Take Five: The Road to Belém
A selection of the major stories impacting ESG investors, in five easy pieces.
This week politicians were reminded that well-designed climate policies are their best defence against economic decline.
Security guarantee – Ministers from around 40 countries met in Berlin this week to discuss priorities for COP30, focusing on the importance of multilateralism in tackling climate change and the role of private finance in adaptation and decarbonisation. These are the first major talks since a new climate finance deal was agreed in Baku, also the first without US representation. UN Climate Change Executive Secretary Simon Stiell called on European politicians to consider investment in the clean energy transition as a security guarantee for the continent’s economy – warning of spiralling costs in the absence of a “strong new climate plan”. COP30 Chief Executive and Brazil Climate Minister Ana Toni also linked climate action to national security, reflecting on Europe’s willingness to innovate to fund urgent defence needs. “Defence is important in the short term, but we also need to look at the long-term consequences of not fighting climate change. Mutual security by combatting climate change is something that countries need to have in mind when they decide their budgets,” she told the BBC. Europe received further advice on its imminent nationally determined contribution (NDC) from the Organisation for Economic Cooperation and Development and the UN Development Programme, making the economic case for well-designed climate policies. Motivation of another kind was provided by the International Energy Agency, which flagged that rising energy demand – partly due to greater use of cooling systems during the hottest year on record – contributed to sharply higher emissions in 2024.
Silent spring – In the aforementioned speech, Stiell held up the UK as a rare example of a country to have already delivered an ambitious updated NDC. But Keir Starmer’s government has not yet fully reclaimed the country’s leadership role on climate – nor is it yet grasping green growth opportunities. This week, it was given extra time to deliver a revised Carbon Budget Delivery Plan, containing stronger emissions reduction policies up to 2037. An extension to October was granted by the High Court, at the behest of ClientEarth and Friends of the Earth, who had successfully argued that previous plans – submitted by the prior Conservative administration – were unlawful. The UK’s approach to the energy transition will also be tested in the High Court, where campaigners this week challenged its decision to issue North Sea oil and gas exploration licences on climate grounds. The government had not previously challenged a Supreme Court ruling that full climate impacts should be considered at the approval stage of fossil fuel projects. But in this case, it is arguing climate due diligence should wait until a later licensing stage, not when granting exploration rights. Despite Stiell’s entreaties, there was little mention of climate policy as an engine of much-needed growth in Chancellor Rachel Reeves’ Spring Statement – although some took that as a win. And the Financial Conduct Authority was similarly silent on its policing of sustainable investment in its five-year strategy, also issued this week – influenced by the government’s pro-growth efforts to reduce red tape and encourage greater risk-taking. The regulator said it wanted financial services “to seize future potential” but was less clear on detail, such as the UK’s development as a transition finance hub.
Warning signal – Defence was front of mind in the US as well as Europe, with the role of technology in warfare given an expected spin by the inadvertent inclusion of a journalist in the chat group used by Trump administration officials to oversee military strikes in Yemen. But you don’t have to be US National Security Adviser Mike Waltz to have concerns about the intersection between artificial intelligence, cybersecurity and defence capabilities. Investors are increasingly concerned that big tech firms are abandoning previous commitments in pursuit of the profits to be made by developing AI applications for use in weapons or surveillance systems. Big tech business models have always depended on keeping at least one step ahead of regulation, but their move into the military market makes it just that bit easier to evade scrutiny on grounds of national security. With asset managers reportedly scrambling to develop defence-focused investment vehicles, and regulators taking a pro-growth, pro-innovation stance on AI, investors may need to apply some sophisticated filters as they lower their exclusion screens.
Duty calls – The Principles for Responsible Investment (PRI) has released a trove of data on current practice in responsible investment, including further evidence that investors are being increasingly explicit in their policies and expectations. A total of 69% of signatories have made public their climate change policies, with 64% doing so for human rights. In addition, more signatories are covering stewardship activities in their policies, including how these influence investment decisions. While this transparency is welcome, less so is the contrast in ambition levels between asset owners and managers, including on escalation and collaboration in stewardship. Added to data highlighting greater asset owner scrutiny of managers’ responsible investment approaches, the findings suggest recently highlighted differences will only become more apparent. The PRI also found that 60% of signatories’ policies set out the link between responsible investment activities and fiduciary duty. It would be interesting to analyse the level of consensus across policies given the lively debate currently taking place in the UK pensions industry. While some see forthcoming legislation as an opportunity to provide greater clarification on the boundaries of fiduciary duty, others feel that enough work has been done, claiming resources and expertise at smaller schemes are the bigger issues when it comes to unlocking sustainable investment flows. “Adjusting the educational base of trustees would likely be more rapidly deliverable than legislative change ever would be,” as one expert noted in this week’s ESG Investor feature.
Equipped to engage – One of the reasons for the presence of clear human rights guidance in many responsible investment policies is the introduction of groundbreaking legislation such as the UK Modern Slavery Act, which marked its tenth anniversary this week. While its reporting requirements remain voluntary, the act has helped to raise investor awareness of where risks lie across supply chains, as well as inspiring other laws, including the under-siege Corporate Sustainability Due Diligence Directive. Is the act still fit for purpose? Read next week’s feature to find out what experts told us. But it’s clear that investors are now much better equipped to engage with investee companies on the topic, through guidance and toolkits, and collaborative initiatives that have brought to light company shortcomings in lieu of legislative sanction. Of course, anniversaries are rarely occasions for complacency: according to the International Labour Organization, forced labour in the private economy generated US$236 billion in illegal profits per year globally.
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