ESG In Pills - May 2023

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The Implications of Credit Suisse’s Collapse

As always, market failures have rippling effects. The collapse of Credit Suisse last month is not just worrying for the global financial system. The banking crisis also has consequences for the fight against environmental degradation. Credit Suisse was the sole structurer and arranger of the world’s largest?debt-for-nature swap. Debt-for-nature swaps help governments restructure their debt to raise money that can use to fund conservation efforts. Credit Suisse put a price tag of?$364 million deal in 2021 on a debt-for-nature swap for Belize, along with the charity The Nature Conservancy. Last year, it sealed another?$150 million contract for Barbados.

While debt-for-nature swaps have been around since the 1980s, Credit Suisse has, in recent years, helped revive interest in the instruments and, for the first time, opened them up to institutional capital. The bank raised money for Belize and Barbados from pension funds, including Sweden's Alecta and Nuveen LLC , a unit of the US's TIAA, by issuing so-called blue bonds ?tied to the deals.

To do so, Credit Suisse developed complicated structures involving multiple “special purpose vehicles” responsible for payments that stand alone from the bank after the deal is closed, according to a sustainable bond investor with close knowledge of debt-nature swaps who talked with Bloomberg and asked to remain anonymous. The person said those SPVs would probably insulate borrowers and investors from any fallout from Credit Suisse's sale.

According to Daniel Munevar, an economic affairs officer at the United Nations Conference on Trade and Development, the deals were likely a good source of profits for the bank. The Belize deal was “free money for Credit Suisse because they hold no risk whatsoever,” he said. The US International Development Finance Corp. insured part of the transaction, which agreed to cover payments if Belize defaulted. For Barbados, the Inter-American Development Bank and TNC backed the investment.

Several other countries have signalled their interest in debt-for-nature swaps.?Gabon, ?the world’s fourth most-forested nation, has proposed a $700 million restructuring to protect its marine life. Ecuador is working on an $800 million transaction,?Reuters reported , and Sri Lanka is?considering ?a $1 billion deal. Analysts expect the global debt-for-nature swaps market to?exceed $800 billion eventually.

The instrument could be a crucial tool for developing countries struggling to find a way to repay debt and protect against nature loss. Thirty-seven low-income countries are currently in or at high risk of debt distress, according to?the World Bank . According to data compiled in a Bloomberg index, 18 emerging markets have dollar-denominated sovereign debt trading at distressed levels.

Credit Suisse also experimented with other tools to help developing countries fund environmental protection. It was the sole structure and joint book runner on the World Bank’s $150 million “Rhino bond,” a unique instrument designed to fund the protection of black rhinos in South Africa which a Pill back in June 2022 had covered. The bank also committed to spending $324 billion on sustainable finance activities by 2030.

"Anytime there is a bank failure of this magnitude, it has a ripple effect across the world,” said Ryan Straughn, an official in Barbados’ finance and economic affairs ministry. “The world cannot afford a financial crisis on top of the climate crisis.”

The complex setup has?drawn criticism from sovereign debt experts for its high cost and lack of transparency. And the opaque terms of the Belize and Barbados deals — the first of their kind — mean outside analysts will struggle to assess what comes next.

“We're feeling around in a dark room,” said Sean Newman, a private investment adviser and former chief investment officer of Sagicor Group, a financial services conglomerate in the Caribbean. “It’s certainly very unprecedented and uncertain times. A gap may be created, and the question then is: Who is going to take that?” UBS, which declined to comment on the future of Credit Suisse’s debt-for-nature swaps, has indicated it plans to shrink the latter’s investment banking arm.

Chart of the month

The most significant false green claims made by major global fashion labels:

Environment

Major Companies Funding Carbon Removal Technologies

Frontier helps its member companies purchase CO2 removal via pre-purchase or offtake agreements. The goal is to spur the development of a new industry, carbon removal, by providing a novel funding source. Instead of debt or equity investments, it works on funding actual product purchases before the technology is fully available at scale. "Permanent carbon removal is under-invested in and under-supported even though we know through IPCC reports that we will need billions of tons of annual capacity in the coming decades. And so, really, Frontier is an extension of work that we've been doing in permanent carbon removal for many years," Hannah Bebbington, the strategy lead at Frontier,?told CNBC. H&M Group,?JPMorgan Chase , and?Workday announced a combined $100 million commitment to Frontier on Wednesday. That adds to the $925 million reported in April 2022 ?from?Alphabet , McKinsey,?Meta ?and?Shopify ?at the launch of Frontier. Frontier's member companies tell Frontier how much money they want to spend and over what timeframe. Frontier then decides how to allocate that capital to carbon removal companies in its portfolio. All of the CO2 removal solutions funded will have to meet specific criteria, including permanence (more than 1,000 years), cost (with a viable path to costing less than $100 a ton at scale), additionality (meaning they're not removing CO2 that would have been removed or reduced through some other method anyway), and capacity (more than 0.5 gigatons of carbon per year at scale). The IPCC emphasises throughout the report that reducing emissions is the primary and most important factor in mitigating the negative impacts of climate change. Still, it also says carbon removal technologies can help if used strategically. Frontier is taking up a big challenge since that many of today's removal solutions are still nascent, and we will need to scale the industry if we are to meet the scale necessitated by climate models.

UK Supermarkets Funding Amazon Deforestation

UK meat industry and supermarkets, including Tesco, Asda, Sainsbury's and Morrisons, are causing illegal deforestation in the Amazon. The investigation by environmental groups Mighty Earth, Reporter Brazil and Ecostorm combines satellite data with observations on the ground showing evidence of a direct link between illegal deforestation in the Amazon and supplies of soya beans shipped from Brazil to the UK by US commodities giant Cargill. Following an investigation by Brazilian authorities into previous illegal deforestation on the farm, Cargill removed it from the list of its approved suppliers. However, the company reintroduced it in 2022. The UK imports around 70% of soya from Cargill, and 75% of Cargill's soya comes from Santarem port in Brazil. Soya is a crucial ingredient in animal feed, particularly for intensively farmed chickens and pigs. One of the UK producers with the most significant exposure to the Brazilian soya is Avara Foods - the UK's largest chicken producer, which is part-owned by Cargill and is directly supplied with feed by them. Avara supplies many leading supermarkets and suppliers, including Tesco, Asda, Lidl, Sainsbury's, Morrisons, McDonald's, KFC and Nando's. "Our investigation shows Tesco is a basket of problems for the Amazon," said Gemma Hoskins, UK director at Mighty Earth. UK food retailers like Tesco are signatories to the UK Soy Manifesto which committed them to ensure their supply chains were "deforestation- and conversion-free" by 2020, with a further commitment to stop sourcing from suppliers linked to deforestation or land conversion by 2025.

US Dominating the Fossil Fuel Market

Despite scientific proof, fossil fuel financing from the world's 60 largest banks hit $673 billion in 2022. These banks have funded $5.5 trillion in fossil fuels projects in the seven years since the adoption of the Paris Agreement, according to the annual?Banking on Climate Chaos report ?by Rainforest Action Network, Oil Change International, Indigenous Environmental Network, BankTrack, Reclaim Finance, Sierra Club, and Urgewald. This year, for the first time since 2019, US bank JP Morgan Chase dropped from the top spot of the biggest backer of fossil fuels. US banks dominated fossil fuel financing, accounting for 28% of all fossil fuel financing in 2022. JPMorgan Chase remains the world's biggest funder of fossil fuels since the Paris Agreement, while Citi, Wells Fargo, and Bank of America are still among the top 5 fossil financiers since 2016. Under pressure from ESG trends and shareholders, some banks have announced stricter rules on the financing of fossil fuels in recent months. However, most large banks are falling short of announcing overall pledges or targets in funding oil and gas. Barclays stated it will no longer provide?funding to oil sands companies or projects and tightened conditions for thermal coal lending in an updated policy. Banking On Climate Chaos?report shows that since governments signed the Paris climate agreement, and up to the end of 2021, Barclays has financed around US $167 billion in fossil fuels, making the bank the most prominent financier of fossil fuels in Europe and the seventh-largest in the world.

Social

Inflation Helping Secondhand Uptake

A growing?number of people are buying used clothing, propelling the secondhand industry to a 28% increase over 2021, which counts for $177 billion in global sales last year, according?to a new report from online thrift marketplace ThredUp Inc. The uptake is due to surging inflation, more retailers developing curated secondhand offers, and increased awareness of sustainable shopping habits. Additional growth is coming, too: the ThredUp report, which relies on research and data from?third-party retail analytics firm GlobalData, predicts the secondhand industry?will practically double to $351 billion in global sales by 2027.?ThredUp co-founder and Chief Executive Officer James Reinhart told Bloomberg Green in an interview that brands also see resale as increasingly crucial for their sustainability agenda. “When I talk to brands today, it’s not a question if they will be involved in resale — it’s about how,” he said. The shoppers?most attracted to resale are members of younger generations, mainly Gen Z. According to a GlobalData Survey of roughly 3,000 US adults, 83% of Gen Z respondents said they had already shopped secondhand for clothes or were open to it. That same?cohort of consumers has largely fueled?the?rise of fast and ultra-fast fashion, which helps explain why even major fast fashion companies are now embracing selling secondhand in stores and online. Shein, a Chinese retailer that has helped supercharge the fast fashion model,?got into resale ?last year with its?Shein Exchange site, and H&M has, in recent annual reports, said it expects climate-aware consumers to prefer more sustainable products in the future. Per the company, that potential shift in consumer preferences could be a big hit to future sales or, quite possibly, an opportunity.

AstraZeneca CEO Calls Climate Change “Biggest health crisis of our time”

“While much has been said about the damage to weather patterns, crop yields and coral reefs, the effect a hotter world has on our health is less well understood. The reality is that the climate crisis is the biggest health crisis of our time, bigger even than Covid-19.” These are the words of Pascal Soriot, the chief executive of the Anglo-Swedish pharmaceutical company AstraZeneca, in his article for The Guardian this month. Lung cancer and respiratory-related deaths linked to air pollution are up 160% over the past 30 years, and it causes genetic mutations in some lung cancer-linked genes. Heat-related deaths are expected to treble by 2050. It has been estimated that poor health costs the global economy 15% of global GDP. For Soriot, decarbonising the economy is an opportunity and a driver of growth, “which is why?the backlash?against environmental, social and governance-focused investing is so misguided.” The toll on human health is enormous and likely to get worse. Healthcare companies will do all they can to treat patients suffering from climate-related diseases. Prevention, however, will have the most significant impact on health. Health professionals worldwide recognise that all stages of the fossil fuel lifecycle present a grave and escalating threat to human health and have signed an open letter joining the call for a global Fossil Fuel Non-Proliferation Treaty. They see the damage in their clinics and hospitals, caring for patients and communities suffering from the health impacts of climate change, fossil fuel production, and air pollution. Only by taking radical action on greenhouse gas emissions will we be able to say that we are doing everything we can for the health of humanity.

TikTok Against Climate Denialisms

Under government pressure over privacy and safety concerns due to its Chinese ownership, TikTok has toughened its stance on harmful content over the past year. This month, the popular video app?said it was updating its misinformation policy to target any content which "undermines well-established scientific consensus" about global warming. The app will remove clips which contain misinformation about the climate crisis. The company is also introducing new search features to direct anyone who looks up climate content towards "authoritative information" sourced in partnership with the UN. Despite repeated attempts to improve its reputation among sceptics, the company still faces the prospect of an outright ban in the US , where politicians argue it is used to push misinformation and pro-China propaganda. And in the UK, the company was recently?fined almost ￡13m for misusing children's data . The app has also been banned from the work phones of government staff, following in the footsteps of the US, EU, Canada, and others. Investors and environmental activists have been pressuring social media all around the world to review their policies against climate denial, with scarce success.

Governance

Largest Ever ETF Fund Launched This Month

Asset manager DWS achieved the largest-ever ETF launch in the US by listing a new climate-focused ETF backed by a $2 billion investment by Finland-based pension insurance company Ilmarinen. The new fund, Xtrackers MSCI USA Climate Action Equity ETF (NYSE: USCA), aims to expose investors to US large and mid-cap companies leading in their sectors on climate transition action. The index tracks the MSCI USA Climate Action Index, which employs a series of ESG screens to its parent index, the MSCI USA Index, including ineligibility for securities with very high emissions intensity and no Science Based Targets initiative-approved (SBTi) emissions reduction targets. Arne Noack, Head of Systematic Investment Solutions, Americas at DWS, said: "US investors considering how to lower their carbon emissions over the long term are looking for best-in-class, forward-looking strategies that align with their objectives." However, a quick visit to the fund’s site reveals quite the opposite. The 11th most significant holding, JP Morgan, not only has no SBTi but is also one of the most prominent financiers of fossil fuels. The 14th largest holding is Chevron, which has no SBTi, has devoted only 0.2% of its Cap X to low carbon energy products between 2010 and 2018 and has no commitment for Scope 3 emissions.?Overall, 7 of the top 10 holdings are tech companies, and two are in Healthcare, which seems a choice for higher returns than climate champions. As Ken Pucker notes, DWS has just recently emerged from the ESG scandal of a police and regulator raid on the firm and the resignation of the CEO.

FTC Tackles Greenwashing

The US?Federal Trade Commission (FTC) aims to fight greenwashing by big business with an update to its "Green Guides”, which would give the agency more robust legal cases against polluters by clarifying when companies' deceptive marketing around sustainability and environmental responsibility violates federal law. The move follows years of formal?complaints ?filed?with the FTC about often highly questionable claims by fossil fuel companies, big agriculture, major food producers and other polluting industries. The Green Guides were first issued about 30 years ago and are designed to provide the industry with guidance on how it can make environmental marketing claims that comply with the FTC Act. The guides are non-binding, but they strengthen the FTC's cases when it takes legal action against industry, and courts often reference the directions. The last update occurred in 2012. Since then, the misleading marketing level has increased, probably because consumers are more interested than ever in supporting environmentally responsible companies, and the industry is capitalising on that desire. Brown University researchers found that the five largest oil companies have spent? over $3.6bn on "reputation building" advertising over the last 30 years, and Harvard research in 2022 identified some form of greenwashing ?in 72% of social media posts by oil and gas companies. The new rules are expected to be in place by the year's end and come as the EU has promised to crack down ?on greenwashing.

Leading Asset Managers Ignore Climate Risks

The report by Carbon Tracker, “Missed Pitch,” finds that asset managers publicly backing efforts to limit global warming to 1.5°C have $417 billion invested in oil and gas companies fuelling climate change. The report identifies 25 members of the Net Zero Asset Managers' initiative (NZAM) that could be misleading clients and putting their investments at risk. Being a signatory of the NZAM signals the market that managers will invest in line with a 1.5°C pathway. For this to be credible, investee companies should be climate-aligned. Yet, Carbon Tracker finds many of the most prominent NZAM members heavily invest in unaligned oil and gas companies. Some, like Blackrock, Fidelity, and the Capital Group, have significant holdings in almost all 15 heavily polluting companies and increased their positions in 2022. Others, like DWS, Abrdn, and Schroders, carry more limited exposures, stable throughout 2022. Where portfolios contain constituents not aligned with Paris, asset managers may expose themselves to regulatory and reputational risk. While increases in holdings are likely due to high commodity prices in 2022, investors must be aware of the advancing demand substitution risks from new technologies. Passive investment products account for some of these increases, raising questions about the compatibility of index products with Paris Agreement goals. While managers may argue that an active ownership approach can ensure companies achieve 1.5°C alignment, voting data suggests managers tend not to support 1.5°C-aligned resolutions. Asset owners should clearly express their voting preferences to their chosen managers and monitor them regularly.

Events

Net Zero Delivery Summit

City of London

May 24, 2023

London, UK

RI Japan

Responsible Investor

May 24-25, 2023

Tokyo, Japan

ESG & Climate Risk Summit Europe 2023

Risk.net

June 7, 2023

Summit

Institutional Investor

June 13-14, 2023

London, UK

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May 2023, issue XXVII. Previous editions can be found on LinkedIn or the Oxford Business Review website . All information in this article is personal and does not represent the viewpoint of any company.