In this month’s round-up, Mike Scott reports on a new coalition to speed up Asia’s exit from coal, Ceres’s Ambition 2030 initiative, and increasing scrutiny of ESG, including probes into DWS in the US and Germany
As the summer draws to a close, all eyes are turning towards Glasgow in the run-up to the COP26 climate talks. As the summit approaches, investors continue to challenge companies to strengthen their ESG credentials at the same time as they are facing increased scrutiny themselves.
All of this takes places against the background of a summer of extreme temperatures from the west coast of North America to the Arctic and the Middle East, floods from Germany to Nigeria and India – and the publication of the latest report from the Intergovernmental Panel on Climate Change (IPCC), which bleakly sets out what UN Secretary-General António Guterres calls a “code red for humanity”.
“The facts are clear: human-induced climate change is indisputable, it affects every region on our planet, and strong, rapid reductions in greenhouse gas emissions are needed to curb warming rates,” says Fiona Reynolds, outgoing CEO at the Principles for Responsible Investment.
“The financial services sector has a vital role to play in overcoming these challenges. We encourage investors to review their commitments to tackling climate change and to take action, by setting a net-zero target and supporting initiatives such as Race to Zero and the UN-convened Net-Zero Asset Owner Alliance.”
Severe weather events drove global insured catastrophe losses of $42bn in the first half of the year
Insurers are already starting to see the impacts on their bottom line, with the Swiss Re Institute reporting that severe weather events drove global insured catastrophe losses of $42bn in the first half of the year, the second highest figure on record.
Analysts at Société Générale suggest that insurers may want to accelerate their exit from coverage of the oil and gas sector, as 23 have for the coal industry. Doing so would increase their shareholder value, Société Générale argues in a new report Insurance ESG Big Picture. However, to date just one, Australia’s Suncorp, has said it would not cover new oil and gas production.
Peter Bosshard, global co-ordinator for the Insure Our Future coalition of NGOs, says that insurers “have no excuse for enabling the continued expansion of fossil fuels.”
In Australia, the Australasian Centre for Corporate Responsibility (ACCR) has stepped up its efforts to get Australia's fossil fuel producers to address climate change. It is taking Santos, Australia's biggest domestic gas supplier, to court to challenge the company's claim that natural gas provides clean energy and that it has a "clear and credible plan" to achieve net-zero emissions by 2040.
"This is the first court case in the world to challenge the veracity of a company's net-zero emissions target, and a world-first test case in relation to the viability of carbon capture and storage and the environmental impacts of blue hydrogen," the group says.
The ACCR also attacked a deal in which Woodside Energy will buy oil and gas assets from BHP, which is seeking to reduce its exposure to fossil fuels, calling it a "disastrous outcome for Woodside shareholders and climate".
On a positive note, Reuters reported last month that financial firms including British insurer Prudential, lenders Citi and HSBC and BlackRock Real Assets, backed by the Asian Development Bank, are devising plans, which they hope to unveil at COP26, to speed the closure of Asia's coal-fired power plants in order to lower the biggest source of carbon emissions.
And sustainable investment group Ceres has launched a new initiative, Ceres Ambition 2030, focused on decarbonising six of the highest-emitting sectors in the U.S.: banking, power, food, oil and gas, steel and transportation. Ceres aims to “set off a cascade of actions that will bring wholesale change in the highest-emitting sectors and stabilise our rapidly warming climate in the next decade”.
There is growing evidence that the biggest investors are starting to throw their weight behind ESG issues, with BlackRock backing 64% of environmental proposals on shareholder ballots, up from just 11% the previous year.
Companies are coming under pressure, with ESG issues – which were almost never mentioned between 2005 and 2018 – being brought up in almost a fifth of calls (19%) in 2021, according to PIMCO.
Data drives climate action
One of the drivers of increased shareholder engagement and activism is the growing amount of data available to help investors to make more informed decisions. New research from Orbitas, for example, shows that if the world meets the requirements of the Paris Agreement, up to 76% of unplanted palm oil concessions and 15% of current plantations could become stranded assets. The study highlights that transition risks are just as important for agricultural companies as for those in energy and transport, the group says.
A new project from University College, Dublin, GreenWatch, has developed algorithms that use AI to help investors to detect and quantify greenwashing. “Companies are spinning one story after another,’’ says Andreas Hoepner, a professor in banking and finance at University College, Dublin, who is overseeing the analysis. “If no one checks them, they can say what they want.”
Meanwhile, CDP’s first Water Impact Index highlighted the role of investors in financing the world’s most water-intensive and polluting industries (see Brand Watch: Facebook and PepsiCo commit to ‘water-positivity’ as climate crisis hits home). According to CDP: “The flow of money from banks, insurers and asset managers into high-impact companies is enabling agribusinesses to pump ever increasing amounts of non-renewable groundwater, it is enabling tailings dams to be constructed at the heads of free-flowing rivers and it is enabling chemical, apparel and pharmaceutical companies to release toxic pollution, much of which is carcinogenic, posing a real and present danger to human health.”
Question mark over hydrogen
But there is also a huge increase in investment in clean energy, with BloombergNEF reporting that new renewable energy projects attracted $174bn of funding in the first six months of the year, the highest ever first half total. One area that is attracting huge investor enthusiasm is clean hydrogen, where, according to BloombergNEF, “nearly everything has doubled already this year, and we expect the momentum to continue in the months ahead. More than 40 countries have now published a hydrogen strategy or are developing one. More than 90 projects are being planned worldwide to use hydrogen in industry. Electricity generators have almost doubled their planned hydrogen-fired turbine capacity since January.”
But Bloomberg lead hydrogen analyst Martin Tengler warns that “hydrogen's future as a major clean energy source is far from certain. We'll need to see CO2 prices of at least $100 per ton by 2030 to incentivise hydrogen adoption. No country has such carbon prices today, and we forecast only three markets to reach that level before 2030: Canada, the EU and the UK. It is no surprise then that the vast majority of announced large-scale demand-side clean hydrogen projects come from these regions.” (See Policy Watch: China rebuffs Kerry as IPCC raises stakes for success in Glasgow)
The breadth and depth of financial products and investments continues to expand and target a growing number of specific niches. Among them, BNP Paribas Asset Management has launched an ETF that invests in the best-rated ESG performers in the Chinese market, while another new ETF, from Quickro, Tematica Research and HANetf, offers exposure to the growing trend towards “cleaner living” across five sectors – food and dining, health and beauty, buildings and infrastructure, transportation, and energy.
The Cleaner Living ETF highlights that it is Article 8-compliant under the EU’s new SFDR (Sustainable Financial Disclosure Regulation), which was introduced to create more transparency around ESG investment and prevent greenwash. Article 8 covers lighter green financial products that “promote environmental or social characteristics”, while the objective of Article 9 products is primarily to have an E, S, or G impact.
New ESG rules under fire
However, it is clear that asset managers are still struggling to get to grips with the new rules and that some are being more diligent about applying the criteria than others. A Reuters study asked 20 of the biggest fund managers for a list of products they market as compliant with Article 8 or 9 of the SFDR.
Analysing the funds of the 14 firms that replied revealed that “some Article 8 products have limited claims to sustainability, such as those tracking conventional stock and bond indexes, investing in fossil fuels or buying debt from countries with weak ESG standards such as Saudi Arabia and Nigeria.
Reuters quoted analysis by Morningstar showing that a quarter of Article 8 funds are exposed to companies involved in controversial weapons and one in five to tobacco. A third of Article 8 and 9 funds have more than a 5% exposure to fossil fuel firms. The rules will be tightened up in 2022 and further guidance will be issued, but until then, firms have few limits on what they can dub as sustainable.
Asset managers need to be cautious about trying to paint all their funds with the sustainability brush, not least because of the SEC’s launch of a Climate and ESG Enforcement Task Force to crack down on greenwashing. “It has become clear that the SEC views the disclosure of material environmental risks in the investor's best interest,” according to Jefferies Equity Research.
The dangers of making unsubstantiated claims have quickly become evident. Desiree Fixler, who was sacked from her job as global head of sustainability at DWS earlier this year, alleged that the asset management arm of Deutsche Bank misleadingly claimed that more than half of its $900bn in assets under management were invested using ESG criteria. The allegation is now being investigated by U.S. and German authorities, though DWS defended its approach.
This week DWS was also one of 125 successful applicants to be accepted as signatories to the UK’s influential Stewardship Code after a revamp that set tougher new reporting requirements, including asking asset owners to provide evidence of how they were integrating environmental, social and governance factors into investment decisions.
Schroders, State Street and JPMorgan were among those that failed to pass the review process.
Asked about the probes into DWS, Catherine Howarth, chief executive of ShareAction, the responsible investment charity, told the Financial Times: “I don’t think DWS is the worst out there by any means. If DWS has this problem, then a lot of other asset managers have this problem. I don’t think they were an outlier or a total pariah there — lots of others [asset managers] were doing something similar.”
Main picture credit: Fred Greaves/Reuters
COP26 IPCC PRI Race to zero Net-Zero Asset Owner Alliance Ceres ShareAction Palm Oil greenwashing CDP hydrogen Cleaner Living ETF DWS