Take Five: Unfinished Business
A selection of the major stories impacting ESG investors, in five easy pieces.
Lobbyists were blamed as another decision on an urgent matter for people and planet was pushed back to 2025.
Three strikes … – For the third time in barely a month, a UN-sponsored attempt at positive multilateral action on the environment collapsed into chaos on the last day. After fractious conclusions to COPs in Cali and Baku, Busan saw the fifth round of negotiations on a global plastics treaty fall short, largely due to disagreements over plans to set production limits. While unfinished climate-related business can be added to the COP30 agenda, interim summits will now take place on biodiversity and plastics early next year, with COP16 reconvening in Rome in February to reach deals on issues including resource mobilisation, while the location for ‘INC-5.2’ is yet to be confirmed. Who to invite? Much has been made of the attendance of influencers alongside negotiators, with around 220 fossil fuel and chemicals sector lobbyists among the 3,300 delegates in Busan. Some have argued that asset owners need to step up their own advocacy efforts, using their leverage to address systemic risks at the policy level rather than focusing engagement on corporates. But it’s not an either/or situation. Asset owners have stepped up their vigilance of corporate lobbying in recent years and are likely to do so further, especially when evidence of conflicting interests with investee firms continues to mount. According to a new report from Carbon Tracker, fossil fuel firms are betting on 3.9% annual growth in demand to 2035 for plastics, fertilisers and other petrochemicals to offset falling demand elsewhere, underlining their need to tilt the regulatory landscape in their favour.
Ask Atkins – It has been widely assumed that Donald Trump’s return to the White House would sound the death knell for long-delayed federal climate disclosure requirements in the US – but does Paul Atkins’ nomination as next chair of the Securities and Exchange Commission (SEC) represent another nail in the coffin or a last-minute reprieve? It seems certain to confirm a shift in policy toward digital assets, following a cautious if not hostile approach under outgoing Chair Gary Gensler. But it’s hard to draw any conclusions about the returning former commissioner’s attitude to climate reporting, or sustainable investing more broadly, from Trump’s claims for Atkins’ belief in “robust, innovative capital markets that are responsive to the needs of investors”. A look back at his 2002-2008 tenure at the SEC gives more clues, during which Atkins demonstrated a consistent concern for the cost of disclosure-related regulation, in an era marked by the Enron and Worldcom scandals, not to mention the genesis of the Global Financial Crisis. This light-touch approach suggests an Atkins-led SEC will take a tougher line on allowing ESG-related shareholder resolutions at AGMs – which will please at least one oil and gas firm. And he does have form on climate reporting, telling Congress in 2019 that a specific rule was not necessary, partly as existing laws would elicit material disclosure, but also because advocates could not, at the time, agree what could be disclosed.
Marching orders – European countries are close to agreeing a €500 billion (US$528.78 billion) defence fund to finance spending on military equipment, according to the Financial Times, which will issue bonds to investors backed by guarantees from participating countries. Pressure has been growing for Europe to increase defence spending since Russia’s invasion of Ukraine – as acknowledged by Ursula von der Leyen’s emphasis on security in her pitch for a second term as European Commission President. Given the transactional approach of his first spell, Donald Trump’s return to power in the US probably accelerated the plans, which will reopen the question of whether investments in weapons can be justified ethically or sustainably. In recent years, politicians in the UK and the Netherlands have argued that defending democracy should be considered within the realm of ESG. With little clear guidance from the UN Guiding Principles on Business and Human Rights, asset managers and owners are split, some maintaining detailed policies on the types of weapons deemed acceptable. There have already been signs that investors are expected to do their duty, with a faith-based asset owner given short shrift at last month’s ‘EU Defence Industrial Investment Forum’.
First of many? – Expectations of fines for asset managers in Europe rose this week following news of the first sanctions brought under the Sustainable Finance Disclosure Regulation (SFDR). Luxembourg’s Commission de Surveillance du Secteur Financier (CSSF) fined Aviva Investors €56,500 (US$59,800) after two breaches by an SFDR Article 8 fund. The regulator found that a sub-fund had not filtered out bonds in line with ESG-based exclusions outlined in pre-contractual disclosures, while other sub-funds did not have measures in place to target specific UN Sustainable Development Goals as disclosed in the fund’s prospectuses. The manager’s fine was reduced due to its conduct during the investigation and the corrective measures implemented since, but it’s highly likely that more punitive fines could be seen in 2025, especially as a number of regulators across Europe have confirmed ongoing and increasing vigilance.
Follow the money – One of the largest and longest-running surveys of institutional ESG investing reported this week that strong future growth was being driven by returns, performance and demand. Around four fifths of global asset owners and investors told the Morgan Stanley Institute for Sustainable Investing that their share of assets in sustainable funds would grow over the next two years, driven by exposure to growth opportunities and a more established track record. Asset managers expected growth opportunities to be spread evenly across new mandates from asset owners attracted by their sustainability offerings, existing sustainably-minded clients increasing their allocations, and current clients making sustainable investments for the first time. More than 80% of asset owners globally require asset managers to have a sustainable investment policy or strategy in place, according to the survey. And nearly 90% of institutional investors said sustainable investing activities were driven by client and stakeholder demand. “This trend is consistent across regions and among both asset managers and asset owners,” the institute noted.
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