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Commentary

Take Five: Onwards and Upwards

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

In both the public and private sectors, this week saw incremental progress in support of sustainable investment objectives, rather than transformative changes.

Reporting relief – Sighs of relief were audible around the European Parliament on Wednesday as MEPs endorsed the European Sustainability Reporting Standards, overcoming last-ditch efforts to derail them. This should be a big step forward to giving investors the standardised and comparable information they need to judge the sustainability performance of investee companies. ESRSs remain on track to guide the disclosure efforts of 50,000 firms under the Corporate Sustainable Reporting Directive from next year. But they were weakened when certain previously mandatory disclosures became subject to a materiality test. And there are further challenges ahead, with the European Commission expected to propose delays to the introduction of sector-specific sustainability reporting standards, starving investors of the detail they need to benchmark firms operating in particular industries. If anything, there is even more scope for compromise and delay to blunt the Corporate Sustainability Due Diligence Directive. Concerns over slipping timelines are compounded by expectations of a paler green – and more populist – parliament after next June’s elections, but this is by no means certain.

Time will tell – Two reports this week gave us a snapshot of the status of asset owners’ efforts to decarbonise the operations and supply chains of the firms in their investment portfolios. First, the UN-convened Net Zero Asset Owner Alliance told us of a steepening uphill struggle, but an effective one driven by target-setting across activities and sectors. Its third progress report said early cohorts had achieved absolute GHG emissions reductions of around a fifth, but acknowledged a tougher road ahead, with reductions needed in the range of 40-60% by 2030 based on the latest IPCC modelling – leading it to call on policymakers for accelerated reform of investment policy frameworks and integrated transition planning. It also underlined engagement as “critical”, in keeping with Climate Action 100+’s report on the response of carbon-intensive corporates to investor demand for more detailed and more ambitious net zero transition plans. In common with the NZAOA, CA100+ highlights progress, but emphasises the need for much more pace and detail, noting that only 37% and 33% of target firms have long- and medium-term targets that also cover material Scope 3 emissions. Engagement works, seems to be the message, but does it work quickly enough?

The end of the beginning – The Net Zero Asset Owner Alliance also urged further efforts to “reform the current multilateral financial architecture”. On this front, developments look promising with decisions taken at last week’s World Bank Group – IMF Annual Meetings in Marrakech described as the “end of the beginning”. Positive steps included capital adequacy reforms, disaster debt suspension clauses, new principles on global cooperation between multilateral development banks – emphasising support for resilience and green transition – and the prospect of the World Bank improving MDB access to guarantees and risk insurance. All this would seem to improve resilience against external shocks and increase public and private funding to emerging market and developing economies, but much still depends on countries stumping up for additional capital contributions.

Social science – There are many reasons given for not incorporating social metrics into investment decision-making frameworks, often centring on claims of subjectivity, sparse data and different cultural norms across jurisdictions. And when Europe demonstrated how difficult it was to follow objective science when creating a green taxonomy – by allowing the inclusion of gas and nuclear – plans to create a social taxonomy were soon kicked into the long grass, despite their relatively advanced state. But the idea refuses to go away, not least because of the abundant evidence of appetite to measure and compare firms’ social risks and impacts. And a willingness to overcome objections through innovative thinking. Researchers at Sciences Po recently reinvigorated debate on the social taxonomy, just ahead of the launch of a stakeholder request mechanism which invites suggestions for additions to the EU taxonomy “based on scientific and/or technical evidence”. This week saw a further development with the release for consultation of a guide and recommendations aimed at “embedding” social factors within UK pension schemes’ investment decisions. Leading on the issue of modern slavery, the report, backed by the UK’s Department of Work and Pensions, shows that the data, materiality frameworks and other processes can be developed for rigorous and robust analysis of social factors in line with fiduciary duty.

Table stakes – Six weeks ahead of COP28, the seven countries to have submitted nationally determined contributions so far in 2023 (including hosts UAE) have been joined by the 27 countries of the European Union. The document is not a game-changer, however, largely outlining the main components of Europe’s ‘Fit for 55’ strategy, which was formulated well before last month’s synthesis report on the technical dialogue of the Global Stocktake warned of a “rapidly narrowing window” to implement existing commitments to tackle climate change. It doesn’t make significant reference to agriculture’s impact on climate, despite the incoming requirement for food systems emissions to be factored into national plans, although more details are promised. Nor does it make more than fleeting reference to the recently updated EU Sustainable Finance Framework, which might come as a surprise to those focused on using disclosure frameworks and due diligence rules to drive capital to climate-positive projects and businesses. Perhaps one should assume that governments, which tacitly approved the synthesis report, are keeping their plans for the “systems transformations” it demands in their back pockets.

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