Commentary

Take Five: The Heat is on

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

This week, the return of El Niño applied added pressure for meaningful outcomes from COP28 to avoid a 1.5°C overshoot next year.

The heat is on – On the hottest day on record, the World Meteorological Organization officially confirmed the return of El Niño, the climate pattern responsible for the warmest year on record in 2016, and the extreme weather conditions across large parts of the Global South. This raises the prospect of 1.5°C being breached next year, adding extra urgency to negotiations at COP28, already certain to be fraught, after recent international summits were characterised by pronounced mistrust between developed and developing nations. There was further evidence this week of richer nations falling behind on climate finance. A leaked memo showed the UK government would have to spend more than 80% of its foreign aid budget to meet a 2019 commitment to double international climate finance to £11.6 billion. Some might argue that this failure is in keeping with the parlous state of the UK’s climate mitigation and adaptation plans. But with developing countries facing a US$4 trillion SDG funding gap – including a stark absence of renewable energy investments – the issue is a hot and uncomfortable one for all.

Shepherding resources – The Church of England is not short of experience or inspiration when it comes to stretching resources across competing priorities. This week, the Anglican church’s £3 billion AuM pension scheme announced it was quitting one of the two net zero groupings to which it belongs to better focus efforts to decarbonise its investment portfolio. Rationalisation of net zero initiatives is perhaps inevitable and overdue, but the decision to leave the UN-convened Net Zero Asset Owner Alliance – the longest-standing and most credible of the finance sector sub-groupings under the GFANZ umbrella – will raise some eyebrows and questions, including whether other asset owners will follow suit. It follows the CoEPB’s announcement of its intention to divest from oil majors, but the board is unlikely to take a back seat in future, given its coordinating role on initiatives relating to executive pay, climate finance, mining, sovereign debt and lobbying.

Could do better – Many firms were slow to explain to investors how they were adhering to the UN Guiding Principles on Business and Human Rights after the invasion of Ukraine, as the continued operation of their Russian businesses risked facilitating human rights abuses. This week a number of companies were under pressure to explain why they were still doing business with Putin’s kleptocracy, including household names like Shell, which is trading Russian LNG due to “long-term contractual agreements”, and Unilever. The Anglo-Dutch consumer goods firm defended its position by pointing out that a lack of buyers would see its businesses fall into the hands of the Russian state, after the Moral Rating Agency calculated that the firm was contributing £500 million per annum to the Russian economy by remaining. Interestingly, Shell (‘C’) and Unilever (‘D’) were far from the worst performers in the recently updated ‘A-F’ corporate scorecards compiled by the Yale Chief Executive Leadership Institute for completeness of withdrawal from Russia. Meanwhile, the Kyiv School of Economics calculated that global corporations contributed US$3.5 billion in profit tax in 2022 to the Russian treasury, a figure it regards as “only the tip of the iceberg”.

Wind in their sails? – Low expectations were not disappointed by the International Maritime Organization, which met in London to adopt the 2023 Strategy on Reduction of GHG Emissions from Ships. Described by Secretary-General Kitack Lim as a “monumental development” which “opens a new chapter towards maritime decarbonisation”, the strategy only targets “striving for 10%” uptake of near-zero GHG emission fuels and energy sources by international shipping by 2030. With the sector representing 3% of GHG emissions globally, some argue against waiting for tougher regulation or greater availability alternative fuels, including the CEO of Smart Green Shipping, arguing that “wind is the obvious solution – it’s abundant, freely available, saves costs and drives down emissions”.

Regulating the raters – Regulation of the ESG ratings sector has taken a number of steps forward recently. HM Treasury’s consultation on the introduction of UK regulation of ESG ratings closed last week, following close on the heels of a similar exercise in Europe. This week saw the release of a further consultation, on a proposed code of conduct, by the ESG Data and Ratings Code of Conduct Working Group, convened by the UK’s Financial Conduct Authority last December. The group has liaised with other bodies which have also been developing codes, such as Japan’s Financial Services Agency and the Monetary Authority of Singapore. But calls for domestic and international consistency may prove challenging in practice, with the Securities and Exchange Board of India, for example, taking a distinct approach from most other regulators.

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