Commentary

Take Five: Stuck in the Middle

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

This week, the Securities and Exchange Commission delighted and disappointed as it sought to find the path of least resistance to its climate disclosure rules.

Scope for improvement In the same week that meteorologists confirmed the ninth consecutive month of record-breaking heat, US financial regulators were congratulated for recognising that climate risk is, indeed, investment risk. CalPERS, the US’s largest public sector pension fund, described the Securities and Exchange Commission’s (SEC) Climate Disclosure Rule as a much-needed boost for transparency. The fund observed there was more work to do following this “victory for investors”, which was presumably a reference to the absence of Scope 3 reporting requirements. If SEC Chair Gary Gensler was hoping that this gaping omission would limit opposition, he may already be disappointed. Senator Tim Scott, the man expected to accompany Donald Trump on his carbon-intensive return to the White House, denounced the rule as “federal overreach at its worst”. Within hours of the SEC’s 3-2 vote in favour of the rule, the attorneys-general of ten Republican states launched a lawsuit against it. In contrast, environmental NGO Sierra Club is considering a challenge based on the SEC’s “arbitrary removal” of key provisions, citing research from Ceres which found that 97% of institutional investor responses to the rule’s consultation had backed Scope 3 disclosures.

Paris’ little brother – Alongside sheer political dysfunction, a major risk posed by a second Trump presidency is isolationism. The US’s withdrawal from NATO, the Paris Agreement and multilateral trade arrangements could have myriad negative consequences for the global order. Some already see the growing tendency of countries going it alone as a global threat to effective climate action. A working paper from the International Monetary Fund on the Fiscal Implications of Global Decarbonisation warns that the sum of all unilateral actions will unlikely be sufficient without coordination”. Unilateralism, the paper states, gives rise to worries about the impact of climate action on competitiveness, suspicions about the less-than-ambitious efforts of others, and over-emphasis on subsidy-led approaches. All of this is evident today, as countries seek to meet their nationally determined contributions. To balance the impacts of rising revenues from carbon pricing and falling ones from fuel taxes, the paper recommended a so-called side-agreement to the Paris Agreement – a policy package that would maintain “a level playing field and address concerns about competitiveness, relocation of industries and carbon leakage”. The paper promised positive impacts for the US, but it may take a little more than that to convince the returning Trump.

Paths to progress Moves were made this week to identify and address the wrongs of forced labour. The European Council adopted its negotiating position on a proposal to prohibit imports of products made through forced labour, which involves strengthening the investigative powers of the European Commission. The plans have parallels with the EU Deforestation Regulation, which effectively bans imports of certain commodities that cannot demonstrate a clean, green provenance. Such actions should be applauded, although it seems a little too soon after EU member states’ failure to support the Corporate Sustainability Due Diligence Directive to credibly commit to “breaking the business model of companies that exploit workers” (even if rumours of the directive’s demise are premature). Meanwhile in the UK, trustees were provided with advice on how to ensure their investment managers are sufficiently watchful to eliminate modern slavery practices from their portfolios. This came as part of a new package of voluntary guidance from the Taskforce for Social Factors – a body created by the Department of Work and Pensions to help pension funds consider social risks in investment decisions and stewardship activities. One good indication of intent could be involvement in the Votes Against Slavery campaign, which this week targeted FTSE AIM smaller listed companies and FTSE 350 companies that failed to disclose in line with the UK’s Modern Slavery Act.

Break down the barriers – With its roots in labour protests, International Women’s Day typically triggers a slew of reports highlighting glacial progress on C-suite representation and pay gaps. Many of these point to higher levels of gender diversity among board directors at larger, well-established firms, especially in mature economies, but do not necessarily delve deep into the systemic issues that investors need to understand to engage with portfolio firms beyond well-intentioned voting policies. Released today, the UK House of Commons’ Treasury Committee’s ‘Sexism in the City’ report does indeed note “marginal” improvements in representation and pay gaps in the finance sector. But it also highlights the processes that are blocking change, such as the use of non-disclosure agreements to silence whistleblowers and the lack of support in sexual harassment cases from HR departments. Further, it argues for a wider remit for the Women in Finance Charter to support the development of an ongoing pipeline of female talent into the sector at all levels, while also noting that maternity arrangements remain a “significant barrier”, resulting in many women leaving finance permanently after having children. With the Resolution Foundation having recently found that women are disproportionately represented among the cohort of younger workers that do not work for mental health reasons, the challenges of building workplaces fit for all appear to be economy-wide.

The history man – In this era of gerontocracy, former US climate envoy John Kerry indicated he had no intention of slowing down, highlighting instead the need to speed up the adoption of clean energy. In an interview with the Financial Times, the 80-year-old former presidential candidate said he would now be able to work with many more partners to help accelerate the net zero transition. Reflecting on his past achievements, Kerry acknowledged that Just Energy Transition Partnerships “haven’t worked properly yet”, and called on multilateral development banks to do more to incentivise private capital. However, he was most forthright in his comments about the recent decision of some leading US asset managers to leave Climate Action 100+, arguing they were not “acting on the right side of history”.

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