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Take Five: Parallel Priorities

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

People and planet have been put on an equal footing by standards setters.

Capital investments – The International Sustainability Standards Board (ISSB) finally confirmed its next move, having completed much of the heavy lifting on its standards for climate and general sustainability disclosures. Following an extensive consultation period, the ISSB decided it could not keep the world waiting for a global baseline to guide investments in natural or human capital, and so decided to press ahead on both fronts. Many had called for a clear focus on nature and biodiversity – understandably given the proximity of COP16, which will be held in Colombia in October – and for accelerated action in the public and private sectors to fulfil the promises of the Global Biodiversity Framework. But the ISSB felt it could ignore the pressing need for a universal framework for reporting companies’ risks and opportunities related to human capital. From the launch of the Social Outcomes Platform, Asia’s first impact data registry, to the release of new statistics about the impact on workers’ health of the physical risks of climate change, awareness of investors’ risks and opportunities around human capital is rising. It will be interesting to see how the ISSB’s project proceeds, bearing in mind its intention to address human rights only as far as they concern workers within company supply chains. Meanwhile, investors will be keeping a close eye on the ISSB’s success in maintaining consensus and consistency as it implements its initial two standards across jurisdictions – a task not to be taken for granted.

Vote green – Sustainable investors had cause to celebrate this week, as the European Parliament passed the Corporate Sustainability Due Diligence Directive (CSDDD), amid a flurry of pre-election voting on green topics. The directive had spent much of 2024 to date on life support, with EU member states backsliding on measures to hold firms accountable for environmental and human rights harms along their supply chains. Following tweaks to scope, timing and reach (but not extraterritoriality), its passing brought two cheers, rather than unbridled joy, but all responses were tempered by the mixed fate of other bills in the last week of votes by MEPs before Europe’s electors get their turn. Environmental campaigners and investor groups hailed backing for legislation such as the Packaging and Packaging Waste Regulation, the Ambient Air Quality Directive and the Net Zero Industry Act, as well as a decision for the EU to exit the Energy Charter Treaty. But legal NGO ClientEarth criticised reforms to the Common Agricultural Policy as “incompatiblewith existing laws and the EU’s ability to tackle the biodiversity and climate crises, while Green MEP Philippe Lamberts warned of threats to the EU’s green deal if populist parties thrive in June’s EU-wide polls.

Bank examinations – The strength of shareholder backing for ESG-related resolutions was tested this week at US banks’ AGMs, on the back of three consecutive years of declining vote share. Supported by Norwegian sovereign wealth fund NBIM and both major proxy voting houses, a proposal to split the CEO and chair roles at Goldman Sachs gained a third of all votes – double last year’s level – also picking up 31% of Bank of America’s shareholders. There was slightly less support at Goldmans (29%) and Bank of America (26%) for resolutions requesting disclosure of clean energy supply financing ratios. But New York City Comptroller Brad Lander, who filed on behalf of the city’s retirement systems, nevertheless warned: “Shareholders are paying close attention to ways they can measure their portfolio companies’ progress on the bold climate action to which they’ve committed.” Lander had made similar filings at Citigroup and JP Morgan, but withdrew them after the pair committed to disclose relative financing levels for low-carbon energy versus fossil fuels. Perhaps unsurprisingly in this presidential election year, the resolution that came closest to gaining a majority concerned lobbying expenditure disclosure – winning 39% of Goldman Sachs shareholder votes, according to preliminary tallies.

Amber gamblers – The traffic lights of the electric vehicle (EV) revolution have been sending mixed signals to investors of late. The week started with predictions of global gluts, based on industry research highlighting stalling sales – largely in China – and “vast” overproduction. The gloom deepened with Stellantis CEO Carlos Taveres railing against UK policymakers for imposing a “terrible” and inflexible mandate, forcing manufacturers to achieve EV sales well above prevailing levels of demand. There appeared to be trouble at Tesla too, with revenues and deliveries sharply down due to diminished customer appetite and increased competition. But drooping investor sentiment soon picked up, with shares rising more than 10% after boss Elon Musk accelerated plans for the launch of new models. Some observers claimed the slowdown would be short-lived, pointing both to cyclical factors and a steady decline in price differentials between EVs and fossil-fuelled rivals. In its global EV outlook, the International Energy Agency acknowledged the current headwinds, but pointed out global sales were still 25% higher in Q1 2024 versus 12 months ago, setting the pace for every other car sold globally being an EV by 2035, “based on today’s energy, climate and industrial policy settings”.

A maturing market – There were significant developments in the sustainability-linked bond (SLB) market this week, when Italian power utility Enel was forced to pay step-up payments to investors in US$11 billion of its SLBs for missing its 2023 greenhouse gas emissions reduction targets. Enel, the SLB market’s first and biggest issuer, blamed the failure on the 2022-23 energy crisis, but said it would still meet its longer-term climate goals. Although the penalty payments were predicted in October by the Anthropocene Fixed Income Institute, the investor reaction – affected Enel bonds continued to outperform those not linked to emissions cuts – said much about the current dynamics of a nascent market. But it’s also worth noting that SLBs issued today are likely to behave differently to the 2019 vintage. “We believe SLB investors now demand a higher standard of materiality and ambition, as evidenced by some of the stronger structures currently being issued,” the institute said.

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