ESG round-up: Green investments are no hedge against transition risk, warns Banque de France

The latest developments in sustainable finance: NGOs call on COP28 participants to step up transition finance; GSIA's Alexander raises concerns on greenhushing.

Green investments should not be considered a good hedge against transition risk, the Banque de France has warned in a bulletin on the exposure of French investment funds to transition climate risks. The central bank wrote that green assets “cannot be relied upon as an effective hedge”, because it is “questionable” to assume that holding green assets will offset the devaluation of brown assets in the event of a climate shock. Of the 3,199 French funds analysed by the bank, 2,100 have more than 20 percent of brown assets in their portfolio. If these funds fail to adjust the size of their holdings, they could “suffer significant losses” in the event of a major repricing of these assets, the central bank said.

Eleven NGOs, including CDP, Ceres, the Climate Bonds Initiative, and ShareAction, have called for the increased deployment of transition finance from the financial sector, governments and issuing entities at COP28. The open letter urged the financial sector to develop supportive internal policies and practices, offer and scale transition finance products and services, engage clients through stewardship, report transition finance activities and support a Just Transition. The NGOs have also asked governments to create national transition plans, de-risk and allocate transition finance, and support a Just Transition. Issuers are encouraged to demand transition finance, develop credible transition plans with third-party verification, report material transition metrics and engage stakeholders.

The Global Sustainable Investment Alliance (GSIA) has raised concerns about the impact of greenhushing, after a biennial review of the global sustainable investment market found more conservative reporting than in previous periods. Responding to an information request from US SIF, several asset managers reported “far lower sustainable investing AUM than they had in 2020, in some cases, in the magnitude of billions and trillions of dollars”, the report said. There had also been more conservative reporting in Canada. GSIA chair and UKSIF CEO James Alexander said: “There are still challenges in terms of the way this industry is being perceived. I think for that reason, some people are perhaps not necessarily showcasing and highlighting everything they’re doing as part of that reporting.”

Singaporean banks and insurers will suffer the largest losses from the building and construction sector as a result of climate transition risks, according to a joint analysis by the city state’s central bank and academics. This is due to the significant sectoral exposure among financial institution balance sheets (55 percent for banks, 32 percent for insurers), despite a relatively mild valuation shock forecasted for the sector. Coal exposures are not expected to cause significant losses due to many institutions “deliberately” avoiding the sector, said the supervisor. The analysis was featured in the annual financial stability report published by the Monetary Authority of Singapore.

The Hong Kong Stock Exchange (HKEX) has signed a Memorandum of Understanding with the China Beijing Green Exchange (CBGEX) to cooperate on several fronts. These include building an ESG ecosystem, promoting green and sustainable finance, and contributing to the green development of the Belt and Road Initiative. The two exchanges will work together to explore cross-border sustainable development, in particular addressing the demand generated from China’s increased focus on green infrastructure investments and its shift to a low-carbon economy. They will also conduct research on green and transition finance, collaborate on capabilities building for ESG standards and information disclosure, and explore opportunities in the carbon market.

The Church of England Pension Board has committed to produce its own public policy and industry association disclosure in its first climate action plan. Published today, the plan sets out six strategic pillars to help the scheme achieve its goals, including public policy engagement, manager monitoring and “robust” stewardship. Among the specific commitments in the plan are piloting an engagement programme with banks on their fossil fuel financing, engaging with portfolio companies on climate lobbying disclosures and escalating with managers where their ESG or stewardship approaches are misaligned with members’ long-term interests.

The New York City Employees’ Retirement System and Teachers’ Retirement System, Folksam and Aviva Investors are among the signatories of the newly launched Labour Rights Investor Network (LRIN), which will push investee companies to respect workers’ fundamental rights to freedom of association and collective bargaining. The LRIN is housed at the Global Unions’ Committee on Workers’ Capital (CWC), a committee of the International Trade Union Confederation, the Global Union Federations and the Trade Union Advisory Committee to the OECD which advocates for the responsible investment of workers’ capital.

KfW has fulfilled its mandate to help develop the green bond market, according to the German Ministry of Finance. The development bank was given the mandate in 2015, when the market had less than €100 billion in outstanding volume. Since then, KfW has invested €3.4 billion in 64 issuers across 16 countries, as well as sitting on the executive committee for the Green Bond Principles and supported issuers setting up issuance and reporting programmes. The bank also revealed it is working on a group-wide impact management system using the lessons learned from developing standards in the market.

Ninety One has launched an emerging market transition debt fund. The strategy, which the South African asset manager said was developed in collaboration with a number of other investors and advisors including Cambridge Associates and Wiltshire Pension Fund, will “provide credit to high-emitting companies which have strong potential to reduce emissions” in emerging markets.