ESG+ Newsletter – 14th October 2021

ESG assets to eclipse €1 trillion in EU private markets by 2025

PwC this week published a research report on private markets (i.e. private equity, private debt, infrastructure and real estate) which detailed that ESG assets among private markets managers in Europe could rise to between €775.7 billion and €1.2 trillion by 2025. This projection indicates that ESG assets will account for 27.2% to 42.4% of Europe’s private markets AUM by 2025, further reflecting the continued growth in popularity of ESG products amongst the investment community. For the report, PwC surveyed 200 general partners and 200 limited partners representing €46 trillion in global assets under management and, according to their feedback, 63% said they plan to increase their allocations to ESG funds in the next 24 months. The report states that the key drivers for the continued growth of ESG investing are shifting societal values, changing investor behaviour, policy shifts and regulatory changes, and ESG’s value creation and risk mitigation power. These areas of focus in the coming years will continue to place ESG and sustainability investing at the forefront of the private markets. Weekly readers of the newsletter will be aware that the PwC report comes at a point where demand for ESG and sustainability linked financing by investors has never been higher, with the European Union this week drawing record demand for its debut €12 billion green bond.

Poll: Commitment to ESG increasingly important to investors

In addition to the PwC research, a recent poll has provided additional evidence of the importance of ESG to investors, with over 70% indicating that ESG policies are important to them. This is more pronounced among younger investors with 78% of millennials (somewhat or very) likely to add ESG investments to their portfolio. News about environmental matters and climate change is driving this interest in ESG investments for more than half of respondents (52%), with media reports of social unrest (33%) and the pandemic (32%) also contributing. Over half of respondents are also willing to sacrifice investment returns in to achieve ESG goals, but age profile is once again a factor with 75% of millennials willing to take a hit on their investment performance, compared with 51% of Gen X and dropping to 35% for baby boomer investors. This research highlights how commitment to ESG will continue be a driving factor for the investors of the future.

Japan becomes first G7 nation to use foreign reserves for ESG investments

This week, Japan became the first G7 nation to factor ESG considerations into its investment decision making for foreign reserves held by the finance ministry. The decision, announced by Japanese Finance Minister Shunichi Suzuki last week, is being taken to “help achieve a greener society and carbon neutrality in 2050″ and is being conducted against a backdrop of “increasing interest in ESG from institutional investors.” It is also expected that this decision will increase investment into ESG bonds as the ESG bond market expands.

The debate on who should shape the direction and focus of combatting climate change – investors or governments – has been hotly contested and something that we have discussed in greater detail in a previous edition of the ESG+ newsletter. However, Japan’s decision demonstrates a clear intent to take both responsibility and action in combatting climate, especially considering that Japan’s sizeable foreign reserves – which stands at $1.4 trillion – is second only to China’s.

Lenders resist ending oil, gas and exploration projects

Banks have resisted committing to the most explicit roadmap for cutting greenhouse gas emissions to Net Zero by 2050, according to internal messages seen by the Financial Times. The Glasgow Financial Alliance for Net Zero (GFANZ), a Mark Carney-led initiative that aims to encourage finance groups to stop funding fossil fuels, has found resistance to using the International Energy Agency (IEA) roadmap. The 59 banks who signed up for the initiative prefer to adopt targets derived from the International Panel on Climate Change (IPCC), which is not prescriptive and leaves room for oil and gas financing. The IPCC and IEA scenarios are similar in terms of global warming objectives, but the key difference is the IEA bans fossil fuel exploration projects whereas the IPCC does not. Banks are increasingly coming under pressure from stakeholders because of their role in financing fossil fuels. This is likely to increase with the upcoming COP26’s focus on the rules for achieving the Paris Agreement, where the role of financing will be at the centre of discussions.

Turning blue chips green: A review of FTSE100 net zero commitments

The UK government will need the support of the private sector in order to achieve its targets of reducing GHG emissions by two thirds by 2030 and reaching net zero by 2050.  With this in mind, WWF UK conducted a review of the publicly available net zero commitments of FTSE100 companies between August and September 2021. The findings are rather sobering and despite the private sector more than doubling its net zero commitments in the past 12 months, 26% of companies have not yet made commitments. The depth and scope of these commitments are also highly varied and there is a clear lack of technical action plans which set out how companies will meet their targets. In fact, 57% of companies have no publicly available plan on how they will meet net zero. The voluntary approach towards emissions cutting is clearly not enough and there is a need for urgent legislation to catalyse support across the private sector.

BlackRock’s move sets debate on best way to make ESG impact

BlackRock recently revealed that from next year some of their institutional clients will be able to play a bigger role in shareholder votes.  This significant move comes at a time when some of the biggest impacts in the ESG space have been made by active investors, such as Engine No.1. These recent wins have demonstrated that shareholder activism can be an effective way of bringing about change and could have more impact than divesting. In fact, recent studies have shown that divesting may not meaningfully affect real investment decisions. A more effective approach and one BlackRock could be moving towards, is to use active investors that exercise their rights to influence and change corporate policy. BlackRock is the biggest issuer of ESG ETFs and, as it increasingly uses activism as a means of bringing about change, it is likely a broader trend towards control of voting will follow.

Hedge funds snap up uranium in bet on green energy shift

After years of stagnation, uranium prices are rising according to the Financial Times, attracting investors back to the market, and enriching the hedge funds that have been betting that a market laid low by a nuclear disaster a decade ago would rebound. The price of uranium, aka yellowcake, rose to its highest level since 2012 at $50 a pound last month. This surge in price was catalysed by the Canadian asset manager, Sprott, following the launch of an exchange traded trust, which has bought large stockpiles of uranium (9 million pounds) after raising money from shareholders. Sprott’s Physical Uranium Trust is one of the few that buys and stores physical uranium, with most funds adding exposure through mining equities, which have rallied 58% this year. Further, this surge in price is also a reflection of how uranium has been undervalued in its role to tackle the climate emergency as it provides abundant and reliable low-carbon electricity, at a time where energy prices reach fresh highs in Europe and China. The commitments to new nuclear power stations and the development of innovative nuclear technologies alongside recent optimistic releases about nuclear power from the World Nuclear Association and the International Atomic Energy Association is all making investors more bullish about future uranium demand.

Reimagining power to unlock the potential of stakeholder capitalism

Writing for Fortune this week, Alicia Dunn, Associate Director of Communications and Marketing at FSG, and Victor Alvarez, an ESG Consultant, look back on the emergence and growth of stakeholder capitalism, concluding that “we can’t talk about changing capitalism without considering “power.” They argue that in order to unlock new opportunities for innovation, partnership, impact, and growth, business leaders need to consider the idea of power, who holds it and, more critically, who does not. Just as they responded to calls from society “to intentionally understand and focus on the role systemic racism plays in perpetuating many of society’s inequities”, the authors make the case for leaders to reflect on how they wield and hold on to power within the company, the community and at the societal level. They cite a new book called ‘Power, For All’ (by Julie Battilava and Tiziana Casciaro) which posits that “most people have deep-seated misconceptions about power” and outline three apparent fallacies that get in the way of grasping and exercising power:

• the belief that power is a thing individuals possess, and that select people have special traits that enable them to acquire it; 
•  the belief that power is positional; 
• the belief that power is dirty.

Applying this to stakeholder capitalism, the authors suggest that power can be infinite and rest in the hands of many, “in ways that are additive both to stakeholders and the strength of a company’s business.” Food for thought on how business leaders can use power in their three core “spheres of influence”.

Kellogg’s responds to strike action by drafting in contractors

Cereal manufacturer Kellogg’s has responded to strike action taken by workers at its plant in Omaha by drafting in contractors, according to Bloomberg. Kellogg’s management has claimed that it is “implementing contingency plans to mitigate supply disruptions, including using salaried employees and third-party resources to produce food”. However, while this practice may solve some short-term labour issues for the company, it may escalate the dispute further, leaving a longer-term resolution further away. Representatives of Kellogg’s workers claim that the company may also have trouble running the facilities without its full direct employee base. This represents the latest in a flurry of strikes taking place across America on factory floors where food manufacturing takes place. The struggle within Kellogg’s, like others, relates to divergence over the terms of a new contract of employment, with employers either seeing a need or identifying an opportunity to reduce labour costs. Kellogg’s workers appear to be under no illusions as to which bracket their dispute falls into, with one mechanic and president of the local union telling the Financial Times: “At a time when the company is making money and the high-level executives are making money, they are asking us to take concessions and we don’t agree with that.”     

In Case You Missed It

• Following Tesla’s decision to move its headquarters to Austin from Palo Alto, California, Reuters has reported that the reallocation might further impair the company’s ESG credentials. As Texas Governor Greg Abbott’s administration has recently approved measures to prop up the fossil-fuel industry and load green energy up with more costs, the move is giving ESG focused investors reasons to think twice.
• Etihad Airways has raised $1.2 billion in the first sustainability-linked loan in global aviation tied to ESG targets. Reuters reports that the new ESG targets for Etihad, which has already committed to net-zero carbon emissions by 2050, are related to reducing carbon emissions and improving corporate governance in addition to advancing female participation.
• Speaking on Bloomberg TV, Christopher Marangi, Gamco Value’s co-chief investment officer said that “GM has found a new life as an ESG play”, affirming that GM is investing in products to compete with Tesla and others, focusing on having good ESG scores that “have attracted capital, and in many cases have garnered valuation premiums”. 

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