ESG+ Newsletter – 20th January 2023

“The economic opportunity of the 21st century”, says Skidmore’s Net Zero Review

Last Friday, Former Energy Minister, Chris Skidmore, published the highly anticipated Net Zero Review, which outlined 129 recommendations to “turbocharge” climate action in the UK. To produce the report, the Net Zero Review travelled around the UK, received over 1,800 responses to the Call for Evidence, and held more than 50 roundtables, making it one of the largest engagement exercises on net zero globally. The message from the new review is clear: the UK Government’s current approach is “not matching world-leading ambition with world-leading delivery”, resulting in missed opportunities to maximise the economic and social targets of the transition. The review highlights a series of inconsistent policies, mismanaged reporting structures and a lack of detail against existing commitments, all of which could pose “‘significant risks”’ to the UK successfully achieving its target of net zero emissions by 2050.

The key takeaway is that the issue doesn’t lie with the policy of net zero itself, but rather the government’s inadequate performance to turn this policy into a reality. As the Review explains, net zero is the right target for the UK and its benefits outweigh the costs. As such, “significant additional government action is required to ensure that the UK achieves net-zero in the best way possible for the economy and the public.” The 100+ recommendations have been delivered to do exactly that: to help the UK on its journey to net zero, which has been defined as “the economic opportunity of the 21st century”. 

Behaviour vs disclosure – a battle to deliver carbon reduction

And Simon Glynn, of Zero Ideas, agrees. In an Op-Ed in Responsible Investor, he laments the focus by investors on disclosure, viewing it as a failure to tackle the big challenges facing companies – reducing their carbon emissions and transitioning to net zero. The increasing demand for metrics and disclosures by investors has, in turn, led to a growth in the ESG ratings and carbon accounting industries. However, Simon believes this has forced companies to disappear down “a rabbit hole of complexity” and that a failure to avert this course could result in a “decade of disclosure” rather than a “decade of delivery” that the Paris Agreement promised the 2020s would be. So how do we navigate a path forward? Simon argues that investors need to use their influence more effectively, eschewing the focus on carbon disclosures and ESG ratings and demanding action on transition plans and the meaningful steps being taken to achieve them. The focus would be on the company’s transitionary strategy, its overall role in reaching net zero in the context of the wider world’s efforts, and how they are having a positive impact by driving the transition with other stakeholders. Therefore, if investors focus on the big issues facing the carbon transition, this could influence companies to tackle their own behaviour, driving action and delivery over talk and commitment and, ultimately, contributing to a overarching solution.

Science Based Targets for Nature preparing to launch

The Science Based Targets initiative (SBTi) plans to launch a full methodology for Science Based Targets for Nature in March 2023. The methodology will aim to enable companies to assess and prioritise their impacts on nature, progressing to setting targets on freshwater, land, and climate – three of the greatest drivers of biodiversity loss. This week, SBTi issued a call for volunteers to test its land and freshwater methodologies. SBTi is looking for 10 companies, with the hope that the trial will help create a robust target validation process for corporate nature targets.

This week, WWF also launched a tool a tool to help make biodiversity risk management easier for companies and investors. The Biodiversity Risk Filter uses 50 datasets to identify exposure to biodiversity-related risks. As we have previously covered in this newsletter, biodiversity is closely following in climate’s footsteps as arguably the biggest issue for companies’ sustainability strategies. The Kunming-Montreal agreement reached at COP15 is likely to further accelerate this trend and increase expectations on companies to identify, assess and act on impacts on nature.

ESG issuance levels in Asia provide hope for sustainable funding

While 2022 seemed to be characterised by a decline in ESG issuances, figures published by Reuters show how Asia Pacific has bucked the trend with the issuance of bonds coming in just below the record levels achieved in 2021. The top issuer was China, where total proceeds from Chinese ESG-linked bonds increased by approximately 6% to $80 billion, in stark contrast to the US and Europe where total issuances declined by 30%. As the west battled with inflation, low yuan interest rates saw investment from domestic institutions compensating for the decline in cross-border markets. It’s a similar picture elsewhere in Asia, as local insurance companies, sovereign wealth funds and pension funds fuel demand for ESG issuances. The Asian market remains small in comparison to Europe – $142 billion in 2022 versus Europe’s $340 billion – and some risks loom on the horizon as new rules look to crack down on greenwashing. However, aggressive green targets, such as China’s aim of doubling wind and solar capacity by 2030 and the decarbonising of supply chains, may well lead to significant capital requirements, supporting continued sustainable investment in Asia through 2023 and beyond.

NGOs launch alternative to EU’s sustainable investment list

A coalition of environmental and consumer groups, the Observatory Against Greenwashing coalition, has proposed an alternative to the European Union’s sustainable investment list, reports Politico. The European Commission’s list of sustainable activities, known as a taxonomy, aims to channel investor money into the green transition; however, there has been extensive criticism of certain aspects of the final list, particularly the decision to include natural gas and nuclear energy. In response, the coalition sets out its own list, arguing that an independent, science-based list with rigorous criteria will allow financial institutions to assess more effectively what is green and what is not. In addition, the list expands the taxonomy by ranking economic activities based on traffic light systems, with sustainable activities marked in green; activities that could contribute to green goals but do not currently do so indicated in amber; while activities that are harmful to the environment are indicated in red. With the criteria used for the NGO list set to be updated every three to five years to reflect technological, scientific, and legislative developments, it will be interesting to see if its content is taken on by investors to pressurise individual companies.

Analysis of major carbon credits reveals many may be worthless

The Guardian, Die Zeit and SourceMaterial undertook a nine-month investigation into rainforest carbon credits verified by the Verra carbon standard. The investigation alleges that more than 90% of Verra’s rainforest carbon credits do not represent genuine carbon reductions. This data is based on a series of interviews, on-the-ground reporting, insights from scientists and conversations with indigenous communities. While Verra disputes the allegations, the investigation also raised serious concerns around human rights issues relating to at least one offsetting project. The carbon credits in question relate to schemes that aim to prevent deforestation, with doubts emerging around the amount of avoided deforestation and the corresponding carbon that had been prevented from being emitted. This revelation raises serious concerns for companies that have used Verra verified carbon credits to offset emissions, with some even leveraging the use of these credits in marketing campaigns or selling products as carbon neutral.

The governance of voluntary carbon markets frequently comes into question, as do arguments around whether carbon credits should be part of the solution to the climate crisis. A study conducted by Conservation International and the We Mean Business Coalition found that while there was a recognition of the role of carbon credits in compensating for emissions which are hard to abate, more than 40% of respondents expressed concern about the misuse of carbon credits. Carbon credits, and their use, may have become a divisive topic, however the IPCC has been clear that credits will be needed to keep the dream of 1.5 alive.

Different battles at the proxy ballot box

In a recent FT article, the CEO of Norges Bank, Norway’s oil fund, highlighted its expectation for Boards to improve their oversight of management, business strategy and their companies’ approach to ESG. It will vote against board members for cases of failure to disclose, manage or effectively oversee climate risk. To further strengthen its stance, Norges announced that from 2023, it will be filing its own shareholder proposals, signalling its view that there has been a lack of action on companies’ climate-related efforts.

While shareholder proposals continue to be a tool used to raise material issues to the Board, Share Action has criticised institutional investors for their lack of support. It highlights that the largest institutional investors have supported significantly fewer shareholder proposals in 2022 than in previous years. In response, asset managers have pointed to a drop off in the quality of shareholder proposals; however, Share Action calls for asset managers to strengthen their voting policies to support shareholder proposals with positive social and environmental impacts, accompanied by policymaker action that enhances proxy voting transparency and improves accountability for asset managers’ voting relative to their claims. At the same time, also covered in the FT, Republican state attorney-generals have targeted proxy advisors, ISS and Glass Lewis, arguing that their voting recommendations on zero carbon emission goals and diversity represent a threat to asset owners’ value.

ICYMI

• World Economic Forum: Millions more green jobs needed globally to deliver on climate goals. New research conducted by the World Economic Forum has found that an additional 76 million jobs will be required by 2030 across green and social sectors in order to meet the world’s climate targets. The report also revealed that clean technologies will prove fundamental to creating new green markets and the jobs of the future.
• Investors and philanthropists vow collaboration to unlock $3trn a year for climate and nature. The World Economic Forum has launched the Giving to Amplify Earth Action (GAEA), a new initiative bringing together dozens of the world’s largest philanthropic organizations and decision-makers in the public and private sectors to finance $3trn in climate action funding.
• ESG accounts for 65% of all flows into European ETFs in 2022. ESG ETFs gathered €51 billion over last year, now bringing the total to €249bn in ESG-aligned ETFs in Europe. This marks a significant jump from ESG’s 51% share back in 2021, pointing to the rising popularity of ESG strategies, as The Financial Times reports.
• ‘Green’ offices in London are over 25% more expensive. But a modern workforce now expects it. Companies are increasingly committing to reaching net zero targets, and this means many are looking to transform their offices into greener spaces. Despite this coming at a price, employees are now demanding that workplaces not only be a productive environment, but a sustainable one too.

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