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The ESG Interview: Dancing into the Mainstream

Eric Usher, Head of the UN Environment Programme Finance Initiative, says public and private sectors are making step-by-step progress on climate action.

Sustainable finance, until recently still a niche activity, is now a mainstream strategic consideration for banks, asset managers and insurers.

This is the assessment of Eric Usher, Head of the UN Environment Programme Finance Initiative (UNEP FI) which brings together the United Nations and the financial sector to develop responsible investment agendas.

UNEP FI is responsible for formulating the Principles for Responsible Investment (PRI) and convenes the Net Zero Asset Owners Alliance (NZAOA), the Net Zero Banking Alliance (NZBA) and the Net-Zero Insurance Alliance (NZIA).

To prove his point, Usher notes the investigation by the US Securities and Exchange Commission (SEC) into greenwashing allegations made in the Wall Street Journal by a former executive of asset management firm DWS.

The asset manager’s offices were subsequently raided by German regulator BaFin this May which led to the resignation of Asoka Woehrmann as DWS CEO at the start of June.

“The sector of sustainable finance is growing up. Who would have thought three years ago that the SEC and BaFin and many other regulators would getting so serious about this space? This is a sign of success that [ESG] is becoming material from a strategic sense to the entire financial industry.”

Usher says ESG has transitioned from an activity on the margins of mainstream finance, to becoming a central concern for asset owners.

“ESG is no longer just the responsibility of sustainability or environmental risk management teams. This is something that’s being centralised and mainstreamed across organisations. For example, the Net Zero Asset Owners Alliance is not led by sustainability teams, it’s typically CIOs who are driving it.”

While Usher welcomes investigations into accusations of greenwashing, he disputes claims made by BlackRock’s former Head of Sustainable Investing Tariq Fancy who, in 2021 for an article for USA Today, claimed asset managers and other private-sector could not be trusted to provide genuine ESG products without regulation.

Fancy writes: “To fix our system and curb a growing [greenwashing] disaster, we need government to fix the rules.”

Usher says: “Tariq Fancy says it’s all greenwashing until the regulators come in and set the requirements, but we don’t believe that. The relationship between the private sector leaning in voluntarily and the increase in regulation is a dance. One takes a step, signals the other and they take a step.”

He points to the evolution of the Taskforce for Climate-related Financial Disclosures as an example.

“First it was led by the French presidency of the EU. Then the private sector set up the Task Force resulting in voluntary uptake over the first several years. Now regulators are imposing mandatory disclosures.”

Disconnection

Yet while Usher is optimistic about the direction of travel for sustainable finance, especially since this is now navigated by those at the top, he concedes there is a disconnect between what financial institutions are doing and what wider society wants.

For example, ahead of this year’s AGM season, BlackRock made clear that it would not support climate resolutions it deemed to be too prescriptive and that amounted to ‘micromanagement’ of company decisions.

Usher says asset managers are not alone; many members of the Net Zero Banking Alliance have taken a similar view, choosing to side with management on climate for the time being.

Usher says: “AGM resolutions often set expectations that maybe outstrip the reality of what is possible for a company to achieve. Many of the votes that got support last year were about setting targets and this year owners are not yet ready to second guess how management will implement their strategies.”

When it comes to government, Usher is also positive about the progress made in terms of climate change policy, but he has caveats.

“Certain governments and countries have been making impressive progress even with the worrying developments [in Ukraine], which weren’t predicted even six months ago. But that [progress is] not being made by all governments.”

Usher wants to see policymakers introduce sustainability policies that are more heavily influenced by science-based targets in the same way the financial sector and asset owners use them to drive their net zero strategies.

“The private financial sector is getting better at looking through the regulatory landscape and using science as a driver for net zero policies. One can assume that policy will catch up with the science eventually, but it will do so in different ways across different jurisdictions at different paces.”

Usher would also like to see governments’ declarations on net zero reflected more fully their nationally determined contributions (NDCs). ClimateWatch reports that while 193 out of 197 countries have ratified the Paris agreement on climate change, covering 94.6% of greenhouse gas (GHG) emissions, only 161 have updated their NDCs, covering 83.6% of emissions.

“Governments are setting net zero targets, but these haven’t been translated into NDCs and policies, so they are aspirational. We need to see it folded into policy the same way that banks or investors are translating net zero into their own policies and strategies,” he says.

Race to zero

There is more work to do at a company level, too according to organisations that monitor the progress of the transition to net zero.

The Net Zero Tracker 2022 Stocktake states: “Overall the transparency and integrity of existing net zero pledges are far from sufficient to ensure a timely transition to global net zero GHG emissions to achieve the Paris Agreement’s long-term temperature goal. Across the board, an enormous need for greater standardisation and operationalisation of net zero targets is needed.”

In June, the UN-backed campaign group Race to Zero which launched in 2020 to “rally non-state actors – including companies, cities, regions, financial and educational institutions – to take rigorous and immediate action to halve global emissions by 2030 and deliver a healthier, fairer zero carbon world in time” made its membership criteria more stringent.

Corporates and investors must restrict the development, financing, and facilitation of new fossil fuel assets; publicly disclose a transition plan within 12 months of joining Race to Zero; and align their lobbying and advocacy activities with net zero by proactively supporting climate policies at the subnational and national level consistent with the Race to Zero criteria.

These pose quite a challenge to many in the finance sector, including investors. The PRI has led best practice, but Usher concedes there is a danger in bringing so many members together under one roof. The PRI covers approximately half of the financial sector’s AUM but momentum may be stifled when an organisation moves into the mainstream.

“When you have 50% of the industry around the table, it’s not possible to move at the same speed as the leadership initiatives such as the NZAOA. The PRI partners with NZAOA and various other initiatives and involves those who want to move forward quickly. But our biggest challenge is creating leadership initiatives that then spawn mainstream activity. You don’t want the leaders to run off too far ahead rather you want to create something that the others who will follow.”

On the banking side, Usher says the NZBA started as a leadership initiative and is now “close to mainstream” with close to 50% of global banking assets on board.

“The leadership starts to become the norm across the industry fairly quickly. The PRI approach is ‘let’s find out what the first movers are doing and then see how we can foster that in the mainstreaming’.”

Focus on nature

As part of UNEP FI’s efforts to embed sustainable decision-making into mainstream finance, Usher says there is increasing focus on nature-related disclosures.

UNEP FI has helped draft the UN’s new global nature goals – the post-2020 Global Biodiversity Framework – which incorporates “finance for nature, phasing out harmful investment and aligning financial flows towards a make-or-break, nature-positive future for the planet”.

Usher’s optimism about progress on climate change extends to the latest initiatives from the Taskforce for Nature-related Disclosures (TNFD) which is building a framework to enable companies and financial institutions to integrate nature into decision making.

“The nature agenda has been embedding itself much more quickly [than carbon disclosures]. I think largely because of the door was already opened on climate within the financial sector. We are pleased to support the TNFD and we’re doing a lot of work on piloting the initial frameworks to provide feedback.”

However, Usher accepts that moving from risk disclosure creating nature-positive portfolios “is a big step up”.

“We are putting a lot of effort in there, but we have to acknowledge that it is tough to do.”

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