Take Five: Ready to Engage
A selection of the major stories impacting ESG investors, in five easy pieces.
Proposals to bolster sustainable finance in Europe include recommendations for a new region-wide stewardship code.
Europe’s new code – As Ursula von der Leyen mulled over the composition of her top team for the next five years, the European Commission’s incoming finance chief was already getting advice on the future of sustainable investment. This week the European Securities and Markets Authority (ESMA) laid out its long-term vision for Europe’s Sustainable Finance Framework. Leaving aside the irony that the watchdog made a full 30 recommendations on “addressing complexity and further simplifying” Europe’s approach to channelling capital to sustainable and transition-related investments, it may be that the last of these has among the biggest impacts. After recommending a renewed focus on the EU Taxonomy, greater support for the net zero transition, and new transparency requirements, ESMA said the commission should “consider the introduction of an EU-wide stewardship code”. Asserting that active engagement was a “powerful tool” to drive transition, it said a voluntary code – applicable to benchmark administrators and investment service providers as well as asset owners and managers – “would reflect the EU framework and support its implementation”. Coming in the same week that revisions to the UK’s own code took greater shape, perhaps stewardship could be another example of post-Brexit EU-UK rapprochement.
Go with the flow – ESMA has also been at the forefront of the debate about green fund labels in Europe. Having called for a sustainability scale for investments as part of planned reforms to the Sustainable Finance Disclosure Regulation (SFDR) – issued alongside its fellow European Supervisory Authorities – the securities regulator offered further advice in its new wide-ranging opinion. This included the suggestion that a sustainable product categorisation system should be based on science-based eligibility criteria, as well as transparency obligations to help buyers understand outcomes. One might argue that there is no need to rush the changes, with European sustainable funds having attracted more than US$20 billion in inflows in the first half of 2024, according to new data from Morningstar Sustainalytics. In Q2 2024, Europe’s strengthening performance was, however, offset by outflows in virtually every other market – meaning green funds globally saw just US$4.3 billion of net new money. The biggest Q2 outflows were seen in the US, but the US$4.7 billion of withdrawals over the past three months represented just half of those made by American investors in Q1 2024. For now, the jury’s out on whether the US’s anti-ESG backlash is running out of steam – at least until 5 November.
Signs of commitment – In this particular US civil war, the sustainability commitments of asset managers have been closely watched – not least due to the mounting legal pressure they have faced to ignore material ESG risks in their portfolios. Withdrawals from Climate Action 100+ have been taken by many as signs that the red team is winning. But there are few telling indicators to be found in the long-awaited 2024 Target Disclosures Report, published this week by the Net Zero Asset Managers (NZAM) initiative. There is little evidence of US asset managers jumping ship – at 59 signatories, they represent the second largest contingent behind the UK. It’s harder to say how much of NZAM members’ collective US$57.5 trillion AUM is being managed in line with their signatory commitments to decarbonise their portfolios. Detail is thin in the annual report, but the curious asset owner can spend many a happy hour on the initiative’s website, finding that many US firms compare favourably with European counterparts.
Hungry for change – With six years to go, UN Sustainable Development Goal (SDG) 2 – which aims to end hunger, achieve food security and improve nutrition – is back to square one, at best. According to a report from five UN agencies, one in 11 people – 733 million – faced hunger in 2023, a stubbornly high level initially reached in 2020, comparable to levels of nourishment seen in 2008-2009. At this rate, 582 million will be chronically undernourished by 2030, meaning no progress will have been achieved since the SDGs were first established in 2015. Around a third of the global population lacked economic access to healthy diets, the UN added – noting that food insecurity and malnutrition are worsening as drivers like conflict, climate change, and economic downturns aggravate underlying factors. Finance is an issue. Two thirds of low- and middle-income countries have limited or moderate access to financing, emphasising the importance of initiatives such as the International Fund for Agricultural Development’s first nutrition bond, also launched this week. The UN report said a common definition and mapping of financing for food security and nutrition were “urgently needed”. But transforming and strengthening agrifood systems is essential too. “We must innovate and collaborate to build more efficient, inclusive, resilient, and sustainable agrifood systems that can better withstand future challenges,” said Qu Dongyu, Director-General of the UN’s Food and Agriculture Organization, which is due to release the second volume of its roadmap at COP29 later this year.
A universal challenge – UN agencies have also joined forces to step up global action on another systemic risk – climate change – through a near-global programme to help governments come up with their most ambitious nationally determined contributions (NDCs). Three agencies are organising a series of six events – dubbed the NDCs 3.0 Regional Fora – from August to October to guide the development of comprehensive five-year plans due next year, which must bring the world back in line with the Paris Agreement. The UN Environment Programme’s Emissions Gap Report 2023 found existing NDCs were only sufficient to keep global warming to 2.5-2.9°C. The importance of more ambitious NDCs was underlined at the recent Bonn Climate Change Conference – which saw the launch of the NDC 3.0 Navigator, amid “modest progress” on most policy fronts – as well as by the incoming COP29 Presidency earlier this month, alongside national adaptation plans. According to a press statement, “participants will engage in peer-learning, explore innovative financing models and share how to develop policy roadmaps that lead to implementation”. Developed countries are assumed not to need external expertise in the development of their next NDCs, given the absence of fora in Western Europe or North America. This might come as a surprise to some – including the UK’s Climate Change Committee – which recently concluded that just a third of the emissions reductions needed to achieve the country’s 2030 decarbonisation target are currently covered by “credible plans”.
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