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Take Five: Policy and Power

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

With electoral excitement reaching fever pitch in several major economies, public and private sector climate and sustainability strategies came under scrutiny this week.

Podesta’s problem – US Climate Envoy John Podesta gave a strong signal this week on the likely introduction of a carbon border adjustment mechanism (CBAM) to help ensure the global trading system takes greater account of embodied emissions. Without mentioning China by name, Podesta told the Financial Times that the US would not allow “freeriding” countries to keep “dumping carbon” via subsidised, high-emission industrial exports. A CBAM is just one of the options under consideration by the White House. US senators have already proposed carbon-based import tariffs, while Podesta launched a Climate and Trade Task Force in April – noting at the time that the US’s aluminium industry had been destroyed by rival Chinese exports generating 60% more emissions per ton. The US has already linked climate and trade policy by introducing tariffs for a raft of Chinese products, including electric vehicles (EVs) and solar panels – all agents of the green transition, and of ‘red’ economic revival. What the US has not done, though, is introduce either a domestic carbon tax or an emissions trading system to manage down its own industrial emissions – unlike more bureaucratic economies such as Europe and China (the former started its CBAM transition last year, while the latter’s is much further into the future). Podesta and co are collating data before making any policy recommendations, but they will need to make an iron-clad case to deflect accusations of climate-led protectionism.

Road to nowhere? – While the US was edging closer to adopting a European idea, the EU was aping a US initiative, ramping up tariffs on Chinese EVs to protect its own manufacturers. Having already imposed a 10% import tax, the EU has now introduced firm-specific levies – some as high as 37.6% – to further level the playing field in the face of “unfair subsidisation” by the Chinese government. One of the worst-hit firms is BMW – whose Chinese-made Minis will suffer a 38.1% tariff – leading to a chorus of disapproval from German auto manufacturers, who claim that such taxes damage all market participants. “The planned tariffs will make it more difficult to successfully ramp up electromobility and thus decarbonise,” said German trade body Verband der Automobilindustrie. While German car executives are keen to protect strong trade links with China, they also have a point that trade wars will only add to the many existing uncertainties on the path to transport electrification. Besides, the EU’s CBAM will have at least some restraining impact on Chinese electric vehicle imports if the country’s power utilities continue to rely so heavily on coal.

Story time – The halfway point of the calendar year brings forth a stream of impact and sustainability reports from asset managers and owners, particularly in the UK, as signatories also comply with their obligations under the Stewardship Code. Like the sustainable investment strategies they support, these reports have broadly similar objectives, but take many diverse routes to get there. The most common approach is the data deluge, overwhelming the reader with the sheer weight of meetings, interactions and initiatives evidencing their engagement activities. On the surface, the quantitative approach can aid comparability, but it also leaves institutions open to accusations that their reports are “full of sound and fury, signifying nothing”. Increasingly, both asset owners and managers are taking a more qualitative approach, increasing the emphasis on outcomes. Releasing its stewardship report this week, UK manager WHEB took a swipe at rivals – with Stewardship and Climate Analyst Racheal Monteiro observing that reporting the number of engagements is “an inadequate proxy for the real purpose of engagement, which is real-world change”. Instead, WHEB outlined how activity over 2023 demonstrated its commitment to the 12 principles of the code, outlining engagement objectives, priorities and methods alongside outcomes-led case studies. WHEB is far from alone in this, with Brightwell (formerly the BT Pension Scheme) having taken a similar approach with its recent sustainability report, which also eschewed numbers for thematics. Both reports did of course include data – and the time-poor may still be tempted by AI-assisted analysis – but for as long as stewardship remains a complex and collaborative exercise, the need for narrative is likely to remain.

A new social network – Like many asset owners, gender-based and other forms of social inequality represent key systemic risks for Brightwell. Partly in recognition of these concerns, the Principles for Responsible Investment (PRI) this week confirmed the September launch of the Taskforce on Inequality and Social-related Financial Disclosures (TISFD). Originally formed through a merger of like-minded bodies in Q3 2023, the taskforce was created to develop a global framework for risk management and disclosures affecting financial stability and long-term value creation. Institutional investors have long sought more granular data on social factors alongside those on climate and nature, the availability of which has evolved more rapidly in recent years. Momentum has built steadily this year, with the release of the final recommendations of the UK’s Taskforce on Social Factors, the International Sustainability Standards Board’s commitment to human capital disclosures, and the Global Reporting Initiative’s review of its workforce-related standards. According to a PRI LinkedIn post that flagged an introductory webinar later this month, the TISFD will offer disclosure guidelines to companies and investors, outlining also governance and engagement plans. The PRI is currently in the midst of a major strategic review, but its involvement in the TISFD’s steering committee suggests active involvement in investors’ understanding of human capital is likely to remain a core focus.

Artificial expectations – Internet search giant Google admitted this week that its carbon emissions had risen by 48% over the past five years, putting its 2030 net zero plans in jeopardy – due largely to its AI ambitions. Sounds familiar? That’s because it is. In May, Microsoft acknowledged that its emissions had increased 30% last year alone – also blaming AI. While the Seattle-based firm’s mea culpa was accompanied by news of a renewable energy deal with Brookfield, Sundar Pichai and colleagues signed up to an arrangement with BlackRock which will give Google the right to procure up to 300 megawatts of solar energy from New Green Power – a portfolio company based in Taiwan. All investments in renewables have to be viewed as a positive given the slow pace of the energy transition. But whether this is exactly what Bill Gates meant when he said AI would help to combat climate change, is less certain.

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