Take Five: Call of Nature

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

This week, it was a close call as to who was least prepared for COP16.

Nature trail – An absence of urgency has continued to characterise preparations for COP16, which starts in the Colombian city of Cali next Monday. This week, The Guardian revealed that only 25 countries have submitted their national biodiversity strategy and action plans (NBSAPs) for implementing the Global Biodiversity Framework, meaning more than 80% of the governments which signed up in Montreal two years ago fell at the first hurdle. According to the UN Environment Programme – Finance Initiative (UNEP FI), the finance sector has ground to make up too, albeit at least some of the responsibility for this also sits with governments. Private sector investment in nature had swollen to US$102 billion by May 2024, an eleven-fold increase on May 2022, apparently. But this is something of an estimate without the development of sustainable finance taxonomies that include nature, or use of the ‘D3’ reporting indicator, part of the GBF’s monitoring framework aimed at tracking the alignment of private sector flows with its goals. UNEP FI has called for a pilot for the indicator – with a mechanism for linking into countries’ NBSAP priorities – in tandem with the adoption of the ‘Finance for Nature Positive’ model it developed with the Finance for Biodiversity Foundation to capture and categorise all types of financing related to nature, positive or negative. This is likely to be one of many points of negotiation at COP16 when it comes to agreeing on the resource mobilisation strategy – the plan for practical implementation of the GBF.

Coalition of the willing – Climate Action 100+’s annual assessment of the net zero trajectories of the world’s highest-emitting firms offered some valuable, if not entirely surprising, insights to those of us who still believe that engagement with such firms is important. Many of these carbon-intensive entities are setting targets, reducing carbon intensity and providing greater transparency – but are they putting in place the measures that will turn their business strategies from brown to green? This is far less clear, which is frustrating a full year after the coalition announced its intention to shift its focus from disclosure to action. Nevertheless, the report observed “pockets of positive company progress” in this respect. Alongside the company benchmarks, with only slightly less emphasis, CA100+ was keen to point out its swelling ranks. And though 90 new members might not offset the assets under management subtracted by the high-profile departures of several US asset managers this year, new joiners may do much to boost its esprit de corps.

Breathing space – Another important indicator of the transition to a low-carbon economy was provided by the International Energy Agency’s (IEA) annual World Energy Outlook. Noting continued risks from geopolitical tensions and trade barriers, the IEA stressed energy security as much as climate change as a critical reason for countries to accelerate their investments in clean energy transition. Nevertheless, it painted a complex picture, outlining diverse scenarios and reflecting several known unknowns impacting the future paths for renewables and electric mobility – including increasing extreme weather events and the rise of AI.? The agency recommended governments make good use of the likelihood of cheaper and more abundant energy in the second half of the decade – including oil and gas – to ease near-term consumer pain. “The breathing space from fuel price pressures can provide policymakers with room to focus on stepping up investments in clean energy transitions and removing inefficient fossil-fuel subsidies.” In a year of unprecedented election activity, it remains unclear whether they will take this opportunity, the IEA admitted, which may make the outcome of COP29 harder to predict.

A very British transition – Mandatory transition plans for corporates in the UK took a step forward this week with the release of the government-commissioned Transition Finance Market Review (TMFR). Credible plans based on the guidelines set by the Transition Plan Taskforce are a pre-condition for the development of a market for entity-level transition finance, the review noted, alongside recommendations for a principles-based approach to the classification of instruments – as well as greater certainty and clarity from government, including sectorial pathways. The paper positioned transition finance as a timebound opportunity for the UK finance sector to rediscover its mojo and relevance in a post-Brexit world, but also emphasised the need to support transition in emerging markets and international interoperability. To seize the opportunity, the TFMR suggested the need for new bodies such as a Transition?Finance?Lab and Transition Finance Council, though their effectiveness will depend on “strong governmental backing and ministerial involvement”, as noted by UKSIF Head of Policy Oscar Warwick Thompson.

Watching the watchdogs ?– The TMFR made little acknowledgement of the need to finance a nature-positive transition, which is reflective of the approach of most financial market policymakers and supervisors. According to SUSREG 2024, the World Wide Fund for Nature’s latest assessment of the integration of environmental and social considerations into regulatory and supervisory practices, nature lags climate considerably in the minds of central bankers, and banking and insurance supervisors. Indeed, the failings of financial regulatory frameworks to address climate risks are largely nature-related, with risk drivers such as deforestation, land conversion, freshwater management, and ocean and marine life protection all “insufficiently addressed”. Further, the WWF found 14 high-income countries had achieved less than 50% alignment with its nature-related banking supervision criteria, along with seven out of the top 10 biodiversity ‘hotspot’ countries. This may well change as a result of discussions at COP16 over the next two weeks, though there is no such global forum to propel social risks up the supervisory agenda. The WWF described current levels of alignment with its social criteria as “alarmingly low”, with an average of only 32% for banking supervision and 27% for insurance supervision.

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.