Take Five: A Mountain to Climb
A selection of the major stories impacting ESG investors, in five easy pieces.
The first week of COP16 underlined the scale of the changes required to align finance flows with the Global Biodiversity Framework.
In nature’s debt – COP16 opened on Monday amid widespread determination among its 23,000 delegates to accelerate action in support of the goals of the Global Biodiversity Framework (GBF), signed two years ago by nearly 200 countries at COP15 in Montreal (attendance: 10,000 approx). Fewer than 20% of signatories had submitted GBF implementation plans by the start of the summit, and just 1% of Fortune 500 companies had developed strategies to address their nature impacts, suggesting the only way was up. This week, finance sector representatives underlined their expectations for clear policy direction from governments, with major asset owners calling for ambitious national targets and nature-related transition plans, mandatory disclosure regulations, economy-wide regulation to protect nature, and the scaling up of supporting financial mechanisms. If governments can find the collective will to commit to the finance and policies needed to implement updated national biodiversity strategies and action plans, the impact on bond portfolios could be significant, according to Moody’s. The credit rating agency identified eight sectors with a combined US$1.6 trillion in rated debt – including metals and mining, oil and gas, agriculture, steel and building materials – as having very high or high inherent exposure to nature-related risks. Specific GBF targets also increase pressure on other sectors such as fisheries, forestry, real estate, chemicals, plastics and consumer goods. Investors looking to gravitate away from at-risk industries and toward nature-based solutions may find useful guidance on offer at next Monday’s dedicated Finance Day.
Do no harm – The scale of biodiversity loss and the prospect of ecosystem collapse can be disorientating, to say the least, leaving policymakers and investors uncertain about how best to respond. ‘Stop funding the bad stuff’, or as the EU Taxonomy puts it, ‘do no significant harm’, isn’t a bad place to start. To help put this principle into practice, this week at COP16 the UN Development Programme (UNDP) published guidance for governments on reducing harmful subsidies – the goal of GBF’s Target 18. As has been proved by efforts to reduce fossil fuel subsidies, progress is incremental, complex but possible – and worthwhile. Minimising such subsidies – which exceed US$1 trillion annually – would go a long way to reducing an annual biodiversity finance gap reckoned at US$700 billion. The methodology developed by the UNDP’s Biodiversity Finance Initiative is helping governments identify and redesign subsidies to minimise their negative impacts on nature. It also requires help from the finance sector – by disclosing nature impacts and dependencies, and supporting nature-positive investments that allow countries to mobilise new funding sources for biodiversity. This theory has already been implemented, with programmes having helped catalyse over US$1 billion in financing for nature across 41 countries since 2018, according to the UNDP.
Credits due – New ways for governments to mobilise funding sources for biodiversity have been abundant at COP16. One potentially big step forward was the launch of High Level Principles for Integrity and Governance of the Biodiversity Credit Market by the International Advisory Panel on Biodiversity Credits, the Biodiversity Credit Alliance and the World Economic Forum. At least part of the plan is to learn from the mistakes made with voluntary carbon markets – still viewed with suspicion as the most public and unacceptable face of greenwashing, only now retrieving their reputation and potentially on track to achieving their potential. The bringing together of diverse stakeholders at the launch event suggests the best of intentions. The nascent nature-based solutions market was further boosted by the unveiling of the Brazil Climate and Ecological Transformation Investment Platform, designed to channel international investment towards the restoration and sustainable management of native vegetation, the reduction of deforestation, and development of regenerative agriculture.
Here for good – A new survey by US-based global asset manager Capital Group suggested the demise of ESG-based investing is overstated, claiming adoption has risen to an all-time high. Nine in ten institutional investors and intermediaries agreed that ESG is central, considered, or applied in their investment approach. Two thirds claimed this was because of compliance, while half said it helped them manage material risks and identify opportunities. Just over half (56%) also thought incorporating ESG factors into investment analysis improved decision-making. More than 90% increased or maintained allocations over the past 12 months, and more than half will allocate more during 2025 – often responding to client demand. In a maturing and diverging market, multi-thematic strategies are gaining ground, with social, transition and nature all rising up the agenda. Will it last? Nearly six in ten investors will maintain a long-term commitment to ESG despite current geopolitical and macroeconomic headwinds. Is it true? You certainly get a slightly different – and less bullish take – from other recent data, including Morningstar’s latest quarterly sustainable fund flow data. Surveys can tell you anything you want to hear, it is said; at ESG Investor we’ve certainly read our fair share of questionable research. And it’s not only Paul Simon and Professor Alex Edmans who have acknowledged the human tendency to pay more attention to the voices that suit our situation. But for now we’ll take at least some note of the views of 1,130 asset owners, managers and intermediaries looking after US$55.6 trillion in assets.
The nuclear option – There was further evidence this week that the transition to low-carbon energy will be anything but straightforward. Earlier this year, the AI arms race threw into question the ability of tech giants to keep to their net zero commitments, prompting concerns that power-hungry data centres would also requisition an overwhelming share of new renewable energy capacity as soon as it is connected to the grid. Not willing to take any chances on intermittency issues – and with money to burn – tech firms have struck a spate of deals with operators of US nuclear power plants, resulting in a surge in their stock prices. Amazon and Google signed up to secure power via small modular reactors, while Microsoft agreed terms with Constellation, a major conventional nuclear plant operator. The sting in this particular tale comes from the possibility that demand from the tech sector – often on long-term deals to guarantee supply – could drive up the price of nuclear, forcing states that were planning to phase out coal and gas to rethink their plans.
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