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Commentary

Take Five: The Wrong Signal

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

After an underwhelming fortnight in Bonn, negotiators face many more hard yards and late nights if COP28 is to deliver an ambitious new round of climate action.

Opinion divided – ‘Bonn Climate Conference Closes With Progress on Key Issues, Laying Groundwork for COP28’. It’s fair to say that the Samoan delegation, delivering a statement on behalf of the 39 members of the Alliance of Small Island States (AOSIS), disagreed with the official UN Climate Change verdict on two weeks of pre-COP28 negotiations. “We are shocked by the lack of momentum, stagnation and in some cases even regression that we encountered during this session. The necessity to pursue 1.5°C-consistent pathways was put on trial, and we spent the entire session debating whether the Mitigation Work Programme should be featured on the agenda. We are also appalled by the harassment that some delegates faced during these negotiations, and take this opportunity to remind everyone that these are diplomatic multilateral negotiations that must adhere to the code of conduct. Those factors obviously failed to create the conducive environment that we need for substantive discussion and necessary progress. This should not be the tone that we set for ourselves as we march toward COP28, especially as we are undertaking the Global Stocktake with the aim of sending the world the right signal on the direction we need to be heading.”

Beat the clock – There was a palpable sense of urgency in Brussels this week, with the European Commission releasing what it billed as its final major package on sustainable finance before elections next year. In truth, the only new measure was the much-trailed rules for ESG ratings, largely in line with the IOSCO principles being adopted in many other jurisdictions, alongside guidance on transition finance and the finalisation of the non-climate elements of the Green Taxonomy. The latter, in particular, contained some important new details for lawyers and sustainable investors to digest, but inevitably are subject to further refinement. Elsewhere, Commission officials urged observers concerned at confusion and dilution regarding rules such as SFDR and CSRD to embrace the iterative nature of the frameworks being put in place. As regulatory and policy experts called for better use of existing tools to tackle greenwashing, rather than imposing further new ones, tempers frayed in the European Parliament on related measures, notably around protecting biodiversity, while European scientists underlined that it’s not just the political clock that is ticking.

Sure of that, Shell? – After an eventful AGM season, the business strategies of oil and gas majors continue to attract criticism. While it was once ExxonMobil that drew most attention among ESG-focused investors and activists, Shell has taken on that mantle. In its latest results, the UK-listed firm upped cashflow to investors (through raised dividends and share buybacks), cut capital expenditure and abandoned plans to reduce oil output year on year. CEO Wael Sawan insisted he was committed to “transforming Shell to win in a low-carbon future”, claiming year-on-year production reduction targets were no longer needed due to output already having fallen more steeply than previously anticipated. Shell also outlined plans to invest in biofuels, hydrogen, EV charging and CCS, while its returns to investors arguably providing them with the opportunity to invest directly in greener businesses. Net Zero Tracker, which pointed out the inadequacy of oil and gas firms’ net zero pledges in its latest stocktake, suggested cognitive dissonance at work, with the ECIU’s Richard Black highlighting “a realisation that the long-term trajectory of oil demand is downwards” as well as a failure to embrace “the swift changes taking place in the reputational & regulatory landscape”.

Whose proxy? – Gary Retelny has had enough of being painted as some kind of ‘woke activist’. The President and CEO of proxy advisor Institutional Investor Services penned a blog this week outlining the services his firm provides to investors, including those who recognise that environmental and social factors can be financially material to their investment decisions. “ISS understands what it means to be a fiduciary,” he said. Retelny’s position found support in new research commissioned by the UK’s Financial Reporting Council, which found that 75% of investors ask for voting research from proxy advisors to be based on their own in-house voting policies, rather than obediently following benchmark policies, as often claimed by anti-ESG groups. Some would argue, including UKSIF in a new briefing, that greater clarity on fiduciary duty is still needed in the UK, while others observe that the concept is in much greater need of an overhaul in the US. Meanwhile, Retelny questions the motives of those who seek to “impose heightened duties on investors, investment managers and proxy advisers”, without going so far as to question their funding.

Green shoots – One might think that the signing of the Global Biodiversity Framework last December would unleash a wave of policy and regulatory response by the signatory countries. Not so, or at least, not yet. New research from the Imperial College Business School and Impax Asset Management finds governments are not yet developing the regulation and incentives needed to stimulate corporate action, such as strengthened environmental licensing and making nature related disclosures mandatory. Elsewhere, the World Bank explores quite how much work there is to be done on one of the GBF’s key themes – reforming subsidies, which currently amount to US$7 trillion (or 8% of global GDP) to fossil fuels, agriculture and fisheries.

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