ESG+ Newsletter – 23 May 2024

This week, there is a clear focus on the energy transition: whether it needs greater investment or capital unions, or whether the continued focus on gas makes its achievement less realistic. We also take a trip to Japan to investigate why there is such a strong focus on biodiversity there and analyse the debate on ESG proxy voting. Finally, we review investment in stewardship teams, asking whether it is sufficient against the backdrop of a rapidly evolving regulatory landscape. 

Achieving Net-Zero may need more investment than expected 

As summarised by Bloomberg, an analysis of 18 million data points has found that sectors like electric vehicles, renewable energy, power grids, and carbon capture need considerably more financial support. In fact, the report estimates that achieving net-zero emissions by 2050 will require an additional $34 trillion investment from governments and companies. The report outlines two scenarios. The base case, using only economically competitive technologies, would result in a 2.6°C global temperature rise; the second scenario, assuming stronger government support for emission-reducing technologies, would keep the temperature rise closer to 1.75°C, still missing the most ambitious Paris target but shifting to a below 2° C scenario. Indeed, achieving net-zero would require drastic measures, such as mandating all new cars sold from 2034 are electric and investing $6.8 trillion in carbon capture technologies. Despite recent political swings, the private sector continues to invest in the green transition, with renewable energy potentially exceeding 50% of the global electricity mix by the end of the decade. While these – regular – reports can make for stark reading for those seeking faster action on mitigating climate change, they do offer hope that collaborative efforts from both the private and public sectors can spur change. 

Investors’ votes on ESG remain under scrutiny 

Institutional investors’ voting practices have been under significant scrutiny in recent years, particularly on topics related to environmental, social and governance issues, as noted in a recent Wall Street Journal article, criticised by some for not taking sufficient action to pressurise change among investee companies; and, by others for “following the progressive political herd on environmental, social and corporate governance proposals”. In the latter camp, the Committee to Unleash Prosperity has published a report which found that support for ESG resolutions decreased by 25% in 2023 from 2022. In last year’s report, the Committee had criticised portfolio managers for allegedly focusing on politics over returns, arguing the backing of ESG-related resolutions was unrelated to enhancing shareholder value. The Committee identifies the focus on ESG issues as a “distraction – and often a major headache” for corporations. However, as regulators across the globe increasingly demand greater action from companies on sustainability strategies and reporting, the value of sustainability to the health and performance of the business seems to be clear, raising questions about whether attacking shareholder voting on ESG is the actual distraction. 

Despite emissions progress, world still heavily reliant on fossil fuel   

The EU emitted 3.4 billion tons of all greenhouse gas emissions in 2023, representing a 5.1% year-on-year reduction, according to a recent analysis by Reuters. While Europe’s emission progress is welcome news, demand for fossil fuel looks unlikely to abate anytime soon, with leading oil & gas majors and gulf states recently signing new long-term contracts for the supply of gas. The signing of multidecade contracts will ensure that fossil fuels will still be shipped to Europe beyond 2050, raising concern about the EU’s ability to achieve its long-term climate targets. Advocates for the use of gas in the energy transition believe that it is a more reliable energy source than renewables and has a lower carbon footprint than coal and oil. Critics argue that the advantages of gas’ lower carbon footprint is offset by the methane – a greenhouse gas with more warming power than carbon – leakage that occurs during the production or delivery of the fuel. While technology and corporate action might ultimately help solve the methane leakage issue, the gulf states LNG expansions and long-term gas supply contracts mean that gas will remain a feature of the energy sector for years to come. 

Japan’s financial institutions take the lead on nature reporting 

Japan has taken top spot among nations for having the largest national cohort of TNFD signatories, reports Responsible Investor. Over 80 banks, corporates and investors in Japan have committed to adopt its recommendations and publish TNFD-aligned disclosures as part of their annual reporting by the end of 2025. So why has the TNFD provided so popular there? Some corporates point to the influence of local culture, and how there is a deep understanding in Japanese tradition that living in harmony with nature is a fundamental aspect of human life. Another driver is the shifting regulatory landscape, both on a local and an international scale. Since the COP15 biodiversity conference in December 2022, nature has become a priority for Japanese policymakers, as in certain other jurisdictions across the globe. On top of this, in July 2023 Japan published its updated National Biodiversity Strategy and Action Plan (NBSAP), advising businesses to assess the risks, opportunities, dependencies and impacts of their operations on biodiversity and natural capital. We have yet to see whether nature-related financial disclosures will become mandatory in the country, but for now, the enthusiasm of Japanese financial institutions to put nature first is a positive step.

French national bank provides guidance on the energy transition

The governor of the Banque de France, Francois Villeroy de Galhau, has outlined his view in Environmental Finance on the three tools required to achieve the climate transition, while advocating for the formation of a Capital Markets Union (CMU) in Europe to mobilise and direct the region’s private savings into investment in green assets. He names addressing the absence of a global carbon price, regulation, and public subsidies as those tools, and notes that without a pricing solution, the transition is too reliant on catalysts which are exposed to political risk, with the Inflation Reduction Act being a key example, as its continuation is uncertain due to the impending US presidential election.  

On the CMU specifically, an initiative which originated in 2015 but has since stalled, Villeroy de Galhau believes that it is an essential step for addressing the current cross-European border issues which impact the ability to effectively allocate an approximate pool of €33 trillion in private savings. It is a problem which has frequently been discussed by leading European investors, including the CEO of BNP Paribas Asset Management Sandro Pierri who, in April, referred to the stagnant state of play which is not only affecting energy transition investment but also defence and other key sectors. With Europe the global leader in savings, impactful changes may offer hope for a shift in action.

Investors should spend more on stewardship resources 

Last week, PAfuture shared the main findings of a report prepared by the Thinking Ahead Institute (TAI) on behalf of the Principles for Responsible Investment (PRI). The report looked at the resources dedicated by investors to their stewardship efforts. It found that, at the industry level, stewardship resources only account for 5% of total investment management costs, and that the industry should double these resources to meet “increasing demands and needs”. The report also highlighted that the industry is currently unable to accurately assess the costs needed to improve its stewardship efforts. To remediate this issue, the TAI launched the Stewardship Resources Assessment Framework. Some of the stewardship costs discussed in the report include “spend on internal staff time, third-party providers of stewardship services, data, subscriptions, memberships and reporting costs.” Many institutional investors have increased the size of their stewardship teams over the last five years or so; however, as demands from asset owners and regulators continue to increase, and the focus on impact of investments rises simultaneously, it appears likely that asset managers may well need to continue to invest in stewardship teams for a while to come. 

ICYMI 

• Qatar raises $2.5 billion through its first-ever green bond issuance. This marks the country’s first dollar bond sale in four years and highlights the growing trend in the Middle East towards sustainable debt financing, Bloomberg Although Qatar hasn’t committed to net-zero emissions, it is investing in solar power and promoting gas as a cleaner energy source, criticising countries for vague net-zero pledges.
• Maples report highlights European sustainability funds now worth over €5 trillion. New analysis by the Maples Group has shown an increase in the number and asset value of European sustainability funds since the EU Sustainable Finance Disclosure Regulation (SFDR) became law, according to Irish Legal News. The analysis shows a 20 per cent growth year-on-year in the number of European sustainability funds.
• Nearly half of Gen Z and Millennials reject employers over climate concerns. Deloitte’s 2024 Gen Z and Millennial Survey connected with nearly 23,000 respondents to examine the circumstances shaping workplace and societal experiences of these generations. According to ESG News, the survey found that as anxiety about climate change increases, many millennials are actively seeking to align their careers with their environmental values with majority also being likely to turn down work or employers that don’t align with their values.
• Sustainability professionals believe that increasing reporting burdens are preventing their teams from delivering impactful programmes. Edie reports that facilities management giant, Mitie, conducted a survey of 500 sustainability decision-makers at UK organisations. According to the survey, 55% of leaders agree there is too much admin involved in producing sustainability reports and disclosure documents, with 70% stating that the time and money allocated to reporting is directly impacting their ability to deliver programmes to achieve environmental targets.