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Take Five: World in Transition

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

Many people and organisations forging the path to net zero were facing up to the need to manage change this week.

Help yourself – Transition planners were given further guidance this week, with a slew of reports from the Network for Greening the Financial System (NGFS), a collective of central banks and financial markets supervisors focused on green finance. At this nascent stage, the NGFS found much room for improvement, including coverage of both physical and transition risks in plans, clearer policy support from governments, and interoperable disclosure frameworks across jurisdictions. This follows the release of its final set of sector-specific guidance by the UK’s Transition Plan Taskforce last week, aimed at a global audience, and the launch of a new Centre for Economic Transition Expertise at the London School of Economics. In terms of the current use of non-financial firms’ transition plans by investors and other financial institutions, the NGFS found “no uniform approach” – despite hopes for using these as a “leading indicator” of future ambition and strategy. Institutions will use clients’ transition plans “to adapt their business strategy, identify transition finance opportunities, and for risk management purposes”. Further, the NGFS saw the development of transition plans as a good opportunity for deep and targeted engagement. This could mean investors asking about the extent to which investee business model, assets, and operations are resilient to transition and physical risks, as well as how they plan on managing such risks over time. “It can be in their own interests to help clients develop their transition planning,” the NGFS said with admirable understatement.

Beyond a boundary – Most asset owners are already convinced of the benefits of engaging with corporates over their transition plans, but are increasingly looking beyond their own portfolios to exert influence in support of climate action. In parallel with the release of its plans to decarbonise across asset classes up to 2030, the UN-convened Net Zero Asset Owner Alliance (NZAOA) published this week a background document outlining its underlying assumptions. It included the US$9.5 trillion AUM group’s theory of change, which relies on exerting influence through capital allocation, engagement and field building. In the latter two, NZAOA members displayed a willingness to go beyond traditional boundaries, both by disrupting the norms of the finance sector – including “delegitimising certain business activities” – and by leaning into policy engagement. There’s little point in engaging with firms on the basis of their sector’s demise “while their products still remain economically viable and in demand”, the report said, calling instead for proactive policy engagement in support of decarbonisation aimed at achieving a 1.5°C future. This shift was also witnessed during last week’s Stewardship Summit 2024, with speakers noting a growing appetite among asset owners for “influencing and shaping policy and regulation and the functioning of financial markets”.

No substitute – The row over use of carbon credits in corporate decarbonisation plans rumbles on, with the World Wide Fund for Nature (WWF) saying it “cannot be a substitute” for operational efforts to reduce emissions. The WWF, a co-founder of the Science Based Targets initiative (SBTi), apparently voted against a board statement issued last week, which laid out plans to extend the use of credits for abating Scope 3 emissions “beyond current limits” that will be fleshed out in July. The SBTi amended its statement after a staff revolt – which claimed established process had not been followed, and warned against complicity with greenwashing – in order to clarify that no change had yet been made to current standards, and asserting that new guidance and usage “will be informed by evidence”. It has been a long-held principle of the SBTi – which verifies the science-based emissions reduction plans of more than 5,000 firms – that credits must play a minimal role, and that investors should view with scepticism any decarbonisation strategies that rely heavily on them. Paying to pollute can only be a short-term and secondary element of transitioning to net zero – even if the voluntary carbon markets are increasing their efforts at transparency and accountability. That said, technologies, processes and rules are being introduced to quantify the impact of carbon credits more accurately. As some have noted, it remains an open and increasingly urgent question whether we have the structures in place to help firms navigate a science-led path to 2050.

Regional flavours – More challenging, if unsurprising, news hit US asset managers this week. A global ranking assessed 600 asset managers on their ability to act as responsible investors and commit to sustainable development. Europe took a clean sweep of the top ten firms listed in the sixth Responsible Investment Brand Index – although US patriots can take some comfort from the fact that second-placed firm Candriam is owned by the New York Life Insurance Company. Analysts rubbed salt in stateside wounds, with dismissive country report headings (‘Largest region, lowest score’). But anyone seeking a more positive story need look no further than Asia-Pacific, where asset managers are now regarded as being in line with worldwide standards, with Australian and Japanese firms leading the pack.

Hostile environment – In US asset managers’ defence, it is of course no secret that they face the most challenging domestic environment when it comes to delivering fund solutions that help investors manage ESG risks and opportunities. Declining support for sustainability-related resolutions at the US firms’ AGMs can be traced in no small part to the hostile and litigious atmosphere whipped up by populist politicians. It is then with no little dismay that we note the efforts of discredited former prime minister Liz Truss to import US anti-ESG rhetoric into the UK, accusing fellow Conservatives of “accepting extremist environmentalist dogma and wokeism”. British politicians have already made a poor fist of their climate commitments, with the Scottish government’s climbdown from its 2030 decarbonisation pledge being the latest example. In a week that saw Dubai drown and the Sahel swelter, the advent of science-based engagement on climate policy can’t come soon enough.

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

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