Take Five: Forest Fire

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

This week Brussels stoked fears of a waning political commitment to Europe’s green agenda.

Bonfire of the regulations – After months of speculation – not to mention the odd denial – the European Commission confirmed this week a 12-month delay to the introduction of the EU Deforestation Regulation (EUDR). The announcement was accompanied by new guidance to support compliance, which at least shows the commission listened to the key points made in the recent Draghi report – which criticised the efficacy of Europe’s sustainability-related regulations, rather than the need for them. The delay and guidance should mean there is less risk of European firms falling foul of the EUDR’s steep fines for importers of key commodities who fail to demonstrate their deforestation-free origin. Responses were diverse, with at least some in the food sector warning against any plans to “reopen the substance” of the regulation. Arguably, the writing had been on the wall since the European elections in June, which squeezed the Greens and centrists in favour of the centre-right, leading to expectations of a watering down of the previous parliament’s sweeping reform programme. The reversal may not bode well for other legislation imposing compliance deadlines on large European firms, such as the Corporate Sustainability Reporting Directive and the Corporate Sustainability Due Diligence Directive. The proposed pushback – which needs approval from both the European Parliament and Council – will frustrate and alarm investors and others seeking to tackle nature and climate risks. But Europe is perhaps in a better place than certain other jurisdictions that are struggling to get similar rules on the statute books.

Food for thought – While being handed something of a reprieve in Europe, firms within the global food system were under scrutiny for other aspects of their environmental impact this week. Five of the ten companies with the biggest impact on biodiversity are from the food products industry, a new global study found, with nine of the ten firms with the highest level of dependence on ecosystem services – notably surface and groundwater – also coming from the sector (the other being a drinks conglomerate). The Finance for Biodiversity Foundation study analysed 2,300 companies within the MSCI All Country World Index universe, covering direct operations and value chains. Similar to climate, the report found that ‘Scope 3’ impacts far outstripped direct ones. If this was the downside for those involved in nature-focused investor engagement initiatives, some upside was provided by the level of concentration: two thirds of the estimated biodiversity impacts within the sample were caused by the top 250 highest-impacting companies.

Wasted opportunities – Both the environmental and social performance of food retailers made the wrong kinds of headlines in the UK this week. Admittedly, they got off on the right foot, marking the UN’s fifth International Day of Awareness of Food Loss and Waste by calling on the government to implement mandatory food waste reporting for large companies. According to the letter, the UK’s 10.7 million tonnes of wasted food annually cost ￡21.8 billion (US$28.7 billion) and cause 8-10% of the country’s carbon emissions. But things rapidly went downhill with the revelation that 70% of soft plastic collected by supermarkets for recycling is in fact incinerated, some burned for energy. With the Global Plastics Treaty nearing completion, food retail is one of the sectors most in need of rapid action to adopt alternatives. Separately, the BBC reported a court case resulting from the exploitation of 15 victims of modern slavery at a UK branch of McDonald’s and a supplier to several major supermarkets. The exploitation ended in 2019, but had lasted four years due to undetected red flags including excessive overtime, multiple employees at a single address and wages being paid into accounts held in other people’s names.

Lending lobby – For complexity, scale and reach, the food retail sector is rivalled by few industries, with banking being one of the exceptions. As such, investors have found it extremely hard – but critical – to get a handle on the ESG risks of the banks in their portfolios, especially their impact on climate. Given the sheer range of financing products offered by banks – from standard lending to M&A, to capital markets and trade finance, to fleet finance – there are endless ways in which the larger ones can influence polluting and / or sustainable economic activities. This week, the release of the 144-strong Net Zero Banking Alliance’s (NZBA) 2024 Progress Report gave investors more information from which to assess their climate orientation. Alongside details of transition plans and progress on Paris-aligned target-setting for carbon-intensive industrial sectors including cement, iron and steel, and aluminium, the report included a call on policymakers. “Voluntary commitments like the ones banks make when joining NZBA are no substitute for climate-related policies in the real economy,” the banks urged, listing proposals including more demand-side incentives, such as tax credits and concessional finance. While this pro-climate lobbying is constructive and welcome, it may still take some time before individual banks are recognised among the leaders in climate policy engagement.

Gambling on red – In terms of macroeconomics, the story of the week has been the 24% equity-index surge in response to China’s stimulus package including interest- and mortgage-rate cuts, US$114 billion in support for the stock market and much more released – but not formally announced – to the benefit of consumers, local government and recapitalised banks. The impact on asset prices was such that one trader summed up his strategy in two words: “Buy everything”. However, the problems of China’s property sector are so deep that it is not clear that the good vibes will last. The Economist described the stimulus as “better communicated and co-ordinated, and more targeted” but still feared it might not be enough. Evidently this matters to the rest of the world too, both from an economic and environmental perspective. With China nearing peak emissions, dominating solar power installation and accelerating EV and wind turbine production, a faltering in its green investment revolution would have far-reaching consequences. As author David Wallace-Wells recently noted, “the energy transition is, at present, to a large degree, a Chinese project”.

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.