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Take Five: Will Joe Use his Veto?  

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

There were different perspectives in the US and UK this week on the rights and obligations of investors and businesses to consider ESG risks.  

Joe says ‘no’ – US President Joe Biden’s expected veto to a Congressional Review Act – backed by 50 senators to 46 on Wednesday – will not end opposition to the Department of Labor’s new rule permitting consideration of ESG factors in US retirement plans. Two Democrat defections and three absences were needed to pass a joint resolution, already backed 216-204 in the House of Representatives, underlining that the anti-ESG movement is far from over. In response, investors expressed their frustration and academics reiterated the new rule’s consistency with past guidance. Although Biden will refuse to sign the bill, attention will pass to the courts, where two suits have been filed, including one in the Northern District of Texas, to be heard by a judge with a recent track record in reversing agency actions.  

Yes, you can – Alleging anti-trust violation is one of the tactics used by anti-ESG politicians in the US, but UK regulators have been at pains this week to point out collaboration to meet sustainability objectives will not be viewed as anti-competitive. On Monday, Sacha Sadan, ESG Director at the Financial Conduct Authority, told a meeting convened by the Transition Plan Taskforce not to pay too much attention to lawyers’ concerns. Systemic risks need collaborative responses, appeared to be the nub of Sadan’s position, a point underlined in the FCA’s recent discussion paper. “If the lawyers’ say you can’t, you can,” he said. On Tuesday, the Competition and Markets Authority (CMA) issued draft guidance designed to let firms take action on climate and environmental sustainability “without undue fear of breaching competition rules”, which includes a reinterpretation of the traditional ‘fair share’ assessment. As CMA Chief Executive Sarah Cardell recently noted, “climate change represents a special category of threat”.  

G20’s governance failure – Despite an address from Prime Minister Narendra Modi – in which he said “global governance has failed”, citing climate change, soaring debt levels, and energy and food security issues – India’s summit of G20 foreign ministers failed to focus on the urgent needs of developing countries. Criticisms of Russia over its invasion of Ukraine meant there was no joint statement by foreign ministers, similar to an earlier meeting of finance ministers. However, Russian and Chinese finance ministers did approve some wording, including action “to enable enhanced financing” for the Sustainable Development Goals, such as the creation of a G20 Sustainable Finance Technical Assistance Action Plan, which will make recommendations on transition finance frameworks and climate and sustainability data. There may be little chance of complete consensus when G20 leaders meet in September, but there may at least be progress by a coalition of the willing.  

Actively passive – The debate about whether passive strategies are too blunt to be effective tools for ESG investors took on a new twist this week as JP Morgan Asset Management cut Adani holdings from two ESG ETFs – despite the Indian conglomerate remaining in the MSCI index the funds track. Following investigations into fraud claims, the inclusion of the Indian energy-to-infrastructure firm in MSCI’s ESG indexes means many SFDR Article 8 funds are still exposed, while other index providers have taken different positions. Morningstar data shows passive funds have taken the lion’s share of a rebound in sustainable investment inflows. The firm puts this partly down to transparency and technology, but a slightly active approach to passive investment may further increase their appeal.  

Sustainability assured – Audit quality continues to be a thorny issue in several major jurisdictions, but typically fails to register high on the investor agenda. Will this change as auditors are charged with verifying climate and other sustainability reports? A new report from the International Federation of Accountants said 64% of large firms obtained assurance for ESG reporting in 2021, while 86% reported using multiple standards and frameworks, a barrier to globally consistent sustainability assurance. Further, Carbon Tracker has highlighted “drastic differences” in how climate risks are considered, especially between users of prevailing US and international audit standards. As countries prepare to incorporate sustainability reporting into domestic frameworks, both audit firms and regulators will need to ramp up capacity.  


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