ESG round-up: IGCC welcomes Australia’s Net Zero Authority

Institutional investor emissions exposure rises; State Street launches carbon asset servicing product.

The Investor Group on Climate Change (IGCC) has welcomed the announcement by the Australian government last week that it will create a new National Net Zero Authority, describing it as “an important step towards a just, orderly, and accelerated transition”. There has been a marked shift on climate since prime minister Anthony Albanese was elected last May. Last month, the Aussie government committed to co-fund the development of a national sustainable finance taxonomy – a decision welcomed by the country’s super funds. Under the previous administration, the government had remained at arm’s length from the work of the Australian Sustainable Finance Initiative (ASFI).

The absolute emissions of investor portfolios have risen over the past year, reaching the highest levels since pre-pandemic times – despite a 10 percent decline in carbon intensity, according to a study by State Street. This is based on a calculation of carbon intensity that averages absolute emissions over every $1 million in revenue. From March 2022 to March 2023, high-carbon sectors outperformed the market leading institutional investors to seek more exposure to the sectors that increased their portfolio emissions, the research said. This was accompanied by increases in revenue that grew faster than the rising emissions, causing emissions intensity to fall. The study was based on a carbon indicator tool developed in partnership with S&P.

Separately, State Street has launched a new product to allow clients to directly invest in carbon allowances and credits. State Street’s Carbon Asset Servicing Solution will include a range of fund services, including recordkeeping, reporting and other oversight functions. The product aims to simplify the complex processes that have historically characterised the market for carbon assets. Phil Kim, global ESG product head at State Street, said that the size of the carbon assets market reached a record $950 billion in 2022 and is expected to grow fifteen-fold by 2030.

Two-fifths of banks are not embedding ESG accountability within business operations, as considered best practice, but instead are coordinating ESG efforts through centralised teams. This was one of the findings of a global survey by US consultant Bain & Company covering 55 banks, representing more than $40 trillion in assets. Overall, 64 percent of respondents reported that they had yet to incorporate climate data and metrics into credit underwriting, with most banks from the Americas planning to do so in the next three years.

Sustainability-linked bonds issued in 2023 have had the highest variety of step-up sizes of any year since issuance began, according to figures from Barclays. Analysts assessed 164 SLBs and found that fewer than one-third issued so far this year have a 25 basis point step-up, while SLBs with a step-up of 75bps or higher account for just over 40 percent of issuance. The vast majority of SLBs are still linked only to emissions targets, but social targets are more common in the US, which Barclays suggested may be driven by the fact that only SLBs linked to environmental targets are eligible for the ECB’s corporate sector purchase programme.