuel business (oh, the irony) but ADNOC, the national oil firm he runs, was one of many found to be polluting vast swathes of the Middle East through the practice of flaring – which is unnecessary, easy to prevent but apparently hard to resist despite multiple past pledges. And efforts to keep a closer eye on the decarbonisation efforts of non-state actors are in the balance with some countries feeling the UNFCCC is stretching its mandate. As delegates headed to Dubai – some powered by chip fat – these ominous stories were accompanied by legions of reports detailing the appalling absurdities of the current output plans and business models of the oil and gas sector, and their implications for a boiling planet. Could all this be a calculated precursor to a more robust methane pledge, as trailed by US Climate Envoy John Kerry, and a more ambitious-than-expected response to the Global Stocktake? Let’s hope it’s not just more hot air.

First fruits – Away from the UAE, there were positive developments toward the headline goal of the Global Biodiversity Framework to protect 30% of terrestrial and marine habitats by 2030. Having previously come close to halting the legislation, members of the European Parliament’s Environment Committee this week voted overwhelmingly in favour of the version of the Nature Restoration Law  agreed in trilogue negotiations with the European Commission and Council. While exceptions and compromises have been inevitably granted along the way, this effectively clears the way for the first-ever EU law to restore natural ecosystems – designed to implement measures to restore at least 20% of the EU’s nature on land, rivers, and seas by 2030 – subject to a final plenary vote in early 2024. Alongside the EUDR, which aims to reduce deforestation via due diligence requirements on the sourcing of key commodities (much needed, given the current track record of corporates and financial institutions), the NRL may prove an important step to rebalancing our relationship with nature.

Gradual greening – At the risk of overplaying its second-mover advantage, the UK’s Financial Conduct Authority finally unveiled its sustainable fund labelling regime and proposed anti-greenwashing rules, after multiple delays. While the FCA’s primary concern is protecting consumers, institutional owners will benefit too from the extra caution and precision that asset managers will soon need to exercise when designing and marketing their sustainable fund products. The regulator cheerfully acknowledged that there’s no real consensus on what ‘sustainability’ means, but clearly feels this is no barrier to keeping green funds green. Although its detailed proposals run to many pages, with plenty of practical examples, the guidance comes down to a universal truism: “A firm’s products or services should do what they say they do.” Amen to that, but as some pointed out, we’d be even better off if we could raise the principle up a level to ensure that firms only do what they say they do too. While we wait, we can tick off the other long-awaited elements of Britain’s greenwashing-proof sustainable finance architecture, starting with a green taxonomy.

Opportunity knocks – As much of the sustainable investing world turned its attention to COP28, the OECD published a major study on social inequality, supported by French asset manager Amundi. Around 80% of respondents across 27 OECD member countries said economic inequalities should be reduced and / or more should be done to ensure equal opportunity. A majority also agreed that large businesses and financial institutions had a key role alongside governments in alleviating inequality, with favoured solutions including higher minimum wages, increased access to education and higher income taxes for high earners. With the influence of asset owners under debate this week at the ESG conference of the UK’s Pensions and Lifetime Savings Association, it’s interesting to note another survey (also supported by Amundi) suggested global pension plans are committed to addressing social inequalities with 64% naming diversity and inclusion as their main social theme over the next three years. Fortunately for all, their need to make a return while supporting social and economic change is increasingly backed up by the numbers.

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