In the Loop: Net zero resources, writing troubles, and private market giants defending ESG

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Initiative overload

Source: Getty

Last Friday saw the Church of England Pensions Board (CEPB) call it quits with the Net-Zero Asset Owner Alliance (NZAOA). The surprise departure took place just weeks after the mass exodus from the Net-Zero Insurance Alliance, which saw the initiative lose more than half of its members.

While the insurance initiative was marred by the anti-ESG backlash in the US and antitrust concerns, the NZAOA is less likely to see a dramatic mass exit.

However, there are several members that could find themselves in the situation that led to CEPB’s departure.

Laura Hillis, director of climate and environment at the CEPB, said the decision was made in an effort to consolidate its commitments to net-zero initiatives, adding that “a clear focus on one initiative was needed”.

Hillis is referring to the pension fund’s membership of asset owner group the Paris Aligned Asset Owners (PAAO), which like NZAOA is also part of the Glasgow Financial Alliance for Net Zero (GFANZ).

CEPB was not the only investor to be a signatory of both NZAOA and PAAO, with UK pension fund BTPS, and Danish pension funds Lægernes Pension, Pension Danmark, and PKA all belonging to both initiatives.

All four told Responsible Investor that they remained members of both alliances, but one hinted that it might be reviewing its membership in NZAOA in the near future.

Another said it currently still sees the value in belonging to both initiatives, but is continuously reviewing its initiative commitments due to increasing reporting burdens.

And resource management could be a wider issue for net-zero groups.

Interestingly, out of the three asset owners to leave NZAOA since its launch in 2019, Australian superannuation fund CBUS – which left in September 2022 – also cited a strain on its resources as its reason for leaving the alliance. HanseMerkur, which left in May this year, did not provide its reasons for leaving.

The week in RI

There’s been a flurry of regulatory news this week. In Europe, investor groups were split over the value of proposed SFDR reforms, while regulator ESMA announced it is working with EU national regulators to help harmonise SFDR supervision.

Meanwhile, the UK published its draft code of conduct for ESG ratings and data; and several major ESG data providers have adopted the principles-based code of conduct composed by Japan’s Financial Services Agency.

This week RI reported that the Net Zero Insurance Alliance (NZIA) had responded to a May letter from 23 US attorneys general and pushed back at their concerns around the initiative, for example surrounding antitrust laws.

In related news, influential proxy advisor ISS also pushed back at allegations made by US Republican politicians that it is “pushing political agendas”, highlighting that it supported “just 52 percent” of environmental and social shareholder resolutions filed at major US firms last year in its main advice.

Finally, RI’s biodiversity expert Gina Gambetta has done two deep-dives into stewardship. She explores how investors are ramping up engagement on nature loss, as well as the future of biodiversity at AGMs.

Quote of the week

“If we persist in delaying key measures that are needed, I think we are moving into a catastrophic situation, as the last two records in temperature demonstrate”

A stark warning from UN secretary general António Guterres, referring to the world temperature records broken this week

Reaching for the thesaurus

Source: Getty

Complaints over reporting burdens are not uncommon in the ESG industry, and we feel for the members of institutional ESG teams who thought they were signing on to save the world and instead end up putting together pie charts of how many sternly worded letters they’ve sent by asset class.

“I get a lot of complaints from the staff,” the head of responsible investment at one British asset manager tells RI. “It’s a maturity thing in the industry, we’re professionalising and having to document things we never had to document. That’s important, but when you hired lots of passionate sustainability people it’s not their natural skill set, so it’s a recalibration of the type of skills that you need.”

While they admit the state of reporting at the moment is “painful”, they say it’s a necessary pain to embed functions within the wider business.

That said, writing does not necessarily come easily to the governance-geared and climate-conscious. The same person sent their entire team on a writing course last year given the amount of time spent writing, rewriting and editing.

“We write a lot and we’re not that good at it,” they admit.

Private marks giants defending ESG

While the backlash in the US has led some public managers to tone down their ESG language, some of the largest players in private markets have been vocal in their defence of responsible investment.

As affiliate title New Private Markets reports (registration required), Carlyle, KKR and Apollo have all mounted defences of the connection between ESG and fiduciary duty in their annual sustainability reports.

The word “material” appears almost as many times as the word ESG itself in a letter by KKR’s global head of public affairs and co-head of its impact platform, while Carlyle head of impact Megan Starr says the firm believes “it is critical to work to build connections between the often-nebulous concept of ESG and traditional financial line items”.

In its report, Apollo CSO Dave Stangis acknowledged the backlash directly, but said it was not changing how the firm did business and was helping to drive precision in defining how decisions were made and value is driven.

The focus of state-level bans has tended to be on public markets managers. Only Oklahoma has blacklisted private managers at the firm level, with a number of smaller houses as well as Actis appearing on its blacklist.

Today’s letter was prepared by the RI editorial team.