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ESG politics, net zero banking standard and climate’s back in court

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There is continuing fall-out from the political issues around ESG but long term investors are starting to realise that assessing impact, and integrating nature into decision-making is going to play a critical role in decisions in the future. Last week we saw new approaches to helping financial services transition joining the mainstream, and the EIB called on cities to disclose environmental data through CDP.

Politics, investors and net zero don’t mix but new index drives ESG focus

The political fallout from Republican action against ESG continued, with news that Spain’s MAPRE (MCE:MAP) has joined other insurers in quitting the Net Zero Insurers Alliance (NZIA). It is going further than expected, however. The German state of Baden-Württemberg recently passed a law mainstreaming sustainability concerns alongside traditional investment metrics such as profitability and liquidity. Reuters reported that this could have an impact on 20% of the state’s $18 billion in holdings as it moves towards ESG. The speculation is that this continuing politicisation of ESG in the US could see the sale of US treasuries affected.

Political shenanigans aside, there is continuing growth of support for developing ESG products. Impak has launched the world’s first indices based on ESG+impact assessment, showing that there is strong appetite for action. The indices have been designed to help the financial sector build new products such as ETFs and other structured products. The idea is that they will enable investors to support positive change in five key areas: Green Energy & Technology, Sustainable Food & Biodiversity, Clean Water & Waste, Social & Economic Empowerment, and Health & Well-being.

Based on a double materiality approach, impak says its methodology is the most rigorous and efficient to ensure that only the companies with the most significant impact are selected for each index. Clients will be able to fully customise their index strategies using many approaches such as thematic screening, best-in-class, and exclusion for new product creation, direct indexing, or benchmarking.

What will be interesting to measure is how far such rigorous methodologies result in data supporting the benefit of an ESG investment lens – and how effective such data will be in persuading politicians to act in favour of a net zero nature positive future, rather than acting as brakes on much-needed change in the way that we look at the purpose of the economy.

Multilateral development bank EIB calls on cities to disclose through CDP

The European Investment Bank, the EU’s Climate Bank, has called on subnational governments to report data on climate and nature risks, science-based targets, infrastructure financing needs, climate action and adaptation plans through CDP. The NGO estimates that European cities require $17 billion in further financing to fund their green transition, yet they struggle to access the necessary levels of finance.

One of the greatest challenges is getting the right data in place to support a financial package: financing institutions such as the EIB rely on environmental disclosure data to back sustainable investment programmes. In 2022, 135 cities across Europe disclosed 527 projects worth $41 billion, but needed $17 billion in further investment and CDP says it hopes that the endorsement will result in increased disclosure and data as well as further finance.

IIGCC and TPI Centre launch Net Zero Standard for Banks and Net Zero Banking Assessment Framework

The Institutional Investors Group on Climate Change (IIGCC), in consultation with the Transition Pathway Initiative Global Climate Transition Centre (TPI Centre), have launched a Net Zero Standard for Banks setting out investor expectations on the transition to net zero.

The Standard is built around 10 areas: bank commitments; targets; exposure and emissions disclosure; emissions performance; decarbonisation strategy; climate solutions; policy engagement (lobbying); climate governance; just transition; and annual reporting and accounting disclosures; and complements the Net Zero Investment Framework.

It is intended to support constructive engagement with banks to aid the ongoing implementation of climate commitments. Where necessary, it will continue to evolve and be refined to reflect relevant developments, including new methodologies, policy and regulation.

Alongside the Standard, the TPI Centre has launched a Net Zero Banking Assessment Framework, which is a set of measurable indicators, sub-indicators, and scoring guidance for assessing the alignment of banks against the goals of the Paris Agreement. The Framework was produced by the TPI Centre in consultation with IIGCC and Ceres.

The TPI Centre will use the Net Zero Banking Assessment Framework to assess 26 global banks across Europe, North America and Asia annually, with the inaugural assessments due for publication in summer 2023. As well as highlighting areas for improvement, the assessments will capture the progress many banks have made to date and the ongoing implementation of their stated climate-related policies and plans.

Pensions remain too slow to integrate nature risk and opportunity

Pensions for Purpose is calling on asset owners and managers to start investing to preserve and enhance natural capital. The NGO has released a new white paper, commissioned by Gresham House, which highlights the opportunity for asset owners and managers to enable more resilient portfolios and bolster biodiversity by integrating nature preservation and restoration into their investment strategies.

According to the research, at least 62% of UK pension funds are not invested in natural capital solutions despite growing awareness of biodiversity risks. It also says that most asset owners asked agreed addressing biodiversity risk is at least as crucial as tackling climate change, and that investing in natural capital solutions can help asset owners manage the systemic financial risk of biodiversity loss.

Currently, 35%-54% of financial institutions’ assets are highly or very highly dependent on ecosystem services supported by biodiversity, according to the Sustainable Policy Institute. Despite this, 80% of asset owners interviewed do not view biodiversity risks separately from climate risks, primarily due to the data challenges mentioned and limited internal resources to focus on biodiversity loss as they do for climate change.

The report also found that 54% of asset owners interviewed now see biodiversity and nature loss as an ESG risk and a theme with which to engage underlying investments. Direct investing in natural capital remains a new market but, as biodiversity loss is a financially material systemic risk, asset owners can manage their exposure by engaging with companies on biodiversity and nature loss or by investing in natural capital solutions.

The research also highlights a divide among pension funds when it comes to their responsibility to invest in natural capital. While 38% believe it falls within their remit, an equal percentage believe it does not, with the remaining respondents undecided. Some funds focus on the responsibility and role of their own investment portfolio, while others adopt a more active stance, considering the future of investment and the wider implications of securing a better world for their members’ retirement.

New investment partnership launches to deploy capital for a nature-positive future

It’s been estimated that $4-6 trillion in capital will need to be invested every year in order to build a net positive global economy. Given the challenges that states are facing and the need to trade-off over different concerns, most of that capital is going to come from the private sector.

While pension funds might seem to be the obvious investors of choice, given their focus on long term return, it is clear that not all players have woken up to the need to change their focus. The private equity sector seems more interested in taking advantage of the opportunities in economic transformation.

To that end, Lombard Odier Investment Managers, the asset management arm of Swiss banking group Lombard Odier, and system change company Systemiq have announced a new partnership to build holistiQ Investment Partners.

holistiQ will operate as a new platform within LOIM solely dedicated to sustainable investing and will combine Lombard Odier’s asset management heritage, commitment to sustainability and investment track record, with Systemiq’s deep analytical understanding and expertise in economic system transformation. The platform says it will seek to deploy capital to capture investment opportunities, concentrating on the transformation of key economic systems such as energy; land and oceans; and materials.

Carbon market transparency extended with launch of the CIX Exchange

To address industry calls for greater transparency and price certainty, CIX has introduced the first daily on-exchange liquidity window in the voluntary carbon market with firm bids and offers. This dedicated 30-minute pricing session pools all-day liquidity from Asia, Europe and Middle East to help sharpen benchmark prices and improve order depth for spot nature-based credits.

By close of trading on 7 June 2023, bids and offers had converged to just a few cents and seven transactions totalling 12,000 tonnes of carbon credits had traded and cleared on CIX’s first standardised contract announced in March, CIX Nature X.

Bids, offers and transactions came from a variety of active market participants spanning leading project developers and suppliers, major financial institutions, trading houses and corporate end-users, demonstrating support for price discovery and market scaling. The first trades were executed by Chevron (International) Trading Pte Ltd, CICC Commodity Trading Limited, Engie Energy Marketing Singapore and Standard Chartered. Other supporters that participated include Carbon Growth Partners, DBS Bank, Hana Securities, RWE Supply & Trading, South Pole, Viridios Capital and Vitol Asia.

Greenwash moves beyond comms to liability

Greenwash was in the news again this week. The sports world has been up against it, with news that the Swiss advertising regulator has ordered FIFA to stop describing the 2022 World Cup as “carbon neutral” because the claim is “false and misleading”. Meanwhile Saudi Arabia’s purchase of the PGA Gold Tournament has gone through – many are wondering whether human rights concerns raised during the negotiations will continue to be raised.

There is an increasing challenge both in the press, and for regulators, to address the disconnect between statements and actions. It’s one thing when Shell, Repsol and Petronas get their knuckles rapped for misleading advertising, or KLM gets pulled up for not being clear about aviation’s climate impact. That matters because it signals a shift in focus on communications and the materiality of a company’s impact, and whether it’s being disingenuous. But it’s quite another thing when it comes to being found liable in court.

The continuing discussion of the reputational risk of poor state or corporate behaviour is one thing. It’s quite another when it starts becoming part of litigation – and while it many have taken a long time to get here, Monday 12 June sees the start of the climate change trial against the state of Montana. Meanwhile, a federal case that was dismissed in 2020 has since been reopened.

There’s a lot to unpack in a fast-changing market, but acceleration towards a net zero future continues.

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