Take Five: A Change in the Climate

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

This week, the most consequential election of the year gave sustainable investors pause for thought.

Climate of hope I – It’s OK to be bemused at a time when the owner of the world’s largest manufacturer of electric vehicles puts such effort into returning to power the man who popularised the slogan ‘drill, baby, drill’. (From a strictly Tesla perspective, neither a tariff war with China and the EU, nor an abandonment of the Environmental Protection Agency’s current tailpipe emissions rules look like good news) And it’s understandable to be non-plussed by the all-but-certain exit of the US from the Paris Agreement, extinguishing the last hope of restricting climate change to 1.5°C above pre-industrial temperatures. Carbon Brief analysis from earlier this year estimated that Donald Trump’s return to the White House would result in an extra four trillion tonnes of greenhouse gas emissions by 2030, which is a mighty amount, even if he fails to persuade a finely-balanced House of Representatives to cut back the Inflation Reduction Act as much as some predict, due to the jobs it underpins in many red states (after all, it was the economy, stupid). But it’s also possible to imagine a world in which a second term for Trump, while slowing climate action, does not derail it entirely. Almost all forms of US energy generation increased under Joe Biden, and this is likely to continue, not only through unpalatable extensions to drilling rights, but also through the ongoing ability of onshore wind and solar farms to deliver power that is both clean and cheap. And we will get an immediate signal in Baku next week as to whether the world can maintain its collective resolve, as China – the world leader in many clean energy technologies – faces the prospective departure of its long-term partner in global climate diplomacy.

Climate of hope II – While much remains uncertain in the days after an election, it is inarguable that the job of integrating ESG factors into investment decisions just got harder. It’s a safe bet that institutional investors and their intermediaries are going to be seeing a lot more of their lawyers in future. In recent years, we’ve seen asset managers dragged into the courts for offering low-carbon investment opportunities, investor networks accused of operating cartels, activist shareholders sued for filing resolutions, and regulators forced to shelf rules that bring climate disclosures by US firms into line with global practice. Neither US-based corporates nor investors are going to stop factoring material ESG risks and opportunities into their decisions, but they will be more clear-eyed and certain of their case as they do so. Concepts of fiduciary duty will be tested, states will take increasingly different positions as federal agencies retrench following the demise of the Chevron precedent, and shareholder resolutions – on sustainability themes in particular – will face greater scrutiny from a post-Gensler Securities and Exchange Commission. And if this prompts reflection among sustainable investment professionals about the balance between long- and short-term priorities – as recently proposed in a report by the Cambridge Institute for Sustainability Leadership – that may be no bad thing.

The art of the deal-breaker – It’s far too early to say with conviction whether a second Trump presidency will be nature positive, but there’s a strong chance it will cause problems for one of the more successful outcomes of COP16, which ended in disarray last Saturday morning. Before being abandoned due to a lack of numbers, the final plenary backed the creation of the Cali Fund, which will share the benefits from commercial exploitation of digital sequence information (DSI) on genetic resources, i.e. plants and animals. This was seen as a breakthrough because it diverts to biodiversity-rich developing countries, Indigenous Peoples and local communities a share of the profits made by the pharmaceutical, biotechnology and agribusiness industries from use of DSI. But the deal is not yet legally binding, and certainly not for firms headquartered in countries that have not yet signed up to the Global Biodiversity Framework, such as the US. There were many theories circulating on the sidelines at COP16 about how US firms could be brought into the fold. But was there one that reckoned with the author of ‘The Art of the Deal’?

Rising tide – On the eve of COP29, the United Nations Environment Programme provided more proof that climate adaptation remains the poor cousin of mitigation, despite evidence of rising need on an almost daily basis. According to its latest adaptation gap report – ‘Come Hell or High Water’ – public finance flows are roughly on track to achieve the Glasgow Climate Pact goal of doubling adaptation finance to developing countries by 2025. This requires funding to rise from US$28 billion in 2022 – a record amount – to US$38 billion next year, a feat which would close the adaptation finance gap – estimated at US$187-359 billion per year – by approximately 5%. As they rise from modest levels, public sector flows are crowding-in private finance. According to blended finance specialists Convergence, there were 32 adaptation-focused transactions between 2021 and 2023, with a median transaction size of US$32.5 million, which contrasts with six US$1 billion mitigation-focused deals in 2023 alone.?In this week’s ESG Investor interview, Dr Nicola Ranger of the Environmental Change Institute says policy and perception shifts are needed to attract more private capital. “Policymakers don’t fully understand how to engage with financial institutions around adaptation,” she says.

Supervisory shift – Away from the noise and spectacle of presidential elections and global summits, there was a marked shift in tone on climate risks in financial markets supervisory circles. The European Insurance and Occupational Pensions Authority (EIOPA) recommended additional capital requirements for fossil fuel assets on European insurers’ balance sheets to “accurately reflect” their high risks.?This followed the release of updated long-term climate scenarios by the Network for Greening the Financial System (NGFS), a group of central banks and financial markets supervisors. The NGFS revised previous scenarios sharply upwards, assessing that GDP losses by 2050 could be two to four times greater than previously estimated. Campaigners called for the European Banking Authority to follow EIOPA’s lead, pointing out that academics and think tanks have been highlighting for some time the risks of relying on scenarios from mainstream economists that underplay climate impacts. Now it seems that at least some mainstream economists agree, including Livio Stracca, Deputy Director for General Financial Stability at the European Central Bank. “This update clearly demonstrates that insufficiently ambitious climate policies worldwide make the transition even more challenging,” said Stracca.

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.