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UK climate failings, biodiversity needs funding and SLLs open to question

© Shutterstock / iQonceptImpact investment.

The UK’s climate strategy was a focus last week, with the Climate Change Committee (CCC) warning that the UK is looking set to miss its net zero target. The news that Environment Minister Zac Goldsmith resigned is also a concern, especially because he said it was due to the fact that the current government isn’t taking climate change seriously, talking of ‘government apathy’. The outgoing head of the CCC said the country has lost leadership in the climate fight. Given the approval of new oil and gas, as well as a new coal mine, it is hard to argue.

Australia is moving down the path to action, as it is exploring plans to introduce mandatory climate disclosure from 2024. The reality however, as seen in the UK, is that states need to take a holistic approach to the challenge, integrating industrial strategy with environmental and climate action – isolated approaches are clearly not the way forward. Despite the recent introduction of its green strategy, the UK is even less likely to hit its 2030 targets than last year. The US with its Infrastructure Investment Act and the Inflation Reduction Act, China with its Five Year plan and the EU with its Fit for 55 approach, have clearly decided to go in another direction. And, as ever, that will affect the flow of capital.

There’s increasing social focus on the energy transition and shift from fossil fuels

Where that capital goes is critical to the speed of the transition. As Vicky Sins of the World Benchmarking Alliance pointed out: “Global energy-related CO2 emissions hit a new record in 2022, and the majority of emissions linked to oil and gas products come from the use/combustion of products. Thus, reducing oil and gas production and demand is by far the most efficient way to see sectoral emissions decreasing.”

There is also growing pressure on pension funds, with the Make My Money Matter’s report ‘Fossil Fuels in UK Pensions’ on the UK’s £3 trillion in pension funds showing significant exposure to oil and gas.

US appears to be eyeing the VCM with concern – linked to the ESG debate

In the US, there seems to be renewed focus on the voluntary carbon markets. The Commodity Futures Trading Commission’s Division of Enforcement has established an Environmental Fraud Task Force to combat environmental fraud and misconduct in derivatives and relevant spot markets.

The move can be seen as part of the ongoing debate around ESG in the States, as Director of Enforcement Ian McGinley said:  “The Environmental Fraud Task force will focus on addressing fraud and manipulation in carbon credit markets and other forms of greenwashing, including material misrepresentations about ESG investment strategies.”

Commitments on biodiversity are one thing, where’s the money?

Biodiversity funding was in the news, as the Global Environment Facility (GEF) approved plans for a new fund to finance the implementation of the Kunming-Montreal Global Biodiversity Framework. The GEF Council decision, taken during a meeting in Brazil, clears the way for the launch of the Global Biodiversity Framework Fund at the Seventh GEF Assembly, to take place in Vancouver, Canada, in August.

It’s critical to get the fund up and running with such a short space of time to take action and the vast amounts of capital required. A report from the RSPB, The Wildlife Trusts and the National Trust says the UK alone needs £4.4 billion in funding for nature, and of course climate-friendly or regenerative agriculture. At the moment, one of the most pro-nature pieces of legislation is Europe’s Nature Restoration Law, which is currently deadlocked in the Parliament. A vote will be taken in the July plenary.

Biodiversity got further corporate backing however, with news of AstraZeneca’s (LSE:AZN) plans to invest $400 million in its reforestation and biodiversity programme AZ Forest, including a commitment to plant 200 million trees by 2030. The investment builds on AstraZeneca’s initial AZ Forest commitment, announced in 2020, to plant and maintain more than 50 million trees by the end of 2025.

And impact asset manager ResponsAbility announced that it has raised $106 million for its climate-smart food systems investment solution to support the transformation of global food systems in alignment with the world’s climate targets.

Nature and biodiversity interest means more marine action

The marine environment also got a boost, with news that the Food and Agriculture Organisation (FAO) has announced a partnership with ADB, CAF, EBRD and IOC-UNESCO. The goal is to address agricultural, municipal, and industrial pollution from land-based sources that harm coastal environments.

The Clean and Healthy Oceans Integrated Program, is a source-to-sea initiative that will direct up to $115 million in grants to help countries curb land-based pollution of coastal environments and Large Marine Ecosystems. Oceans have lost nearly 2% of their oxygen since the 1950s, resulting in “dead zones” – known as hypoxia – that cannot support marine life. This phenomenon is typically driven by pollution from land-based sources, including the overuse of fertiliser, organic waste from livestock, and untreated municipal and industrial wastewater.

The Clean and Healthy Oceans Integrated Program aims to curb land-based pollution of our oceans through policy and regulatory innovation, infrastructure investments, and nature-based solutions. It will also map land-based sources of ocean pollution to better understand the impacts of hypoxia and apply ocean science to develop solutions that improve human and ocean health.

Specifically, the programme aims to improve sustainable practices on 200,000 hectares of landscapes and 14.3 million hectares of marine habitats (an area roughly the size of all of Thailand’s cultivable land). Additional aims include reducing pollution and improving management in more than three Large Marine Ecosystems and mitigating 5.6 million metric tons of greenhouse gas emissions.

Sustainable debt continues to appeal to the market

Thailand is to publish its Sustainable Finance Taxonomy, while back in the UK, the Financial Conduct Authority has expressed concern that the sustainable finance market is at risk of greenwash. While it sees a great deal of untapped potential, in particular around sustainability-linked loans (SLLs) there are issues around miscommunication, market integrity and conflicts of interest.

When debt is linked to performance on emissions reductions alone, it’s a lot simpler to track. DHL Group’s (ETR:DHL) mail and parcel delivery business Deutsche Post, announced the completion of its inaugural sustainability-linked bond offering, raising €500 million, with interest rates on the ten-year bond tied to the company’s CO2 emissions reduction targets.

The bond offering follows the publication in November 2022 by DHL of the group’s new Sustainability-Linked Finance Framework, outlining the Key Performance Indicators and Sustainability Performance Targets to be used in sustainability-linked issuances, and trigger events that cause a step-up in debt cost.

Algebris Investments has also announced it has launched a Sustainable Bond Fund. It will invest globally in fixed-income securities with an ESG focus, and has been labelled an Article 9 under the EU’s Sustainable Finance Disclosure Regulation (SFDR).

Attitudes are changing

The Index Industry Association (IIA) has just released its third annual ESG Global Survey of Asset Managers. In partnership with Opinium Research, the IIA has taken the pulse of 300 CIOs, CFOs and portfolio managers from the UK, US, Germany and France.

The survey responses suggest that, despite significant economic volatility and political frictions, ESG’s future role in global investment portfolios continues to increase. Asset managers in France, Germany, the UK and US are ramping up their use of ESG factors. Eight in ten (81%) asset managers say ESG has become more (54%) or much more (28%) of a priority to their investment strategy over the past 12 months.

ESG investing remains on course to reach almost half of portfolios in two to three years’ time, and to reach 63% in 10 years. That’s on par with last year’s expectations (64%) but a notable rise from two years ago (52%). Interestingly, ESG support is highest among asset managers in the US, where 88% say it has become more of a priority.

And an IBM survey on CEO decision-making in the age of AI reports that many chief executives are using, or planning on using AI – which was not a surprise. What was a surprise was the news that nearly half of the CEOs now have compensation tied to ESG performance.

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