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Commentary

Take Five: Twin Peaks

A selection of the major stories impacting ESG investors, in five easy pieces. 

Developed countries have belatedly reached a target for climate finance, only to be set a new one for nature.

Ten years after – It might have taken them a little more than a decade, but at last they got there. Developed nations mobilised US$115.9 billion of climate finance for developing countries in 2022, it was revealed this week, exceeding for the first time the US$100 billion annual level set in Copenhagen in 2009. According to the Organisation for Economic Co-operation and Development (OECD), last year saw a record 30% annual rise in climate finance, meaning the target – originally unveiled at COP15 – was reached two years late. The total includes more than US$20 billion in attributable private finance, as well as bilateral and multilateral public sector funding, plus export credits. Importantly, adaptation finance accounted for US$32.4 billion of the total – three times the 2016 level. Discussions on a New Collective Quantified Goal (NCQG) on climate finance for the post-2025 period, which made little progress at COP28, should progress at next week’s Bonn Climate Conference, where the agenda will also include carbon credits, adaptation finance and the Global Stocktake, ahead of COP29. In anticipation of the NCQG, the OECD released an analysis recommending use of public sector interventions to directly or indirectly finance climate action. But measures to support the goals of the Paris Agreement must now sit alongside those needed to realise the objectives of the Global Biodiversity Framework (GBF). At a Nairobi summit that concluded yesterday, the UN Convention on Biological Diversity called for investments of at least US$200 billion a year from all sources, and for reform of US$500 billion in harmful subsidies to achieve the GBF’s Goal D: invest and collaborate for nature. These and other recommendations will be discussed at COP16 in Colombia in October.

Gap analysis – A lack of progress on gender equality in the workplace has been underlined by the International Labour Organization (ILO) in a report reflecting fewer jobs and lower pay for women, especially in low-income countries. According to an update to the ILO’s annual World Employment and Social Outlook, the ‘jobs gap’ – which measures the number of persons without a job but who want to work – stands at 22.8% for women in low-income countries, versus 15.3% for men. This contrasts with a gap of 9.7% for women in high-income countries and 7.3% for men. Within the context of a relatively stable global situation – overall unemployment is expected to tick down from 5.0% in 2023 to 4.9% this year – just 45.6% of working-age women are employed compared to 69.2% of men. The challenge of ensuring that economies take full advantage of willing human resources is primarily one for policymakers, whom the ILO called on to prioritise inclusion and social justice. But equally, investors may be considering the effectiveness of their engagements with large firms on gender-related employment themes as well as the progress achieved by funds committed to supporting UN Sustainable Development Goal 5.

Same direction, different pace – This week saw several steps toward a world in which sustainability is fully integrated into business and investment decisions, but perhaps none more significant than updated evidence and guidance on jurisdictions adopting common disclosure standards. In the UK, new anti-greenwashing rules came into force, primarily designed to protect retail investors as part of the Financial Conduct Authority’s Sustainability Disclosure Requirements, while Europe saw sign-off of the Net Zero Industry Act, Fit for 55 methane-tracking measures and a right-to-repair directive – as part of a pre-election desk-clearing exercise that saw the EU Corporate Sustainability Due Diligence Directive finally rubber-stamped last week. At a global level, the International Sustainability Standards Board (ISSB) confirmed that 20 jurisdictions – representing more than half of global GDP and greenhouse gas emissions – have now announced plans to adopt its climate and sustainability reporting standards – including Canada, Australia, the UK, Singapore, and South Korea. Also unveiling materials to support the adoption and implementation of its standards, the ISSB emphasised the importance of usage of its standards in emerging markets, highlighting progress in Brazil, Bolivia and Nigeria. To date, the US has kept its distance, albeit with the Securities and Exchange Commission acknowledging similarities between its much-awaited climate risk disclosure rule and the ISSB’s climate reporting standard – both of which derive from the recommendations of the Task Force on Climate-related Financial Disclosures. Before long, perhaps, many large US corporates will proudly confirm to shareholders their compliance with ISSB standards, rather than seeking to cow them into silence on climate risk through the threat of legal action.

Pricing pollution – John Kerry may have stepped down from the global stage at the end of COP28, but his influence was much in evidence this week, shaping a very American solution to the challenge of emerging markets energy transition. US Treasury Secretary Janet Yellen outlined the need to address the failings of the voluntary carbon market (VCM) at a White House briefing, but it was the former US special climate envoy who had created the mechanism for turning high-quality carbon credits into transition funding for developing countries. Kerry unveiled the Energy Transition Accelerator at COP27 in 2022, designed to be “a high-integrity carbon finance platform” that would direct private capital to just energy transition strategies – essentially using carbon credit sales to support the shift from dirty to clean energy in the Global South. The efforts have not always been to universal acclaim, with many still regarding even high-integrity credits as slowing essential decarbonisation by their purchasers. Nevertheless, the US government’s new set of principles for increasing VCM credibility is yet another factor increasing the cost of pollution.

Encouraging exchanges – The greening of more traditional financial markets was also in the spotlight, with the release of the World Federation of Exchanges’ (WFE) 10th annual sustainability survey. While it’s interesting to note that 18 WFE members report their Scope 3 emissions, more material is their role in supporting the sustainability strategies of investors. In that respect, the picture is still somewhat mixed. The number of exchanges offering green bonds has increased from eight in 2016 to 34 in 2023, with a number listing a range of labelled bonds including social, sustainability-linked, green sukuk and gender-linked bonds. Several exchange operators also offer ESG-themed indexes and derivatives, gradually widening risk management options for market participants. But despite 96% of survey participants reporting investor demand for ESG disclosure, exchanges appear reticent to mandate it from issuers without regulatory backing, with just 12 requiring ESG disclosure – compared with 34 “encouraging” it.

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