Daily ESG Briefing: Morningstar’s sustainability head urges investors to ‘own up’ to limitations of Net Zero passive funds

The latest developments in sustainable finance

Morningstar’s Global Head of Sustainability Research has urged that asset managers to “own up” to the problem that passive investments pose to their Net Zero ambitions. He suggests that managers could “close traditional index funds and steer new money into net-zero index funds”, although admits this is “unlikely”. Failing that, he says that managers could push for regulatory solutions that would limit automatic inclusion of companies that don’t have Net Zero commitments in portfolios. Or, he adds, they could press the “companies they think they have to own” to make their own Net Zero commitments, using direct engagement and voting.    

There is an “unprecedented” shift in capital allocation towards renewables and away from “long cycle” oil projects driven by an “extraordinary divergence” in cost of capital, according to Michele Della Vigna, a London-based analyst at Goldman Sachs. Della Vigna told Bloomberg that returns of 20% are now needed to justify new oil projects, whereas for renewables it’s dropped to between 3% and 5%. 

Shares of coal miners dropped on the back of the Glasgow Climate Pact being signed at COP26 on Saturday, according to Reuters. The Pact was the first time fossil fuels were explicitly addressed in a global climate agreement, with governments committing to “phase down” coal – a watered down version of the original wording, which would have seen the fuel “phased out”, after interventions from coal-heavy India and China. Reuters reported that mining giants China Shenhua Energy and Yanzhou Coal fell 1% and 2.4%, respectively, in Hong Kong. An index of mainland-listed Chinese miners fell about 1%.   

BlackRock’s 10th annual Global Insurance Report shows that 95% of insurers now view climate risk as investment risk. The findings come from a survey of 362 insurance company executives across 26 markets, representing $27trn in investable assets, who told BlackRock that they believe climate risk will have a significant impact on portfolio construction over the next two years.   

Norwegian finance services firm Storebrand has been included in Dow Jones’ Sustainability Index (DJSI) – an index which purports to hold companies in the top 10% based on their sustainability performance as judged by the US index giant. Earlier this year, the index came under fire for its inclusion of Adani Ports. Dow Jones also announced that it had added US tech giant Alphabet and pharmaceutical firm Gilead Sciences to the World version of the DJSI index. Food giant Nestlé S.A. and French oil major TotalEnergies were also revealed to have been removed. 

A Brussel’s court is today hearing a groundbreaking legal case brought by law firm ClientEarth against Belgium’s central bank over its corporate quantitative easing programme, which the firm says is contributing to the climate crisis. The lawsuit against National Bank of Belgium is the first piece of climate litigation against a central bank.