This week’s round-up explores the investor shift towards ESG (despite yet another move by US Republicans to push back), what happened at the Paris Finance meeting in June, whether offset use actually means more internal action, some green bond activity where the EIB explores the use of blockchain, and the growing importance of impact as Boston Consulting Group launches an impact measurement scheme.
ESG and carbon research reflects the increasingly mainstream face of ESG
Analysis from PwC, GPs’ Global ESG Strategies: Disclosure Standards, Data Requirements & Strategic Options reports that over 75% of investors in the private markets expect to stop investing in ESG products. Not only does it suggest that ESG assets under management (AUM), which hit $1.1 trillion in 2021 from a base of $600 billion in 2015), will hit $2.7 trillion by 2026 (possibly going as high as $4.5 trillion) but in the survey, 76% of LPs disclosed plans to stop investing in non-ESG private market products.
A similar percentage of GPs intending to halt their offering of non-ESG products. PwC expects the funding to be used to expand the reach of ESG investments and enhance the associated technological and workforce capabilities.
Interesting analysis from Trove Research shows that companies using emissions offsets actually do more on internal emissions reductions than those who don’t – a very different perspective than the public perception that offsets are used to replace internal action. This is a clearly an area of research that needs more attention.
The report analysed the impact of carbon credit use by 4,000 companies and shows that those companies which use a material amount of carbon credits demonstrate faster emission reductions compared to those that do not.
What was also interesting was that as concern increases about the impact of stranded assets as the investment environment changes, it looks as if it’s the rich who are likely to be most affected. Research published in Joule suggests that the energy transition may not have that much impact on ordinary people.
In the United States, two-thirds of financial losses from fossil fuel assets would affect the top 10% of wealth holders, with half of that affecting the top 1%. At the other end of the spectrum, 3.5% of financial losses would affect the poorest half of US citizens. The researchers say that analysis on Europe and the UK showed similar results.
Paris climate finance meetings make little progress
Despite the fact that movement on climate finance is one of the key levers for addressing climate change, the much-lauded summit on a New Global Financing Pact in Paris last week saw little significant change. With high level calls for taxes on shipping, addressing the debt burden of developing nations and even talk of a tax on the wealthy (although that seems highly unlikely), at least the conversation seems to be shifting.
Researchers had hoped that the discussion would explore the impact of multinational development banks (MDBs) and their financing of high emissions intensity projects. Obviously the initial focus is on fossil fuel power plants but there is growing concern about the impact of MDB investment in livestock production. Since 2010 the MDBs have reportedly invested over $4.6 billion in such projects which, given livestock production is responsible for around a fifth of annual global emissions, is a serious oversight.
There were positive messages, with new World Bank president Ajay Banga saying the institution was shifting focus away from development alone towards an integration of considerations of the climate crisis. This, combined with the news that the multi-lateral development banks (MDBs) have finally aligned their lending criteria with the goals of the 2015 Paris agreement, means we may see the end of large scale fossil fuel power plant funding in emerging markets. If this is the case, it could provide a long term shift in overall risk management approaches. To be effective however, these approaches will have to cover all sorts of emissions sources.
One outcome of the meeting was an agreement about redistribution of the special drawing rights (SDR), a financial mechanism provided through the International Monetary Fund (IMF). The UK, Japan and France agreed to allocate a proportion of their SDRs to developing countries – amounting to around £100 billion. If Congress approves the US commitment, this could rise by a further $21 billion. While it could be argued that this is simply a reallocation of capital that would otherwise have been devoted to other needs, this is in addition to the $100 billion in climate finance that was promised to poorer countries in 2015 and not a replacement for the loss and damage fund that was agreed (in principle) in 2022. It’s worth noting that a deal was agreed to provide $2.7 billion to fund a renewables roll-out in Senegal.
One of the goals of the event was to explore a rethinking of the Bretton Woods institutional make-up – a framework set up post WWII to ensure international financial stability. Not much was achieved but its clearly time for a hard look at international finance frameworks and global governance. The introduction of the Bridgetown 2.0 initiative, updated since the introduction at COP27, has introduced some interesting ideas.
There was also the launch of a proposed $1.5 billion climate and blended finance platform at the summit – GAIA. The intent of its founded is that it reach nearly 20 million direct and indirect beneficiaries across 25 developing and emerging countries.
GAIA will blend commercial capital with a concessional and patient source of capital, creating a model that can be scaled and replicated across market and is being supported by multiple public and private sector organisations, including these three prominent global philanthropic institutions: FinDev Canada, MUFG, and a consortium of UN partners and platform-based initiatives.
Could greater clarity on impact measurement cut through ESG confusion?
Climate finance matters for the private sector too, it needs to increase from current levels of around $1.5 trillion to over $4.5 trillion in the next few years – especially considering that the world is nowhere near achieving any of the Sustainable Development Goals. Realigning capital can prove difficult however, as investors struggle to manage different reporting regimes, mandatory and otherwise. In fact, Capital Monitor analysis suggests that many investors are members of around 24 different ESG initiatives – because each approaches the challenge in a slightly different way, or speaks to a different set of stakeholders.
Boston Consulting Group and Temasek-based decarbonisation platform Gen Zero have now launched their own framework, the GenZero Climate Impact Measurement Framework.
This time however its focused on understand the impact of investments – instead of focusing on accounting for corporate emissions, it focuses on assessing overall carbon impact. This could prove useful not only for corporates, but for investors trying to understand the impact of their financed emissions.
EIB launches a Climate Awareness Bond on blockchain
The European Investment Bank (EIB) priced its first ever SEK 1 billion ($92.7m) Climate Awareness Bond (CAB). What was interesting was its choice in using digital platform so|bond, which was launched with the intention of bridging the gap between green finance and the digital world, providing an efficient mechanism for raising and managing climate-related project finance. The first CAB was launched in 2007 and is often considered the world’s first green bond and their issue is aligned with ICMA’s green bond principles.