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There isn't an asset manager in Europe and beyond that does not now have a working knowledge of the EU Sustainable Finance Disclosure Regime (SFDR), which kicks in today! (March 10).
As I mentioned in an article last week, I think the tipping points for the huge ESG shift we are witnessing are the regulatory drivers of The EU Green Deal and Action Plan on Financing Sustainable Growth. They are two blockbuster regional policy drivers that will have global ‘translation effects’ for all companies and investors; public or private, amplified rapidly under a new US administration and fed by China’s competitive streak to lead the green global energy transition.
That’s my optimistic, 50,000-feet-high view of change, shorn of the horrible realities and hypocrisies that exist (vested interests, faux tech fixes, lobbying, global tragedy of the commons, etc, etc) for which much ink has been spilt – and will continue to be – given that this is the mother of all battles for the health of our world and our place in it.
Are the EU policy drivers perfect? Of course not. But they’re all we’ve got right now on the big regulation front; and my rule of thumb (sic) when hitchhiking back in the day was to take the first ride that gets you nearer the destination, and then adjust, rather than wait for the perfect match. The EU policy drive is the best one around, and we need to back it strongly.
And the regulations are finally driving real change in the investment world; even if that change in investment strategy, process, product and capital flows is still fledgling and often flawed: better late than never; but now time to hold it to account, and ramp it up massively!
Anyone who thinks that the green investment shift is unlikely or impossible (no-one here, I know…but send it to sceptical colleagues or friends!) should read a paper titled: ‘Techno-optimism, behaviour change and planetary boundaries’, by Adair Turner, chair of the Energy Transitions Commission, a global coalition of major power and industrial companies, investors, environmental NGOs and experts working out pathways to limit global warming to well below 2˚C by 2040.
At RI, we believe the EU Green Deal and Action Plan on Financing Sustainable Growth are the biggest regulatory developments for business and finance since the introduction of global accounting standards for companies or Global Investment Performance Standards (GIPS) for investment managers.
Hence our journalism has been leading on them, and our forthcoming flagship RI Europe conference (June 14-18) is designed exclusively around the practical implications of the regulations for investors and investee companies.
Our flagship RI Japan conference (May 17-21) also looks at the effects of many of the related issues for investors and companies in Japan and those doing business and investment there.
But, the new EU rules do bely a fundamental quandary (as do most modern climate policy fixes): how much will they drive action (or inaction where necessary…aka de-growth) to really reduce CO2 to net zero and safeguard critical biodiversity, given that the challenge we face is between the science of planetary limits and the so-called ‘imperative’ of exponential economic growth, a torturous paradox deftly traced in Duncan Austin’s recent Long Read and Paper on RI.
In many ways, the global response to Covid-19 – pitting economic shut down against public health – is a ‘taster’ of what is here now, and will likely dominate future debate on climate change.
And we know we are not doing enough. UN Secretary General, Antonio Guterres recently sounded the regular UN warnings on global policy failures in aligning to the Paris 1.5 degrees target.
Then we have the technical battle pitting climate science v net zero targets and various environmental reporting initiatives; of which the recent critique of the work of the Science Based Targets Initiative was one episode.
And Mark Carney’s slip into the wrong side of climate accounting was another, as this piece in the Guardian newspaper by Simon Lewis, professor of global change science at University College London and University of Leeds, outlines.
My view is that these tough questions can only be answered at the global political level (maybe via an amplification and gradual tightening of a version of the EU position), but that they will also require radical shifts in the stance of voters, companies and investors to support them.
So, I think the EU’s work (and its national copycats) is the best policy framework we have at the moment – warts and all – for the critical need to work out our future economic course on climate change.
Of course, a primary question to ask regarding the EU climate regulations – and I’ll use the shorthand of the green ‘Taxonomy’ at the heart of the rules – is will it change the way investors invest? After all, that is what we are here for.
The European Sustainable Investment Forum (Eurosif) has published a handy ‘mythbuster’ titled: The EU Taxonomy: fostering an honest debate.
It’s useful because of the intense amount of lobbying that the Taxonomy has been subject to lately (after a relatively benign beginning when it flew under the radar); a sign of its increasing importance, relevance and danger to vested interests, as RI points out here.
There are already grave fears hanging over the progress of the EU regulations at the Commission and Parliamentary level as a result of intensive push-back efforts claiming that Europe will be hobbled economically.
There’s no need to re-produce in this article a paper that is best – and quickly – read in full, but a couple of interesting points jump out from the Eurosif primer.
One is that the Taxonomy increases transparency to prevent greenwashing by identifying 'sustainable investments', but does not, of course, determine whether these investments are financially sound, nor in itself turn capital towards them; both of which will be crucial to ensuring that institutional investors can invest while meeting the fiduciary financial goals of pensioners and savers.
And, as it notes, a “real problem” at the moment is that 50% of the investments in Europe required to meet net-zero by 2050 are not profitable in the current policy environment of carbon price, taxation and subsidies, according to McKinsey estimates.
That change will only come from higher carbon prices, related taxes, and incentives.
As a result, it says the Taxonomy will unlikely in its current form be a material factor for investment decisions, and that the data shows a large majority of current sustainable/ESG funds will likely have no more than 10% of their portfolio aligning with the Taxonomy.
In turn, it says the Taxonomy is unlikely to create a ‘green’ financial bubble, nor undermine the transition of certain sectors to meet the goals of the Paris Climate Agreement; allegations that have been levelled against it. It could, however, Eurosif says ‘over time’ lead to a lower cost of capital for Paris-aligned companies.
These are interesting points that counter some of the lobbying heat and mistruths directed at the Taxonomy.
But they are all frustrating indications of where we need to be pressing for tougher sustainability rules and better incentives for sustainable practices.
And, they are only the tip of the ‘honest debate’ required about how effective policy, rules and incentives need to be to get near to the clear science outlining the threat of dangerous, runaway climate and biosphere destruction.