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Anti-ESG rhetoric trumped by market projections

Dollar bills.

Despite increasing noise around the anti-ESG agenda, investment continues apace and there is increased scrutiny on nature and climate risk reporting in this week’s roundup, as well as a growing standardisation on expected risk disclosure.

Acceleration towards standardised reporting continues

Disclosure standards are converging as EFRAG and the GRI confirm that the European Sustainability Reporting Standards (ESRS) and GRI Standards have high interoperability. This is another signal that whatever the public political concerns about disclosure burdens, the trajectory towards a more transparent economic framework is accelerating.

Following the requirement of the CSRD to adopt a double materiality approach and to take account of existing standards, ESRS and GRI definitions, concepts and disclosures regarding impacts are fully or, when full alignment was not possible due to the content of the CSRD mandate, closely aligned. That means that those using the GRI standards to report are going to be ahead of the curve on reporting on ESRS.

Anti-ESG continues to make noise

There was news this week that the ESG boom was ending, with ESG equity funds seeing outflows of £953 million in August 2023. However that’s part of a wider market concern about equity and fixed income funds – especially in a higher interest rate environment –  according to global funds network Calastone.  Yet recent reports from Bank of America suggest inflows of £33 billion into ESG bond funds. What’s clear is that different types of finance are attracting different types of finance, and political grandstanding is still playing a major role.

US presidential hopeful Ramek Vivaswamy’s Strive Asset Management says it has hit $1 billion in assets under management – a fund set up to “prioritise the financial interests of their clients”.  It’s difficult to understand how ignoring the supply chain risks of climate change and extreme weather, or the impact of modern industrial farming on soil health, or the inequity within corporate operations is going to minimise financial risk.

There are undoubted issues around the constitution of ESG funds, and the extent to which they include climate destructive entities. Work remains to be done on transparency and accountability but that doesn’t change the fact that while much of the success its due to social policies and low scope 1 and 2 emissions from US tech companies, social, governance and environmental risks are fundamental to the changing operational environment. There is still little reason however to believe that any investor with a perspective longer than 2-3 years can ignore the critical importance of climate and nature to economic operation – fundamental change in perspectives across the market is on its way.

It’s also worth noting that the ECB Stress Test has warned that banks credit risk could double under a a slower net zero transition – which is once again a signal for longer term thinking.

But funding continues to flow into climate tech, despite some market concerns

The BBVA has invested $45 million in Lowercarbon Capital in order to help its work on decarbonisation, while Infinity Recylcing’s Circular Plastics Fund has hit over €105 million in committed capital. Sweden’s H2 Green Steel has raised $1.6 billion in a private placement, showing just how strong the appetite for hydrogen solutions remains.

In the UK  Ofwat’s Innovation Fund has said it will provide up to £40 million to “ bold and innovative cross-sector collaborations that are solving challenges facing the water sector.” The regulator says it is seeking even more ambitious solutions that tackle climate change, pollution, and leakage, as well as those that enhance the natural environment, improve services for consumers and increase the resilience of infrastructure.

And in impact investors news, EIT InnoEnergy has raised over €140 million in a private placement. Investors in this round are new strategic players (Societe Generale, Santander CIB, PULSE – CMA CGM Energy Fund, Renault Group, Stena Recycling and NIIT), and existing shareholders (Siemens Financial Services, Schneider Electric, Capgemini, Volkswagen Group, ING, Koolen Industries, GROUPE IDEC and Engie).

The proceeds will be used for increasing new deal flow, accompanying the current 200 portfolio companies in their growth, accelerate the successful launch of new industrial champions such as InnoEnergy company builders and capturing the opportunities created by new regulatory frameworks, and boosting the expansion in the US.

National action

At African Climate Week, leaders called for new global taxes to fund climate change action while the Emirates NBD has launched its own Sustainable Finance Framework. The Framework will cover Emirates NBD Group entities such as Emirates NBD, Emirates Islamic, DenizBank and Emirates NBD Asset Management and will accelerate the Group’s efforts when it comes to innovative sustainable finance offerings.  Meanwhile Singapore has expanded its pilot project to boost the ocean’s CO2 absorption capacity – a project that the Public Utilities Board is running using an electrolytic process developed by LA-based Equatic.

In the UK, a report from Green Alliance shows that MPs now believe that climate change is no longer an ‘outsider’ issue, but one that lies at the heart of political decision making – but that significant concerns remain around the complexities of how to address the issue.  This could be driven, in large part, by a growing acceptance of the economic implications of a failure to act.

Industry body Energy UK has released its Path to Prosperity report, which  “explores how much the UK is set to gain under a scenario where we ambitiously transition to Net Zero and what the implications of decarbonisation are for different sectors of the economy. It finds that the economy could be up to £240 billion larger, but that this is only possible with the right frameworks and policies in place to unlock private investment.”

At an international level, the UNEP INC chair has published a first draft of a Global Plastics Treaty. In 2022 it was agree that 175 national will agree an legally binding treaty by the end of 2024. Research commissioned by WWF and conducted by Eunomia identified the most high risk products and suggested that global bans, phase outs and control measures are entirely feasible. One of the concerns of advocates for action is that a focus on recycling and waste management will fail to address the upstream issues associated with plastics.

Nature and climate risk

The Network for Greening the Financial System (NGFS) has released a conceptual framework for central banks and supervisors to address how to manage nature risk in their approach to the economy. The report, which attempts to define nature-related risk, as well as identify sources of physical and transition risk, and improve modelling and data. It’s release is timely considering that CDP assessment showed that the majority of G20 countries lack policies on nature related disclosure, despite commitments at COP15 on the back of the Global Biodiversity Framework.

This happened the same week the University of Waterloo released a report highlighting ways in which nature could help protect from extreme weather.  While the guidance is focused on what people can do for their homes and buildings, it has a much wider resonance across the board.

The ASEAN Business Advisory Council (ASEAN-BAC) and the ASEAN Centre for Biodiversity (ACB) sealed their partnership through a Memorandum of Understanding to advance business and biodiversity integration initiatives in the ASEAN region, which shows that there is growing understanding of the problem.

In terms of understanding impact, the  Intergovernmental Platform on Biodiversity and Ecosystem Services (IPBES), released a report warning that the global threat posed by invasive alien species is underappreciated, underestimated, and often unacknowledged. Not only do they play a critical role in plant and animal extinction, the annual cost of such species spread is now estimated to be more than $423 billion.

The International Federation of Red Cross and Red Crescent Societies (IFRC), in collaboration with global professional services firm Aon, Lloyd’s Disaster Risk Facility and the Centre for Disaster Protection,  have launched a new financial mechanism to transform disaster response, an increasing necessity in a world of climate change.  The new risk transfer mechanism will ensure swift and agile support is available when a disaster occurs. This tool provides an insurance  backstop for the IFRC’s Disaster Response Emergency Fund (DREF).

A concerning report from the Transition Pathway Initiative shows that banks are still not living up to their need to address financed emissions, with less than 5% of banks setting net zero commitments across all their financing categories. Only 6 banks on the 26 assessed have disclosed a commitment to end all on- and off-balance sheet activities that finance new coal capacity immediately. The International Energy Agency has indicated that coal should be phased out by OECD countries by 2030, and by 2040 if the world is to limit global warming to 1.5° Celsius.

Bonds: green, sustainable and more

Green bonds are reported to be on track to reach up to $1 trillion 2023, while Sweden and UK based ClimateAligned has launched a new platform to scale sustainable finance in the debt markets, through the application of AI and ESG. ClimateAligned is using machine learning (ML) technology to gather, process and analyse data from multiple sources, rendering the climate and sustainability credentials of bonds and issuers transparent and comparable, through a single access point.

The company says that technology and its application can be infinitely adapted to assess financial assets against proprietary or regulatory frameworks, guidelines and other metrics at scale with changeable parameters. This enables investors to rapidly integrate best practices in climate and sustainable investing into their credit investment processes, portfolios and products, and avoid greenwashing and associated reputational risks.

Meanwhile the World Bank has launched a proposal for a performance based sustainability-linked bond format that is expected to help protect the Brazilian Amazon. “ It argues that the carrots and sticks of sustainability-linked bonds should not use key performance indicators which are solely tied to outcomes. Instead, they should be based on its issuer’s level of performance with respect to a target. The paper defines performance as the part of the outcome that the issuer can influence.”

Carbon markets

Despite reports that the volume of trade in the voluntary carbon markets has fallen due to concerns about robustness and the validity and usefulness of some avoided deforestation credits, activity in the sector continues apace as corporates continue to evolve their response to the need to address their carbon footprints.

BeZero Carbon has just launched a white paper explaining a new methodology to enable companies to make credible claims around carbon credits and their use. It’s a risk-adjusted approach focused on discounting rates – it is similar to the process used in the bond markets, which provides a quantitative indication of how many credits a buyer should purchase and retire in order to make a given tonne-based claim.

The carbon removal credits is still seeing strong activity, with Microsoft announcing its purchase of 315,000 metric tones of CO2 removal credits from direct air capture group Heirloom from its Cypress hub, while Frontier has facilitated its third round of carbon removal purchases. It has facilitated $7 millino of carbon removal purchases from 12 companies—Airhive, Alkali Earth, Banyu Carbon, Carbon Atlantis, CarbonBlue, CarbonRun, EDAC Labs, Holocene, Mati, Planetary Technologies, Spiritus Technologies, and Vaulted Deep—on behalf of buyers Stripe, Shopify, and H&M Group. In addition, Stripe has provided $500K in R&D grants to Carboniferous and Rewind, and $200K to Arbon and Vycarb as part of a partnership with Activate.

And in the drive to have clarity about exactly how to manage emissions, BT has partnered with SAP to find new ways of making carbon emissions visible, using the SAP Sustainability Data Exchange (SDX). The idea is that the SAP SDX will enable the BT Group to collect, trace and share carbon data across its own supplier base, providing unparalleled visibility into the carbon footprint of its products and services. BT can then share this information directly with business customers when they purchase products through SAP Business Network. Furthermore, BT can complement this with data-driven insights from its Digital Carbon Calculator and Carbon Network Dashboard to help customers optimise their own IT for both carbon and energy.

In other carbon news, CarbonClear and Innovex have partnered to issues data driven carbon credits derived from off-grid solar in Uganda. Using CarbonClear’s carbon avoidance programme, and its underlying Distributed Ledger infrastructure, an IT integration with its monitoring software will allow Innovex’s users to generate Micro Carbon Avoidances (MCAs) from the off-grid solar installations that they operate. These MCAs will then be available to corporate buyers looking to offset their CO2 emissions.

Meanwhile Signapore based Wealthgreen has launched a new carbon credit trading app in its goal to open up carbon credit trading to all.

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