Take Five: Is Your Cup Half-full or Half-empty?

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

COP16 negotiations have proved a grinding experience in Cali.

Colombian blend – In December 2022, the determination of China, holder of the COP15 Presidency, was a critical factor in the signing of the Global Biodiversity Framework (GBF). Almost two years later in Cali, it’s now the turn of Colombia to forge at least some level of agreement on the GBF’s implementation, as a fortnight of negotiation nears conclusion. COP16’s second week started with a flurry of announcements on finance day, focused on disclosures, data and transition plans, but overshadowed by new details on the scale of species extinction risk. Late nights and strong coffee have already been needed to reach agreements, such as the one struck on Wednesday to establish a framework for identifying ecologically or biologically significant marine areas, which is required to implement a number of GBF targets. More after-hours discussions are expected in order to reach consensus on other aspects of implementing the GBF, not least the resource mobilisation strategy that will outline how finance is to be raised and spent in support of its goals. The underwhelming contributions so far to the Global Biodiversity Framework Fund underlined the scale of Colombia’s challenge, as did an intervention by environmental charities, calling for more ambitious national plans and strong accountability mechanisms. They were joined by finance sector representatives arguing for wide-ranging reforms to the finance system to help reverse biodiversity loss, including accelerated private-sector disclosures, compulsory nature transition plans for corporates and financial institutions, integration of nature-related risks into the mandates of central banks and regulators, and ‘whole-of-government’ approaches to nature-positive policymaking. As a start, the Coalition of Finance Ministers for Climate Action said they recognised the need to “mainstream nature” into economic, fiscal, and financial policies, acknowledging the need to “play a greater role” in international biodiversity policy discussions, as well as in implementing the GBF in their own jurisdictions. Whether this extends to staying up all night to seal a deal in Cali remains to be seen.

How green is my budget? – Back in Blighty, the UK’s finance minister was struggling to convince onlookers of her climate finance credentials, let alone her ability to nurture investment in nature. Rachel Reeves is not the first Chancellor of the Exchequer to commit to pursuing policies to deliver net zero. But her first budget – admittedly delivered in challenging circumstances – was pale green at best. There is certainly potential – offered primarily through the ￡100 billion (US$128.9 billion) in capital investment over the next five years, enabled by a change to the government’s fiscal rules, some of which will be channeled into the net zero transition via GB Energy and the National Wealth Fund. More funding for hydrogen and carbon capture is positive to the extent one expects these technologies to make a significant contribution to our net zero future, while some will have mixed feelings about the incentives to North Sea oil companies to decarbonise their operations. Confirmation of a January 2027 start for a UK?Carbon Border Adjustment Mechanism was welcomed as providing certainty to investors over its scope. But overall, the first Labour budget for 15 years was far from an exemplar of the joined-up approach advocated by former Climate Change Committee chair Lord Deben, with the ￡3.4 billion for the Warm Homes Plan described as the “minimum possible” by the Green Alliance and the continued fuel duty freeze regarded as baffling by everyone else, including drivers.

Falling short – UNFCCC Executive Secretary Simon Stiell described as “stark but unsurprising” the findings of the latest ‘Synthesis Report’, which calculates the impact on greenhouse gas emissions of current nationally determined contributions (NDCs) to the Paris Agreement. If fully implemented, existing NDCs would see emissions fall by 2.6% in 2030 compared with 2019 levels, somewhat short of the 43% cut calculated as necessary by the Intergovernmental Panel on Climate Change to keep climate change to 1.5°C. The analysis followed the publication of the UN Environment Programme’s annual Emissions Gap Report, which said current polices were putting the world on course for a temperature increase in a 2.6-3.1°C range over the course of the century. According to Stiell, the next generation of NDCs should be economy-wide, broken down into sectors and gases, and backed up by “substantive” laws and funding. According to others, they should also be “investible” by institutional investors, including via blended finance.

Make it mandatory – As the Taskforce on Nature-related Financial Disclosures and Glasgow Financial Alliance for Net Zero laid out their first proposals on nature transition planning, the UK’s Transition Plan Taskforce (TPT) issued its final report, outlining the tools, practices and resources needed to deliver comparable and credible transition plans globally. Launched two and a half years ago, into a world where transition was viewed with suspicion – almost a synonym for greenwashing – the TPT’s guidance materials made transition a tangible and measurable process, giving investors a greater degree of confidence their capital was supporting real-world decarbonisation. The process is not over yet, as this week’s ESG Investor feature suggests, with the TPT’s work being taken on by the International Financial Reporting Standards Foundation and the International Transition Plan Network. But with countries from Malaysia to Brazil making transition plans mandatory, the direction of travel is clear.

Perspective please – Following the mention in last week’s blog of a Capital Group study suggesting institutional investors are integrating ESG factors into investment decisions in record numbers, this week we offer evidence that shareholder support for environmental and social proposals is far from terminal decline. Taking a ten-year perspective, ISS Corporate found that the number of environmental or social proposals filed at US firms was 44% higher this year than a decade ago, citing changes in guidance from the Securities and Exchange Commission as a catalyst. And while support for proposals has receded somewhat from the highs of 2021 – that post-pandemic year in which net zero commitments and racial justice issues were high on the agenda – ISS Corporate suggests much of the reason is improved disclosure and performance by corporates, leading investors to take a more “nuanced” approach to engagement. With the “overwhelming majority” of S&P 500 companies now disclosing key climate, labour, diversity, and other environmental and social metrics (albeit not yet nature), lower overall support for sustainability-related proposals should not be mistaken for apathy. According to Kosmas Papadopoulos, Head of Sustainability Advisory for the Americas, “corporates and investors are increasingly engaged on these issues and perceive them as highly relevant to material risk analysis”. Which is just as well given the direction of regulation.

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.