Europe’s green taxonomy: the new Basel?

As we mark the first anniversary of the initial Covid-19 lockdowns here in New York, it is hard to look back on 2020 and see much to celebrate. But environmental, social and governance investors may not be so glum. 

After years of building momentum, 2020 was when ESG investing finally broke into the mainstream. When the markets took a nosedive around this time last year, ESG funds did remarkably well. That went a long way towards settling the long-running debate over whether investors had to give up returns to fight climate change or social injustice. And then came the staggering inflows of money.

But now there are signs the tide is turning. Some high-flying green companies have started to pull back. And even former ESG acolytes are beginning to reject the movement’s ideological underpinnings. 

This is evident in a scathing critique in USA Today, written by Tariq Fancy, a former head of sustainable investing at BlackRock.

According to Fancy, ESG investing is not merely ineffective, it is actively harming the planet by stalling and obfuscating the need for major government reform.

“Imagine the planet is a cancer patient, and climate change is the cancer. Wall Street is prescribing wheatgrass: A well-marketed, profitable idea that has no chance of curing or even slowing down the cancer,” Fancy writes.

The same argument could easily apply to “social” investments that purport to help fix issues such as racial inequality but do little to address the structural inequities inherent in society.

As Gillian noted in her column on March 18, this type of scrutiny could end up being a positive for ESG in the long run, because it could force companies to embrace higher standards, which may lead to real change.

But time is running out, and if it is true that the market forces that got us into this mess cannot quickly be redirected to get us out of it, we will need to chart a new course soon. (Billy Nauman)

Europe’s green taxonomy could get tied up in red tape

Will Europe’s green taxonomy become the green equivalent of the Basel banking rules? That is a question that Moral Money has often wondered, for reasons that are good and bad.

On the “good” side of the ledger, the European Commission deserves credit for attempting to define green standards and improve the reporting system, just as the Basel banking rules did three decades ago with capital buffers.

But on the “bad” side, the Basel rules were so rigid and backward looking — partly because they were drawn up by a committee of bureaucrats — that they were quickly arbitrated by financiers.

So too, perhaps, with the EU green taxonomy. We have not yet seen the final version of the rules, but financiers are already sounding alarms. Huw van Steenis, a former adviser to Mark Carney at the Bank of England who now champions ESG at UBS, for example, has just penned a thought-provoking piece that warns of the risks around the taxonomy’s red — or green — tape.

“Brussels has gotten bogged down in the details and a noble, but self-defeating desire to create an exhaustive, one-size-fits all solution,” he said. “Investors and companies are beginning to fret about how they will put into action technical guidance that runs to 593 pages so far.”

Green evangelists might retort that this is just a case of special pleading by financiers who hate the idea of being constrained by new rules. Maybe so. But the intervention by van Steenis echoes a view that is widely shared in finance. And as such, it has two implications: first, if the EU goes ahead with this 593-page taxonomy there will almost certainly be Basel-style arbitrage. Second, American financiers will fight to ensure that Washington embraces a more market-friendly framework, shaped by bottom-up evolution. Which, of course, will spark allegations by Europe that America is tolerating greenwashing. (Gillian Tett)

How can we focus on what matters in measuring ESG?

The surge in ESG-themed investing has gone hand in hand with growing efforts to measure companies’ environmental and social impact. But the burden of keeping up with these new reporting expectations has also grown. So how can we do a better job of capturing what matters in measuring ESG, while lightening the reporting load?

We launched the Moral Money Forum to take on big questions such as this, and our next report will try to answer this one. As with our first report, we’re keen to hear your thoughts. Please share them here by March 31.

Axa decision to drop RWE sends a warning about net zero pledges

Last week, when French insurer Axa moved to drop German energy company RWE as a client, it was not just a sign that coal was quickly becoming untouchable. It was also a warning to fossil fuel companies that simply pledging to go net zero will not be enough.

As we have noted before, the concept of net zero is coming under heightened scrutiny as people grow increasingly dubious of greenwashing and the role of carbon offsets.

But what is particularly interesting is that RWE went so far as to sign up for the Science Based Targets initiative (which is often touted as a gold standard for companies planning to reduce emissions) and still found itself on the wrong side of Axa’s climate divestment policy.

Environmental non-profit group Urgewald praised Axa’s decision to drop RWE, which does not plan to stop burning lignite, the most polluting grade of coal, until 2038. The group also highlighted several “shortcomings” with the SBTI “which companies with ongoing fossil activities can use to their advantage”.

So far, Axa’s divestment list only includes “coal, tobacco, oil sands, controversial weapons and palm oil”. But what might happen if it were to expand that list to include more fossil fuels and other insurers followed its lead? High-emitting companies should watch insurers very closely and recognise that their net zero pledges might not offer the protection they expect. (Billy Nauman)

China unveils weak climate ambition in new five-year plan

Beijing earlier this week suffered through one of the worst sandstorms in recent memory, pushing air pollution levels into record-high territory. The eerily grey glow served as a reminder that China’s air pollution presents a constant threat to local and global health. (Reuters has more pictures here.)

When China announced last year that it would have net-zero carbon emissions by 2060, it was welcomed as “an extremely important shift.” China is the world’s largest carbon emitter, pumping more than twice the amount of carbon into the air as the second-largest producer, the US.

But China’s first specifics about how to get there are alarmingly weak. In a new five-year plan adopted last week, the country offered no new carbon reduction targets. The plan “presented a weaker climate ambition in the near-term than is needed to be Paris-aligned”, said Credit Suisse. China’s absolute C02 emissions could grow by at least 1 per cent a year through 2025. The International Energy Agency’s sustainable development projections call for China’s absolute CO2 emission to fall by about 1.5 per cent annually over the next five years. 

“These targets do not indicate an increase in ambition to lower emissions,” S&P said in a note on Tuesday. The reduction in energy and carbon intensity as a per cent of GDP “are roughly similar” to what has occurred over the past five years, S&P said.

But there are rays of sunlight piercing through the smog. China installed a record number of wind power generators in 2020, our Beijing-based colleague Christian Shepherd wrote this week. The Chinese wind market exceeded forecasts by more than 70 per cent, elevating wind-generated power in China above the combined total for Europe, Africa, the Middle East and Latin America. (Patrick Temple-West)

Local governance strives to build community trust

Cities around the world have been hard hit by the pandemic, but the mayors of Bristol, Los Angeles, New Orleans and Cape Town said on March 18 that they are hopeful that urban centres will forge a different path during the vaccine rollout.

“The opportunity to build trust . . . is stronger at the city level than national,” Marvin Rees, Bristol’s mayor, remarked, speaking on a panel at the Pritzker Forum on Global Cities. “We’ve learned there’s no national lever that can be pulled” nodding to the inconsistent approach taken by the UK since the start of the pandemic.

Eric Garcetti, mayor of Los Angeles, echoed Rees’s point on how instrumental the city government has been in “building back better” over the past year. Los Angeles identified within the first month of the pandemic that black people in the city were dying from Covid-19 at disproportionally high rates given their share of their population.

“After that first month, [we were] one of the only cities in America that has cut deaths in the African American community to under the represented population,” Garcetti said.

However, as cities look forward to vaccinating their populations, inequalities continue to exist. Garcetti noted that 60 per cent of the Covid-19 cases have been among Latinos, while just 23 per cent of vaccines are reaching that community. (Kristen Talman)

Democrats in Washington seize on climate concerns

The US derivatives regulator might seem like an odd place to start a climate change conversation. Its staffers are skilled at hunting for market spoofers or delving into the Libor transition. Climate concerns have not been their forte.

But now the agency’s acting chief is trying to change that. Commodity Futures Trading Commission acting chair Rostin Behnam on Wednesday announced a climate risk unit of agency staffers to address what role derivatives play in addressing climate risk or the transition to a low-carbon economy. 

“Climate change poses a major threat to US financial stability,” Behnam said. “We must move urgently and assertively in utilising our wide-ranging and flexible authorities to address emerging risks.”

The Senate banking committee held a climate change hearing on Thursday about how to incorporate climate solutions into the US economy. Climate concerns are definitely being taken seriously in Washington now as never before. What permanent solutions lawmakers and regulators develop remain to be seen. (Patrick Temple-West)

Chart of the day

In an annual survey of its financial advisers, Merrill Lynch this year focused on ESG. The company found that nearly 80 per cent of respondents have clients interested in ESG factors as part of their investments, according to results published on Thursday. Up to 37 per cent were actively incorporating ESG considerations, up from 18 per cent in 2018.

Notably, the number of financial advisers who view ESG as an alpha signal tripled to 16 per cent, from 5 per cent last year, Merrill Lynch said. “Our survey indicates that advisers that consider ESG factors typically see better performance than those who do not,” it said.

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Further reading

• Brexit: the low-paid migrant workers ‘trapped’ on Britain’s farms (FT)

• China dominates global wind industry after record installations (FT)

• Tokyo Olympics ceremonies chief resigns over sexist ‘Olympig’ remark (Nikkei)

• Toshiba investors secure landmark win in clash with management (FT)

• Japan Inc embraces landmark same-sex marriage ruling (Nikkei)

• Oil and Gas Investors Need to Start Asking Tough Questions (Barron’s)