Take Five: Big, Green Government

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A selection of the week’s major stories impacting ESG investors, in five easy pieces.

European and UK policymakers were given a consistent message by the private sector this week – more or less.

Mixed messaging – Seventy-two large companies signed the Antwerp Declaration, calling for a European Industrial Deal to complement and reinforce the existing European Green Deal. The signatories proposed a ten-point industrial strategy that would provide “clarity, predictability and confidence” to business, thus underpinning efforts to deliver the innovations needed to drive prosperity while meeting Europe’s net zero goals. This included empowering customers to “choose net zero and circular products based on transparent product and environmental carbon footprints”. But this agenda for green growth was somewhat undermined by one of the signatories: INEOS founder Sir Jim Ratcliffe, who issued an open letter to Ursula von der Leyen criticising past and present EU policy flaws – including carbon taxes – for “driving investment away”. The chemicals-to-fossil fuels entrepreneur railed against imports from countries without carbon taxes, albeit not acknowledging the introduction of the Carbon Border Adjustment Mechanism, explicitly designed to level the playing field. One would have expected the man whose firm recently profited to the tune of £8.3 million from the inefficiencies of the UK’s Emissions Trading Scheme to have kept abreast of the evolution of the regulated carbon markets. But perhaps one should not expect too much coherence, or indeed clarity, from an organisation whose official net zero targets are limited to its Antwerp operations – while its climate and circularity claims have regularly failed to stand up to scrutiny.

Public-private partnership – Calls for a more joined-up green industrial policy framework were also made in London this week. The Institute for Public Policy Research and Green Finance Institute released a report emphasising the importance of long-termism from government, including clarity and consistency in policy pathways and “investible transition plans”. Much of it echoed the messages sent by the finance sector last August, highlighting the need for UK government action to go beyond regulation, partnering with the private sector and using the catalytic power of blended finance. But it also proposed interventions to create sector-specific enabling environments, including establishing stakeholder forums to deal with transition challenges confronting particular industries or technologies. The lack of strategic action was leaving private sector firms “unable to take concrete steps beyond disclosure”, the report noted, pointing to a yawning charging infrastructure investment gap as one of many issues facing the electric vehicle sector. This last point was further underlined by Maria Grazia Davino, Group Managing Director at Stellantis UK, who said the government should “stimulate more demand in the electric vehicle market and support manufacturers that invest in the UK for a sustainable transition”.

Duty calls – Along the corridor from the launch event for the above-mentioned report, British parliamentarians were taking evidence on whether changes are needed to pension trustees’ fiduciary duties to incorporate climate risk into their investment decision-making processes. This followed the release of a review by the Financial Markets and Law Committee (FMLC), which confirmed that incorporating climate and other sustainability issues into investment decision-making is consistent with trustees’ fiduciary duties. Witnesses included Charlotte O’Leary, CEO of Pensions for Purpose, who backed the FMLC, but said a broader range of systemic risks and opportunities should be considered within the scope of fiduciary duty, calling also for “comprehensive guidance that includes trustees, advisers and asset managers”. The Pensions Regulator appeared to agree, at least on the first point, with Climate and Sustainability Lead Mark Hill recommending this week that pension trustees take steps to better understand material ESG considerations impacting their investment decisions. “Failure to account for climate-related risks and opportunities and, where material, nature and social factors, puts savers at risk,” Hill wrote in a blog.

Tools of the trade – Regardless of their awareness of ESG risks and opportunities, pension trustees might argue that they can only do so much with the tools available. Reports published this week would certainly back this position. The climate strategies of the largest providers of UK defined contribution pensions were largely ranked “inadequate” or “poor” by campaign group Make My Money Matter, while US asset managers were taken to task by NGO Sierra Club for “propping up” fossil fuel majors through equity and bond holdings. But investment firms can legitimately claim they are thwarted by information gaps. Carbon Tracker found that the financial statements of 63% of high-emitting firms did not accurately reflect climate impacts. In addition, a study from the International Federation of Accountants concluded that varying sustainability standards and frameworks still hamper investors’ and lenders’ pursuit of consistent and comparable sustainability information. This evolving data picture is likely to be a contributing factor to the differences in fund performance also facing investors as they seek to balance risk, return and impact. The wide disparity in returns from US-domiciled ESG equity strategies highlighted in a new Scientific Beta analysis represents yet another factor for asset owners to weigh up.

Food for thought – Sustainability issues have been most prominent during recent proxy voting seasons at the AGMs of fossil fuel firms and their financiers. This is all but certain to be the case again in 2024, while investors’ focus on the giants of the technology sector will also continue, reflecting the sheer scale of their influence and impact. But firms along the food value chain may well experience more intense scrutiny this year, partly due to their substantial carbon and nature footprints. One further factor could be the increasing evidence of major food manufacturers’ reliance on revenues from unhealthy food options. Investors are increasingly collaborating with other stakeholder groups to add pressure to firms in the food sector – and not all of them will be able to rely on dual class share structures to defeat shareholder resolutions.

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