Take Five: Goodnight Vienna

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

A big step forward was taken this week by Europe to protect nature, or was it?

Viennese waltz – Sighs of relief rather than celebratory cheers greeted the formal adoption of the Nature Restoration Law (NRL) by the Council of the European Union. The NRL, which commits to restoring at least 20% of member states’ land and sea areas by 2030, had failed to secure sufficient backing from governments in March. And it only scraped through this week after Austria’s climate and environment minister defied senior coalition partners, prompting fury and threats of legal action from Chancellor Karl Nehammer. It remains possible that the NRL – which barely survived a bumpy passage through the European Parliament last year – could yet face a reverse. This would be embarrassing for Europe to say the least, and far from helpful to efforts in Colombia in October to build out the Global Biodiversity Framework, particularly given the limited progress made on setting COP16’s agenda at an interim summit in Kenya last month. Even if the NRL remains untrammelled by Austrian political strife, intergovernmental negotiations on how its objectives are met via member states’ national restoration plans will be instructive, given Europe’s recently redrawn electoral landscape.

The next big thing – It can take a long time to become an overnight success. And many other factors besides. Chipmaker Nvidia took 25 years to reach a market capitalisation of US$1 trillion, before more than trebling in value to US$3.3 trillion in 12 months, overtaking Microsoft and Apple this week to become the world’s largest company. The firm’s meteoric rise stems from its strong positioning to profit from the explosion of investment in AI, which is rapidly expanding beyond the IT sector to early adopters in fields such as finance and healthcare, and predicted use cases elsewhere. But does Nvidia deserve a place in a sustainable investment portfolio? The California-based firm’s ESG scores are impressive, which is not a given for a sector known for resource consumption, especially water. But a bigger sustainability question might be raised with regard to Nvidia’s client base, which has yet to prove it can deliver on AI’s promises reliably or ethically. Governance concerns and social risks have worried policymakers and investors increasingly, with rules being introduced in multiple jurisdictions and questions being asked at the recent AGMs of Meta and Alphabet. In terms of its own governance, it’s worth noting Nvidia is rare among tech giants for having a single share class with no priority voting rights. Advocates of looser listings rules in London might consider factors other than lax corporate governance standards in pursuit of a sustainable approach to growing the next big thing in their backyard.

Texan stand-off – Elon Musk might think himself the epitome of the modern mogul – complete with his mixed record on, and disdainful approach to, ESG risks – but it’s not yet Tesla that serves as the bellwether for relationships between titans of industry and their sustainability-minded shareholders. That role remains firmly with ExxonMobil, whose CEO, Darren Woods, experienced a setback this week when a Texas judge dismissed the oil and gas giant’s case against activist investor Arjuna Capital. In the ‘shareholder spring’ of 2021, which marked the high watermark of investor support for ESG-related resolutions, the removal of three Exxon board members was hailed as a potent symbol of investor action in support of the net zero transition. While that eviction did have some impact, it has not significantly altered the firm’s emissions trajectory or exploration plans. Nor did it stop Woods pursuing Arjuna and Follow This through the courts for lodging a proposal at this year’s AGM requesting medium-term emissions reduction targets. Exxon’s refusal to drop the case – even after Arjuna withdrew and promised to never again file a climate-related shareholder resolution – led to widespread investor condemnation and a rebellion against directors last month by some of the world’s largest asset owners. Exxon’s suit was largely a response to an unwillingness by staff at the Securities and Exchange Commission (SEC) to strike out proposals that interfere with the duties of management, so where does the court’s judgement leave the balance of power? According to law firm Ropes and Gray, a stalemate may continue, with firms unable to challenge SEC staff decisions on exclusions, but increasingly able to convince most shareholders not to support the resolutions seeking disclosure or action on ESG risks – while Arjuna’s costs will make investors “think twice” before submitting proposals in future.

Transition mission – Exxon’s Woods might well feel vindicated in his overall strategy by two reports published this week which suggested that the transition from fossil fuels to renewable energy has barely kicked into gear. The Energy Institute’s Statistical Review of World Energy described an increasingly power hungry world that was still highly reliant on oil, gas and coal, meaning that carbon emissions continued to rise in 2023 even as renewables took a slightly bigger slice of an expanding pie. In a year that saw fossil fuels’ share of the global energy mix tick down from 82% to 81.5%, their use in China and India grew 6% and 8% respectively. But while India’s burgeoning fossil fuel appetite grew to meet almost all its new demand – as the country’s coal consumption overtook the US and Europe’s combined total – China’s was offset by increased clean power capacity, accounting for 55% of all added renewable energy generation in 2023. The Energy Institute report also confirmed the need to focus more attention on the Global South’s carbon-intensive energy mix, now that North America and Europe are responsible for less than a third of global energy consumption. This makes it all the more concerning, if not surprising, that the energy transition has only taken root in developed markets. While the rate of energy demand increases, the pace of policy change is stuttering, found a report from the World Economic Forum, which blamed geo-political volatility and macro-economic uncertainty for slowing transition momentum. Ranked on security, equity, sustainability and overall transition-readiness, only three countries from outside Europe and North America – Brazil, Chile and China – made the report’s top 20. “Global decision-makers must make bold moves to regain momentum in the transition towards an equitable, secure and sustainable energy future,” said Espen Mehlum, WEF’s Head of Energy Transition Intelligence and Regional Acceleration.

Game-changer – As underlined by WEF and the Energy Institute, a key element of the energy transition is policy certainty for investors. In the UK, where the granting of future oil and gas exploration licences has been a dividing line between major parties ahead of a general election on 4 July, the country’s Supreme Court has unexpectedly shifted the calculus. In ruling that a local council should have considered the climate impacts of their final outputs when granting planning permission for new oil wells, the court brought downstream emissions into play, throwing into question the approval of pretty much any new fossil fuel projects. This follows a High Court ruling that existing government policies needed to be revised as they do not currently support its legal commitment to reach net zero emissions by 2050. “This decision changes the game for planning decisions: it irons out expectations, making it clear that companies and authorities have to account for downstream emissions,” said ClientEarth Lawyer Sophie Marjanac.

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