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FTSE Russell: Evaluating national climate commitments using implied temperature rise

Tracking national greenhouse gas (GHG) reduction commitments is key to enabling alignment with the objectives of the Paris Agreement. The Implied Temperature Rise (ITR) metric, which uses countries’ past and projected future GHG emissions to estimate their contribution to global temperature rise, is an important progress indicator.

We apply the ITR metric to assess and quantify 132 countries’ commitments with respect to global climate goals, and to estimate corresponding transition risks for sovereigns. This paper explores the most recent updates to the robust methodology driving our analysis.

What does our research mean for investors? 

The implications of our research extend beyond academic circles to impact investors and financial stakeholders. By providing a robust methodology for assessing implied temperature rise and climate alignment across countries, our research offers critical insights for investors seeking to incorporate climate risk into their decision-making processes.

Understanding the gap between countries' projected emissions and their commitments can inform climate-focused investment strategies. Investors can harness our ITR data to identify regions that are either leading or lagging on climate action, thus assessing risks and opportunities associated with climate change mitigation and adaptation efforts.

Responsible investing. Meeting the challenge, together

Royal London Asset Management's latest report covers key areas of their activities, including:

• Stewardship and responsible investment
• Stewardship activities
• ESG Integration

At a glance

• The transportation sector has a significant impact on global emissions, but technology innovations, policy changes and shifting behaviours can reduce this
• Government regulatory timelines and international treaties are adding some urgency to the process, with many firms committing to net zero emissions by 2050
• As part of this energy transition, it is essential that companies in this sector adapt their products to serve clients effectively while remaining commercially viable

Columbia Threadneedle Investments: Decarbonising steel: redefining the value chain  and the role of iron ore miners

• Steel production is highly greenhouse gas-intensive, making up between 7% to 9% of annual global emissions; reducing its environmental impact is technologically and economically challenging.
• The need to decarbonise is driving innovation in the steel sector, which in turn is reshaping the global value chain for one of its key inputs – iron ore.
• Higher-grade, lower-impurity, iron ore, which only makes up a tiny fraction of the market today, is needed to produce green steel. A potential shortage of suitable ores threatens the scalability of low carbon production routes.
• In October 2023 Columbia Threadneedle visited Fortescue Metal Group’s new high-grade iron ore mine in Australia. Here they draw from that experience to discuss how iron ore miners can position themselves to benefit from, and contribute to, the steel sector’s decarbonisation.

Columbia Threadneedle Investments' latest stewardship report details key areas of their activities, including:

• ESG Integration
• Engagement 
• Voting and corporate governance 
• Governance and oversight
• Conflicts of interest

Creating Sustainable Value Through Active ESG Integration

ClearBridge's latest stewardship report covers key areas of their activities including:

• The ClearBridge Model for ESG Integration
• Tackling Urgent Sustainability Challenges
• Engagements and Impactful Active Equity Opportunity
• Shareholder Advocacy - making each vote count 
• Understanding ClearBridge's portfolio alignment with SDGs 

MFS's latest Sustainability Report details their 2023 stewardship activities, including:

• Sustainability Overview - resources and governance
• Research and Investment Outcomes - ESG data and tools
• Update of Industry Initiatives - proxy voting
• Client and Industry Alignment - assessing effectiveness
• Corporate Sustainability - diversity, equity and inclusion

Creating a sustainable future through the power of investment

Asset Management One's latest Sustainability Report covers key areas of their stewardship activities including:

• Representing the Future with Materiality Map - Climate Change, Biodiversity and Nature
• Fulfilling Our Stewardship Responsibilities - Engagement and voting activities
• Co-creating Sustainable Investment - ESG Integration and Research
• Moving Forward Together with Stakeholders - Client survey 2023
• Our Own Actions - Sustainable governance and risk management

It’s been a busy year for advocating sustainable investing in the face of many headwinds. The steps taken to continue combatting climate change, along with spreading our knowledge on SI, are among the highlights of Robeco’s Stewardship Report detailing the progress made in 2023.

Summary

• Focus on our key priorities climate change, biodiversity and human rights
• SI Open Access available on our corporate website
• Full report on Active Ownership and related SI activities

RFI Foundation: ICMA sustainable sukuk guidance brings flexibility and risks for issuers with limited green assets

The International Capital Markets Association (ICMA), Islamic Development Bank (IsDB) and LSEG have released guidance on sustainable sukuk, reflecting the growing contribution of Islamic capital markets to the wider sustainable fixed-income market.

Through the first quarter of this year, sustainability-labelled sukuk have been dominated by core Islamic finance jurisdictions including Malaysia, Indonesia, the UAE, Saudi Arabia and the IsDB, but the new guidance has been purposely developed for issuers coming from either sukuk or green bond markets to issue green, social, sustainable, transition or blue sukuk.

This is generally supportive of market development because there has been particular growth of labelled sukuk rather than bonds within the GCC market to accommodate the widest investor base within the region’s financial markets. The guidance focuses on asset-based use-of proceeds bonds where “proceeds are intended to be allocated towards eligible green and/or social projects”.

One element of the market that isn’t directly addressed in the review process specifically is the sustainability characteristics of the underlying asset referenced in the sukuk transaction. The guidance clarifies that the asset-based structure involves transfer of beneficial ownership interest in the underlying portfolio “with no recourse to the assets and their credit quality”. In addition to no recourse, investors are not always provided detailed disclosure about the underlying assets.

The guidance notes that the contribution of Islamic finance to sustainable development provides “an additional layer of governance (Shariah) that helps in the allocation of issuance proceeds and directs them towards projects/companies that are aligned with both Shariah standards and ESG/sustainability criteria”. It is silent, however, on whether the underlying assets used to structure asset-based sukuk would be subject to similar consideration against ESG/sustainability criteria.

This is an important consideration because it affects the specific structural difference between use of proceeds sukuk and bonds. It could become particularly relevant in countries or for issuers with a need for finance who lack green assets but have a large domestic investor base that requires Shariah-compliant options.

Consider, for example, three types of projects: refinancing a coal-fired power plan as part of a transition plan for early retirement; financing a new solar power plant; and financing a program supporting the retraining of workers from fossil fuel production to renewable energy.

Within a conventional green, social or sustainable bond issuance, many financial institutions and investors are struggling to incorporate early-phase out financing into their sustainable finance frameworks despite the importance of credible transition finance for climate mitigation. Financing most renewable energy projects fits cleanly within definitions of green projects so long as they don’t produce significant harm such as population displacement or contravening the land rights of indigenous communities.

For conventional bonds, it would be relatively uncontroversial to train transitioning workers to use skills developed in fossil fuel-related industries to be able to adapt and apply these skills for renewable energy. For example, training drilling engineers for geothermal energy or offshore platform workers for offshore wind. However, similar financing through a social sukuk would face limits in the structuring process because it would require Shariah-compliant tangible assets owned by the originator to be included. The requirement to link the transaction to a tangible underlying asset may impede the efforts of some companies, or lead to situations constraining investors who may have strict and narrow limits for what they can finance (for example, excluding finance of any fossil fuel investments).

In some cases, these financing requirements may be combined in a way that makes it more difficult for Islamic finance compared to conventional finance. This is relevant as many OIC countries have substantial financial assets held by institutions that can only invest in Shariah-compliant structures into which conventional investors are also able to invest.

Consider a project that involves the early retirement of a coal-fired power plant, eventual replacement of all or part of the electricity supply with renewable capacity, and a Just Transition plan to maintain overall employment through retraining. A conventional transition bond could be issued to refinance the power plant while a social bond is issued for worker retraining, and over time successive green bonds could be issued to finance new renewable capacity as part of the transition plan for the originator.

In the conventional case, each dedicated investor base could have different financing structures to maximize the range of investors who participate. Financial institutions wishing to finance Just Transition but not able to finance or refinance fossil fuel assets could invest only in social or green bond issuance, while development banks actively supporting early phase-out of fossil fuel assets (such as through JETPs) and investors with fewer restrictions on financing the transition away from fossil fuel could provide support only to those elements that need some degree of concessional financing to pencil out.

That same series of transactions would be more complicated to issue as a sukuk with the same ability to meet the requirements of all investors, but it doesn’t appear to be ruled out under the new ICMA guidance. The difficulty of financing a worker retraining program on a standalone basis would be more challenging in the absence of a clear underlying asset owned by the obligor.

Financing through a sustainable sukuk along with a solar plant could be possible, but if the workers need to be trained before the new renewable capacity is installed, then it may not be able to be attached to that part of the financing. This either means the transaction cannot be done using sukuk for all elements, or the training component needs to be financed with the coal-fired power plant as the underlying asset, endangering the participation of green investors.

There may not be a way to fully replicate each element of the example above. However, the guidance wouldn’t clearly rule out the potential for an asset not directly involved in fossil fuel combustion (such as an office building at the coal-fired power plant) being used for structuring a social sukuk alongside a refinancing with transition finance of the remainder of the plant as part of an early retirement plan and later issuance of green solar sukuk to finance construction (or refinance bank financing) for the new renewable capacity.

This is just a hypothetical example. But it highlights both risks and opportunities connected with expanding the application of Islamic finance for sustainable finance purposes. The risks are clear where there is a division between underlying assets and use of proceeds where there is not ESG/sustainability evaluation screening of the underlying assets.

The opportunity may nonetheless be needed to allow for structuring flexibility in markets – such as many of the OIC countries – lacking in green assets and needing substantial and phased investment to support the transition where the supply of green assets may lag the requirement for finance. Notwithstanding that important need for flexibility, the lack of ESG/sustainability evaluation of underlying assets in the process of receiving a second-party opinion may introduce a risk that needs a response to mitigate. For example, a second party review could include additional disclosures about the ESG/sustainability characteristics of the underlying assets. This would avoid controversy in the future about the sustainability characteristics of underlying assets used by issuers of green, social and sustainable sukuk.

EthiFinance has published the first edition of the "SRI study on the Spanish Private Equity market" presents the developments in the ESG (Environment, Social and Governance) maturity of Spanish Private Equity Asset Managers, highlighting new ESG trends in the market and identifying areas for improvement for Asset Managers.

Four main aspects are analysed: ESG approach, exclusions, resources dedicated to ESG and SFDR classification of the funds.

This study is based mainly on public information made available by the Asset Managers on their website and the information contained in the pre-contractual fund documents, available on the Spanish National Securities Market Commission (CNMV) website.  The data was collected from 112 Asset Managers (and independent investment funds) active in Private Equity in Spain.

Download report - In English (EN) | In Spanish (ES)

Cement is a critical ingredient for concrete – the most used material in the world behind water. However, cement production is emissions heavy, leaving the industry and its investors exposed to transition risks. Robeco’s proprietary decarbonization model concretely quantifies that risk and provides an early signal for cement’s transition-ready leaders.

Summary

• Cement is critical for buildings and infrastructure construction
• Production is emissions heavy, intensifying transition risk for cement makers
• Decarbonization models quantify transition risks for cement companies

Trillium’s shareholder advocates are in the thick of the proxy voting season in the first quarter of 2024 and are pleased to share updates on several issues – including excitement about Starbucks agreeing to negotiate a collective bargaining agreement with their employees’ union, a major success after more than two years of investor pressure.

Trillium has withdrawn several shareholder proposals after reaching satisfactory agreements with several portfolio companies on issues ranging from improved reporting of workforce diversity data and access to paid sick leave. They also have an update on firm-wide work to encourage companies to set science-based targets. See the Advocacy Impact Report for more details.

Climate change has taken center stage during the annual general meeting (AGM) season for many years, offering investors the chance to vote on how well companies are transitioning toward net zero. But it’s not a simple matter of voting yes or no.

Climate change cost the U.S. over $90 billion in 2023. Last year was the hottest year in recorded history and had a record physical impact. Swiss Re warns that rising temperatures are likely to reduce global wealth significantly by 2050 as crop yields fall, disease spreads, and rising seas consume coastal cities, among a host of other harms.  

Linking greenhouse gas emission reduction targets to executive compensation is one important lever by which CEOs can be incentivized to achieve timely and systematic progress on climate. This second edition of the Pay for Climate Performance report analyzes how effectively 100 of the largest U.S. companies by market capitalization, across 11 sectors of the economy, are currently linking GHG emissions reduction incentives to CEO remuneration.

These 100 companies collectively represent a market capitalization of $28 trillion. Building upon the 2022 Pay for Climate Performance report’s analysis of 47 U.S. companies, this edition enables year-over-year comparisons and provides broader coverage across industries.

This report also provides a succinct overview of best practices and investor expectations, evaluates the 100 companies on how they incorporate climate metrics into CEO compensation, and considers the associated investor challenges in assessing climate-related CEO compensation incentives.

Summary: 
 
- ESG ratings have started to address shortfalls in scoring methodology and overall transparency. 
- Key improvements include clearer definitions, more transparent scoring methodology, and public access to ESG scores.
- Looming ESG regulations are a key driver of change, with initiatives underway in Japan, the UK and India. 
- Greater ESG ratings transparency is paving the way for expanded data collection that companies will need to monitor. 

To help business understand emerging trends, frameworks and reporting requirements – and how they can respond to these by taking some decisive first steps towards positive action on nature – the report is broken down into four main chapters:

- Why the nature agenda is shaping business strategies examines the need for action with a particular focus on the agri-food sector as one of the industries most reliant on healthy natural systems.
- The farming and nature nexus looks in more depth at the structure of agricultural value chains and the challenges existing structures pose to greater action on nature.
- What this means for business – how to prepare focuses on nature targets under the TNFD and SBTN, two of the most prominent assessment and disclosure frameworks.
- Key success factors for becoming nature positive examines the three areas identified as critical to addressing nature issues for agri-food businesses:

• Getting the right nature-related data
• Engaging with key stakeholders across the value chain
• Embedding nature action within a wider holistic strategy

This World Earth Day, RBC BlueBay Investment Grade Fixed Income Portfolio Manager, Harrison Hill reflects on the investment potential for fixed income within a circular economy.

Discussions around sustainable finance often centre around private equity and venture capital, however, fixed income has an equally large part to play. However, to-date this asset class has been arguably underutilised within this space.

The concept of a ‘circular economy’ is rising in prominence as the impact of climate change and resource scarcity increasingly pose risks around the globe.

For investors, this concept represents an opportunity to gain an exposure to sustainable business models that can potentially lead to reduced costs, improved efficiencies, and reduced dependence on finite resources. Despite this, investment in the circular economy from a private sector standpoint remain subdued despite a growing arsenal of ways to invest within the space.

"In our view, high-impact companies should prioritize the protection of biodiversity alongside their transition to a net-zero economy. We would like this publication to serve as a call to action for high-impact companies to address the challenges related to land use, deforestation, water conservation, climate change mitigation, waste management and species conservation.

In this report, we present the findings of a survey we received from 70 respondents (out of more than 220 surveys sent) from high-impact industries to understand their approach to biodiversity and assess the actions they have taken to address biodiversity-related concerns. We selected companies that have a significant impact on the reduction in biodiversity, as well as those that are highly dependent on it."

Financial risk and opportunities for investors related to processed foods

There is increasing emphasis on the need to align financial interests with public health objectives. There is a growing awareness around the adverse impact of the financialization of UPF and how this impacts diets.

Overall, the investment case for considering nutrition when investing in the food sector is strong and the majority of ATNI’s 80-plus Investors in Nutrition and Health have integrated nutrition in their responsible investment approaches – thus aiming to leverage the healthiness of processed foods for both business and society. However, the topic of food processing is relatively newfor the investment community. For investors who are interested in nutrition and health, the level of food processing and its effects on health is a logical issue to consider in relation to their responsible investment strategies.

Banks such as Rabobank and Barclays are already explicitly paying more attention to processing, outlining in their consumer trend reports that food companies should look at the potential risks that processed foods pose to financial returns over the long term, and opportunities to mitigate them.

For example, one opportunity recently highlighted by Rabobank involves reverse engineering and redesigning food production processes to retain the positive aspects of food processing without being linked to adverse health outcomes.

Cutting aluminum emissions is a challenging but vital step toward industrial decarbonization as demand is expected to grow sharply in coming years.
 
Producing “green aluminum” and securing a climate-safe economy while meeting rising demand will depend on significant collaboration across governments, international organizations, and industry. In this report Climate Advisers developed in partnership with the Atlantic Council, we dive into the complexities of decarbonizing the global aluminum market, how actors are working to produce the metal with cleaner methods, and recommendations for stakeholders to advance industrial decarbonization.

Aluminum production accounts for 3 percent of the world’s climate change emissions. This is set to increase with demand projected to rise by nearly 38% from 2020 to 2030. To learn more about how meeting growing demand for aluminum can be decoupled from climate emissions and how various countries are implementing the solutions listed below, download this report. 

In September 2023, FirstRand published its annual climate-related disclosures across the following reports: climate change strategies report 2023 (climate report), Basel Pillar III disclosure 2023 (Basel III), governance report 2023, and remuneration report 2023. These are read with the bank’s climate change policy 2022 and its policy on energy and fossil fuel financing. Although the bank has published a document setting out its policy statements relating to restrictions on the financing of certain sectors/activities, this does not deal with fossil fuels, merely referencing that thermal coal is addressed in a separate policy. 

Just Share has also engaged with FirstRand on several issues arising from its 2023 disclosures.
This briefing draws on the bank’s published disclosures and on clarifications provided by FirstRand during these engagements.

FirstRand has produced a clear and useful set of climate disclosures. It has attempted to address most elements of the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), and its disclosures make it possible for stakeholders to identify the gaps and challenges that it is facing in fully integrating climate risk into its decision-making. This briefing addresses someof these gaps, to focus investors and the bank on the issues that will help or hinder FirstRand’s ability to meet its long-term climate commitments.

Solactive: EU Taxonomy-Aligning Benchmarks 

EU Taxonomy-Aligning Benchmarks are proposed investment strategies that center on the EU Taxonomy for Sustainable Activities. These benchmarks would strategically leverage companies' disclosed capital expenditure aligned with environmentally sustainable economic activities.

Essentially, their overarching objective would lie in prioritizing companies directing capital towards pivotal sustainable initiatives, serving as a complementary framework to EU Climate Benchmarks.

Action is urgently needed by UK policymakers to tackle the causes of obesity and diet-related disease, as well as acting to reduce the environmental impact of our food system. 

This policy briefing summarises research by Sustainable and Healthy Food Systems (SHEFS) which models the possible effects on food choice of a salt and sugar tax, as recommended in the 2021 National Food Strategy (NFS). It looks at the impact of consumers substituting frequently consumed foods for lower salt and sugar alternatives within the same food category, assessing the affordability of such swaps, and modelling the impact they might have on healthy weight and the environment. 

The research finds that even very small swaps within just eight commonly consumed food categories (therefore likely to be realistic for the general population) can have notable impacts on both healthy weight at a population level and several environmental impact outcomes. 

The findings support the introduction of targeted fiscal incentives for reformulation, such as a salt and sugar tax, ensuring that any potential risk to people on low incomes is minimised. 

William Nicolle and Leland Werden discuss the white paper's key highlights. They explain the urgent need for a more holistic approach to reversing global biodiversity loss by 2030 and to achieving a nature-positive world by 2050.

Associated white paper available here

Key Takeaways
- Long-term investment in Novo Nordisk, a Denmark-based pharmaceutical company whose research and development has pioneered a leading class of diabetes drugs, has provided actionable insights into the blockbuster global market for diabetes and obesity treatments.
- While Novo and Eli Lilly are making substantial investments to produce their leading diabetes and obesity treatments at scale, current production challenges could allow another biopharmaceutical player to gain market share.
- We view diabesity as a dynamic market that will create not only investment opportunities across the health care sector but also second derivative demand in other industries where international companies maintain leadership positions.

Merck's latest sustainability Report covers key areas of their activities, including:

• Business ethics - human rights, animal welfare, bioethics and corporate governance 
• Products - sustainable innovation & technology, health for all and products & packaging 
• Employees - corporate culture, diversity, equity and inclusion 
• Environment - climate action, resource efficiency 

Mercedes-Benz's latest report details areas of their sustainability activities, including:

• Governance - sustainable business strategy, integrity, and compliance and integrity 
• Environment - climate protection, air quality, and resource conservation 
• Social - diversity and inclusion, vechile and environmental safety, and human rights

Kenmare's latest report "Responsibly meeting global demand for quality-of-life minerals" covers key areas of their activities, including:

• Safe and engaged workforce - diversity and inclusion, labour practices and security 
• Thriving communities - socio economic development, land use and community relationships 
• Healthy natural environment - climate, energy use, biodiversity, waste and radiation 

• The recent Spring Meetings in Washington DC have set the tone for the next rounds of global forums, notably the G20 and COP29, where scaling up climate finance for emerging markets (EMs) will be high on the agenda.

• A new global climate finance goal is under discussion to replace the previous USD100 billion target – indications are that the new target will need to be several multiples higher.  

• EMs face challenging economic conditions and their issuance of labelled debt, a key source of finance for sustainability projects, has stagnated compared to developed markets over the past few years.

• With EM sovereigns’ own fiscal space increasingly squeezed, MBDs look set to play a larger role in addressing EM’s climate financing shortfall, with reforms aimed increasing climate-related lending as a share of MDBs’ overall activities.   

• The largest MDB, the World Bank, has taken a number of important steps, including revising its equity/loan ratio to free up an additional USD40 billion in lending capacity. It has also launched a new, streamlined set of 22 impact metrics to guide and assess all its activities, many of which are climate-related.

• The Spring Meetings highlighted that private sector investment will be essential for increasing climate finance to EMs. Again, MBDs will play a key role in providing solutions, including through blended finance mechanisms.

• At the Spring Meetings, the World Bank highlighted its plans to triple the guarantees it provides to USD20 billion by 2030.

The concept of the polycrisis , popularised by the World Economic Forum (WEF) in its Global Risks Report 2023, refers to a state where multiple crises intertwine - their causes and processes inextricably bound together to create compounded effects.

The report warned that the world faced the risk of an emerging polycrisis in relation to “shortages in natural resources such as food, water and metals and minerals” by 2030.

A year later, the complexities we face in the world today remain as challenging, if not more. Roughly 10% (783m people) of the world’s population is undernourished as of 2023  and the number of people living in extreme poverty has risen to nearly 700m , a significant share living in conflict-affected areas. From wars in Gaza and Ukraine to hostilities in the Middle East, conflicts and violence have led to mass migrations, food and energy insecurity and disruption in trade which has caused ripple effects through society. The entire 2.2m population of Gaza is faced with the risk of famine as the war continues . Geopolitical risks have also increased the probability of recession in Europe and the US , while the economies of several emerging countries like Lebanon, Argentina, Sri Lanka and Bangladesh are already holding on by a thread.  

Around the globe, unforeseen climate emergencies in 2023 – like torrential rains in Southeast Asia and droughts in Africa - have taken thousands of lives, caused billions in infrastructure and economic damage and have displaced vulnerable populations.  During the wrap up of COP28, the United Nations (UN) issued an appeal for $46.4bn for 2024, in order to bring aid to 181m people worldwide, suffering from famine and disease or subject to mass displacement, stemming from conflicts, climate emergencies and collapsing economies. People, planet and profit – all three P’s have been put under threat in this age of polycrisis.

Investing based on systems – a case for transformative investing

Big problems require strong actions. To address the polycrisis that we are experiencing, society needs to invest in transformative change across multiple planetary, societal and economic ecosystems. Systems-based investing or transformative investing is a school of investing that is theoretically guided by a systemic theory of change  and that applies a comprehensive systems intervention approach. 

Although there is no technical definition yet, under the umbrella of sustainable investing, transformative investing should aim to direct financial resources systemically towards supporting the transformation from one way of doing things to another. This is opposed to impact investing, which is usually focused on individual enterprises. Investing in systems change is also different from traditional thematic investing as it follows a holistic investment approach - considers the trade-offs and synergies between multiple sustainability themes, vs just one (for eg. climate change). Society, climate, economy and nature form a nexus that is highly interconnected – we cannot overlook one to the beneift of another.

Solving the Rubik’s cube

The solution to dealing with a polycrisis is best understood as solving a Rubik’s cube – all six faces of the puzzle must be solved, which requires making trade-offs and backtracking, all the while keeping an eye on the end result. 2023 was a hallmark year for making “carbon tunnel vision” a thing of the past. More companies and investors have recognized that holistic social and environmental solutions will bring society closer to a resilient future as opposed to just optimizing for carbon sequestration. The health implications of climate change were considered in the climate proposals of 91% of governments in their Nationally Determined Contributions (NDCs) 9 , although most of these health-promoting proposals remain unfunded. The giant leap in Generative AI is considered as transformative as the invention of the printing press10 , but the industry has also faced essential questions on its potentially negative social and environmental impacts11 .

Regenerative agriculture12 is occasionally considered a one-stop solution to addressing climate, food and nature crises. However, corporate-sponsored regenerative agriculture programs that pay farmers to implement sustainable practices do not always benefit native communities, as these programs usually run within the firm’s own supply chain. In some cases, regenerative agricultural practices have also been found to unknowingly contribute to crop yield decline (endangering food security), and negatively affecting off-farm biodiversity or climate change mitigation. Contextual variations such as soil type and topography have been found to be key determinants of the outcomes in different geographies.13 Companies, in partnership with farmers, need to set an outcomes-based approach to determine the effectiveness of regenerative agricultural practices and adopt methods that are suitable to local contexts, while tackling issues at landscape and global levels. Diversity and inclusion have been increasingly important topics since the death of George Floyd in 2020. Over the course of 2023, the role of local communities and indigenous populations in addressing biodiversity loss14 and transforming socio-economic systems15 came into particular focus. Society can lean on indigenous populations in addressing systemic crises locally, addressing their own needs and priorities16 – solving faces of the rubik’s cube in isolation – before, or even instead of, looking for a universal solution. Indigenous populations are experts at living with uncertainty and making the most of it. From them, society can learn how to live in an increasingly uncertain world.

It is also important to note that one cannot systematically prioritize one crisis over another, nor assume that everyone shares the same priorities. Policymakers from the global North might articulate very different crises than those from the global South, affecting how responses are formulated. The one-size-fits-all approach can, sometimes, inadvertently, lead from one crisis to another. Research17 has shown that actions to contain Covid-19 had a devastating economic impact on the poor around the world. In preparing for future pandemics, infrastructure systems and policy responses have to be carefully adapted to local and regional considerations. However, these considerations can also prevent and/or delay interventions on a potentially dangerous, and even urgent, “single crisis”’; for example, refraining from acting immediately on one, in fear of exacerbating another – being afraid to mess up a solved face. This scenario played out at the recently concluded COP28 where the official global consensus advocated for a phase away approach to fossil fuels as opposed to a phase out, partly out of concern for energy security for the masses. Trade-offs must be made but is there enough time?!

Transformative or systems-based investing is still an underdeveloped financial and sustainability practice. The investment industry needs to be creative and innovative in developing the concept, processes and infrastructure systems that will enable it to take a systems-based approach and present viable financing solutions for the polycrisis. Innovative financing mechanisms, such as debt-for-nature swaps, nature-based solutions and credit enhancements, were a key part of the discussions at COP28 to address the multi-crisis of nature, climate and economic collapse in vulnerable countries/communities. According to Sustainable Fitch18, the sustainable bond market in 2024 is expected to increasingly require social co-benefits in nature or climate related issuances. For example, issuance could focus on areas linked to nature in which social co-benefits are specifically identified, such as food security, or on climate projects that also bring benefits to public health. Our hope only grows for this trend to become the norm, not an exception.

At the United Nations Water Conference in 1977, the first Action Plan for addressing the water crisis was created, recognizing that, “all peoples, whatever their stage of development and social and economic conditions, have the right to have access to drinking water in quantities and of a quality equal to their basic needs.”

Almost five decades later, we are nowhere close to ascertaining this basic human right. According to the United Nations University Institute for Water, Environment, and Health  (the Think Tank on Water), approximately 72% of people worldwide live in water-insecure countries, c. 2bn people do not have access to clean and safe drinking water and approximately 3.6bn people (46% of the world’s population) lack adequate sanitation services. Many of these issues are attributed to unprecedented population growth in many countries, but there are other reasons. Most notably, our consumption patterns have become highly water intensive - everything from the production of clothing to harvesting crops for food to the manufacturing of electronics requires an immense amount of water. 

Water on Earth is scarce – despite 70% of our planet’s surface being covered by water, only 1% of it is potable. Additionally, water is not an easily renewable resource – replenishing ground water can take decades, if not centuries. Water availability is further compromised by extreme weather events, pollution and aging infrastructure. Water contamination from chemicals, drugs, agricultural run-off, microplastics and ‘forever chemicals’ add to water insecurity across the world. This affects not only people and society but our investee companies as well. The Panama Canal backlog created by historic droughts and low water levels raised costs for countless firms in 2023. Drought is the third highest risk identified in India, and 59% of Indian firms reported as being affected . Companies are exposed to water-related physical climate risks in one way or another - through their own operations or their supply chains.

The water sector provides public and private benefits. However, many of these benefits cannot be easily monetized, thus limiting revenue streams from investments. The water sector requires a considerable amount of financing, with estimates ranging from $182bn to $664bn annually (2019). This gap includes various areas such as water supply and sanitation ($116bn to $229bn per year), flood protection ($23bn to $335bn per year) and irrigation ($43bnto $100bn per year), as well as funding for the implementation of water resources management.  Our existing water infrastructure is not well adapted as necessary investments have been neglected for decades. Utility companies report that one out of every six gallons of water is lost between the water treatment plant and the end customer – termed as ‘non-revenue water’. Without investments and proper water governance, there is likely to be increased competition for water between public and private sectors and an escalation of water crises of various kinds, triggering emergencies in a range of water-dependent sectors. Regulatory barriers can also limit innovation and prevent the adoption of new technologies or approaches.

Nevertheless, there is still hope. Co-operation and innovation are key – between companies, investors, communities and countries. The development of sustainable financing models can be enabled by public sector backing. For the sustainable management of water resources, in addition to constructing new infrastructure, investments are necessary to maintain, operate and enhance the resilience of current facilities (especially ageing infrastructure). In addition, effective incentives and regulation can redirect funding towards climate-smart, resilient and nature-positive investments. We need public and private finance to work hand in hand. In Ghana, different actors, including the private sector, non-governmental organizations, charities and development partners, financed the increase of coverage of safely managed drinking water services by 28 percentage points from 2000 to 2020, totalling 41% of the population in 2020 . At the global level, it is also necessary for increased data sharing and improved interoperability of all Sustainable Development Goal global databases. On the industry level, CEO Water Mandate brings together 240+ companies to share good practices and forge partnerships to address urgent water challenges related to scarcity, quality, governance and access to water and sanitation. 

The water sector sits comfortably at the intersection of climate, nature and social themes creating opportunities for investments for all sustainability-focused investors. However, most water investments till now have been focussed on water utilities which address the public demand/need for water. But there are many well established companies as well as new start-ups that are now working to solve water security issues using innovative technology and solutions. According to some analysts, the global addressable market opportunity for the water and wastewater industry is estimated between $700 and $800bn. In-sourced OEM (original equipment manufacturers) and Construction/EPC (engineering, procurement & construction) cover over half of the market while the remaining is covered by enablers, including general equipment, such as pumps, valves and meters, outsourced operations & maintenance services, water treatment and various parts & consumables. Earth observation technologies, including satellites and drones, present a transformative opportunity for both the public and private sectors to enhance water resources management. Governments can also use innovative methods, such as offering tax reductions for nature-based solutions and conservation spaces or payments for ecosystem services to preserve water-critical green infrastructure, making it lucrative for private finance to kick in. 

The theme of World Water Day 2024 is ‘Water for Peace’. On this World Water Day, public and private sectors need to come together to govern, innovate and finance a water resilient future in which people and businesses can thrive in peace and harmony.

This commentary is provided for informational and educational purposes only. Published by La Française AM Finance Services, head office located at 128 boulevard Raspail, 75006 Paris, France, 326 817 467 R.C.S. Paris, a company regulated by the Autorité de Contrôle Prudentiel as an investment services provider, no. 18673 X, a subsidiary of La Française. La Française Asset Management (314 024 019 R.C.S. Paris; 128 bld Raspail, 75006 Paris) was approved by the AMF under no. GP97076 on 1 July 1997.

A passion for fashion has kicked off a new year for Robeco’s Active Ownership team as they engage to improve sustainability in the industry.

Summary

• Fashion engagement theme runs in tandem with new investment product
• Reports on successes seen in water use and gaming engagement themes
• Tax transparency and corporate governance work also highlighted

'Our Active Ownership report details how our Investment Stewardship and Investment teams exercised voting rights across our entire book and engaged with companies, policymakers and other stakeholders with an aim to deliver positive change on topics including deforestation, income inequality, human rights and artificial intelligence.'

'Metals like copper, lithium, and nickel entered the spotlight recently as high demand from new economic sectors has been transforming their markets. Propelled partly by the green energy revolution, we have seen increased investments and innovation in these metals to meet the growing demand for renewable energy.'

Alexandra Symeonidi, CFA, is a corporate credit analyst on William Blair Investment Management’s Emerging Markets Debt team. Covering the oil and gas, metals and mining, industrials, and utilities sectors across emerging markets, Symeonidi's recent work explores the reasons behind the metals’ growth and demand.

The report highlights 2023 key developments: 

AllianzGI further built out its sustainable investing offering. There are now more than 200 sustainable funds that are classified as Article 8 or 9 according to the European Union (EU) SFDR regulation , accounting for 61% of AllianzGI’s total mutual fund AuM.

Capitalising on the successful Key Performance Indicator (KPI) approach targeting decarbonisation, AllianzGI introduced two new sustainable investment approaches in 2023:

a) the ESG score approach that targets a higher weighted average ESG score in comparison to the benchmark and is applied to emerging market strategies

b) a KPI sustainable investment share approach that directly leverages AllianzGI’s proprietary methodology to identify sustainable investments, according to the SFDR.

Successful introduction of new and innovative fund solutions. Examples are the launch of the company’s first social-focused equity strategy and the closing of the SDG Loan Fund, a “blended finance” strategy established together with MacArthur Foundation and FMO IM that mobilised USD 1.1 billion in investor capital to advance the United Nations Sustainable Development Goals (SDGs) in emerging and frontier markets.

Intentions for 2024

AllianzGI’s Sustainability and Stewardship Report also looks ahead and outlines aspirations for 2024.

In the current year, the political agenda risks delaying the financing and implementation of transition plans. This can result in a higher probability of a “delayed transition” scenario. AllianzGI is already providing advisory analysis on the potential impact on client portfolios in terms of the drag on returns under different climate scenarios reflecting increased systemic risk.

Moreover, 2024 could be the year when biodiversity – a topic that typically attracts less attention than climate change as an environmental concern – gets the attention it deserves. The integration of biodiversity into the investment process will likely be accelerated, and AllianzGI expects this to stimulate further client interest and new product development.

VBDO: Biodiversity and Business - Challenges and good practices 

The past five decades have seen a rapid deterioration in our global ecosystems. Research by the UN Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES), shows that biodiversity is under enormous pressure from human activities. The WWF Living Planet Report describes that one million species – out of an estimated eight million in total – are threatened with extinction.

Most companies have taken action to reduce their impact on biodiversity, but at the same time are struggling to find the right approach, the report notes. From the interviews conducted, this is mostly due to the complexity of the subject: there are many different factors involved in effectively reducing negative impacts on biodiversity. For instance, the focus is usually on climate change, while four other causes need at least as much attention, such as countering pollution and the spread of invasive plant and animal species.

Good practice instead of best practice

The report stresses that it is crucial for companies to be aware of their impacts and to understand the dependencies within their business models. In this way, they can make changes appropriate to their operations and the areas in which they operate

Looking back two years, can you still remember the shortage of numerous products towards the end of the pandemic? Consumers were facing shortfalls of products ranging from televisions and cellphones to cars, WiFi routers, medical devices and gaming consoles, among many other things. A central reason was a global shortage of semiconductors, also known as microchips and integrated circuits, mainly due to the effects of the Corona crisis causing disruptions in the supply chain.

The shortage of semiconductors had a serious impact on industrial companies worldwide. The automotive industry was hit hardest: production lines been stopped, employees were put on short-time work, new cars had an analogue speedometer instead of a digital version or had to do without certain assistance systems. But a lack of microprocessors didn’t hit only the automotive industry hard. Goldman Sachs identified 169 industries that suffered from the ongoing chip shortage.

Digitalization and therefore microelectronics are moving into all areas of life. With their diverse areas of application, semiconductors play a central role in the materials of electronics and energy technology.

Semiconductor chips are incredibly complex. State-of-the-art devices can contain over one billion circuit elements. There is simply no way to manage this level of complexity without sophisticated automation. Electronic Design Automation (EDA) provides this critical technology.

In this industry with high relevance to the global economy, US company Cadence Design Systems is one of the largest provider of EDA technology with a market share of 30% while dominating the analog design part of the market with around 70% share.

The world is drowning in garbage. At least that’s the impression you might get if you look at the forecasts for the projected global increase in waste: For 2050, the World Bank predicts a growth in the annual global waste generation from the current around 2 billion to 3.4 billion tons – an increase of around 70%. This represents more than double the population growth over the same period.

Worldwide, only 14% of waste gets a “second life”. Much of what cannot be recycled is burned to generate energy. The problem is that this increases global carbon dioxide emissions and is therefore harmful to both humans and the climate.

GFL Environmental – Waste is their business

GFL Environmental is one of the top 5 waste management companies in North America. With a compound annual revenue growth rate of 32% over the past five years, GFL has become the fastest-growing U.S.-listed municipal waste management company. 

• The EU Green Deal is alive and well, but successful implementation requires an integrated economic narrative
• Fierce global competition in many clean and transition techs reveals uncomfortable lessons for EU green industrial policy
• In our view, getting policy right could reduce the cost of capital while increasing investment returns and growth

Clients of HSBC Global Research can access the full report via the HSBC Global Research website or by contacting Wai-Shin Chan

Contrary to popular opinion, the Green Deal is alive and well. Despite some watering down and political surprises - to be expected ahead of elections - it continues to provide a strong foundation to achieve Europe's 2030 climate targets.

However, we think a shift in narrative and mindset is needed to implement it successfully post June's EU Parliamentary elections. Examining climate policy in a silo and imposing this on the economy will no longer work. Green Deal implementation needs to start with consideration of socio-economic factors first, including rapidly shifting geopolitics, changing trade flows, monetary and fiscal policy, changing industrial competitiveness, and so on, and then fully integrate green.

In our view, this approach could reduce the risks of pushback and a stop-start transition, which would be detrimental to corporate value and investment returns.

Planet Tracker: Leaders and Laggards  in Chemical Industry's Transition to Net Zero Emissions

The chemical industry, generating USD 5.7 trillion in annual revenues (2022) and directly employing over 15 million people, plays a pivotal role in the global economy.

Its products are integral to various sectors, making chemical components essential for 96% of all manufactured goods.

The journey towards sustainability in this sector, especially in producing key chemicals like ammonia, methanol and ethylene, is critical for the broader transition to a global Net Zero economy.

Planet Tracker’s report, Tomorrow’s Chemistry, presents a comparative analysis of the Climate Transition Assessments (CTAs) of seven leading chemical companies, Air Liquide, BASF, Bayer, Dow, Incitec Pivot, LyondellBasell and Toray Industries.

After assessing their commitments, strategies and readiness to align with the Paris Agreement and achieve Net Zero emissions by 2050, Planet Tracker's ranking identifies Air Liquide as the clear leader in the analysis, while BASF sits at the bottom of the ranking.

View the Best Practice Guideline                            

Download the Investor Engagement Sheet

Robeco: SI Dilemma: How important is the G in ESG?

We have discussed the competition and interaction between E and S in this column before, but not the G in ESG.

In fact, looking at the range of sustainable investment strategies in the market, it would be fair to think that the G is often neglected!

Summary

• Governance can seem neglected compared with the E and S
• Agreement on financial materiality, but impact materiality requires judgement
• The G is actually everywhere – a necessary foundation for SI strategies

• What are companies saying about ESG? We apply our bespoke natural language processing model to corporate earnings calls
• Mentions of the term "ESG" have fallen to almost zero in the US amid pushback; Europe and LatAm still use the term...
• ...but whether they say the word "ESG" or not, companies continue to comment on related themes

Clients of HSBC Global Research can access the full report via the HSBC Global Research website or by contacting Wai-Shin Chan

Is ‘engagement washing’ poised to be the next term maligning asset management’s ESG movement?

Institutional investors often engage with companies they invest in to improve those companies’ environmental, social and governance practices— rivalling capital allocation as a core mechanism for achieving sustainable investment outcomes. But do engagement activities really deliver impactful, positive, real-world outcomes?

As a growing number of institutional investors make ambitious sustainability commitments, the volume of engagement activity reports grows with them. Company interactions on sustainability topics are commonplace, the range of engagement themes has widened, and goals have become loftier. Meanwhile codes of best practices are evolving to encourage a focus on real-world outcomes in engagement reporting, in contrast to the investment outcome focus of just a few years ago.

Yet, there is a growing realisation – and genuine bewilderment – that engagement for positive sustainability outcomes is not living up to the expectations of its proponents. When it comes to mitigating the negative impacts of certain economic activities on our environment and society, engagement can be influential, but it is rarely transformational—and an engagement expectation gap is emerging.

Gender lens investing offers investors a process for identifying and weighing issues pertaining to gender-based issues — pay equity, gender diversity, and career advancement, to name a few. Zevin AM integrate these findings into their investment decision-making with the goal of mitigating risk, identifying opportunities, and creating positive social impact.  

Only about 12.5% of portfolio managers across U.S.-based funds in 2022 were women, almost unchanged from the previous ten years, according to Morningstar. The financial services industry has historically been unwelcoming to women given toxic working environments stemming from a culture of bullying, misogyny, and sexual harassment. Changing that culture is one aspect of Zevin's approach to gender lens investing.  

Gender lens investing includes supporting shareholder proposals that seek to expand disclosure of workforce diversity or to improve or adopt policies that promote an inclusive workplace. Zevin AM believe shareholder requests for improving workforce diver sity, equity and inclusion (DEI) position a company for long-term success. 

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Executive Assistant, Chief People Officer and one other Executive (10 Month Family Leave Cover) - Principles for Responsible Investment - Applied (beapplied.com)

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JobPost: PRI - Manager, Responsible Investment Ecosystems UK & Ireland (Hybrid/London | Closing: 8:00pm, 5th May 2024 BST)

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JobPost: ISS: Sustainability & Climate Sales Specialist (Rockville / Washington | Posted 17 April)

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Head of Accountability and Product Communications (5 Month Fixed Term Contract)

Closing: 8:00pm, 24th Apr 2024 BST