Take Five: Europe’s Green Brigade Takes Shape
A selection of the major stories impacting ESG investors, in five easy pieces.
Sustainable investment opportunities and risks are slowly beginning to emerge as Europe outlines its plans to rearm.
Europe mobilises – The European Commission (EC) launched two interrelated capital-raising programmes vital to the future security and prosperity of its citizens – but their sustainable finance impacts are unclear for now. The EC presented its ‘Readiness 2030’ white paper, outlining its strategic priorities for rebuilding Europe’s defence capabilities, and provided more detail on its €800 billion (US$867 billion) ReArm Europe plan. The EC pointed to defence-orientated SMEs – important for AI and cyberwarfare – as underserved financially, pledging to help by clarifying the relationship between defence and sustainable investment in the upcoming review of the Sustainable Finance Disclosure Regulation (SFDR). But some called for a more fundamental reboot of investment in European innovation – especially in clean technologies – to pursue “trajectories that are compatible with its climate transition targets”. Others suggested taking inspiration from the green bond markets to develop European defence bond frameworks for funding projects of “high strategic importance” to European sovereignty. The EC also underlined the role in channelling capital to Europe’s defence sector of the Savings and Investment Union (SIU) – the week’s other big announcement. The SIU is aimed at mobilising retail savings and investments, too many of which lie dormant, with levers potentially including pension auto-enrolment, better-designed investment solutions, and tax incentives. These can boost investment not only in defence, but also other critical objectives including the net zero transition. However, like the overarching Capital Markets Union of which it is part, the SIU currently lacks the structures and guidelines to ensure funding is steered toward sustainable and Taxonomy-aligned growth opportunities.
School of stewardship – This week saw further evidence of asset owners’ willingness to take the ultimate sanction against managers that underperform on sustainability and stewardship. Denmark’s AkademikerPension, a member-owned scheme serving 174,500 teachers and other academic professionals, said it had decided to “terminate our relationship” with State Street Global Advisors (SSgA), after the US-based index fund giant was given a low ESG rating by staff. Akademiker said the decision was partly driven by its new equity strategy, but also asserted that SSgA’s “changed approach to active ownership and responsible investing no longer meets our expectations”. In line with a recent trend, the asset owner has published its requirements and assessment methodology for external managers. The decision follows SSgA’s mandate loss at The People’s Pension, in similar circumstances, and comes in the same week as a report by UK-based advisory firm Pensions for Purpose, which highlighted an increasing focus on manager performance and accountability. “Some asset owners report significant discrepancies between their intended stewardship objectives and the actual voting behaviour and engagement strategies executed by managers,” it found. As noted in this week’s ESG Investor feature, the brighter the spotlight turned on stewardship activities by regulatory change and client expectations, the clearer the distinctions between providers become.
Exit strategy – Among the managers likely to meet asset owners’ climate stewardship expectations is Sarasin & Partners. This week, the UK-based boutique said it had exited its position in Equinor in January, citing a gradual but terminal collapse of confidence in the board’s willingness to live up to its climate commitments. Having initially viewed the Norwegian energy firm as a potential transition leader, Sarasin lost faith that it would align capital expenditure plans with a credible decarbonisation trajectory, as it watched the firm take a similar path to peers, by “prioritising short-term returns over long-term sustainable capital creation”. As highlighted at last year’s Stewardship Summit, investors tread a fine line when engaging with carbon-intensive holdings. This week, Aviva Investors abandoned a pledge to divest from high-emitting firms that had previously been put on a climate watchlist, citing “a very different macro backdrop” since its engagement escalation programme was established. US pension fund CalPERS recently attracted criticism for the extent of its fossil fuel investments, but argued that a “pragmatic” approach was most effective to finance the clean energy transition. This becomes a tougher shout when investee firms appear to be betting against their public commitments. As Sarasin observed, “Most of Equinor’s largest development projects are expected to operate beyond 2050 to be viable, making them reliant on demand exceeding the Paris Agreement goals.”
The art of the possible – One politician showing pragmatism on climate action has been Mark Carney, who appeared to be making a mockery of predictions about his positive green impact by axing a carbon tax as his first action as new Canadian Prime Minister. The move was designed to neutralise a potentially powerful line of attack by opposition Conservatives, clearing the decks not only for the start of an election campaign but also for a wider range of emissions-reducing measures, including – yes – a carbon border adjustment mechanism. Introduced in 2019, Canada’s carbon tax levied charges on both industry and consumers, with the latter receiving quarterly rebates. Subject to carve-outs, political attacks and court cases, the consumer carbon tax became a lightning rod for popular discontent in a cost-of-living crisis, despite not materially contributing to rising consumer prices. As such, Carney cut the consumer charge to zero on his first day, while proposing a number of further actions to improve the effectiveness of the industry charge, which research claims will be responsible for 23-39% of Canada’s emissions reductions between now and 2030. The former central banker has also promised to move forward with mandatory climate risk disclosures and Canada’s long-awaited taxonomy – with guidance for priority sectors from the fall of 2026. Fans of real climate U-turns need look no further than British Leader of the Opposition Kemi Badenoch, who this week declared net zero by 2050 an impossible dream for the UK, despite having supported the policy as a member of the last Conservative government. Unlike HSBC and UBS, Badenoch declined to set a new target date.
Beijing bound – In another shift from the policies of the last government, the UK’s Labour administration has been actively engaging with clean energy superpower China, with Net Zero Minister Ed Miliband following up on Chancellor Rachel Reeves’ visit to Beijing in January. The first outcome, announced this week, will be the launch of the first London-listed CNY-denominated sovereign green bond later this year. Initially trailed after Reeves’ dialogue with Chinese Vice Premier He Lifeng, the bond will raise at least CNY6 billion (US$830 million), allocating to projects in line with a sovereign green bond framework released in February. The second outcome will be an annual UK-China dialogue, with a summit also taking place in London later this year. Much may depend on the appetite of international investors, but the deal could be a sign of more flexible alliances for China and others in a less certain, more multi-polar world.
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