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The balance between the transition to a lower-carbon economy and the need for energy security amid geopolitical, implementation and legal challenges is the primary focus this month.
In this edition, there is an update on Germany’s continuing reliance on coal, a check on the UK’s progress towards ambitious climate targets, and the latest from the US Supreme Court.
Both British and European regulators are assessing environmental, social and governance (ESG) ratings providers, along with shortcomings around data and transparency of methodologies.
In this month’s ESG briefing, we take a look at progress towards COP271 taking place in Egypt in November, as countries seek to balance climate commitments against energy security concerns.
First up, Germany has extended some of its coal plants beyond the end of the year in order to boost energy supplies amid fears that the supply of gas from Russia could be restricted or even shut down in the winter.
Over in the UK, the latest Progress Report2 by the independent Climate Change Committee (CCC) finds major failures in delivery programmes towards the achievement of the UK’s climate goals. While the UK has been applauded for its ambitious climate targets, a thorough review of progress finds scant evidence of delivery against these headline goals so far. There are some bright spots of progress, notably in the area of renewable energy and electric cars, but in most areas the likelihood of under-delivery is high and the CCC report makes over 300 recommendations for the government to get back on track.
In the US, the Supreme Court ruled that the Environment Protection Agency (EPA) does not have the authority to regulate carbon emissions from power plants. The ruling is seen as a major setback to the Biden administration’s climate ambitions.
Several elements of the EU’s so-called Fitfor55 package3, including reforms to the bloc’s emissions trading scheme and proposals to ban new sales of petrol and diesel cars by 2035, are making progress. Both the European Council, made up of member states, and the European Parliament have adopted their final negotiating mandates on these files, which paves the way for the final stage of reconciliation between the two to produce the final legal text. While the Council agreement sticks largely with the European Commission proposals, the European Parliament wanted to go further and set more ambitious targets. The next phase of the negotiations could also cause a surprise or two.
More on European sustainable finance developments
Sustainability reporting: white smoke emerged from European policymakers negotiating the EU’s new Corporate Sustainability Reporting Directive, which will introduce mandatory sustainability reporting standards for over 50,000 European companies, including all large companies and all listed companies. Small-and-medium-sized enterprises will also be captured but will have the possibility to opt-out until 2028.
Gender quotas: on 7th June, European policymakers reached a deal on introducing mandatory gender quotas for listed companies. This long-awaited agreement (the proposal was first tabled nearly a decade ago) requires listed companies to have a minimum of 40% of non-executive directors of the under-represented sex, or 33% of executive and non-executive directors by 2026.
Climate reporting: The Swiss government has published non-binding guidance for financial firms disclosing on climate4.
ESG ratings I: The European Securities and Markets Authority has written to the European Commission with the findings of their factfinding on the ESG ratings market to feed into the European Commission’s work on whether to regulate these providers[ii]. The feedback received is indicative of an immature but growing market which, following several years of consolidation, has seen the emergence of a small number of large non-EU headquartered providers. The most common shortcomings identified by the users were a lack of coverage of a specific industry or a type of entity, insufficient granularity of data, and a lack of transparency around methodologies used by ESG rating providers.
ESG ratings II: The UK is also exploring whether to regulate ESG ratings5. In its feedback statement, the Financial Conduct Authority (FCA) sees a clear rationale to bring ESG data and ratings providers within the regulatory perimeter and is said to be working with the UK Treasury to deliver this. For sustainability debt instruments, the FCA aims to take a measure approach and has published guidance for such issuances.
ELTIF: in their negotiating mandate on the reform of the European Long-Term Investment Fund Regulation, the European Parliament has included a proposal for an “environmentally sustainable ELTIF”, where 100% of the assets would be invested in Taxonomy-aligned investments6.
GFANZ: The Glasgow Financial Alliance for Net Zero (GFANZ)7 has issued its draft Net-Zero Transition Plan (NZTP) framework for the financial sector. The framework focuses on four essential approaches for financial institutions to support the real-economy transition to net-zero emissions: financing the development and scaling of net-zero technologies or services to replace high-emitting sources; increasing support for companies that are already aligned to a 1.5 degrees C pathway; enabling high and low-emitting real-economy companies to align business activity consistent with a 1.5°C pathway for their sector; and accelerating managed phaseout of high-emitting assets through early retirement.
Biodiversity I: The Taskforce on Nature-related Financial Disclosures (TNFD) has launched for consultation the second iteration of its draft framework8. The revised framework builds on the three core components of the framework but makes several enhancements based on market feedback and three significant additions: a first draft architecture for metrics and targets, and draft guidance on, and an illustrative set of, dependency and impact metrics; a proposed approach to specific guidance; and an update to LEAP-FI.
Biodiversity II: PBAF, the Partnership for Biodiversity Accounting Financials9, have published three resources for investors on biodiversity: a Q&A for investors looking to get started on measuring and assessing biodiversity risks, an overview of approaches to biodiversity impact assessments and a guide on biodiversity footprinting.
Biodiversity III: The International Finance Corporation (IFC), part of the World Bank, has published a draft guide on biodiversity financing[viii]. The draft aims to provide an indicative list of investment activities and components that help protect, maintain or enhance biodiversity and ecosystem services as well as sustainably manage natural resources through practices that fuse conservation needs with sustainable development.
Climate risk: The Basel Committee on Banking Supervision has issued principles for the effective management and supervision of climate-related financial risks10. The paper sets out 18 principles covering corporate governance, internal controls, risk assessment, management and reporting. They seek to achieve a balance in improving practices and providing a common baseline for internationally active banks and supervisors, while retaining sufficient flexibility given the degree of heterogeneity and evolving practices in this area.
Climate and fiscal policy
Nature: the European Commission has proposed a new nature restoration law. The proposed law would set legally binding targets for nature restoration in different ecosystems. The aim is to cover at least 20% of the EU’s land and sea areas by 2030 with nature restoration measures, and eventually extend these to all ecosystems in need of restoration by 2050. The proposed law also aims to reduce the use and risk of chemical pesticides by 50% by 2030.
What we’re reading
An investor investing in the MSCI World since 2015 would have had higher annual emissions intensity reduction (measured in WACI) than an investor invested in its low-carbon counterparts, according to a new report out from 2 Degree Investing.
The world’s first biodiversity-adjusted sovereign credit rating warns of looming national debt crises across 26 countries.
Being green pays, according to a recent study. Using international data from the syndicated loan market, the paper demonstrates that in the past firms with larger Taxonomy-aligned revenue shares paid lower interest rates. The EU Taxonomy and the Syndicated Loan Market by Zacharias Sautner, Jing Yu, Rui Zhong, Xiaoyan Zhou – SSRN.
Does ESG integration impact the real economy? According to a new report by UZH – Center for Sustainable Finance and Private Wealth, the answer is “maybe a little bit”.
1The UN’s flagship climate conference
3Refers to the EU’s target of reducing net greenhouse gas emissions by at least 55% by 2030.
4Federal Council launches Swiss Climate Scores for climate transparency in financial investments (admin.ch)
5ESMA publishes results of its Call for Evidence on ESG ratings (europa.eu)
6FS22/4: ESG integration in UK capital markets | FCA
7The EU Green Taxonomy is intended to combat greenwashing by defining what activities, and therefore investments in those activities, can be considered environmentally sustainable. The EU Taxonomy defines 6 environmental objectives: climate change mitigation, climate change adaptation, biodiversity, water and marine resources, pollution prevention and control, and circularity.
8Glasgow Financial Alliance for Net Zero (gfanzero.com)
10A Biodiversity Accounting Standard for the Financial Industry | PBAF – Partnership for Biodiversity Accounting Financials (pbafglobal.com)
11Biodiversity Finance Reference Guide [Draft for comments] (ifc.org)
12Principles for the effective management and supervision of climate-related financial risks (bis.org)
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