Take Five: No Half Measures

A selection of the major stories impacting ESG investors, in five easy pieces. 

Whole-economy transformation was high on the agenda at London Climate Action Week and beyond.

Silent crisis – Among the more significant announcements made at London Climate Action Week (LCAW) was the unveiling of its draft ‘Global Roadmap for a Nature-positive Economy’ by the World Wide Fund for Nature (WWF). Avoiding the nature crisis requires the same whole-economy transformation needed to avert the climate crisis, the conservation organisation contends – and similar tools too, such as sector-specific pathways that plot the path to a sustainable future for governments, companies and investors. Due to be finalised and presented at the biodiversity COP16 in Colombia, the framework focuses on five pillars needed to underpin national plans for the nature-positive transition. While companies and investors are beginning to factor nature-related risks, impacts and opportunities into their decisions – as reflected in updates this week from the Taskforce on Nature-related Financial Disclosures and the UN Principles for Responsible Investment’s (PRI) Spring engagement initiative – their actions are limited by prevailing policies. To transform economies and redirect capital to nature-positive projects, resource-strapped governments need help, especially in the Global South. Speaking at the launch, Mahmoud Mohieldin, UN Special Envoy on Financing the 2030 Agenda for Sustainable Development and UN Climate Change High-Level Champion at COP27, said many are already struggling with the “silent crisis” of unsustainable debt levels. Governments that are already slashing health and education budgets rather than entering restructuring negotiations are not best-placed to realign their finance flows with the Global Biodiversity Framework. For this reason, the WWF’s draft roadmap seeks to provide that technical policy support, but it also expects change among those with the most power to influence, calling for multilateral development banks to “mainstream” nature into their decisions – especially around debt.

Plan to succeed – Transition pathways was a key theme throughout LCAW, in recognition of the work still needed to guide businesses and economies toward credible decarbonisation. The International Sustainability Standards Board (ISSB) confirmed it was assuming oversight of the transition plan disclosure resources developed by the UK’s Transition Plan Taskforce, taking the initiative a step closer to its original remit of establishing a ‘gold standard’ framework to be used across jurisdictions. For good measure, the ISSB also announced closer collaboration with other sustainability standards and reporting bodies, partly to build on its recent commitment to

Take Five: Balance of Power

A selection of the major stories impacting ESG investors, in five easy pieces. 

A stark message in Bonn underlined the tensions between electoral cycles and long-term sustainability.  

Climate “collusion” – Republican politicians faced off against US institutional investors on Capitol Hill this week, in the latest round of the war on ‘woke’ capitalism. Having published a report claiming “bullying” of members by the investor-led Climate Action 100+ (CA100+) coalition, the House Judiciary Subcommittee on the Administrative State, Regulatory Reform, and Anti-trust heard from investor network Ceres, shareholder advocacy group As You Sow and CalPERS – the US’s largest public pension fund. Ceres CEO Mindy Lubber opened her testimony asserting: “Climate change, water scarcity and pollution, and nature loss … pose material financial risks to investment portfolios, business operations and supply chains, thus to the long-term stability of our markets and the economy.” As a member of its global steering committee, Lubber was also representing CA100+, which insisted its members “act as independent fiduciaries, responsible for their individual investment and voting decisions”. The stated purpose of the hearings was to decide whether current laws are sufficient to “deter anti-competitive collusion” to promote ESG-related goals in the investment industry. A legal memo recently secured by the US Sustainable Investment Forum found that firms and investors acting in concert on climate risks “are not violating fiduciary duty and are at negligible risk for anti-trust claims”. Even so, the hearings could be contributing to rising outflows from sustainable investment vehicles, with investor behaviour in the US diverging from elsewhere. Among the evidence cited for reduced appetite was the closure of several funds by BlackRock, some sustainability focused, others – less so, including one targeting opportunities arising from remote working. But it’s far from clear whether the world’s largest asset manager has given up on sustainable investing, given its launch this week of a series of climate transition-focused exchange-traded funds.

Slightly right – The rightward shift of the European Parliament following last week’s elections has prompted divergent views on its implications for the Green Deal that MEPs spent much of the past five years constructing. Centre- and far-right parties swelled their presence largely at the expense of the Greens and the moderate liberal Renew grouping – albeit with voting outcomes contrasting vastly across member states. There is scope for this new cohort to weaken some measures that are still being finalised, such as the

Take Five: Modi Feels the Heat

A selection of the major stories impacting ESG investors, in five easy pieces. 

Climate wasn’t high on the ballot in India’s election, but Modi must soon face uncomfortable truths on coal.

Modi feels the heat – Conducted in record temperatures, the world’s biggest exercise in democracy dealt a blow to the ego of incumbent Prime Minister Narendra Modi, but it’s less clear how the outcome of India’s general election will impact its net zero transition. Stock prices were down this week on the assumption that reliance on coalition partners would slow the pace of the infrastructure investment plans of Modi’s ruling Bharatiya Janata Party (BJP). The impact of the election on India’s climate policy might be less significant, for a number of reasons. First, other priorities regularly topped polls of voter concerns, notably inflation and unemployment, although this has evolved recently, partly due to increased instances of climate-induced physical impacts, from landslides to floods to severe crop losses. Second, both the BJP and its leading opponent, Congress, are strongly committed to India’s continued adoption of renewables, albeit via different means – with the challenger party promising in its manifesto a new green transition fund and more resources for India’s National Adaptation Fund. A third reason, which leads on from the first two, is that neither major party has been forced to properly address India’s biggest climate problem – vast and rising emissions from coal. Indeed, current policy is for domestic production to increase up to 2040 to reduce reliance on imports. Coal – and Modi’s close relationships with the controversial Adani Group – notwithstanding, the BJP’s record on solar and hydrogen investments, and fossil fuel subsidy reductions is impressive. But regardless of the make-up of the coalition, India’s next government will need to up the ante to have a hope of meeting even its existing climate commitments, such as installing 500GW of renewables, which will handle 50% of electricity demand, by 2030.

Down, not out – Support for climate-related resolutions at the AGMs of US firms has been closely watched this proxy season for further signs of a “stewardship depression” witnessed since 2021. But climate votes only tell part of the story, with a high number of social-themed filings also vying for investor backing. These include four shareholder proposals seeking more action and transparency on pay, working conditions and racial equity by Walmart, the world’s largest private employer. Prior to

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

Take Five: Coal in the Whole

A selection of the major stories impacting ESG investors, in five easy pieces. 

This week’s G7 commitment on coal will have insufficient impact without a global response.

Coal in the whole – The Group of Seven committed to phasing out unabated coal by 2035, but was criticised for allowing continued use of the fuel in power plants that deploy carbon capture technology, as well as for the flexible deadlines it gave to Japan and Germany. The announcement came in response to the COP28 pledge for all parties to transition away from fossil fuel usage. G7 countries said they would submit nationally determined contributions (NDCs) that “demonstrate progression and the highest possible ambition”, including 2030 targets and demonstrating alignment with net zero by 2050 goals. But the Turin communiqué offered precious little detail on the elimination of oil and gas from the energy systems of G7 countries. There has been some action at the individual country level, admittedly, with the US Environmental Protection Agency last week outlining requirements for coal and gas-fuelled plants to capture 90% of emissions, among other measures. While the G7 stressed its adherence to the International Energy Agency’s Net Zero by 2050 scenario, members are not fully aligned with its ban on new oil and gas exploration or development. G7 environment ministers also encouraged other countries to follow their lead on NDCs, and stressed their continued support for Just Energy Transition Partnerships. Given the latter are focused on effecting the clean energy transition of intensive coal users such as South Africa and Indonesia, it is likely that getting these stalled decommissioning initiatives back on track will have more impact on the decarbonisation trajectory than the domestic actions of leading economies. China, it should be noted, added the most coal capacity last year, followed by Indonesia and India.

Plastic progress? – The fourth round of UN-sponsored negotiations on the Global Plastics Treaty were hampered by an inability to agree on all-important production cuts. As a result, “intersessional work” will be needed if a final draft text is to be ready ahead of the last planned round of discussions in Busan in November. Most progress was made on developing a global approach to extended producer responsibility, but reports suggested developed countries fought shy of committing to binding targets for lower production levels. Prior to the talks, 160 financial institutions called for binding rules and obligations to address plastics’

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