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Climate costs are reframing the economics of action

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The recent publication of the Fifth National Assessment report in the US has once again highlighted the economic and human costs of climate change. In the US alone $75 billion worth of damage has been recorded so far this year, and concerns are being raised about the associated knock-on impacts on food security and resource management.

Government investment is driving growth in biodiversity and climate solutions

As it announced the release of the Fifth National Assessment, the Biden administration also announced more than $6 billion in investments to make communities across the country more resilient to the impacts of climate change, including by strengthening America’s aging electric grid and water infrastructure, reducing flood risk to communities, supporting conservation efforts, and advancing environmental justice. The Administration is also releasing new resources to boost climate resilience efforts.

Under President Biden’s Investing in America agenda, companies have announced $614 billion to build the manufacturing base of the future; over $392.2 billion has gone to upgrading our public infrastructure and investing in clean energy; and $8.8 billion in home energy rebates has been allocated to states to help families cut their energy costs by weatherizing their homes and increasing the efficiency of their appliances.

The European Commission also announced it had approved 171 new projects across Europe under the LIFE Programme for environment and climate action, worth more than €396 million. Thanks to the programme’s co-funding requirements, it will mobilise a total investment of more than €722 million, which represents a 28.5% increase compared to last year.

Projects from almost all EU countries will benefit from EU support under the following sub-programmes: nature and biodiversity; circular economy and quality of life; climate change mitigation and adaptation; and clean energy transition.

LIFE projects contribute to reaching the European Green Deal’s broad range of climate, energy and environmental goals, including the EU’s aim to become climate-neutral by 2050. They are intended to support biodiversity and nature restoration, improve the quality of life of Europeans by reducing pollutants and greenhouse gas emissions, increase circularity in the economy and climate resilience, and accelerate the transition to clean energy across Europe.

Perhaps even more  importantly, the EU has reached a provisional agreement just reached between the European Parliament and the Council on the Nature Restoration Law. Once adopted and applied in the EU Member States, the law will be a key contribution to reaching climate neutrality by 2050 and increasing Europe’s preparedness and resilience to the effects of climate change.

The law should set in motion a process for continuous and sustained recovery of nature across the EU’s land and sea. As an overall target to be reached on EU level, Member States will put in place restoration measures in at least 20 % of the EU’s land areas and 20 % of its seas by 2030. By 2050 such measures should be in place for all ecosystems that need restoration.

Bond markets

Blackrock has announced it has reached $1 billion in first close for its energy transition fund. Evergreen Infrastructure is a core, open-ended infrastructure equity fund focused on energy transition and energy security, as well as thematic sectors including transportation, digital infrastructure and the circular economy. Evergreen Infrastructure will also track Temperature Alignment Key Performance Indicators, which will help the portfolio management team align the Fund, on an aggregate basis, to a 1.5°C temperature rise scenario.

Mitsubishi Electric Corporation (TOKYO:6503) announced it will issue green bonds for the first time to raise funds for the construction of a silicon carbide (SiC) power semiconductor plant, as well as for  related production facilities that handle products capable of contributing to decarbonization.

In preparation for the issuance, Mitsubishi Electric has formulated a Green Bond Framework that specifies its policies regarding the use of proceeds, the process for project evaluation and selection, the management of proceeds, and reporting, as defined in the Green Bond Principles 2021 issued by the International Capital Market Association (ICMA) and the Green Bond Guidelines 2022 issued by Japan’s Ministry of the Environment. The company’s Green Bond Framework has been evaluated by an independent third party, Rating and Investment Information, Inc. (R&I), and confirmed to be in compliance with the aforementioned principles and guidelines.

Market need increased clarity

The UK’s Financial Conduct Authority (FCA) has released a report warning that a  review shows while most Authorised Fund Managers (AFMs) have made efforts to comply with the FCA’s expectations on the design, delivery, and disclosure of their ESG and sustainable funds, further improvement is needed. The FCA is publishing this review ahead of its final rules and guidance on Sustainability Disclosure Requirements (SDR) and investment labels regime.

While progress has been made, the FCA has found that many firms still have further to go to meet its expectations, particularly around the disclosure and clarity of information being given to retail investors and consumers. The FCA has found other examples of poor practice including:

  • Products were inconsistently aligned with their ESG and sustainability goals even if they referenced them in their name.
  • In some instances, fund holdings appeared inconsistent with a fund’s ESG or sustainability objectives, and some AFMs weren’t able to explain how these investments fit with their goals.
  • Key ESG and sustainability information was often not explained, put into context or included in disclosures, meaning relevant information was not immediately or clearly accessible to investors.
  • The design of AFMs’ stewardship approaches did not meet the FCA’s expectations. It was often difficult to identify the exact aim of the stewardship activities, how the activities were aligned to fund objectives, and examples of the progress they made against those aims.

This is especially important in light of the latest research about reporting in the wider corporate market. According to PwC’s 2023 Global Investor Survey,  more than nine in ten investors (94%) believe corporate reporting on sustainability performance contains unsupported claims.

James Chalmers,Global Assurance Leader, PwC UK said: “We are moving from a period of awareness raising around the importance of climate and technological change to a time where investors are increasingly asking specific and tough questions about how companies are addressing those issues in their strategy, how they assess risk and opportunity and what is truly material for them. In this context, corporate reporting needs to continue to evolve so it provides reliable, consistent and comparable information investors – and other stakeholders – can rely on.”

Banks continue to support new exploitation of oil and gas

Despite growing evidence for the need for action on climate change, it appears that European climate risk reporting rules are going to leave the financial sector able to continue as business as usual. This is a considerable concern as banks are major supporters of new oil and gas exploration, especially through bond issues.

The latest report from Reclaim Finance shows that the five biggest bonds were issued by BP ($2.25 billion), ConocoPhillips ($2.7 billion), Duke Energy ($2.150 billion), Eni ($2.12 billion) and Greensaif Pipelines Bidco – linked to Saudi Aramco ($3 billion), and collectively raised more than $12 billion for the oil and gas giants.

Many of these deals have also been immersed in controversy, including ConocoPhillips’ crossing tar sands exclusion thresholds and Saudi Aramco via Greensaif and other companies tapping money meant for sustainable investments.

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