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Policy u-turns and ESG fears grow, but action continues

© Shutterstock / iQonceptImpact investment.

The UK government is in the process of losing its position as a green leader, as Rishi Sunak’s government seems to increasingly believe that rolling back green policies, and the costs they entail, and are key to winning the next election. This is despite analysis that shows that if the UK had implemented its early green policies, energy bills would have been at least £2.5 billion lower when the energy crisis hit.

Nor is it a sure-fire vote winner, as many consumer says they are prepared to pay more for sustainable goods and services – 40% of UK adults are prepared to pay up to 25% more despite the cost of living crisis, at least according to a recent survey from Yonder.

Government policy frameworks, and consumer willingness to pay more for more sustainable goods, are key to the net zero transition. This is because investors, and corporations, are going to take action driven by compliance, risk avoidance or the potential for new (or higher priced) markets. That requires a broader understanding of the risks faced by climate change and the  transition to a sustainable future.

At SG Voice we talk a lot about the failure of the financial sector to fully integrate the impact of physical climate risks into investment decisions, let alone transition risk, but if governments back away from necessary actions that’s a concern for everyone. Especially given that action delayed today is likely to mean higher costs and more sudden and dramatic transition policies in the future.

UK risk assessment avoids warning on climate change

In another signal of the shifting position of the UK government, the UK National Risk Register 2023 was released having dropped ‘chronic risks’ such as climate change from the register. Despite the obvious impact of this summer’s extreme weather, and the fact that the

The new register is now based directly on the government’s internal, classified National Security Risk Assessment. That means that it warns of just under 90 risks, including assassination and the likelihood of a new pandemic, but fails to address the day to day impacts on health, productivity and infrastructure of a changing climate and its knock-on impacts on the supply chain. This is despite the fact that the register itself describes chronic risks as ‘“distinct from acute risks in that they pose continuous challenges that erode our economy, community, way of life, and/or national security.”

While they may not require the acute risk response that the register is intended to flag, they do require long term thinking and planning – something that the current UK government seems intent on avoiding.

The battle over ESG continues

While the US continues its political battle over the use of ESG as an investment lens, very little has actually happened in terms of changes to regulation – in large part due to the split of power between the House and Senate. It seems unlikely that the Businesses Over Activists bill recently proposed will get anyway, but it does give rise to concern that the SEC will tone down its delayed reporting proposals, in order to placate the right wing.

Another case of noise over action but when rhetoric crowds out reason, the ordinary investor and indeed ordinary taxpayer is usually left holding the can, as those in power are too nervous to take necessary action.

Where this is a potential concern however is when it causes the investment community to lose its nerve on ESG and climate risk. The average investor is not prone to sticking their heads above the parapet, or doing anything other than going along with the current herd norm. Calstone’s August 2023 Fund Flow Index reported that July 2023 saw UK ESG funds hit by largest outflows on record – the third consecutive month of net selling.

Yet it’s worth pointing out that this is part of wider market action and a loss of nerve amongst UK investors, with July seeing a net sale of £983 million of their holdings. This was the highest outflow since September 2022 when the government’s mini-budget upset the financial-market apple cart. Furthermore, over the last three months, UK outflows have totalled £1.95 billion, despite global stock markets rising strongly.

Green bond markets continue to grow as companies cut emissions and costs

Intel announced has allocated $425 million, or approximately 34%, of its inaugural $1.25 billion green bond proceeds. As highlighted in its first green bond impact report, the proceeds, which support Intel’s investments in sustainable operations, have been allocated across five project categories: pollution prevention and control, water stewardship, energy efficiency, renewable energy, and circular economy and waste management.

Intel’s green bond programme invests in the company’s environmental sustainability goals through projects that meet defined eligibility criteria. For instance, proceeds have been allocated to support Intel’s water reclamation facilities, which allow the company to treat and reuse water in facility systems and conserve water within its manufacturing operations.

Proceeds have also been allocated to limit greenhouse gas (GHG) emissions through investments in point-of-use abatement systems. The projects are estimated to have reduced Intel’s GHG emissions by 5.3 million metric tons, saved 4.5 billion gallons of water and diverted 56,000 tons of waste from landfills in 2021 and 2022. The projects are expected to continue to have an impact in the years to come.

These investments support Intel’s long-term sustainability commitments, which include 100% renewable electricity across its global operations, net positive water and zero waste to landfills by 2030; net-zero GHG emissions across global operations by 2040; and net-zero upstream GHG emissions by 2050. At the end of 2022, Intel had achieved 93% renewable electricity usage globally, net positive water in its operations in the US and India, and sent 6.4% of its waste to landfills.

Assurance standards drive transparency and accountability

One of the major challenges in reporting on climate and sustainability risk lies in the need for transparency, and standardised approaches that enable like to like comparison. At the same time however its also necessary to ensure that those that assure that a report is accurate are themselves able to show their transparent and robust approach.

To that end, the International Auditing and Assurance Standards Board (IAASB) issued its proposed International Standard on Sustainability Assurance (ISSA) 5000, General Requirements for Sustainability Assurance Engagements. With its focus on assurance on sustainability reporting, ISSA 5000, when approved, will be the most comprehensive sustainability assurance standard available to all assurance practitioners across the globe.

The IAASB said: “ISSA 5000 is a principles-based, overarching standard suitable for both limited and reasonable assurance engagements on sustainability information reported across any sustainability topic. The IAASB drafted the standard to work with sustainability information prepared under any suitable reporting framework.

“These frameworks include the many reporting frameworks already in place and those under development, including but not limited to those issued by the European Union, the International Sustainability Standards Board, the Global Reporting Initiative, the International Organization for Standardization, and others. The standard is profession agnostic, supporting its use by both professional accountant and non-accountant assurance practitioners when performing high quality sustainability assurance engagements.” Four roundtables, starting in September 2023, will play a part in outreach on the standard and the IAASB has invited all stakeholders to comment on the proposed revisions via the IAASB website by December 1, 2023.

Carbon markets continue to evolve as offsets continue to attract criticism

Rubicon Carbon released a white paper detailing a new risk adjustment framework for new and legacy carbon credits. The framework is designed to address issues such as overcrediting risk, future delivery risk, and other risk factors that impact credit quality.

The white paper, A risk adjustment approach for creating high integrity carbon creditswas authored by Rubicon Carbon’s Chief Science Officer Dr. Jennifer Jenkins, Research Manager Dr. Brian Clough, and Rubicon Carbon CEO Tom Montag.

Meanwhile US climate scientist Jo Room has published a research paper entitled Carbon offsets are unscalable, unjust, and unfixable — and a threat to the Paris Agreement. In it he argues that carbon offsets are an excuse to enable fossil fuel companies and multinational to continue business as usual and are undercutting attempts to address changes to the energy system.

While there is a  growing consensus that no more than 5-10% of emissions should be offset – this only matters for companies that have signed up for science-based targets under the SBTi. The issue is a wider systemic one – that our current financial system does not require companies to pay for externalities or the impacts of our actions. As long as we continue to allow that, little movement will be made towards addressing climate change.

If, when and how we choose to address that problem is going to make or break companies and investors – that means it’s a conversation we all need to be having now.

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