- FT announces formation of Stewardship and Sustainability Council
- Shareholders Rights Directive II (SRD II) Reports
- Martin Currie contribute to paper on the impacts of sustainable finance disclosure regulation
- The PRI/Vivid Economics published an update to the Inevitable Policy Response scenario
- US DoL announces that it wouldn’t enforce Trump regulations for fund investments or proxy voting
- SEC creates a Climate and ESG Task Force
- China – five-year plan has no increased ambition on climate
- EU calling for due diligence on risks to human rights and the environment in their supply chains
- London Stock Exchange Group and the PRI ran session on what net zero means for investors.
- Europe’s Institutional Investors Group on Climate Change (IIGCC) published their Net Zero Investment Framework implementation guide.
- HSBC coal phase-out to be put to shareholders’ vote.
Martin Currie engagement and development
Franklin Templeton (FT) Stewardship and Sustainability Council
FT has announced the establishment of the FT Stewardship and Sustainability Council that I will co-chair with David Zahn, head of European Fixed Income at FT. This is a great endorsement for us and the work that we have done in this area. The Stewardship and Sustainability Council is an advisory forum that aims to promote long-term value creation for both clients and the group globally, fostering collaboration and best practice.
The Council will connect our dedicated ESG leaders from across the 19 specialist investment managers (SIMs) to guide the continued evolution of the ESG infrastructure and best practices.
My role as Head of Stewardship and ESG at Martin Currie remains unchanged and I will continue to represent Martin Currie and work closely with our investment teams.
SRD II reports
The EU Shareholders Rights Directive II (SRD II) regulation requires us to produce a report each year looking at how we discharge our duties to clients regarding voting and providing transparency on (ESG) risks in the portfolios that we manage. We have just completed these for the clients and funds covered by the regulation.
The final reports have now been published on our website and are available on our Stewardship site.
Human rights and modern slavery have become increasingly come into focus however there is currently no EU-wide approach.
The impacts of sustainable finance disclosure regulation (SFDR)
Requirements emanating from the EU's SFDR, which are broad in scope, impact not only asset managers but also other financial market participants including the likes of insurers, pension providers, as well as qualifying venture capital and social entrepreneurship managers. We have just co-published a paper on the impacts of sustainable finance disclosure regulation on the European distribution landscape which Julian Ide and I have also contributed to.
Inevitable Policy Response update
The PRI / Vivid Economics published an update to the Inevitable Policy Response scenario which effectively sets out a credible and well-thought-out forecast of sharp policy change required to meet the ambition of the Paris Agreement. This builds on the 2019 publication and essentially forecasts substantially higher policy ambition than that proposed in 2019. Amongst other things this means higher carbon prices, faster coal phase-out, faster internal combustion engine (ICE) phase-out and faster adoption of renewables.
The report also forecasts an increasing adoption of carbon border adjustment mechanisms, an increasing need for low-carbon cement and steel by 2040, agricultural mitigation in Australia, Canada and the US and an end to deforestation by 2030.
US DoL announcements
Having seen the SEC announcement of the formation of a Climate and ESG Task Force in the SEC Division of Enforcement, it was the Department of Labor’s (DoL) turn to turn the tables on some of the regulations approved under the Trump administration.
In particular, the DoL announced that it wouldn’t enforce regulations approved last year by the Trump administration for fund investments or proxy voting which inhibited the role of ESG considerations in investments and advisory. The prior rule, adopted in November, required pension funds and 401(k) plans to make investment decisions based solely on financial considerations. A similar regulation for voting proxies and shareholder rights followed in December restricting retirement plan fiduciaries from casting proxy votes that advance social or political goals unless that vote aligns with retirees' financial best interests.
This is line with expectations that the Biden administration will give a boost to the ESG agenda and effectively is a step back in the right direction for promoting ESG incorporation in the US.
SEC creates a Climate and ESG Task Force
In a further change in the mood music at the US regulator, the Climate and ESG Task Force in the Division of Enforcement will identify any material gaps or misstatements in companies’ disclosure of climate risks under existing rules. The task force also will analyse disclosure and compliance issues relating to investment advisers’ and funds’ ESG strategies.
Earlier, the SEC set out that its 2021 examination priorities would include a greater focus on climate-related risks. “This year, the division is enhancing its focus on climate and ESG-related risks by examining proxy voting policies and practices to ensure voting aligns with investors’ best interests and expectations, as well as firms’ business continuity plans in light of intensifying physical risks associated with climate change,” said Acting SEC Chair Allison Herren Lee. “Through these and other efforts, we are integrating climate and ESG considerations into the agency’s broader regulatory framework.”
China – five-year plan – no increased ambition on climate
China released its 14th five-year plan, which sets out the nation’s economic strategy from 2021 to 2025 but did not set out how to achieve carbon neutrality by 2060. In addition, it did not set a cap on total emissions.
It was expected that President Xi Jinping would announce strict intermediate targets in this five-year plan to establish the sincerity of China’s long-term climate goals. What we did see was a slight shift in the language, perhaps reflecting the enormity of the task requiring the coordination of so many moving parts within the planned economy, and the internal politics of officially setting targets and allocating of responsibility.
The draft document targets a GHG emission intensity reduction of 18% in the next five years – a target which is in line with the previous trend seen in the country, whilst the decline in energy intensity is to be lower, at -13.5%, compared with the -15% of the 13FYP. Non-fossil fuel energy is targeted to make up 25% of China’s energy mix by 2030 (up from 20%).
The Net Zero Investment Framework is designed to provide a basis on which a broad range of investors can make commitments to achieving net zero emissions...
EU – call for due diligence on supply chains
The European Parliament adopted a report calling on the European Commission to propose legislation forcing companies based or operating in the EU to find and fix risks to human rights and the environment in their supply chains. The resolution was backed by the MEPs with 504 votes to 79 and aims to influence the legislation due to be tabled by the European Commission by June 2021.
The proposal would require firms to analyse ESG risks among their suppliers and to publish a due diligence strategy covering the whole value chain and firms breaching these rules could be subject to civil penalties. Human rights and modern slavery have become increasingly come into focus however there is currently no EU-wide approach. National legislation is already in place in some countries, for example the ‘Duty of Vigilance Law’ in France, the ‘Due Diligence Act’ in Germany, the ‘Modern Slavery Act 2015’ in UK, and the ‘Child Labour Due Diligence Law’ in Netherlands. This will be an important step forward in responsible business practices and an area we are monitoring.
Other Market Developments
LSEG and PRI - what net zero means for investors
The London Stock Exchange Group (LSEG) and the PRI ran a session looking at what net zero means for investors in the run-up to COP26.
Both CalStRS, the second largest pension plan in the US, and New York Common, who are both very focused on climate change and have signed up to ‘Net Zero’ presented at the session. The NY State Fund expects to de-carbonise its investments in tandem with the de-carbonisation of the real economy. “That’s why we believe we can’t simply divest our way to net zero. Engagement and advocacy remain the primary focus of our climate work.”
Net Zero Implementation Framework
Europe’s Institutional Investors Group on Climate Change (IIGCC), which represents investors with €37trn in combined assets, last week published the Net Zero Investment Framework implementation guide. The framework, which has been under development since last year, outlines strategies for how asset owners and investment managers can fulfil their pledges to make their portfolios Net Zero by 2050 or earlier.
The Net Zero Investment Framework is designed to provide a basis on which a broad range of investors can make commitments to achieving net zero emissions and define strategies, measure alignment, and transition portfolios. It sets out several components for an effective net zero investment strategy, with recommendations on the key actions and methodologies. The aim is to provide a framework that can be used by asset owners and asset managers, considering their different mandates and starting points. This evolution is important for Martin Currie as some of our larger clients are involved in this initiative.
HSBC – coal phase-out to be put to shareholders’ vote
HSBC is Europe’s second largest fossil fuel financier and last week announced that it will ask shareholders to vote on a coal phase-out plan as part of a board-backed climate strategy proposal at its upcoming AGM.
This follows an extensive engagement by an investor coalition led by ShareAction that, in January, filed a proposal asking the bank how it planned to wind down fossil fuel financing in line with the ambitions of the Paris Agreement. In response to this new board proposal ShareAction will withdraw its proposal. If passed (and enacted) it means that HSBC would stop financing coal-fired power and thermal coal mining by 2030 in the EU and OECD, and by 2040 elsewhere.
1The Institutional Investors Group on Climate Change, as at 31 March 2021
2Rainforest Action Network (RAN), Banking on Climate Chaos, Fossil Fuel Finance Report 2021
Regulatory information and risk warnings
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