A selection of this week’s major stories impacting ESG investors, in five easy pieces.
The UN Principles for Responsible Investment’s PRI in Person 2023 event offered valuable insights into investors’ current and future ESG priorities.
Making the future – The sheer fact of Japan PM Fumio Kishida’s presence at the Principles for Responsible Investment’s annual conference in Tokyo this week was a statement in itself. That he then proceeded to give an impassioned speech, outlining a four-point plan for putting Japan’s huge savings wealth (US$14 trillion) to work towards a sustainable future was even more remarkable. It’s worth noting that his committed appearance at PRI in Person 2023 was supported by a wide range of senior executives from across the Japanese economy. Banks, corporates, asset managers and pension funds all played an active role, none more so than Hiroshi Shimizu, President of Nippon Life, Japan’s largest life insurer, who implored delegates to be “future makers”, rather than future takers. But with the rhetoric must come action and delivery. This is a steep challenge in a country heavily reliant on fossil fuel for energy, which has seen decidedly mixed outcomes from its strategic bet on hydrogen, and many jobs dependent on an automotive sector seen as lagging in the EV race. PM Kishida’s green transformation (GX) strategy is certainly large and ambitious, including the welcome introduction of carbon pricing mechanisms from 2028. But it is also vague in important areas, reliant on fuel sources not aligned with net zero pathways, and with potentially negative external consequences.
Follow the leader – One of the rabbits in Kishida’s hat was the announcement that seven public pension funds, worth US$600 billion in AUM, would become PRI signatories to “reinforce their work on sustainable finance and spread the movement to the whole financial market”. Kisheda noted the PRI’s role in enabling asset managers and owners to engage with companies, calling for collaborative efforts by business and finance “to unleash their immense potential to create substantial impacts, reshape society, and foster sustainable and solid growth”. Presumably Kishida hopes the investors will use their evolving stewardship skills to encourage firms to commit to his GX strategy, which may be a tall order. But the seven do at least follow in the giant footsteps of the Government Pension Investment Fund (US$1.4 trillion AUM) which has recently been analysing the effectiveness of its own stewardship impact. As the fund’s recently published 2022 ESG report underlines, close monitoring of asset managers’ engagement activities continues to be critical.
Great LEAPs forward – GPIF has been an early ESG adopter in a number of respects, including in the assessment of nature-related risks. The aforementioned ESG report includes a trial analysis of its equities portfolio, based on the recommendations of the Taskforce on Nature-related Financial Disclosures (V0.4), which suggested that 65% of its investee firms had either high or very high dependencies on nature. While GPIF is a pioneer in use of the TNFD’s LEAP approach to understanding firms’ and investors’ relationship with nature, it’s far from alone, at least in Japan. The PRI in Person 2023 event saw foods, beverages and healthcare firm Kirin explaining use of LEAP in considering the challenges facing tea plantations in Sri Lanka, as well as MS&AD Insurance Group demonstrating how LEAP had led it to use artificial intelligence and satellite technologies to begin to grasp the impact of clients’ business models on the production of rubber across different locations in Indonesia, with implications for land use change and biodiversity loss. In fact, Japanese presenters overall showed a notably strong commitment to illustrating their support for the event’s slogan of ‘turning action into commitment’.
A big ask – How do you respond to the likelihood (growing stronger by the month) of an overshoot of global warming beyond the 1.5°C target we’ve been trying to keep alive for the past several COPs? Professor Jim Skea, Chair of the Intergovernmental Panel on Climate Change, speaking via recorded interview at PRI in Person 2023, said there was little room for complacency or certainty. While bringing temperature rise back down below 1.5°C is possible, some of its impacts may be irreversible and we don’t yet understand the impacts of carbon removal at scale, he said. While we do have solutions at hand, Skea argued those focused on nature restoration and preservation might yield results faster than some of the as-yet-unproven technologies being developed, summarising his advice to investors as, “Keep calm and carry on with ambitious climate action”. Jan Rasmussen, Head of ESG & Sustainability at PensionDanmark, speaking live at the event, suggested this was a big ask. The fund’s 2025 commitments would stay in place, as would its overall trajectory to net zero. But can pension funds be expected to keep to their 2030 interim decarbonisation targets, he pondered, when policymakers are not sticking to their end of the bargain, failing to implement the policies needed to accelerate the renewable energy transition? “Stewardship should be [directed] not only toward companies, but toward governments,” Rasmussen said.
People and planet – Partly due the recent launch of the TNFD’s final recommendations and the looming row between governments over accelerated climate policy action in light of the Global Stocktake, environmental themes were inevitably in focus at PRI in Person 2023. But human and workers’ rights were to the fore across many conference sessions. The PRI launched an assessment framework to support participants in its Advance stewardship initiative to monitor performance and progress. And asset owners and managers demonstrated repeatedly that a lack of universal consensus on social targets and metrics was not an insurmountable barrier to action and change. Even so, E and S inevitably converged in many conversations, partly due to an increasingly common understanding of the just transition, but also because of continued concerns over transparency and human rights abuses in solar and wind energy supply chains.