Commentary

Take Five: Think Big

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

Plenty of advice on tackling systemic risks was on offer to policymakers this week ahead of the UN SDG Summit and New York Climate Week.

Big shifts and giant leaps – Ahead of next week’s SDG Summit, the UN published a report outlining the science-based “transformational shifts” (or “systems transformations”) needed to achieve the 17 Sustainable Development Goals, replacing the incremental and insufficient process made since 2015. The report insisted there are “more synergies than trade-offs between the SDGs”, and made a strong plea for joined-up and flexible thinking across borders, disciplines and communities, also calling on policymakers to show greater transparency, by “spelling out the costs and benefits of transformation and defining a just transition”. A separate paper by a group of scientists and economists called for five similarly transformative changes, predicting they could achieve the SDGs, by 2050, 20 years after their proposed deadline. The five changes – reforming international finance, wealth distribution, gender power imbalances, food and energy systems – would collectively amount to a ‘Giant Leap’ and cost 2-4% of GDP, but would deliver socially, environmentally and economically across the planet. A further new report from Force for Good says scaling up 15 key initiatives could achieve 70% of SDGs, but admits the funding shortfall remains “stubbornly high”. Talk of transformations implies many risks and opportunities for investors, but further recent evidence of a growing appetite for impact suggests they are braced for the challenges ahead. With just 4% of the total STOXX 600’s combined revenue calculated as having a positive contribution to the SDGs, investors appear to have precious few opportunities for impact today.

End in sight – The International Energy Agency (IEA) this week declared it was the beginning of the end, referring to the entire fossil fuel industry, not just some of its more energetic executives (Generation Investment Management’s latest Sustainability Trends report found Chairman Al Gore in similar fin de siècle mood, referencing both Churchill and Roosevelt). Previewing the IEA’s annual World Energy Outlook, Executive Director Fatih Birol said the “age of seemingly relentless growth is set to come to an end this decade, bringing with it significant implications for the global energy sector and the fight against climate change”. Even without new climate policies, peak demand for coal, oil and gas is now “visible”, thanks to growth in renewable and clean energy technologies, China’s economic slowdown and the Russia-inspired global energy crisis. Birol concurred with the UNFCCC’s Global Stocktake report – which last week confirmed much more action is needed to deliver on the Paris Agreement – insisting “we can speed this up if we put the right new policies in place”. Specifically, this includes greater collaboration between governments – on standards and regulation, financial and technical assistance and market creation – to accelerate the net zero transition, according to a new report co-authored by the IEA, which also found time to release a Clean Energy Equipment Price Index, to help investors track movements in a basket of green technologies.

Rip it up – In a busy week for Brussels (including the EC President’s new plans for the EU Green Deal, and legally binding targets to expand renewable energy), the European Commission opened up a world of possibilities for the future of green funds, with its consultation on the Sustainable Finance Disclosure Regulation (SFDR). Reflecting the pitfalls of first mover status, the scope of the changes being considered are breathtaking. As well as asking how well SFDR interacts with other elements of Europe’s sustainable finance architecture (such as the  Green Taxonomy and the Corporate Sustainability Reporting Directive), the Commission also asks about whole vistas of potential change: how useful or burdensome are principal adverse impact indicators (among other types of disclosures) and how widely should they be required; should Europe formally create a sustainability product categorisation system and what criteria, products and disclosure requirements should be involved; and ultimately: should we allow Article 8 and 9 distinctions to fade from view and categorise funds (voluntarily) according to type of investment strategy, such as impact, thematic or transition? With Brexit disappearing in the rearview mirror, the new regime could be an example of UK-EU convergence.

California leading – Possibly influenced by the run of extreme weather the state has experienced this year, Californian legislators passed a climate disclosure rule, which will require large firms to report Scope 3 emissions from 2027, once signed into law by Democratic Governor Gavin Newsom next month. Around 2,000 listed firms and perhaps 10,000 in total will need to file a climate-related financial risk report under an accompanying bill. Hailing the bills as “an important step forward around transparency for investors”, the US Sustainable Investment Forum also noted thelegislation will have significant global implications”. Given that the vast majority of large US firms operate in the country’s most populous state, and must abide by its laws, the first tremors will be felt domestically. In particular, the California bills could render moot the ongoing deliberations and delays of Chair Gary Gensler on the Scope 3 requirements of the Securities and Exchange Commission’s long-awaited climate disclosure rule.

Edmans engaged – If anyone wants to get a sense of the effectiveness of investor engagement on environmental and social issues, they could do worse than check out responses to a recent LinkedIn post by Alex Edmans. A professor of finance with a keen focus on long-term value drivers, Edmans found himself deluged this week when he suggested he was struggling to identify successful specialised engagements by single managers that did not involve filing a resolution. Almost certainly, few of the dozens of offered examples met Edmans’ criteria, but at least the exercise provided a snapshot of where managers think they are making a difference, and is quicker than reading their Stewardship Code reports.

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