Commentary

Take Five: US AGs Cast a Long Shadow

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

A letter to insurers from US state attorneys-general could have broad implications for the finance sector’s coordinated efforts to support net zero goals. 

Risk-averse – On Thursday, insurance giants Allianz, SCOR and AXA left the Net Zero Insurance Alliance, one of the key sub-sector groups dedicated to net zero under the finance sector-wide GFANZ initiative. With Swiss Re having announced its departure on Monday, five of the group’s eight founders have left. None explained their actions (unlike Munich Re, which left in March); all committed to pursuing net zero goals individually. Their action follows a letter on 15 May from state attorneys-general warning that members may be in breach of state and federal US law. The NZIA has been treading carefully since similar issues were raised in Q1 2022, particularly when issuing its first non-binding target-setting protocol in January. Indeed, all GFANZ sub-sectors have been cautious since Republican politicians targeted banks and asset managers last year. Comments from CEOs of asset managers this week suggest they are still battling to balance their responsibilities to clients, while a minority of investors are pressuring US insurers to up their game on climate, Although insurers might be in a unique position in the business models of their clients, neither the accusations of the AGs (that insurers’ net zero efforts were “resulting in record-breaking inflation and financial hardships”) nor their wielding of anti-trust laws are credible or tested. That the threat was enough brings the risk-averse nature of the insurance sector to new levels. The UN Environment Programme, which facilitates the NZIA, has underlined its commitment to collaboration in support of urgent and ambitious action to support net zero. This may be tested soon, given the AGs also demanded documents relating to the insurers’ membership of the Net Zero Asset Owner Alliance, to which several major insurers also belong.

End of the line? – As support for climate-led shareholder rebellions at oil and gas firms remained stubbornly stuck at one-in-five, exemplified at Shell’s eventful AGM, some long-term investors seemed to signal the end of the recent phase of carbon-fuelled engagement. Church of England Pensions Board CRIO Adam Matthews, formerly co-lead for CA100+’s efforts to engage with Shell, suggested deprioritising meetings with oil and gas executives, citing a “fundamental break with the long-term interests of pension funds” and proposing a pivot to discussions with the demand side of fossil fuel, in the hope of a more open hearing from firms for which climate science is less a death sentence than an inconvenient but not insurmountable truth. Phoenix Group, the new CA100+ Shell co-lead, is not walking way, but neither is it pinning its hopes on a rapid response. The firm’s first transition plan eschews divestment, but neither is it putting all its eggs in one basket, emphasising policy-focused engagement, including encouraging governments to provide the framework and incentives to boost electrification, thereby reducing fossil fuel dependence.

Green shoots – On Monday, World Biodiversity Day brought forward some encouraging signs from policymakers, investors and their service providers of a strengthening commitment to tackling nature risks and reducing biodiversity loss. But there is clearly much more progress needed, in terms of aligning information and finance flows to the aims of the Global Biodiversity Framework. The Science Based Targets Network’s pilot project with 17 ‘nature-intensive’ corporates on science-based targets for nature is just getting off the ground, which should be good news for investors, whose voting proxy record on biodiversity-related measures to date suggests a need for better information and analysis.

It’s about time – Differences in voting behaviour on ESG issues is often said to be influenced by perceptions of materiality, with many asset owners looking further down the line, and perhaps seeing more systemic risks threatening their long-term returns to beneficiaries than their asset managers, at least some of which are more used to tighter timeframes of five years or less. There may have been a range of responses then to the release of a new study by academics including Professor Tim Lenton, a leading authority on planetary boundaries, suggesting around a third of the global population could be forced by 2.7 °C of global heating to migrate by the end of the century. Efforts are increasing to offer guidance on fiduciary duty, but it’s likely debates over long- and short-term interests will continue.

Fast follower – Materiality is also set to play a key part in responses to the UK’s consultation on non-financial reporting requirements, launched Wednesday. As with its planned regulatory framework for sustainable funds, this may be an opportunity for the UK to learn from the experience of Europe, which has led the world in its corporate sustainability reporting requirements, informed by double materiality, but which is now feeling the weight of pushback from some stakeholders. For certain, the exercise adds to the workload of the Financial Reporting Council, which is also undertaking reviews of both the UK Stewardship Code and UK Corporate Governance Code.

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