ESG round-up: Janet Yellen warns of financial shocks from disorderly transition

PRI calls for 'substantive policy response' to corporate target rollback; FCA challenged on cost to consumers of fund labelling rules.

US treasury secretary Janet Yellen has warned that a delayed and disorderly transition could lead to financial shocks. In remarks made at the first meeting of the Financial Stability Oversight Council’s external Climate-Related Financial Risk Advisory Committee, Yellen warned of the existing impacts of climate change, and said that as the physical impacts intensify, natural disasters and warming temperatures could cause a decline in asset values “that could cascade through the financial system”.

The PRI has called for a “substantive” policy response from governments amid the rollback of corporate climate targets. Margarita Pirovska, the PRI’s director of policy, said that high profits and the rollback of climate targets “have given rise to some fundamental questions around the part played by fossil fuel companies in the transition to a sustainable world”. Pirovska said that, while governments are bound by the Paris agreement, there was no equivalent framework for companies and that investors cannot fill this gap alone. “We need governments to step in with robust, clear and whole-economy strategy to ensure the transition to a net-zero investment system,” she said.

Harriett Baldwin, chair of the UK parliament’s Sub-Committee on Financial Services Regulations, has asked the FCA to provide a new cost-benefit analysis of its fund-labelling proposals which estimates the cost to consumers. Baldwin said that, without analysis of what it would cost consumers to switch away from “sustainable” funds which don’t make the grade and overall impact on management fees, the proposals are “lop-sided”. In a letter to FCA CEO Nikhil Rathi, Baldwin also asked for details of the regulator’s enforcement action on misleading financial products, and the risk posed by convergence or divergence from international standards including US and EU rules. The FCA has until 23 March to respond.

An FCA spokesperson told Responsible Investor: “Our analysis strongly suggests that the benefits of consumers being able to invest in products which meet their preferences outweigh the costs. We have set out our views on the costs and benefits. We received around 240 responses to our consultation – we welcome the committee’s engagement on this topic and we’ll consider all the feedback including theirs. When we publish the final rules, we’ll set out an updated views on the costs and benefits, including switching costs.”

The nature of climate-related financial risks “significantly exceeds the competencies and policy tools of the central bank”, according to a European Central Bank (ECB) working paper published this week. These risks include rising income inequality across individuals, sectors and regions, volatility in energy markets, increased inflation, financial markets stress, increased migration and growing public debt. In addition, climate change will make it harder to achieve the primary supervisory mandate of maintaining price stability. But while these challenges are not to be underestimated “they appear manageable for EU member states”, said the ECB.

France’s Climate and Sustainable Finance Commission (CCFD) has recommended that Say on Climate votes be made mandatory for all European companies in a position paper for financial regulator AMF. The CCFD, which was set up in 2019 to advise the AMF on sustainable finance, said that votes should be compulsory in line with the EU Corporate Sustainability Reporting Directive. The CCFD’s positions are not binding on the AMF. However, the regulator has said that companies should ensure that their environmental and climate policies are included in their non-financial reporting.

Swedish government pension fund AP7 has published its first climate lobbying report in line with the global standard it developed with BNP Paribas Asset Management and the Church of England Pension Board. The Global Standard on Responsible Climate Lobbying, which was launched in March 2022, is a 14-point framework designed to ensure companies’ lobbying and political engagement activities are in line with the goal of restricting an rise in global temperatures to 1.5C above pre-industrial levels.

Dutch asset managers are struggling with the complexity of the energy transition, a lack of renewables investments and adjusting passive investments, according to research by VBDO. The sustainable investment industry association spoke to nine managers with €4.3 trillion between them. Three said the complexity of the transition and the necessity for a systemic solution was the largest challenge they face, while two named a lack of scalable renewable investments with acceptable risk-returns, and two said that deviating from benchmarks to accelerate the transition was their biggest challenge. ACTIAM, APG, Robeco and UBS were among the respondents.

Staying in the Netherlands, renewables companies have become the latest sector to sign up to an International Responsible Business Conduct Agreement. The firms have agreed to work alongside the government, unions and NGOs to improve supply chain sustainability and integrate OECD and UN guidelines on business conduct. Vattenfall and ASN Impact Investors are among the 33 institutions to sign up to the agreement, which is the 11th such agreement in the country. Others have been made by the pensions sector, insurers and the garment and textile industry.

The 2° Investing Initiative and French agency for ecological transition ADEME have published a guide on environmental impact claims for financial products in the country. The guide sets out the applicable legal framework for claims, and recommends that they should be defined by what can be proven, that there should be transparency on additionality, that proportionality, clarity and consistency in communications should be ensured.

Clarity AI and CDP have announced a new partnership, which will see CDP data used in the tech firm’s Net Zero Tool. Clarity AI will provide assistance with CDP’s Climetrics tool, which provides ratings for funds and ETFs on their environmental performance.