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Financial fails on climate action, more risk tools and carbon market volatility continues

Dollar bills.

In this week’s roundup, we explore the latest news to affect investment trends and perspectives in the climate and sustainability space.

The financial sector continues to fall short on climate

There is continuing concern about the extent to which financial institutions climate goals actually support effective net zero transmission.  The Institute for Energy Economics and Financial affairs (IEEFA) has issued a report highlighting that the majority of the Royal Bank of Canada’s financed emissions are not being covered under the banks net zero plans. Given that financed emissions, and the ability of climate negative projects, are the majority of the financial services contribution to climate change, that’s a problem. The report says that RBC’s climate and sustainable finance program fails to address ending fossil fuel expansion and excludes significant segments of its business from climate targets.

Adding fuel to the fire was the latest research from Morningstar, which showed that only eight asset managers had actually achieved ‘leader’ status in the latest issue of its ESG Commitment Level Landscape assessment. According to the assessment, ESG issues such as climate change have become more prominent over the last few years. As a result, investors increasingly expect asset managers to minimise these risks to their portfolios and address the impact of their investments on society and the planet.

While Affirmative Investment Management, Australian Ethical, Boston Trust Walden, Domini, Impax, Parnassus, Robeco and Stewart Investor all scored highly, 21 scored advanced, 48 firms achieved basic but 31 remained with a low score.

Climate risk and its management attract financial and corporate interest

MSCI Inc. (NYSE: MSCI) announced an expansion of its partnership with Google Cloud to accelerate the development of generative AI (gen AI) solutions for the investment industry. Powered by Google Cloud’s gen AI platform Vertex AI and climate technology, including BigQuery Geospatial and Earth Engine, the solutions will help MSCI clients better manage portfolio risks and opportunities and make informed investment decisions. The new solution is expected to help with identifying risk signals, conversational AI to help clients get the responses they want and what MSCI and Google call ‘generative climate AI’.

That means leveraging Google’s AI experience to help investors measure and manage portfolio exposure to climate risk and identify low carbon investment opportunities. With these advanced AI technologies, MSCI will make it easier for investors to identify, synthesize, and communicate the broad range of climate exposures across asset classes.

Google has also launched three new APIs make it easy for developers to map solar, air quality and pollen information, from the Google Maps Platform. According to Yael Maguire, vice president and general manager, geo sustainability at Google these products apply AI and machine learning, along with aerial imagery and environmental data, to provide up-to-date information about solar potential, air quality and pollen levels. With this technology, developers, businesses and organizations can build tools that map and mitigate environmental impact.

The deployment of actionable transparent standards and traceability continues

A group of investors with over $1 trillion in AUM, convened by ShareAction’s Workforce Disclosure Initiative, are urging the ISSB to develop new standards for disclosure on human capital and human rights behaviour in its 2024 update.

The investors span six countries and include a mix of asset managers and asset owners and include Impax Asset Management, The Universities Superannuation Scheme and Sycomore Asset Management. They have co-written to the ISSB specifically in response to its Request for Information (RFI) – launched in May 2023 – seeking feedback on which area of sustainability to focus its next set of standards on.

James Coldwell, Head of the Workforce Disclosure Initiative (WDI) at ShareAction said: “We know that workers around the world face exploitation by unscrupulous companies, harming the workers themselves and creating risks for investors. Tackling these issues can only be achieved when there is transparency around corporate practices – something the ISSB is perfectly positioned to deliver. This is why we’re calling on them to prioritise research into human capital and human rights, to develop a globally accepted reporting framework.”

Crucially, the letter also calls on the ISSB to consider “how to disclose human capital and human rights information together” by addressing the relationships and connections between the two topics. It argues that in practice neither companies nor investors treat the two topics as totally separate areas. Human rights due diligence processes, for example, are used as key tools for identifying labour issues. Concepts such as unionisation and modern slavery clearly belong to both categories.

Meanwhile, promotional products supplier Gemline  announced a partnership with the award-winning Aware, a global textile traceability solution for the fashion and textile industry. Aware is said to be “the world’s first hybrid (physical tracer + public blockchain) traceability technology”. It works like a virtual passport to authenticate sustainable material throughout the production process—from textile to consumer, to guarantee that the products are truly made from sustainable materials.

National action looks to address challenges around investment risk

In the US, New York’s pension funds have filed a motion to dismiss an anti-ESG lawsuit, which was challenging their right to stop investing in publicly traded shares of fossil fuel reserve owners. The lawsuit, Wong et al v. NYCERS, claimed that the three Systems (Teachers’ Retirement System, New York City Employees’ Retirement System, and Board of Education Retirement System) breached their fiduciary duties in the years-long process of divesting from fossil fuel companies.

New York City Comptroller Brad Lander said: “The arguments in this lawsuit are a weak attempt by anti-ESG, anti-union forces to undermine the decisions by our pension system trustees to assess the very real risks of climate change to their portfolios.”

The UK looks set to leave the Energy Charter Treaty. While there is still a degree of controversy about membership, effectively it allows companies to sue governments if changes in policy affect their ability to make profits. And that means a potential drag on effective climate action, as rules on fossil fuel extraction and combustion could definitely affect profitability.

In Australia, it’s been reported that the government is to back down over a class action court case demanding it disclose climate risk to sovereign bonds – making it the first triple-A rated government bond to admit that climate change could affect the value of its bonds. Acknowledgement of the systemic risk driven by climate risk is a core concern of many activists.

The UN PRI also announced that a global collaboration of institutional investors would be seeking to engage with Australian governments on climate change risks and opportunities and will expand to 25 organisations with approximately $8 trillion (AU$12.2 trillion) in assets under management.

Investors launched the Collaborative Sovereign Engagement on Climate Change in September 2022, with a pilot focus on Australia. A further 18 investors will join the engagement in 2023-24, through which they aim to collaboratively support governments to take all possible steps to mitigate climate change in line with the Paris Agreement.

Investors are seeking engagement with sovereigns to reduce their exposure to risks associated with a failure to rapidly transition to a net zero global economy including: the value of sovereign debt investments; the continued competitiveness of national economies and investee companies; and systemic risks through exposure to the global economy.

Investors joining the engagement include: Achmea, Ardea Investment Management, Brown Advisory, Candriam, Colchester Global Investors, Fidelity International, First Sentier Investors, IFM Investors, Insight Investment, Jupiter Asset Management, LGPS Central, Morgan Stanley Investment Management, Munich Re, Neuberger Berman, Pendal Group, QIC, Rest and Sumitomo Mitsui Trust Asset Management.

They will join existing members of the engagement’s Advisory Committee: Aviva Investors, BNP Paribas Asset Management, Brandywine Global, HESTA, Nordea, Robeco and Schroders.

Meanwhile in New Zealand, a new coalition has called for the end of free carbon credits. The campaign wants to see a phase out of free credits in the ETS by 2030, the introduction of a carbon border adjustment mechanism and a focus on green development. The coalition, coordinated by Common Grace Aotearoa, includes the New Zealand Green Building Council, Engineers for Sustainable Development and Generation Zero.

Carbon market volatility continues

Generally speaking there is a continued volatility in the voluntary carbon markets, in part due to the ongoing saga about the impact of REDD+ credits, or avoided deforestation credits.  Reuters reported that the markets have shrunk for the first time in seven years as major corporate buyers, including Nestle and Gucci, are backing away.

This is in large part driven by concern about the impact of avoided deforestation projects – which provide a lot of the lower cost carbon offsets available. It’s certainly true that Shell has backed off its $100 million carbon offset plan,  but its open to question as to whether is driven by concern about offsets or a desire to double down on fossil fuel exploitation.

The issue of whether forest carbon credits reared its head again with the publication of the West et al research article in Science focusing on the finding that most had not reduced deforestation. This is part of an ongoing argument about the quality of such credits and has seen credit certification body come under fire.

Verra said that it was concerned that concerns it had flagged about the study’s methodology had not been corrected, especially with reference to sample size. Verra said it had provided detailed feedback on the pre-publication version of this paper in a January 2023 Technical Review after it was covered by the media [which it says have not been corrected] and have updated and expanded on this feedback in a new analysis.

Green bonds continue to stimulate market interest

Interest in corporate banks continues to grow, and Deka recently launched an ETF targeting green bonds from corporate issuers. Bloomberg reports that battery giant LG is considering investor appetite for a green bond sale, while GlobalCapital reviewed Instituto de Creditor Oficial (ICO) fifteen sustainable bond issues. ICO has issued 10 social and five green bonds, proceeds of which have been used to fund the financing programmes of the Ministry of Economic Affairs and Digital Transformation.

South African Real Estate Investment Trust (REIT) Redefine Properties has issued its third green bonds, while Japanese banking and financial services group Mizhuo has issued a €750 million ($820 million) green bond, with proceeds from the offering to be used to finance projects supporting the transition to a low carbon society.

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