Take Five: How to Move a Mountain

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

This week saw AI governance concerns overshadow discussion of sustainability risks by the great and good of Davos.

Biodiversity’s bond boom – Demand for sovereign debt is already soaring this year on expectations of falling interest rates, with France already benefiting from a twelve-fold oversubscription to its fourth green bond earlier this week. The country sought to raise €8 billion with the sale but saw record-breaking demand of €98 billion from almost 500 investors, cementing its place as the largest sovereign issuer of green bonds, with €69.9 billion over four issues. In line with France’s green bond framework, proceeds can be spent on climate change mitigation and adaptation, but also biodiversity protection. Eligible projects include sustainable forestry, certified organic farming, and nature preservation. Ratings agency Fitch expects green bonds to play a key role in channelling finance to support nature conservation and protection, noting a US$700-billion-per-annum finance gap that needs to be filled in order to achieve the goals of the Global Biodiversity Framework. In a new report, Fitch pointed to the growing prevalence of biodiversity-related use of proceeds in bond frameworks, adding that the complexity of nature data was hampering investors’ “ability to assess the materiality of nature issues for specific entities”. This may be so, but the situation is changing fast for both sovereign and corporate issuers. As noted by the Climate Bonds Initiative this week, industry standards are being developed to include data on issuers’ deforestation commitments, and regulations such as the EU Deforestation Regulation are encouraging the use of certification frameworks, which offer increasing transparency to investors.

For peat’s sake – Sustainable finance journalism is a cut-throat and competitive field, we were once told. But at ESG Investor we believe that there is always room for a new publication looking to share knowledge among investment professionals about an asset class with massive growth potential. Published this week, the ‘Investing in Peatlands’ report admits its focus is a novel investment for the private sector but makes a powerful case, pointing out that the concentration and longevity of carbon storage offered by healthy peatlands is “unmatched by any other carbon sink”. It also accepts that investors may need to factor in non-financial co-benefits – such as avoided costs from reduced risk of landslides, flooding, drought or fires – when building the investment case. Overall, sustainable investment teams should rest assured that peatlands are unlikely to take them out of their comfort zones. Those with a working knowledge of carbon and biodiversity credits, or the role of blended finance in de-risking and scaling-up investment opportunities, will take to peatland investing like a bog turtle to water.

Greener growth – The benefits of peatland investing, however, would stack up more readily in a world where the key measures of growth –  specifically, gross domestic product – were designed to take in a wider range of factors. The voices calling time on GDP have grown louder over the past decade, with central banks and governments around the world exploring the incorporation of natural capital into their calculations. The movement gained further momentum at Davos this week, with a new proposal from the World Economic Forum (WEF) that sought to measure quality of growth via metrics for innovation, inclusion, sustainability and resilience. In a surprise to no one, the countries assessed by the WEF performed most poorly on sustainability, which measures the extent to which an economy’s trajectory can keep its ecological footprint within finite environmental boundaries. Their emission levels showed that inevitably, the growth of rich countries was the most unsustainable – though not universally so, with Sweden, Germany and the UK outperforming their peers.

Govern or be governed – Despite its extensive sustainability stream, AI governance was by far the most discussed topic at Davos, with roughly half the world’s politicians worried about its ability to warp election outcomes over the next 12 months and almost all its CEOs concerned about being outflanked if they didn’t adopt the technology quickly or effectively enough. In this context, the WEF’s AI Governance Alliance has made recommendations aimed at the safe development, responsible application and resilient governance of AI. This came after an International Monetary Fund analysis earlier in the week, which warned that the technology would increase disparity between rich and poor countries, as the latter “don’t have the infrastructure or skilled workforces to harness the benefits of AI”. Investors also flagged their fears, asking investee firms to explain how they assess the impact of their AI systems, how the technology factors into their human rights assessments, and how they incorporate considerations around its governance.

EACOP out – The role of insurers in the battle against climate change and environmental pollution was highlighted again this week with the news that more firms have ruled out underwriting the controversial East African Crude Oil Pipeline (EACOP), backed by Total. A total of 28 insurers and reinsurers have now said they would not insure the project, but a number of big players remain onboard, including AIG, Tokio Marine, Chaucer and Hiscox. The centrality of insurance to business as usual was underlined last year, as the UN Net Zero Insurance Alliance effectively crumbled under pressure from US politicians. EACOP, which is also supported by the state oil companies of China, Uganda and Tanzania, has faced multiple delays and strong opposition – both on environmental and human rights grounds – while consensus on the need to transition away from fossil fuels has strengthened. With investors suggesting stiffened resolve through their support of a climate-related resolution at Shell’s 2024 AGM, there could be further debate when Total faces its shareholders.

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