It was the Best of Times, It was the Worst of Times

While writing this week’s edition, new US inflation data dropped, dashing hopes for an economic ‘soft-landing.’ The markets are selling off pointing to a likely recession ahead. Combined with the news that oil producing countries will throttle supply to boost prices, it paints a picture of tough times ahead.??

Macroeconomics can alter the progress of nearly every topic and in past downturns, fighting climate change is one of the first priorities to be set aside.??

But maybe not this time...?

Thanks to new government policies and the ongoing energy transition, the trends in climate tech investing are holding up (so far) and may even prove to be recession proof.??

This week I had the honor of speaking about these issues at a Morningstar event titled The Future of Corporate Sustainability hosted by Gabriel Pressler and her team. I followed Kunal Kapoor - CEO of Morningstar and Nelson Griggs - President of the Nasdaq stock exchange who both articulated upbeat perspectives on ESG investing.?

Photo by Giorgio Trovato on Unsplash

Once-in-a-Generation Opportunity

A new study from PWC claims that ESG-related assets under management (AUM) are expected to continue to surge over the next several years reaching $34 trillion, or 21.5% of all assets by 2026, significantly outpacing overall growth in asset and wealth management investments. The study showed that 8 of 10 US investors plan to increase their allocations to ESG products over the next two years.

Better Times Ahead

Another study from KPMG surveyed CEOs and also presented an optimistic outlook. CEO Bill Thomas writes: “Tested by enormous challenges in quick succession — a global pandemic, inflationary pressures and geopolitical tensions — it’s encouraging that CEOs, surveyed in our 2022 CEO Outlook, were confident in their companies’ resilience and relatively optimistic in their own growth prospects.”

The KPMG 2022 CEO Outlook concluded that despite these challenges, global economic confidence over the next 3 years has rebounded to 71 percent and 85 percent of global CEOs report positive growth expectations.

Photo by Johann Walter Bantz on Unsplash

A Haymaker for ESG Investing?

Bryan McGannon from the US SIF - the forum for Sustainable and Responsible Investment - posted that the Department of Labor’s proposed rule on ESG investments and proxy voting was forwarded for final review indicating a likely release of the rule in November.

Why is this a big deal? The rule changes the implementation of the The Employee Retirement Income Security Act (ERISA) which governs the management of US retirement funds totalling $33.7 Trillion in Q2 2022 .?

The rule acknowledges that ESG factors may be material to the risk-return analysis of a portfolio and that a fiduciary’s analysis may often require an evaluation of the economic effects of climate change and other ESG factors. It explicitly allows ESG and climate issues to be considered if they are consistent with a prudent investment decision process.

Anti-Woke Republicans Still Swinging

With political traction heading into the US midterm elections, the anti-ESG crowd is not giving up. The FT reported that BlackRock has lost more than $1bn in asset management business as conservative states pull out over the firm’s ESG investing and advocacy for fighting climate change.?

South Carolina announced divesting $200mn following last week’s news that Louisiana will withdraw $794mn from BlackRock. Utah and Arkansas jumped in liquidating $100mn and $125mn respectively. With more than $8 trillion in assets under management, this is more of a political problem for BlackRock than threat to the company's revenues.

BlackRock has become the punching bag for the anti-woke movement because it manages more ESG funds than any other investment manager - including five of the top 20 US sustainable funds. Adding fuel to the fire, CEO Larry Fink has taken a very high profile stand driving companies to decarbonize - quoting from his 2022 letter to CEOs:?

“Access to capital is not a right. It is a privilege. And the duty to attract that capital in a responsible and sustainable way lies with you.” “It is not ‘woke’, it is capitalism.”

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Follow the Money

During the Nixon-Watergate scandal, investigative reporters were told to “follow the money” to uncover the truth. This phrase can also be applied to today’s hyper-political, anti-woke crusade.??

The FT reported that South Carolina rejected BlackRock to manage a $41bn fund due to its ESG policies - choosing Federated Hermes instead. But Federated Hermes also offers ESG funds and promotes its sustainability credentials. The article infers that Federated Hermes' political contributions to Republican state treasurers gave them the advantage.

Are Fossil Fuels Uninsurable??

Another way to follow the money is to look at trends in the insurance sector. Since this is an industry built on predicting future financial risks, they are very good at forecasting the costs of the next big disaster. This week, Munich Re, the world’s largest reinsurer, said that it would end support for new oil and gas fields, new oil infrastructure and new oil plants .?

The insurance industry is now putting the most pressure on companies to be more environmentally conscious . Eric Corey Freed, a principal and director of sustainability for CannonDesign said: “Several large European insurers have already come out and said if a business is ‘overextended’ in fossil fuels, they are uninsurable.”

A study published in Adaptation Leader by Peter Soyka and Ira Feldman also warned about the coming lack of insurance and other traditional risk management methods.

Is ESG Financially Relevant to Investing?

Cutting through the political rhetoric, Morningstar sought to answer the central question about ESG’s value to investors with a new survey of 500 global asset owners overseeing $32.7 trillion in assets.?

The study found that 85% of the respondents said ESG factors are “very material” or “fairly material” to the investment process.?

But the survey also pointed to greenwashing as undermining the ESG movement with 61% of respondents indicating it is a “major” or “moderate” problem and 60% calling for more? regulation of the practice.

Tom Kuh , head of ESG strategy, Morningstar Indexes said, “Sustainable investors have ambitions about making investment more long-term, re-allocating capital to more sustainable companies and projects, and hopefully changing outcomes.”

We’re all Tax Nerds

Climate Tech VC’s newsletter reported that 75% of the incentives in the Inflation Reduction Act come from tax breaks and, if these prove popular, the total government support of climate tech could be $800 billion - more than double official estimates. Research shows that the new incentives will decrease climate technology costs by 40% on average . (Note: This story originally broke in the Atlantic, if anyone has the original Credit Suisse research please send me a link!).?

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NOTABLE NEWS

• EFRAG to sign an agreement with TNFD .? If you understand that title, you are reading the right newsletter!? Decoding the alphabet soup - EFRAG is the European Financial Reporting Advisory Group - the group charged with developing the new European Sustainability Reporting Standards (ESRS). If you have patience to learn more abbreviations, the TNFD is the Taskforce on Nature-related Financial Disclosures which is following the same path as the G-20 backed Task Force on Climate related Financial Disclosures (TCFD). What this all means is that the issue of protecting biodiversity is very important and reporting on it will likely follow the TNFD framework.??
• Zero Emissions Steel Startup Electra Raises $85 Million . Is there such a thing as zero emissions steel?? Investors including Bill Gates-founded Breakthrough Energy Ventures, Amazon, BHP Ventures, Temasek, S2G Ventures, and others are betting that start-up Electra can achieve the elusive goal. The company electrochemically refines iron ore into pure iron, while releasing zero carbon emissions by lowering process temperature to 60°C from current methods at 1,600°C and using renewable energy.
• In an odd and unfortunate twist, the SEC announced it is reopening the comment period for its massive climate disclosure rule (and others) due to a technical error that might have prevented comment letters from being received by the SEC. I can’t wait to read the conspiracy theories on this one…
• Decathlon changed its name to 'Nolhtaced ' in three Belgian cities. Having lived in Europe, Decathlon is a well-known sporting goods retailer.?When I first read this, I thought this must be either a language I did not understand or a marketing mistake. The article explained that Nohltaced is Decathlon written backwards. The aim of the move is to promote "reverse shopping," to promote the resale of old or unused sporting goods to Decathlon so that they can be repaired and resold under warranty.
• National Public Radio covered the ongoing Anti-ESG wars in the US , reporting that Republicans say big financial firms are abusing their power to advance a liberal agenda on issues like diversity, social justice and, especially, climate change. Many experts disagree, saying Republicans are distorting the goals and strategies of ESG investing.

NOTABLE PODCASTS

• Hosted by award-winning investigative journalist Amy Westervelt , Drilled is a true-crime podcast about climate change . In this episode Amy insterviews : Harvard professor Naomi Oreskes about her forthcoming book "The Big Myth," focused on the origin story behind free-market ideology, followed by a panel discussion on how to widen climate accountability to include not only oil companies but also the other industries and enablers that have obstructed climate action.
• Outrage and Optimism is a great podcast hosted by Christiana Figueres , Tom Rivett-Carnac , and CDP co-founder and friend Paul Dickinson . In this episode , the co-hosts discuss the anti-ESG (environmental, social, and governance) movement in the U.S. and its broader implications for the role of corporate institutions in an increasingly climate-sensitive world.

A note about the title of this newsletter: We reverted to the original title of ESG and Climate News because it says what it means. Our commitment to accessible reporting of the most important news in the sector is unchanged.