Commentary

Take Five: Taking Issue with the Default Position 

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

 A looming debt crisis might have the biggest impact on investors in the long run, but more headlines were generated by the short-term rush for coal.  

‘One shock away’ – Mark Flanagan, Deputy Director, Strategy Policy and Review at International Monetary Fund (IMF), told BBC Newsnight that 0.7-1 billion people were exposed to extreme food insecurity by a global sovereign debt crisis. “They’re just one shock away from being tripped up and forced into a default situation.” Many middle- and low-income countries are in deep financial strife after 2022’s sharp interest rate rises, led by the US Federal Reserve, which hiked debt-serving costs. Having borrowed heavily in the decade of free money, the combination of the pandemic and the fuel and food price shocks have left many economies reeling, with even the largest facing a tough 2023. In these choppy economic conditions, many countries are also seeking funding for climate mitigation and adaption needs, and will require support to implement the targets of the recently agreed Global Biodiversity Framework. Few will have the resources to handle a bout of extreme weather. High time for new responses, both in terms of the international financial architecture and solutions to indebtedness. Debt-for-nature swaps have potential, but high costs and low volumes are driving calls for a more systematic approach. With institutional investors looking for new ways to reduce the risks of investing in EMDEs, a wave of sovereign defaults will help no one.  

Brownhushing – But the climate story grabbing most this week is probably RWE’s flattening of a site the size of a small German city to access almost 200 million tonnes of lignite, among the dirtiest forms of coal. The project, financed by HSBC and other major banks with varying net zero commitments and fossil fuel phase-out plans, is needed to help Germany take back control of its energy supply after years of over-reliance on Russia. Thank you Gerhard Schroder. We all know that progress is not linear, but the optics of the demolition – and the protests that will this weekend include Greta Thunberg – are far from ideal, especially when it is claimed the financiers actively sought to hush up their participation.  

That Kodak feeling – As he stepped down from his two-year stint as the High-Level Climate Action Champion for the UK’s COP26 Presidency, Nigel Topping told governments they could and should push much faster toward net zero, targeting the early 2040s. The ‘Race to Zero’ architect said Covid-19 responses had proved that governments and businesses can change much quicker when needed. “We should back ourselves more,” he told The Guardian. He also had some sobering words for the fossil fuel industry and its investors. The profits “bonanza” fuelled by Russian military aggression might be the last one, he warned, saying investors would soon demand their money back if CEOs – currently still with their “heads in the sand” – refuse to invest in the renewables transition. “They cannot survive. Their Kodak moment is nigh.” Over to you, Razan Al Mubarak 

Who better? – As well as Al Mubarak’s appointment, Sultan Al Jaber was unveiled as COP28’s President by host country UAE. Al Jaber’s current responsibilities include being Minister of Industry and Advanced Technology, CEO of the Abu Dhabi National Oil Company (ADNOC) and Chair of Masdar, also known as the Abu Dhabi Future Energy Company, a UAE-government owned renewable energy company based in Abu Dhabi. Who better to further the transition to renewables? There is no doubt that the UAE has made some impressive strides in its path toward a renewable future, but from a policy perspective it has been hiding in the shadow of Saudi Arabia, voting with its large neighbour as it sought to water down transition commitments, notably at COP27. That position is, in a word, unsustainable.  

Adding up to zero – A government-backed review of the UK’s approach to reaching net zero has concluded that opportunities for green economic growth have so far been underplayed. Former energy minister Chris Skidmore’s 129 recommendations include greater infrastructure investment and incentives for business, including greater use of the tax system, previously called for by UKSIF, to deliver “new jobs and strong economic growth”. He may not win over all the sceptics in his party, but it might be a better bet for growth than forcing all teenagers to study maths until they’re 18.  

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