Take Five: Future-proofing to the Fore

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

Corporates took the long view on renewable energy, while policymakers made extended commitments on security.

Collective energy engagement – There were positive signals this week for the pace of migration by big business to renewable energy sources. Under the aegis of the Sustainable Markets Initiative, pharmaceuticals giants AstraZeneca and GSK led a deal that will see the collective procurement of 225 gigawatt hours of renewable energy annually, for medical R&D and manufacturing facilities in China. Combined with a similar collective procurement arrangement signed last January by a bigger group of healthcare firms, the agreement is expected to reduce emissions by 250,000 t/CO2e a year. With the energy-intensive healthcare sector responsible for around 5% of greenhouse gas emissions globally, full-value-chain decarbonisation initiatives could represent meaningful steps in the switch to wind and solar. Recent data from BloombergNEF found that the amount of renewable energy bought by firms under long-term power purchase agreements (PPAs) surged by 35% last year to 62.2 gigawatts. Much of the growth stems from the rapid expansion of data centre capacity, largely fuelled by the AI race – Amazon has been the top purchaser for the past two years. But the study suggested demand for PPAs is broad-based, coming from a variety of sectors, including chemicals and mining, and regions, with Asia Pacific accounting for around a fifth of 2024’s PPA volumes. This should reassure the utility firms that need these long-term commitments to keep down the costs of adding new renewable energy generation capacity. However, investors should still note the funding lag being felt in electricity storage and transmission capacity, which is causing a rising tide in curtailment – effectively switching off wind and solar capacity that cannot be used straight away.

Protection racket – Among the firms looking to use updated guidance from the US Securities and Exchange Commission (SEC) to avoid putting sustainability-related shareholder resolutions to a vote is insurance giant Travelers. The firm issued a ‘no action’ challenge on grounds of micromanagement to a resolution seeking information on the “expected impact of climate-related pricing and coverage decisions on the sustainability of its homeowners’ insurance customer base under a range of climate scenarios”. Like several others, Travelers has been hiking home insurance premiums and restricting coverage to protect itself from the financial impacts of extreme weather events associated with climate change, such as the recent Los Angeles fires. Shareholder advocacy group As You Sow, which filed the resolution, responded this week by saying shareholders were not demanding disclosures requiring the kind of “intricate detail” outlawed by SEC guidance. “If increasing climate risk traps the company in a cycle of increasing premiums and cancellations, the sustainability of the line’s customer base becomes a concern,” it reasoned. The challenge follows an SEC decision last month to rescind past guidance, under which the NGO filed climate-related resolutions in 2024 at Travelers and several peers.

Europe mobilises – Following a week that overturned the global political order, European leaders declared their support for a “comprehensive, just and lasting peace” in Ukraine, while also committing to securing “robust and credible security guarantees” and providing continued financial support to the invaded country. They also recognised the need for the European Union to “reinforce its overall defence readiness, reduce its strategic dependencies… and strengthen the European defence technological and industrial base”. In welcoming European Commission (EC) President Ursula von der Leyen’s €800 billion (US$868 billion) ReArm Europe proposal, the European Council flagged the need to mobilise private finance, calling on the EC to signal “the importance of the defence industry for Europe at large”. But many important details remain unclear around how the money will be raised, shared, and spent, not least the kind of weapons that can be procured. Few options have been ruled out ahead of official legislative text proposals, which are expected on 21 March. It’s worth noting that bank finance is expected to be prioritised at first, with no reference in the proposals to adjusting the EU Taxonomy so that defence industries can be considered sustainable. However, that may not last, with von der Leyen hoping to raise capital by accelerating the Savings and Investment Union, a new EC scheme aimed at channelling dormant European retail savings toward investments in innovation, decarbonisation, digital technologies and defence.

Parallel performance – In time, the need to restock Europe’s military may even challenge one of the most fundamental and longstanding tenets of sustainable investing: negative screening of controversial weapons. According to the Morgan Stanley Institute for Sustainable Investing, two thirds of European AUM is covered by an exclusion of investments in controversial weapons, well beyond either thermal coal (52%) or tobacco (48%). The institute’s latest analysis of 99,000 funds globally found that sustainable funds had underperformed traditional vehicles in the second half of last year, for the first time since the first half of 2022, partly due to the tendency of the former to overweight Europe. From a longer-term perspective, however, the more striking finding is the similarity between the performance of sustainable and traditional funds. These have waxed and waned in synch for most of the past seven years. As the report notes, “investing a hypothetical US$100 into a sustainable fund in December 2018 would equate to US$136 today, while investing US$100 into a traditional fund over the same period would equate to US$131 today”.

Second best? – Last week saw the conclusion of COP16.2, with delegates finally agreeing on a resource mobilsation strategy – jargon for a plan to raise finance from a range of public and private sources to support the implementation of the Global Biodiversity Framework. The breakthrough was described as an unlikely “win for multilateralism in uncertain times”, but few were under any illusions of the tough road ahead, illustrated by the continued lack of progress on national biodiversity plans (only the UK submitted a new one in Rome). This week saw the confirmation of the second effort to finalise the Global Plastics Treaty, after failure last December in Busan, largely blamed on the lobbying efforts by countries and firms with fossil fuel interests. This week it was announced that INC-5.2 will take place in Geneva, between 5-14 August. The fact that ten days have been scheduled, rather than the three needed in Rome for COP16.2, perhaps reflects the scale of the challenges. While some have stressed the importance of more ambitious governments being allowed to reduce plastic waste at their own speed, others have also flagged the need for greater focus on ‘chemicals of concern’.

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.