Renewable and Responsible

Nicole Yeomans, Offshore Industrials Lead and Marine Ecology Expert at NatureMetrics, says technology can future-proof floating offshore wind investments against nature risks.

In 1991, ten years after the construction of the first wind turbine, the world’s first offshore wind farm was built in Denmark. Since then, much research has been conducted to better utilise the ocean’s wind power, making offshore wind not only a viable form of sustainable energy, but a strong investment opportunity. Large capital investments into engineering technologies have driven a price reduction of this renewable energy which became price-competitive in Europe with conventional power sources in 2017.

Until recently, offshore wind turbines were placed on fixed structures and could not be installed in very deep or complex seabed locations, which limited the number of sites where these turbines could be utilised. However, the development of floating offshore wind platforms in recent years has opened the door to more offshore sites where the higher wind potential is being utilised in larger and deeper areas.

These large platforms can take different shapes to provide the turbines with buoyancy and stability. They are connected with cables to heavy weights on the seafloor, allowing platforms to float and move with tides and waves but preventing them from drifting. In 2022, 7.1% of global wind power installation came from offshore wind contributing 64.3GW across 19 countries and three continents. By 2050, floating offshore wind will represent 6% of all offshore wind share and a total projected capacity of 300GW.

Exponential growth

With the race to net zero on – and looming renewable energy targets to meet for many countries by 2030 – the interest in the floating offshore sector has grown exponentially. In March 2023, the US administration set a goal to generate 30GW of floating offshore wind energy by 2030, which would power over 10 million homes. Meanwhile in the UK, Labour leader Keir Starmer recently announced an increased investment into floating offshore wind technologies as part of a £8.3 billion budget should the party win the upcoming election. This investment aims to further the UK’s net zero target of obtaining 50GW of energy from offshore wind by 2030. In December 2023, The European Investment Bank also announced a €5 billion commitment to support wind manufacturers and over €20 billion in financing for new projects, such as large-scale offshore wind in the North Sea, small-scale renewable energy projects in Spain, and supply

Countdown to 2025

Bert Kramer, Head of Climate Research at Ortec Finance, says we cannot discount the possibility of a transition-related financial crisis.

As the clock ticks down from the 2015 Paris Agreement, there is growing uncertainty that on our current trajectory the world is going to meet the stated goal to be net zero by 2050. As this target approaches and governments around the world come under increasing pressure to implement policy and other measures to reach it, the likelihood of a smooth, orderly transition to a low-carbon economy diminishes. Experience tells us that financial markets rarely react well to sudden shocks or forced changes.

Losses from stranded fossil fuel assets could result in a US$2.5 trillion loss in financial wealth. This represents some 2.5% of global stock market capitalisation. While this may not seem a significant figure, it is worth bearing in mind that subprime mortgages that started the 2008 Global Financial Crisis were worth less than US$0.5 trillion.

Identifying trigger points for such events ahead of time is inherently difficult, but there are a couple coming up that warrant further attention as they have the potential to catalyse a financial crisis. The submission of new nationally determined contributions (NDCs) by countries in time for COP30 next year is one and the forthcoming interim review of decarbonisation targets by some of the major investor groupings, such as the UN-convened Net Zero Asset Owner Alliance (NZAOA), is another.

Forecast overshoot

A key component of the Paris Agreement, NDCs are submitted every five years. They outline each signatory country’s plans to decarbonise their respective economies including a set of intermediate targets and the steps to reach net zero, which include the all-important policy action required to enforce compliance. The intention is that targets become more ambitious each time they are submitted.

The problem with the current set of NDCs is that they are not ambitious enough to limit global warming to below 1.5 or even 2° Celsius by 2100 and the current policy framework isn’t adequate to enforce them. According to the latest Carbon Action Tracker report, under the current NDCs a temperature increase of 2.5° Celsius by the end of the century is considered most likely with 2.1° Celsius regarded as being an optimistic outcome if all current and long-term commitments are adhered to. This forecast overshoot of the 2100 goal is likely to mount further pressure on governments to make next

The Long Game

Approaching his 20th anniversary in responsible investing, Rathbones Stewardship Director Matt Crossman reflects on the evolution of stewardship and highlights the power of collective action.

“Responsible investing can mean so much more than voting, but it can’t ever be less than that,” Matt Crossman, Stewardship Director at Rathbones Group, told ESG Investor as part of a conversation during which he reflected over his career. “The core responsibility of a sustainable investor is to use their rights and influence in the companies they own.”

And as a 20-year veteran in responsible investing, Crossman certainly has borne witness to just how far investor engagement can come.

“Stewardship is far more embedded and widespread as a concept,” he said. “Today, no one would argue that investors shouldn’t be conducting stewardship activities.”

A nascent sector

When Crossman joined Rathbones Greenbank Investments – Rathbones’ in-house boutique for ESG investments – as an ethical researcher in 2004, sustainability data wasn’t readily obtainable.

“Greenbank ran its own screening database and my job was to look after it, for example trawling through news sources, aggregating data, and uncovering granular insights on the UK’s largest companies and a few international firms,” he said. “It gave me a grounding in how companies work and their approach to sustainability.”

At that time, the Greenbank team wrote to FTSE companies every year to encourage voluntary disclosures. Crossman was involved in the letter-writing campaign, but recalled it “became obvious that we had influence back the other way”.

After taking on an engagement manager role in 2006, he became much more aware of Greenbank’s main clients, which were large charities, religious faith groups and celebrities. “Clearly, they wanted financial products more aligned with their values,” he said. “Having the long-term best interest of your underlying beneficiaries at heart is the basis of stewardship.”

The first annual general meeting (AGM) Crossman attended was Shell’s that same year, where Rathbones co-filed a resolution asking the oil and gas giant to do a better job on ESG risk management. “There wasn’t the big institutional buy-in [seen today], so we used the minutiae of UK company law to get Greenbank’s individual investor clients to co-file resolutions,” he said.

The engagement initiative had quite an effect, sparking off a debate in the UK around shareholder voice.

“We realised that not only do we have the financial stuff to think about, but also stewardship influence and voting rights,” Crossman added.

Industry Split on SFDR Outcome

Consultation results reveal investors and industry networks undecided on whether to leave Articles 8 and 9 behind.  

The European Commission has published a summary report outlining feedback to its consultation on the future of its flagship sustainable finance disclosure regime, having found no clear consensus on how to improve the framework. 

The Sustainable Finance Disclosure Regulation (SFDR) first came into effect in March 2021, introducing disclosure requirements for fund managers to report at the entity- and product-level on how and to what extent their funds align with Article 8 and 9 fund categories. 

In the three years since, compliance with SFDR has been fraught with challenges, prompting the commission to run a three-month consultation last year proposing changes to existing disclosure requirements and questioning whether the regulation was still relevant. 

With the results now visible, it appears that while most respondents agreed that SFDR’s purpose remains valid, they question its current effectiveness, with 62% noting that SFDR has not sufficiently strengthened protection for end investors and 52% claiming it has not successfully directed capital towards sustainable and transition investments. In addition, 84% of respondents said SFDR disclosures were not useful to investors. 

Meanwhile, seventy-seven percent of respondents highlighted additional limitations within the framework, such as a lack of legal clarity on key concepts, limited relevance of certain disclosure requirements, and ongoing issues with data availability.  

A large majority of respondents called for disclosure requirements such as adverse sustainability impacts to be simplified and streamlined across the EU’s sustainable finance framework. 

“Support for SFDR remains strong, demonstrating its positive effect on improving the transparency of sustainable investments,” Pierre Garrault, Senior Policy Adviser at pan-European sustainable investment organisation Eurosif, told ESG Investor. “But many respondents – including Eurosif – find it insufficiently clear in defining key terms and acknowledge it is used as a de facto labelling regime.” 

The commission also noted “no clear preference” for either of its two proposed approaches to a potential EU fund labelling system.  

One of these options would involve designing and implementing new criteria that would more closely align with the UK’s Sustainability Disclosure Requirements (SDR), whereas the other would formalise Article 8 and 9 as

UK Needs Heat and Transport Emissions Pricing

The government is under legal pressure to tighten its climate policies, and pricing the fossil fuels used to heat homes and power cars could be part of the answer.

At a time when the UK government faces legal pressure to ramp up its climate policies, a new report has found that the UK could cut its carbon emissions by as much as 26% by pricing those generated by heating and road transport fuels.

Conducted by the London School of Economics and Political Science’s (LSE) Grantham Research Institute on Climate Change, the research found that extending the UK’s Emissions Trading Scheme (ETS) to heating and transport fuels could produce a “double dividend” by cutting emissions and expanding the economy by as much as 0.3% through the redistribution of the revenue raised to households and businesses.

The report followed a High Court ruling last week, which found that the UK government’s existing climate action plans were unlawful as they failed to demonstrate how they would meet legally binding targets under the Climate Change Act. The ruling underscored that courts take the legislated climate targets and obligations seriously, meaning the government must find new ways to reduce emissions beyond the power sector.

The heat and transport sectors present an obvious opportunity. Both are major contributors to global warming, accounting for 18% and 23% respectively of the UK’s total greenhouse gas emissions, the report found. But so far, the government has not put a price on emissions from these sectors in the way it has for industrial and power sector emissions.

Extending the ETS to heat and transport  would help push households to lower carbon alternatives to gas boilers such as heat pumps, while addressing tax breaks that make gas artificially cheaper than electricity, according to the LSE report. It would also increase take-up of electric vehicles and use of public transport.

With a carbon price on heat and transport fuels starting at £0 per tonne and rising to £80 by 2040, UK emissions across the economy could fall by an extra 26% by that date, the report said. If the price reached £40, emissions would fall by 16%, which would help the government meet the legally binding goal of net zero emissions by 2050.

“Our modelling shows that extending the UK ETS to transport and heating will lower greenhouse gas emissions and boost the economy,” Josh Burke, report co-author and Senior Policy Fellow

Governance Core to Stewart’s Emerging Markets Strategy

The sustainable fund consistently outperforms its benchmark while maintaining a low-carbon intensity, with focus on finding the right people to mitigate investor risk.

The central role that corporate governance plays in investment manager Stewart Investors’ Global Emerging Markets Sustainability (GEMS) Strategy has been underscored to mark the 15th anniversary of the fund’s launch.

The firm has been investing in Asia since 1988, and emerging markets since 1992. It first launched a sustainability strategy for Asia in 2005, followed by GEMS in 2009 – both of which were driven by client demand. In addition to Asia, the GEMS strategy has invested in Europe, Africa, and Central and South America, with investors including large pension funds.

GEMS targets the generation of long-term, risk-adjusted returns by investing in the shares of high-quality companies deemed to be well-positioned to contribute to, and benefit from, sustainable development. The strategy has US$1.7 billion in AUM, while Stewart Investors’ total AUM stood at US$18.6 billion as of 31 March.

“Corporate governance was at the centre of how we invest, simply because you have to if you’re investing in emerging markets and Asia over long periods,” Jack Nelson, Portfolio Manager and GEMS Co-manager at Stewart Investors, told ESG Investor. “Our average holding period is more than five years [and] the quickest way to lose clients’ money is to invest with the wrong people in emerging markets, as you don’t have the same protections.”

As such, the firm has been prioritising investments in high-quality companies with good corporate governance, resilient cash flows and solid balance sheets, Nelson explained.

“When things go wrong in emerging markets – which they very often do – our companies tend not to decline in value as much as others,” he added. “That’s been the bedrock of our approach for 30 years.”

Beating the odds

The GEMS strategy has generated an annualised return of 10% for the 15-year period through March 2024 for Stewart Investors, consistently outperforming the MSCI Emerging Markets Index which returned 7%. It has also beaten the index in 11 of 14 full calendar years between 2010 and 2023.

GEMS is currently invested in 53 holdings across a range of different industries, with the strategy holding shares in an average 30-75 companies at a time. Stewart Investors’ global team of

All About the Outcomes

Measuring the impacts of stewardship is far from simple, even as technological innovation begins to smooth the way. 

When it comes to driving sustainability-related performance at portfolio companies, stewardship is one of the most effective tools currently at investors’ disposal. 

As evidenced during ESG Investor’s Stewardship Summit last month, asset owners are increasingly focused on the outcomes of high-quality engagement – as opposed to the number of engagements undertaken each year. 

“Asset owners are increasingly attuned to the fact that financially material risks linked to system-level issues – such as climate change, biodiversity collapse or social instability – are largely undiversifiable,” Clara Melot, Stewardship Specialist at the UN-convened Principles for Responsible Investment (PRI), tells ESG Investor. “As fiduciaries, they may have a legal obligation to consider what they can do to mitigate risks and act accordingly – this is where outcomes-focused stewardship comes into play.” 

If an investor has engaged with a carbon-intensive company on its climate-related ambition, a positive outcome may be that it sets decarbonisation targets to include Scope 3 emissions, or that it develops and publishes a transition plan aligned with the UK-based Transition Plan Taskforce’s guidance.  

In contrast, a negative outcome may be that the company refuses to raise its ambition, or ditches climate solutions funding altogether.  

The importance of measuring and disclosing such outcomes is also coming into sharper focus thanks to an increase in frameworks, codes and regulations requiring investors to provide robust disclosures on their stewardship activities with portfolio companies.  

However, despite emerging technology-driven tools designed to streamline the engagement process, measuring the effectiveness of stewardship outcomes remains challenging for asset owners and asset managers for a plethora of reasons – such as a lack of standardised metrics, accurate attribution, limited visibility, to name but a few. 

“Asset owners have always been keen to take an outcomes- and materiality-focused approach to stewardship as part of their fiduciary duties,” notes Caroline Escott, Senior Investment Manager for Active Ownership at UK pension fund Railpen. “This approach is fundamental to help asset owners make the most of a finite level of stewardship resource and ensure they push managers on the critical issues that matter most to

BHP’s Carbon-Heavy Bid for Anglo-American

The Australian miner’s attempt to buy Anglo-American has been pitched as a copper deal, but would create a huge coal producer with emissions equivalent to a mid-sized country’s.

Mining giant BHP’s bid to acquire Anglo-American would create the world’s biggest shipper of metallurgical coal and a global mega-polluter, exposing shareholders to stranded asset risk as the world moves away from fossil fuels, a think tank has warned.

This is a particular danger if steelmakers solve the problem of decarbonising steel faster than BHP assumes, and if carbon capture, use and storage (CCUS) – which could extend the life of dirty blast furnaces – fails to take off, the Institute for Energy Economics and Financial Analysis (IEEFA) said.

Australia-based BHP, the world’s biggest miner, offered to buy London-listed Anglo-American last month in an all-share deal that valued the company at £31 billion (US$39 billion). Anglo-American rejected the offer saying it was undervalued, but BHP is expected to increase its offer.

Most commentary has focused on the copper component of the proposed deal, a positive public-relations angle for BHP given the red metal’s central role in the clean energy transition.

But the deal would have a dirty side. Both companies have large metallurgical coal and iron ore divisions, supplying the carbon-spewing steel mills of China, India, Japan and South Korea. Steel is one of the world’s most polluting industries, producing around 8% of global carbon emissions.

Combining the two companies would result in annual emissions of around 490 million tonnes of carbon dioxide equivalent a year, analysis of each firm’s 2023 annual reports shows.

That’s equivalent to the emissions of a mid-sized industrialised country (well above the UK’s total annual greenhouse gas emissions, and about level with notoriously high-emitting Australia). This enormous, hard-to-abate carbon footprint is set to be an ongoing ESG headache for the firm – even as it spins off or shuts down its dirtier mines.

Most of the companies’ emissions come in the form of Scope 3 – emitted by the miners’ steelmaking customers. In BHP’s case, Scope 3 emissions from iron ore represented an eyewatering 283 million tonnes last year (on par with Spain’s total emissions), and from its metallurgical coal about 29 million tonnes. Meanwhile, Anglo-American’s Scope 3 emissions from processing iron ore were 51 million tonnes.

Steelmaking coal still ‘essential’

Iron ore is not intrinsically carbon-emitting. The ore itself contains no carbon, and if alternative methods

Banker Bonus Cap Removal Bursts Fair Pay Bubble

Academics question logic behind higher pay for talent retention, as further pay votes are set for AGMs later this month.

HSBC’s decision to scrap a cap on bankers’ bonuses at last week’s AGM could open the floodgates for rising executive pay, further aggravating investor concerns around fair pay.

The vote to remove the cap received 99.3% shareholder support, allowing the bank to set a new limit for bonus and significantly increase payouts. HSBC paid its top investment bankers an estimated average bonus of US$771,700 last year, while median employee pay at the bank sits at £63,000 (US$79,000).

“It’s reflective of the general direction of travel with senior management pay in the UK,” Lindsey Stewart, Director of Investment Stewardship Research at Morningstar, told ESG Investor. “There’s a conviction, certainly among companies, boards and management, that higher pay has to be part of the equation for talent attraction and retention.”

Before the meeting, Stewart suggested the vote would “likely become a focal point for the UK’s conversation on executive pay”.

Overall trend

Under the previous legal cap, an employee’s bonus could not exceed 100% of their annual pay, or 200% with shareholder approval. These limits were scrapped from 31 October 2023 by then-Chancellor Kwasi Kwarteng’s mini budget.

Similar votes are due to take place at Barclays’ AGM on 9 May and Lloyds’ on 16 May. Beyond the UK, proxy advisor Glass Lewis has urged Morgan Stanley shareholders to vote against an executive pay proposal at its AGM on 23 May.

“The overall trend is going to be preserved,” said Stewart. “With HSBC is having approved this, it’s unlikely that we’ll see a rejection of those decisions at Lloyds or Barclays.”

Last week, Goldman Sachs removed its bonus cap for UK bankers, meaning they can now earn more than the previous limit of double their base pay. The decision was criticised by British trade unions.

The median pay for S&P 500 chief executives rose 9% to US$15.7 million in the year to April 15, increasing the gap between top management salaries in the US and UK. UK executives have complained they are underpaid compared to US peers, with several warning of a talent exodus without more competitive pay.

Last year,

Pension Funds Slow on DEI

Asset owners are urged to better reflect their priorities when engaging with third-party providers and underlying investments. 

Diversity, equity and inclusion (DEI) themes have been increasingly featured in pension funds’ investment policies and assessment criteria for third-party providers, but research has highlighted their surprising absence in ongoing engagement efforts.  

Published by pension fund advisor Pensions for Purpose, the report drew on interviews with 21 organisations – including pension funds, trustees, asset managers and investment consultants – across the UK, Europe and the US, outlining how they consider DEI across their organisation and underlying investments, as well as their approach when interacting with third-party providers. 

All surveyed asset owners agreed that DEI correlates directly with business performance and have integrated such themes into their business models to varying degrees. Forty-two percent of asset owners have also implemented DEI voting and engagement polices, expecting diverse board representation. 

However, the level of development of pension funds’ DEI action plans and strategies still “varies significantly”, Pensions for Purpose said. For example, almost a third have not set specific targets, and only two were intentionally considering DEI topics in their underlying investments. There also remains a “marked lack” of engagement on DEI in pension funds’ underlying portfolio companies, the report noted. 

“There are pension funds doing great things on DEI, and they think about it holistically,” Karen Shackleton, Chair and Founder of Pensions for Purpose, told ESG Investor. “But those pension funds remain in the minority.” 

Ninety-two percent of surveyed pension funds said they had incorporated DEI factors into asset manager selection and oversight processes, with one asset owner commended for setting explicit representation targets for prospective asset managers and mandating a minimum participation of 50% of women or individuals from underrepresented backgrounds on the investment committees of their outsourced CIO.  

“However, most of these asset owners aren’t then challenging their managers [or investment consultants] to improve their DEI performance,” said Shackleton. “It’s fairly straightforward for an asset owner to bring DEI into their selection process, but beyond this DEI appears to be a consideration, not a deal breaker.” 

Until asset owners start regularly encouraging third-party providers to improve their DEI performance beyond the selection process, they won’t improve, Shackleton argued.