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Take Five: Pedal to the Metal

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

Questions of governance – and government – were uppermost in the minds of UK pension funds this week.  

Pedal to the metal – Focused as they may be on environmental and social challenges, UK pension funds were blind-sided this week by a “governance crisis”. As noted by Times leader writer Simon Nixon, the new UK government’s undermining of the tripartite framework sustaining confidence in public finances – HM Treasury expertise, Bank of England independence and Office of Budget Responsibility scrutiny – sent the markets into a downward spiral after last Friday’s ‘not-a-budget’ which threatened to engulf schemes employing LDI strategies. The exposure of LDI to a rapid succession of interest rate movements is well known, but the extent of the collapse in gilt prices in response to Chancellor Kwasi Kwarteng’s unfunded tax cuts seems to have taken many by surprise, with the mass unwinding of positions only contributing to the melee. The Bank of England’s £65 billion intervention to prop up gilts ends on 14 October, giving trustees limited time to “keep their foot to the floor with regards to ensuring collateral sufficiency”, according to Hymans Robertson CIO David Walker. 

No rowing back from net zero – The few pension fund CSIOs with bandwidth to consider longer-term issues this week might have been reassured by comments by Chris Skidmore, the former energy minister charged with reviewing the UK’s path to net zero. Announcing a call for evidence, Skidmore promised “no rowing back” from existing commitments and outlined an inclusive vision, based on “opportunities for greater agency and ownership across society to deliver decarbonisation faster and at reduced cost”. Also speaking at the BusinessGreen Net Zero Festival, Chris Stark, CEO of the Climate Change Committee, welcomed the review as an opportunity to restate the case for transition away from fossil fuels and emphasise the need for stable policy to increase investor certainty 

Power plays – Discussions on the pace of Europe’s transition from gas to renewable energy are also gathering momentum. The REPowerEU policy was centre stage for European Sustainable Energy Week and EU energy ministers are meeting today to debate an emergency intervention to address high energy prices via demand reduction measures, a windfall tax and consumer protection; although discord is expected over price caps on gas. Next week, trilogue negotiations will take place on aspects of the Fit for 55 emissions reduction strategy, including the Carbon Border Adjustment Mechanism and Renewable Energy Directive. Investor groups have called for an “ambitious” package, including “rapid phase-out of free [ETS] allowances” to increase market transparency and investor confidence.  

Business as usual – Today’s meeting of EU energy ministers will also consider the apparent acts of sabotage on the Nord Stream 1 and 2 pipelines near the Danish island of Bornholm. While the energy security implications could be significant, the environmental damage may be a drop in the ocean. According to some estimates, the US oil and gas industry releases as much methane through its normal operations every two and a half weeks. With planned pipeline development topping US$75 billion, what hopes of a positive progress report on reduced leakage from the energy sector, as promised in the Global Methane Pledge, at COP27?  

A bolder blend – A key focus in Sharm El Sheikh is likely to be closing the gap in climate finance to emerging markets and developing economies and the continued lack of progress on loss and damage. Africa Investor, which represents the continent’s sovereign wealth and pension funds, is among the bodies which backed the Net Zero Asset Owners Alliance’s call this week for policymakers to take five steps to scale blended finance, thus facilitating growing asset owner appetite for climate- and nature-positive investments beyond their home markets.  

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