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Commentary

Take Five: Transformation, not Reform

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

This week, world leaders attempted to update the post-war global financial architecture to better support the Paris Agreement and the UN Sustainable Development Goals.

Parisian pathways – After teams of government negotiators failed to make headway on directing much-needed climate finance to emerging and developing economies at the Bonn Climate Conference last week, an assortment of political leaders, financiers and philanthropists met in Paris to come at the problem from another angle. Hosted by French President Emmanuel Macron, the summit for a New Global Financial Pact was convened in recognition that the global financial architecture is no longer functioning effectively, with debt servicing needs overwhelming many countries, climate mitigation and adaptation projects going unfunded, and UN Sustainable Development Goals sliding out of view. The summit has both ambitious and modest aims in that it seeks to create a new world financial order no longer built on post-WW2 expediencies and institutions – to address “unprecedented challenges for humanity and planet” – but sees itself as a staging post in a longer journey, “a catalyser to provide concrete results and raise ambition”. Big changes seem certain for the World Bank and IMF, to better mobilise private finance to fund sustainable development. But whatever the future path following the end-of-summit proposals announced by Macron, policymakers will leave Paris in no doubt on the urgency and scale of action. As noted in the opening ceremony by co-host Mia Mottley, Prime Minster of Barbados and author of the Bridgetown Agenda, “What is required of us now is absolute transformation, not reform.”

Voting matters – At least that is the view put forward by Deborah Gilshan, Chair of the Vote Reporting Group convened by the UK’s Financial Conduct Authority, making the case for a new standardised framework for vote reporting by asset managers. “Current vote disclosure practices do not provide consistent, comprehensive and granular information on voting, especially at the fund or mandate level, to enable investors and broader market participants to hold asset managers to account on their voting practices,” the consultation document explained. The timing of the proposal could hardly be more apposite, released at the end of an AGM season which frequently saw asset owners and managers voting in different directions, especially on climate-related issues (some of the former taking the ultimate sanction). It also follows research commissioned by the Financial Reporting Council, demonstrating that asset owners are pursuing their own policies, not those of proxy advisors, and the launch of a broader selection and monitoring aid by the Institutional Investor Group on Climate Change to help asset owners assess whether their managers are on the same page, climate-wise. “Greater transparency of voting activity should also help to align asset owners’ and asset managers’ stewardship objectives and activities, in turn helping to achieve better value for money for asset owners’ beneficiaries,” asserts the Vote Reporting Group. Here’s hoping.

Plumbing the depths – It was a mixed week for the blue economy. The High Seas Treaty was officially adopted by governments on Monday, a formality not completed when negotiations were concluded in March to establish the first legal framework for the oceans beyond national waters. It will become national law 120 days after it is ratified by 60 countries, paving the way for greater protection and resilience for ocean habitats, and helping to deliver on the key Global Biodiversity Framework target to safeguard 30% of land and sea by 2030. But Norway then muddied the waters by pushing ahead with plans to begin deep-sea mining operations, anticipating a global underwater goldrush for critical minerals, and going against its own scientists and laws. Next month sees a critical meeting of the International Seabed Authority, which may grant Nauru authority to exploit an abyssal plain between Hawaii and Mexico, potentially unleashing a tidal wave of deep-sea mining licences. Activists reject claims by Norway, Nauru and others that these murky adventures are necessitated by the net zero transition, and the justifications will be scrutinised closely as companies and countries seek to secure their supply of so-called critical minerals.

Labour’s bounty – This week it became more likely that the UK’s next government will have an energy policy in line with the International Energy Agency’s Net Zero by 2050 pathway, which proposes no new oil and gas exploration. In a speech delivered appropriately adjacent to a North Sea currently experiencing unexplained heating, Labour Leader Sir Keir Starmer, said it would be a “historic mistake” to extract every last drop of North Sea oil, not least because it risked missing out on the green shoots of opportunity already being offered by the transition to a net zero economy. He also outlined plans for a ‘national wealth fund’ to “harness the bounty of clean energy”. But Labour’s desire to avoid a cliff edge by honouring existing licence applications means that difficult decisions still lie ahead, with a number of controversial projects awaiting consent at the North Sea Transition Authority.

The waiting is over – Barring the unexpected, the International Sustainability Standards Board will unveil next week its climate reporting and general requirements standards, marking a key step toward a global baseline for mandatory sustainability reporting by companies and financial institutions. Although timelines have slipped slightly, this represents a significant effort since the ISSB was formally announced at COP26 and paves the way for adoption by national regulators next January, further approval steps notwithstanding. This further milestone in the journey from voluntary to mandatory disclosures will be welcomed by investors, but many will be focused on the path to a similarly comprehensive approach to reporting impact.

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