Taxonomies are not Instruments of Industrial Policy

Christina Ng, Managing Director of the Energy Shift Institute says Asia’s transition finance complications could harm its climate goals.

Is transition finance an attempt to extend the spectrum of green finance? Or is it a covert means of financing non-green activities, which have had limited opportunity in gaining access to sustainability-conscious investors?

This phenomenon appears to be occurring in Asian markets.

And nowhere is this more apparent than in the realm of national financing frameworks, where the drive to foster economic growth is so strong that it can be pursued at the expense of transitioning to a genuinely green and sustainable energy future.

Recent developments underscore this troubling trend.

For example, Indonesia’s revamped Sustainable Finance Taxonomy incorporates certain new and existing coal-fired power plants as transition activities and therefore qualifies them for transition finance. The Indonesian government justifies this classification due to the role of coal power generation in processing critical minerals for electric vehicles and clean energy technologies – which aim to contribute to economic growth.

Flawed reasoning

This flawed reasoning not only perpetuates the reliance on fossil fuels but also risks alienating climate-minded foreign investors. Indonesia’s logic, if applied universally, would imply that any power plant, including fossil-fired ones, could be labelled transitional, simply because it powers the manufacturing of clean energy technologies.

Up in the northeast of the region, the government of Japan launched a Green Transformation (GX) policy. It aims to switch Japan’s fossil fuel-oriented industries to clean energy focused ones and issue sovereign transition bonds, among other instruments, to finance the GX plan. But a deeper dive reveals that the centrepiece of the government’s GX strategy is about ensuring economic growth.

This observation is also shared in a Sustainable Fitch note which found an emphasis on the term ‘competitiveness’. Specifically, the term was mentioned 15 times in the GX framework as compared to just once in Singapore’s green financing plan and not at all in India’s framework. The note goes on to say “this may explain why some of the eligible transition activities under Japan’s strategy are supportive of industry, but do not meet international green standards”. The questionable activities referred in Japan’s strategy include hydrogen, gas infrastructure, and ammonia co-firing in coal and gas power plants.

The approaches in Indonesia and Japan overlook the fundamental goal of sustainable finance – chiefly, to channel capital to activities that mitigate greenhouse gas emissions that would, in

Diversify for a Just Transition

Anita Dorett, Director of the Investor Alliance for Human Rights, warns of the pitfalls of relying on social audits to address state-sponsored forced labour risks.

Given multinationals’ complex global supply chains and trading relationships, the vast majority of today’s goods are sourced and produced far from where they are sold and consumed. For this reason, to meet their responsibilities under the UN Guiding Principles on Business and Human Rights (UNGPs), companies must ‘know and show’ where human rights risks may be present at every link in their global supply chains.

To address supply chain risks, companies are expected to disclose all their suppliers and business relationships throughout the entire supply chain, develop stringent supplier codes of conduct, and implement robust monitoring systems to ensure their codes are being enforced on the ground. Third-party social and labour audits and related supplier certifications have long been the go-to method for supply chain monitoring, noting that there are significant shortcomings with these programmes. Where these programmes fail, however, is in geographies where state-imposed forced labour is prevalent. In these cases, even the best-intentioned of such risk-assessment schemes are rendered wholly unverifiable and, therefore, meaningless.

Prohibited practices

Distinct from forced labour imposed by private actors like companies or individuals, state-imposed forced labour is compulsory labour enforced by state or governmental authorities. According to Walk Free’s Global Slavery Index, in 2021, 3.9 million people were forced to work by state authorities.

The International Labour Organization’s (ILO) convention No 105 expressly prohibits state-imposed forced labour. State-imposed forced labour is often implemented as a means of political coercion or ‘re-education’ or as a punishment for expressing dissenting political views; as a method of mobilising labor for economic development; as a means of labour discipline; or as a means of racial, social, ethnic, or religious discrimination. State-imposed forced labour can be found in 17 countries including Uzbekistan, Turkmenistan, Eritrea, North Korea, and China.

Nowhere is this pernicious form of human rights abuse better illustrated than the Chinese government’s long-term repression and enslavement of people in the Xinjiang Province (Uyghur region). The pervasive use of state-imposed forced labour programmes, enforced through an extensive surveillance system in the Uyghur region, vividly illustrates the impossibility of conducting credible supply chain human rights due diligence where the state controls the outcome.

According to auditors, they are only given limited access to worksites, can only inspect a curated ‘snapshot’ of factory conditions,

How Investors can Accelerate the Food and Agriculture Revolution

Dr Henning Stein, Finance Fellow at Cambridge Judge Business School, and Ariel Barack, CEO of Ordway Selections, explain why the drivers of change – and the roles of the public and private markets – are evolving.

Efforts to build a genuinely sustainable food and agriculture system have now been under way for a number of years. On the whole, the story so far has reflected an uncomfortable truth: revolutions are messy.

There have been few exceptions to this rule throughout history. Political, social and even scientific upheaval has almost always proved tumultuous, for the simple reason that radical change is seldom easily achieved.

Given this, we should not be surprised that the global transformation of how we produce and consume food has been neither flawless nor swift. Equally, we should not shy away from its imperfect path to date.

There is no denying that some of the setbacks have been jarring. There is also no denying that many investors’ faith in the quest to feed humanity while safeguarding the environment has been undermined.

Other stakeholders have also been left disenchanted. By way of illustration, consider all those who have ‘bet the farm’ – sometimes literally as well as figuratively – on novel technologies whose promise has not yet translated into tangible results.

Yet none of this means we are in the midst of a revolution that is doomed to fail. Rather, it means we are still on a steep learning curve.

As investors, we have to understand what has happened, recognise where errors have been made and rethink our approaches. In public and private markets alike, there are important lessons to digest.

The irrefutable case for change

It is first imperative to appreciate why, in spite of limited progress, the investment attractions of sustainable food and agriculture not only remain strong but have arguably increased. This obliges us to see the bigger picture.

The most significant point here is that this is a transition that absolutely has to take place. The policies and practices that have dominated food production and consumption for the past three quarters of a century are no longer fit for purpose.

Incorporating farming, processing and distribution, the food system in its entirety is responsible for around a quarter of all greenhouse gas emissions. In turn, the dire effects of climate change – including extreme weather events, ecological decline and dwindling biodiversity – are ravaging landscapes and

EU Sparks Controversy on Energy Charter Treaty Drop

European Union will withdraw from ‘anti-green’ treaty on environmental grounds, but sources warn of impact on renewable investments.

The European Parliament’s vote last week to withdraw from the controversial Energy Charter Treaty has been interpreted as a near-certain ‘death blow’ to a decades-old agreement that is widely perceived as outdated and anti-green.

But the decision, which lawmakers say is necessary to protect the European Union’s climate policies against litigation from fossil fuel companies, may not be as positive for the energy transition as some believe.

James Rogers, an international arbitration lawyer and partner at law firm Jenner & Block, said the EU’s withdrawal – which he said left the treaty “dead” – could inadvertently harm the bloc’s green energy ambitions by reducing investor protections against policy changes.

Set up in 1994 in the aftermath of the fall of the Soviet Union, in part to open up gas imports from Russia and eastern Europe, the ECT provides energy investors with legal protection against the policy whims of national governments. Governments that expropriate assets or arbitrarily change rules may be taken to arbitration under the treaty. More than 50 countries across Europe and Asia have signed up to the treaty since, with Japan its easternmost member.

But as climate change became a key policy concern in Europe in subsequent years, the ECT progressively turned into a weapon for fossil fuel companies to fight against green policies that harmed their interests. It was under the ECT that German utilities RWE and Uniper, for example, sued the Dutch government for €2.4 billion over its plan to phase out coal-fired power back in 2021.

Critics say the threat of a legal challenge under the ECT alone has a “chilling effect” on green policy – which is real but difficult to quantify.

Some of its members pushed to modernise the framework. But these efforts largely failed, and a growing number of European signatories have already left or plan to leave the treaty, including the UK, France, Germany, Spain and Poland. The EU’s departure now turbo-charges that trend.

“Finally, the fossil dinosaur treaty is no longer standing in the way of consistent climate protection, as we no longer have to fear corporate lawsuits demanding billions of euro in compensation brought before private arbitration tribunals,” Anna Cavazzini, Member of the European Parliament and Rapporteur for the Trade Committee, said following the vote last week.

Not anti-green

According to

Global Blended Finance Hits US$15 Billion

Climate-focused transactions are also on the rise, but private investors’ efforts have been limited by data availability. 

Catalytic capital flows to de-risk projects centred around sustainable agriculture, renewable energy, and health and education projects across emerging markets (EMs) have increased in 2023 after a ten-year lull. 

According to blended finance network Convergence’s latest State of Blended Finance report, the market rebounded to a five-year high of US$15 billion in 2023 after ten years of consistently low volumes, with multilateral development banks (MDBs) and development finance institutions (DFIs) investing greater sums. 

Convergence recorded 1,123 blended finance transactions totalling US$213 billion, outstripping the yearly 85 deals average of the past decade. Around 40% of these deals were valued at over US$100 billion in 2023, compared to 17% in 2022 and 28% in 2021. 

“Climate has become an even stronger focus [within blended finance], with financing flows increasing by over 100% in the last year and around half of these climate-focused deals worth US$100 million or more,” confirmed Convergence Manager Nick Zelenczuk during a webinar that launched the report. 

Within that, the energy sector was the most active segment, accounting for nearly a third of total deal activity and US$101 billion of capital flows. 

“Much of this investment targets renewable energy development,” the report mentioned. “Over the last year, 91% of blended transactions in the sector channelled financing to renewable energy, with nearly US$10 billion going towards solar projects.” 

In 2022, Convergence had warned that climate-oriented blended finance transactions were on the decline, having dipped 60% from US$36.5 billion in 2016-18 to US$14 billion in 2019-21. 

In its 2023 climate-focused blended finance report, the network highlighted an uptick in climate-focused blended finance, with large transactions such as the US$1.11 billion SDG Loan Fund devised by Allianz Global Investors and the Dutch Entrepreneurial Development Bank. 

Developing countries currently face an estimated US$4 trillion annual investment gap to meet the UN Sustainable Development Goals (SDGs). Blended finance is seen as a vital tool to contribute the capital flows needed to fulfil both these and the Paris Agreement goals. 

Cards on the table 

Despite the significant

Church Commissioners’ Planet Lead to Heighten Engagement Efforts

In her new role, Laura Moss-Bromage will develop a coherent strategy focusing on climate change, nature loss and social inequality.

The Church Commissioners for England has appointed Laura Moss-Bromage as Planet Lead – a new role created as the organisation looks to bolster engagement with companies and policymakers on climate change and biodiversity.

“My responsibilities will be designing and implementing the fund’s nature strategy as well as driving our environmental engagement initiatives,” Moss-Bromage told ESG Investor. “As I build out the fund’s nature strategy, a core pillar will be understanding the climate and nature impacts of the portfolio, which will then shape our future environmental stewardship priorities.”

The Church Commissioners is already involved in a number of environmental engagement initiatives, including Climate Action 100+, Nature Action 100, Finance Sector Deforestation Action, Investor Policy Dialogue on Deforestation, and the Investor Initiative on Responsible Nickel Supply Chains – facilitated by the Investors for Sustainable Development (VBDO) and Rainforest Foundation Norway.

As part of her new role, Moss-Bromage will design and drive the Church Commissioners’ portfolio-wide biodiversity strategy and lead on nature and climate-related stewardship initiatives.

“The Church Commissioners views engagement as one of the most important levers to drive real-world change,” she said. “I will be revamping our climate change engagement strategy to focus engagement efforts on companies that we believe will genuinely play an important role in the transition.”

Corporate activity has been a major driver of both climate change and nature loss, so engaging with companies to reduce their impact and influence positive change has been a priority, Moss-Bromage explained.

Engaging with industry bodies and policymakers can also be an effective lever, as it helps to provide companies with a policy environment that is “stable and supportive from a sustainability perspective,” she added.

Last June, the Church of England Pensions Board (CoEPB) and Church Commissioners announced they were divesting from oil and gas firms – including BP, ExxonMobil, Shell and Total – due to their failure to align with climate goals. The latter had previously excluded 20 oil and gas majors from its investment portfolio.

“Over the past few years, we’ve seen significant commitments made by organisations and now it is time to focus on the actions that will really lead to transformative outcomes,” said Moss-Bromage. “That will be

Listen to the Science

As the fallout continues over the Science Based Targets initiative’s approach to offsets, questions arise over the net zero target-setting landscape for corporates. 

In 2024, the number of listed companies with a climate commitment validated by the Science Based Targets initiative (SBTi) jumped to 20% from just 12% in 2023. In 2020, a mere 1% of listed companies had a decarbonisation target validated by the organisation.

According to SBTI’s website, the number of companies and financial institutions setting greenhouse gas (GHG) reduction targets and having them validated doubled to 4,204 by the end of 2023 from 2,079 in 2022.

This steep growth marks SBTi as a focal point of corporate climate action, said Guy Turner, Head of Carbon Markets at MSCI. “It holds a significant cachet among companies,” he explained.

But SBTi’s status as the gold standard for companies serious about decarbonising in line with the Paris Agreement took a serious hit last month after a highly public spat between staff and executives.

On 9 April, SBTi’s board of trustees released a public statement  announcing a consultation on allowing validated companies to use carbon credits to offset their Scope 3 emissions. Mere hours later, SBTi staff and advisors fired off a letter to management, calling for the statement to be withdrawn and for the resignation of CEO Luiz Fernando Do Amaral and any board members who supported the decision.

The incident reheats the long-running debate on whether credits are a credible way for companies to reduce their carbon emissions. But it also raises questions about whether organisations are fit to assess and accredit the decarbonisation strategies of corporates.

Cottage industry

MSCI’s Turner addressed this issue in a LinkedIn post that went viral, arguing that while NGOs have played a critical role in the creation of global decarbonisation frameworks and benchmarks to date, an update to their modus operandi was needed, given high stakes measured in degrees of global warming and investment dollars.

Using the voluntary carbon markets (VCMs) as an example, he noted that what used to be a cottage industry is now in the mainstream. Billions of dollars are dependent on decisions made by its ecosystem of verification bodies and carbon credit sellers. “I don’t think the organisations have grown up in line with the decisions they are making.”

SBTi, a UK-registered charity, is a collaboration between the UN Global Compact and NGOs CDP, World Resources Institute and the

EU Corporate Sustainability Law Falls Short

The final text has sparked mixed reactions from the industry, with some criticising the reduced ambition of the directive.

The Corporate Sustainability Due Diligence Directive (CSDDD) was finally approved by the European parliament last week after months of tense negotiations, ending fears that the policy may never materialise.

But the version now set to become law is a much weaker piece of legislation than the one originally proposed two years ago, and as such, has drawn criticism from industry members.

The law aims to hold large European businesses accountable for environmental and human rights abuses across their entire supply chain, no longer permitting them to turn a blind eye to environmental and human rights abuses beyond the EU’s borders.

The European Commission released the first draft of the CSDDD in February 2022. The law was due to force big companies to identify, report and prevent the adverse impact of theirs and their business partners’ operations on human rights and the environment. It was also due to require them to adopt clear carbon emission reduction plans.

At the end of last year, the law’s passage through the EU’s two legislative bodies – Council and Parliament – looked guaranteed. But following pressure from some member states, the requirements were significantly scaled back, eventually resulting in the approval of a watered-down version by the council in March.

Under the final text approved by the parliament last Wednesday, far fewer companies will be subject to the rules than originally intended. In addition, the directive’s roll-out has been delayed and will not be fully implemented for five years, and the financial sector will be exempt from conducting due diligence on customers.

Mixed feelings

Supporters expressed some relief that the CSDDD was passed in time before this summer’s EU parliamentary elections – in which polls suggest right-wing parties may make gains – but were critical of its reduced requirements.

Aleksandra Palinska, Executive Director of sustainable finance industry body Eurosif, called its passage through parliament a “major political breakthrough”.

“However, we do regret the last-minute changes which reduced the ambition of the directive, including significant limitation of the scope, a complete removal of the provision on financial incentives for the promotion of transition plan implementation, and a lengthy phase-in period,” she said.

Palinska told ESG Investor that it was “very likely” the directive would not have passed if it had happened after the elections, when a more

Farm Animal Welfare Takes Centre Stage

A benchmark scrutinising company performance has been updated to encourage increased focus on the transition to a sustainable global food system. 

Global food companies have come under increasing scrutiny on their efforts to account for and prioritise farm animal welfare. 

Originally created in 2012, the Business Benchmark on Farm Animal Welfare (BBFAW) is an investor-supported framework assessing food sector companies on related policy commitments, governance and management, and targets. Investors supporting the benchmark include Aviva Investors, BNP Paribas Asset Management, and Brunel Pension Partnership. 

Following a brief pause in 2022, the BBFAW has now been relaunched with tougher assessment criteria for the 150 companies that it assesses globally. These include an increased focus on performance impact and new questions on how companies are recognising the need to reduce reliance on animal-sourced foods, in recognition of the need to support a more sustainable global food system.  

“Since [BBFAW] has been established, it’s dramatically changed the way in which investors think about farm animal welfare as an investment topic, [moving] from being a niche ethical investment issue to being more broadly recognised as a source of potential investment risk and opportunity,” Nicky Amos, Executive Director of the BBFAW and Managing Director at global sustainability advisory firm Chronos Sustainability, told ESG Investor.  

“If a company is not clear about how they are recognising the risks associated with welfare and the scope of those issues to their business, that should be a red flag to investors.”  

Although assessed companies have improved since the benchmark’s inception on areas such as transparency and animal welfare-related policies, previous iterations noted limited progress on the implementation of stated ambitions. In 2021, the benchmark reported an average overall score of 12% for its ten performance impact-related questions. 

As a result, the 2023 benchmark increased the number of such questions from ten to 20, asking companies to detail progress on issues such as the time farm animals spend in live transportation. These questions represent 55% of the overall benchmark score, compared to 45% in 2021. 

None of the companies assessed in 2023 achieved an ‘A’ or ‘B’ rating for performance impact, while the overwhelming majority (93%) were awarded an ‘E’ or ‘F’ grade, and

Big Tech Fails to Account for Israel-Palestine Role

Investors have taken action through engagement and exclusion but are being encouraged to double up efforts to increase transparency in the sector.

Research conducted by the Business & Human Rights Resource Centre (BHRRC) has revealed the extent to which tech companies are failing to take responsibility for fuelling the Israel-Palestine conflict, highlighting the crucial role that investors can play in setting the record straight.

In December last year, the BHRRC invited 115 tech companies operating in or providing services to the Occupied Palestinian Territory (OPT) and Israel to respond to a survey focused on transparency and heightened human rights due diligence (HRDD).

Of all surveyed companies, only three responded with specific answers – Ericsson, Hewlett Packard Enterprise (HPE) and TikTok. A fourth – Meta – responded with general information on its due diligence practices.

“Our outreach was largely met with a deafening silence, revealing that tech companies providing services to Israel and the OPT are falling woefully short of their human rights responsibilities,” said Phil Bloomer, Executive Director at the BHRRC. “We are appalled at the opacity of the tech sector given its high risk of contributing to devastation and suffering in the region. Heightened due diligence is not only a fundamental responsibility to this – but in these circumstances, makes compelling business sense.”

It is common practice for companies and investors to adhere to the UN Guiding Principles on Business and Human Rights (UNGPs) – the global standard for business responsibilities on human rights. Guidance on heightened HRDD in conflict-affected areas was also published by the UN Development Programme and the UN Working Group on Business and Human Rights in 2022. However, NGOs have noted that this guidance is largely aimed at businesses, with very little detailed information for investors.

Firms globally are facing further regulatory pressure for transparency and accountability on human rights risks, notably through Europe’s Corporate Sustainability Due Diligence Directive, but also the US government’s plans to introduce HRDD guidance to manage tech firms’ exposures.

Heightened responsibilities

Since Hamas’s attack on Israel on 7 October 2023, tech companies operating in the region have been linked to numerous human rights violations, according to the BHRRC – including the use of AI to target Hamas, censorship of Palestinian narratives, unlawful surveillance, disinformation, denial of internet access, internet shutdowns, and failure to address hate or incitement content.

The human consequences of these violations can range from facilitating civilian killings in bombing campaigns, limiting access to lifesaving