Take Five: Bigger, Better, Bolder

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

Policymakers were confronted by the scale of the response required to systemic risks this week, from Baku to Brussels and beyond.

COP in the dock – Having opened with a bang of sorts, COP29 was in danger of going out with a whimper at time of writing, due largely to a lack of consensus on the new framework for climate finance. It has become increasingly apparent that private sector support will be needed to fulfil the New Collective Quantified Goal (NCQG) – putting greater onus on the crowding-in role of multilateral development banks . But the first order of business is for rich countries to sign up to a deal to increase climate mitigation and adaptation support to poor countries, in Baku or soon after. Sensing the difficulties, a letter from the Glasgow Financial Alliance for Net Zero Secretariat, the Blended Finance Taskforce and the Global Capacity Building Coalition reiterated the ability of the private sector to deliver US$1 trillion toward the annual US$2.4 trillion required annually. But they emphasised that the NCQG had to be not only bigger, but also better and bolder, including greater use of catalytic financing instruments as well as “broader financial system reform to tackle regulatory, institutional and incentives barriers”. With investors also little the wiser on the ambition and scope – and investability – of nationally determined contributions until their February deadline, it may be some time before this COP can be judged .

A natural consequence – European Central Bank (ECB) Board Member Frank Elderson this week revealed new analysis highlighting the extent of the European economy’s dependence on ecosystem services, warning that “these risks can spread to the financial system, potentially triggering instability”. Noting that 75% of euro area bank loans were granted to firms highly dependent on at least one ecosystem service, Elderson warned of supply chain disruptions, price rises, and defaults which “could ultimately lead to financial stability concerns”. The comments coincided with the release of ECB-backed research outlining a framework to enable central banks, financial regulators and policymakers?to assess climate and nature risks on an integrated basis. Nature is already an ECB focus area for 2024 and 2025 , but Elderson said central banks and supervisors should intensify their efforts, viewing nature-related risks alongside other factors already considered important to price and system stability. This involved working with scientists to better understand transmission channels, and transposing insights from science into economic variables such as growth, inflation and financial risk. “Destroying nature means destroying the economy,” concluded Elderson.

Border patrol – Impending trade wars took on a greener hue this week, with Europe apparently planning to require intellectual property transfers from Chinese firms to qualify for EU subsidies to develop battery factories. This was characterised by the Financial Times as part of a “tougher trade regime for clean technologies” and a “hardening stance” toward China. Persistent anaemic growth rates have led EU policymakers to try to protect its vital industries at the same time as the environment. This also involves putting tariffs on imports of Chinese electric vehicles, as its own automotive sector struggles to accelerate away from a? fossil-fuelled past. Meanwhile, its carbon border adjustment mechanism (CBAM) shields European industries subject to emissions restrictions from being undercut by higher-carbon imports. Electoral developments in the US mean things are set to get more complicated, with the incoming administration likely to threaten Europe with higher tariffs, just as Chinese firms divert more goods to the region in response to the imposition of 60% import taxes by the US. Europe’s CBAM , which is due for revision next year , could play a role in keeping Chinese imports out. US lawmakers have mulled their own CBAM , the appeal of which has centred on its potential to protect domestic industries from cheap Chinese imports, with the environmental impacts regarded often as a secondary co-benefit. Unlikely as it may sound, could a Musk-influenced White House end up keeping a lid on US emissions as an excuse to keep carbon-intensive Chinese competition out? Perhaps too fanciful. But it may have caught US attention that China was keen to have CBAM added to the COP29 agenda on grounds of its protectionist tendencies. Of course, China’s exports are getting greener by the day. As China continues on its way to becoming the lead supplier of clean technologies to the rest of the globe, will the world’s major economic blocs contrive to compete themselves greener? The UK, it’s worth noting, recently confirmed its CBAM plans for 2027 .

False sense of security – The results of the first EU-wide climate risk scenario analysis were released this week, offering insight into the vulnerability of the region’s finance sector to transition risks. Released under the soothing title ‘Transition risk losses alone unlikely to threaten EU financial stability’ – it was almost as if the European Supervisory Authorities (ESAs) were hoping we’d miss the ‘alone’ – the exercise had a very specific remit, i.e. exploring the impact of the EU achieving its planned 55% reduction in greenhouse gas emissions by 2030. The contents of the report itself were slightly less reassuring, with banking, insurance and investment fund sectors all facing double-digit losses under certain scenarios, and the latter challenged most of all. Nevertheless, the regulators acknowledged the limits of the work and the need for further action, calling for “a coordinated policy approach to financing the green transition”, noting also “the need for financial institutions to integrate climate risks into their risk management in a comprehensive and timely manner”. Given climate risk scenario analysis is widely considered to underplay the impacts of failing to meet the objectives of the Paris Agreement, a logical next step for the ESAs and the ECB? would seem to be new research focused on 2050. As Beno?t Lallemand, Secretary General of Finance Watch , said: “Because most severe risks to the financial sector materialise beyond that horizon, it gives a false sense of security and comfort to policymakers – at a time when climate science tells us urgent and ambitious action is badly needed.”

Profits over politics – Vanguard, one of the three largest US asset managers with more than US$10 trillion AUM, extended choice for investors both by increasing voting options and widening the number of participating funds. From the 2025 proxy voting season, four million investors, advisors and plan sponsors representing US$250 billion AUM will be able to select from five policy options, including a new ‘wealth-focused’ approach. This policy promises to vote shares in ways that maximise shareholder value “without being influenced by political or social agendas”. Vanguard still offers an ESG policy, which means that investors in eight participating funds will not be bound to vote in step with Vanguard itself, which declined to support any shareholder proposals on social and environmental topics filed with US firms in 2024. Vanguard has been keen to avoid politics since leaving in December 2022 the Net Zero Asset Managers initiative , which lost a UK-based signatory this week, Baillie Gifford, with the firm saying its participation in the Paris-aligned grouping – as well as Climate Action 100+ – had “become contested”.

This is my weekly blog, also published on www.esginvestor.net , in which I collate and comment on some of the main news items of the week from a sustainable investment perspective. Please click through and subscribe.