ESG+ Newsletter – 30 November

Your weekly updates on ESG and more

Despite the official commencement of COP28 today, this week’s ESG+ Newsletter begins by looking at the FCA’s sustainability disclosure framework and anti-greenwashing rules. From there, attention turns to COP28, as we look at the efforts to forge a new agreement on carbon emissions, despite concerning reports that some nations are using the event as a platform to strike oil deals. The newsletter also looks at new guidance from UNEP FI for banks on setting nature-based targets; the impact of regulatory adjustments on the global ESG investment market; and the Net Zero Asset Owner Alliance’s efforts to align asset owners and asset managers to achieve net zero greenhouse gas emissions in their portfolio by 2050.

UK unveils sustainability disclosure rules

Earlier this week, the UK’s financial regulator, the Financial Conduct Authority (FCA), published its long-awaited policy statement on Sustainability Disclosure Requirements (SDRs) and investment labels alongside a consultation on anti-greenwashing rules. The FCA estimates that the new regime will apply to at least 630 UK-authorised funds. The rules introduce new sustainability labels for funds which contain at least 70% of assets meeting the label’s objectives. The SDRs also require consumer-facing disclosures on the sustainability credentials of financial products. The UK rules can be compared to the Sustainable Finance Disclosure Regulations (SFDR) in the EU, with the FCA citing compatibility between the two regimes, meaning that SFDR data can be used to fulfil many of the requirements of the new UK SDRs. The compatibility between the SDRs and other frameworks does not end there, the SDRs also reference ISSB, GRI and SASB standards as ‘documents to consider’ when reporting; however, reporting against these is not mandatory. It is hoped that these rules will increase transparency and reduce the risk of greenwashing, allowing consumers to make more informed investment decisions. For financial institutions, these new rules may feel like yet another sustainability disclosure, but the high level of flexibility and interoperability built into the rules should ease the reporting burden. From a retail investor perspective, these rules may signal the end of unevidenced sustainability claims in the UK and greater certainty on the alignment of investments to sustainability goals – which may funnel capital into sustainable solutions and is likely to be a hot topic at COP28.

1.5 °C target, lower carbon emissions and the value of COP28

COP28 got underway today and the build-up has been focused on how to limit global temperature rising to 1.5°C – effectively getting back on track to the 2030 roadmap that had been previously agreed. With carbon emissions continuing to rise , which is contributing to rising temperatures, the target is fast getting out of reach. Sultan Al Jaber, president-designate of COP28, is now tasked with forging a new agreement with ministers and officials from 198 countries that will support the rapid reduction in greenhouse gas emissions. In an interview with The Guardian on the eve of COP28, Sultan Al Jaber struck a positive tone, stating that he believed that there was momentum behind getting an agreement in place that would be aligned with scientific advice. However, the world faces a significant challenge to catch up and this was underlined by a special report published by the International Energy Agency (IEA) earlier this week which stated that – to achieve the goal of limiting global warming to 1.5 °C – dependence on oil and gas use would need to decline by more than 75% by 2050. However, the Oil & Gas sector currently only accounts for 1% of clean energy investment globally, leading the IEA to state that the sector faces its moment of truth at COP28 – either evolve its operations and shift to renewable energy or continue to contribute to the worsening climate crisis. Sultan Al Jaber is likely acutely aware of the challenge facing the Oil & Gas sector, particularly as he is also the chief executive of the UAE’s national oil company. 

While the task facing COP28 – and indeed the world – is apparent, there remain differing opinions on the value of COP28 and its place in supporting the world’s decarbonisation efforts. While some see Sultan Al Jaber’s role as a conflict of interest, others argue that his relationships with oil producers and countries in the Gulf region will help support a stronger deal. Only time will tell if COP28 delivers a meaningful pathway towards changing the trajectory of the climate crisis; however, a recent report alleging that COP28 is being used as a platform to discuss oil and gas deals was a disheartening development and a rather ominous sign for the world’s future.

UNEP FI publishes nature target setting guide for banks

The UN Environment Programme Finance Initiative (UNEP FI), together with the Principles for Responsible Banking (PRB), has published new guidance this week for banks on setting nature-based targets. The comprehensive guide outlines how banks can support the Kunming-Montreal Global Biodiversity Framework (GBF) by setting out the key steps that they should take under the headings of foundations for target setting, the target-setting process, and reporting and disclosure.

The guidance advises that banks lay the appropriate foundations by assessing how their portfolios are exposed to nature-related impacts and dependencies, risks and opportunities, while also mapping their exposure to priority sectors. Once the initial assessment is complete, banks can then look to set nature-based targets with the guidance advising that they identify the relevant frameworks to align with based on the main countries in which they operate. The guidance provides a number of hypothetical targets, such as formal engagement with banks’ largest clients on nature-based impacts and dependencies, risks, and opportunities, along with engagement with priority sectors to set Science-Based Targets on nature and to develop an action plan to tackle their most material nature-based issues. Finally, the report lays out guidance on reporting and disclosure, pointing to the proposed TNFD metrics and existing templates for PRB banks. If adopted, the guidance could be a significant step forward in the implementation of nature-based targets.

Regulation readjusts global sustainable investment market

The global ESG investment market has dropped by $5 trillion, contracting to $30.3 trillion from $35.3 trillion from 2020 to 2022, according to recent research published by the Global Sustainable Investment Alliance (GSIA). The Global Sustainable Investment Review, which is published every two years, noted that the impact of increased scrutiny and stringency in defining sustainable investing was a central driver. This is acknowledged by James Alexander, GSIA’s chairman, who outlined that “the industry is maturing”, with ESG definitions maturing as a result. This is reflected through the evolution of regulation, such as the EU’s SFDR, and the UK’s upcoming SDR framework. Further points of note from the research include the significant drop off in the US specifically, with the report finding a drop from $17 trillion to $8.4 trillion. Conversely, in non-US markets, there has been a 20% increase in sustainable assets under management. 

While the timing of the research might indicate that the anti-ESG sentiment which has been pervasive in the US market may not yet be reflected in the data, the level to which the ESG investing bubble has readjusted from the beginning of the two years to the end is illustrative. At the same time, the continued growth of ESG investment outside of the US is further evidence of the continued asset owner interest in this type of investment, despite the period including the Ukraine invasion which saw fossil fuel prices increase significantly. It remains to be seen how the comprehensive and transparent labelling rules which are coming into force will impact these figures as the definition of a sustainable investment becomes more stringent.  

Asset owners set expectations for asset managers’ climate engagement

The ability of asset owners to achieve net zero greenhouse gas emissions in their portfolio by 2050 is strongly tied to the behaviour of their asset managers. Starting from this observation, the Net Zero Asset Owner Alliance (NZAOA), 86 institutional investors with $9.5 trillion, published a discussion paper setting out climate engagement principles applicable to all members’ asset managers. These principles cover the following themes:

1. Governance and integration;
2. Setting and publishing a climate engagement strategy;
3. Climate engagement practices; and 
4. Transparency and accountability on climate engagement

NZAOA believes that asset managers are well positioned to conduct effective engagement at scale, and they expect them to “adopt a consistent, transparent, and outcomes-oriented climate engagement strategy.” In turn, the NZAOA members will be expected to use these principles to inform their selection, appointment, and monitoring of their asset managers. At a time when ESG opinions are getting increasingly polarised, this initiative would reinforce asset managers’ incentives to pursue their climate-related efforts. 

ICYMI

• Norges Bank Investment Management (NBIM) is planning a $70 billion sustainable private equity investment expansion. The proposal involves investing in private equity through managers, requiring firms to commit to net zero emissions and report on responsible investment. NBIM aims for 3-5% of its portfolio, $40-70 billion, in private equity, potentially becoming one of the world’s largest private equity investors.
• Bloomberg introduces tool for assessing SDG impacts. Bloomberg has launched a ground-breaking tool that allows investors to assess a company’s impact on the United Nations’ 17 Sustainable Development Goals (SDGs). The tool aids investors in aligning portfolios with SDGs, addressing the growing demand for objective SDG-related data in the expanding $1 trillion global impact investing market. 
• $11 trillion investor group backs responsible mining commission . The Global Investor Commission on Mining 2030, supported by 82 investors with over $11 trillion in assets, aims to create a socially and environmentally responsible mining sector by 2030. 
• Dublin wins European Capital of Smart Tourism award for its innovation and sustainability. Dublin has been named the European Capital of Smart Tourism 2024 by the European Commission, triumphing over 29 other cities. The Irish capital secured the award based on its innovation, sustainability commitment and smart tourism vision.