Industry

Take Five: Stranger than Fiction

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

Evidence has been uncovered of dinosaurs roaming in Texas.

Stranger than fiction – Republican-held states in America have continued their war on ‘woke’ capitalism, with Texas Comptroller Greg Hegar effectively banning local and state government entities – including the US$200 billion Teachers Retirement System – from doing business with firms judged to be “boycotting” fossil fuels. Firms potentially affected include BlackRock, JP Morgan and Goldman Sachs, after Hager described the concept of ESG as an “opaque and perverse system”. This follows the passing of a resolution in Florida requiring the state’s fund managers to invest in ways which prioritise profit without considering sustainability factors. US SIF has responded to the rise in sustainable investing scepticism by launching ESGtruths, while Mindy Lubber, Ceres’ CEO and President, branded recent attacks on ESG as based on a “blatant fiction”. Speaking of phenomena that Republicans can no longer call fiction, severe drought conditions in Texas have revealed 113-million-year-old never-before-seen dinosaur footprints.

End of abundance – Drought conditions in Europe and the US have grabbed plenty of media attention, but China’s drought – which is being called the most severe in its history – shows high temperatures are having impacts across the Northern Hemisphere, not just the west. The drought conditions have seen the Yangtze River drop to less than half its normal level, severely impacting hydropower and causing power cuts in the Sichuan province which gets 80% of its energy from hydropower. In the west, a European Commission research report suggested Europe is experiencing its worst drought in 500 years, with nearly half of the continent being under “warning” conditions meaning the soil has dried up. The report suggests relatively low impact on agricultural yields so far, but worries persist over winter crops, while energy output has already been affected, notably France’s nuclear fleet. In a timely speech, French President Emmanuel Macron spoke of the end of “limitless availability” of water, products and energy, ahead of ministers meeting next week to discuss climate change.

Energetic policy – As Marcon and colleagues contemplated critical policy questions, France’s neighbours and allies also this week developed their energy security strategies, with differing implications for investors. In the UK, would-be Chancellor Kwasi Kwateng was rumoured to be planning to move wind and solar energy providers onto CFD-based pricing, potentially cutting consumer energy bills but also profit margins for many that have invested in the renewables transition. Meanwhile energetic German Chancellor Olaf Scholtz was seen almost everywhere, agreeing a hydrogen-based alliance with Canada and meeting Norway’s leader to discuss gas supplies. German purchases were seen by some as responsible for new spikes in the global energy markets, while Russia found new ways of dealing with its unsold inventory.

Conflict zone – As Ukraine valiantly celebrated its independence day this week, there were reminders that companies and investors react in different ways when exposed to conflicts and human rights abuses. Research from IESEG School of Management highlighted how firms’ ESG scores and their existing relationship to Russia increased the likelihood of applying sanctions and withdrawing business from Russia after the initial invasion. Meanwhile US non-profit Inclusive Development International highlighted the risks to investors of exposure to human rights abuses from a lack of transparency in ESG-labelled funds, in its response to US regulatory plans to reduce greenwashing.

Looking forward – Asset owners have been largely positive in their responses to draft sustainability reporting standards, both from the International Sustainability Standards Board and European Financial Reporting Advisory Group, which advises the European Commission. Overall, they positively anticipate the introduction of the news standards in the coming months, but with an emphasis on the future, and the importance of forward-looking information based on double materiality. Comments from HSBC Bank (UK) Pension Scheme were typical. “Sustainability risks may initially manifest themselves on the planet and society first and are only experienced by an entity over time. In our experience, it is only once such a risk is experienced by the entity, for example through a negative impact, that it becomes assessed and potentially disclosed by the entity.”

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