Leaders Climate Summit
At the end of April President Biden hosted the "Leaders Summit on Climate" and set out a target for the US to achieve a 50-52% reduction in domestic greenhouse gas (GHG) emissions, relative to 2005 levels, by 2030. This represents a strong increase in ambition, compared with the Obama era’s target to reduce GHG emissions from 26% to 28% below 2005 levels by 2025. In the announcement, the Biden administration reiterated its ambition of eliminating or reducing carbon emissions across the electricity grid, transportation sector and forests and agriculture. Details of the mechanisms however remain lacking although there is a focus on nature based solutions and programs as carbon sinks, a need to support carbon capture and also a need to support hydrogen.
The UK government also stepped up its ambition, confirming it will cut emissions by 78% by 2035 compared to levels in 1990. The target is in line with the reductions that the Climate Change Committee (CCC), the government’s independent climate advisers claim will be needed to reach the nation’s legal goal of net-zero emissions by 2050.
The European Union has also reached a provisional agreement to reduce its net greenhouse gas emissions by at least 55% by 2030, compared to the 1990 levels. This deal has been previously flagged and was reached between the members of the European Parliament and the European Council, representing the 27 EU member states.
7 European nations commit to removing export-finance guarantees for fossil fuel projects
Seven European countries, namely Germany, France, the UK, Spain, the Netherlands, Denmark and Sweden, have indicated they will stop public export guarantees for fossil fuel projects. Traditionally these have made up a significant part of export finance agency guarantees supporting exports through state-backed financing guarantees and insurance. The UK, France and Sweden have already set out their plans and other countries will be deciding on the details of their approach.
EU Sustainable Finance package
The EU last month announced the adoption of a new package of measures to push its financial sector towards sustainability. As in previous measures, the package aims to enable investors to re-orient investments towards more sustainable technologies and businesses, and contribute to make Europe climate neutral by 2050.
There has already been a shift in the tone regarding ESG from the Biden administration.
The package includes:
- The new Corporate Sustainability Reporting Directive (CSRD) will ensure companies provide consistent and comparable sustainability information. This new directive was previously known as the revision of the Non-Financial Reporting Directive (NFRD). This aligns it with the SFDR and Taxonomy regulation.
- The EU Taxonomy Climate Delegated Act will classify which activities best contribute to mitigating and adapting to the effects of climate change. The Taxonomy is for the moment focusing on Climate Mitigation and Adaptation, and should be extended to the other EU Sustainability goals in 2022. The adopted text includes 88 economic activities for substantial contribution to climate change mitigation and 96 for climate change adaptation (an extension from the 70 of last November).
Amending six Delegated Acts that will ensure that financial companies such as advisers, asset managers and insurers, include sustainability in their procedures and their investment advice to clients. Under this insurance and investment advisers will be required to obtain information not only about the client’s investment knowledge and experience, ability to bear losses, and risk tolerance as part of the suitability assessment, but also about their sustainability preferences.
Europe looks for stronger sustainability reporting
A proposed Corporate Sustainability Reporting Directive (CSRD) aims to improve the flow of sustainability information in the corporate world. It will make sustainability reporting by companies more consistent, so that financial firms, investors and the broader public can use comparable and reliable sustainability information. Over time the aim will be to bring sustainability reporting more in line with financial reporting and apply to all listed companies. This is a further move to align the overall European financial system to sustainability.
Proposal for a global corporate minimum tax rate
US Treasury Secretary Janet Yellen last month indicated that she was working with G20 countries to agree on a global corporate minimum tax rate to end a “thirty-year race to the bottom on corporate tax rates”. While the details of the proposals are yet to disclosed there have been indications of support from some other governments. If implemented we could expect a significant increase in the effective tax rate paid by US firms in the future and a shift in terms of government revenue collection – notably in the US again. This would mark a significant push for greater alignment of corporate tax rates most notably in Europe where the low rates in smaller countries such as Ireland prove to be a source of tension with larger countries such as Germany and France. In line with this the US plan on taxation specifically targets American companies making a large part of their profits abroad by doubling the GILTI provision rate from 10.5% to 21%. In terms of sectors, tech companies would likely be most impacted.
SEC ESG Risk alert
Last month the SEC issued an ESG risk alert. Reflecting the rapid growth in interest in ESG this is an increasing focus for regulators. In particular the focus is on authenticity and ensuring investors are not mis-led.
The report notes: ‘In response to investor demand, investment advisers and funds have expanded their various approaches to ESG investing and increased the number of product offerings across multiple asset classes. This rapid growth in demand, increasing number of ESG products and services, and lack of standardized and precise ESG definitions present certain risks’
‘The staff will continue to examine firms to evaluate whether they are accurately disclosing their ESG investing approaches and have adopted and implemented policies, procedures, and practices that accord with their ESG-related disclosures’
This is in a similar vein to the moves in Europe where, under SFRD, the focus is on transparency and authenticity. The alert can be found here:
US Shareholder groups call on the SEC to drop ESG changes
There has already been a shift in the tone regarding ESG from the Biden administration. Last week a coalition of almost 200 US shareholder groups has launched a campaign to overthrow new SEC rules that they claim are an “an attack on corporate democracy”. These changes centre on the announcement last year which would increase the thresholds for Shareholders to submit proposals, requiring them to have held a larger amount of shares for a longer length of time. Resubmitting proposals and aggregating holdings to meet thresholds will also be disallowed under the proposed changes. The plans are seen as undermining proposals related to environmental, social and governance questions at a time when shareholders have been pressing most strongly on these issues.
UK announces consultation on SPACs
Following on from Lord Hills recent review of the UK listing regime the UK regulator the Financial Conduct Authority (FCA) is shortly due to open a short (4-week) consultation on Special Purpose Acquisition Companies (SPACs) with a view to easing the requirements to make listing of SPACs in the UK more attractive. The UK is seen as less attractive to list SPACs relative to the US and e.g. Amsterdam and therefore missing out on the current boom in part because rules are in place stipulating that an acquisition in the UK by a special purpose acquisition vehicle is deemed a reverse takeover, which triggers the suspension of trading in its shares. The reverse takeover rules prevent trading from resuming until a deal prospectus is published, a requirement that has no specified deadline, so investors who want to sell their shares can find themselves locked in.
We are very conscious of the asks we have of the companies that we invest in and as such it is important that we turn this lens on ourselves as well
Net Zero: The role of capital markets
Capital markets and investors have a significant role to play in helping achieve ‘net zero’. However, there is a common misconception that without raising direct equity capital, the ability for secondary markets to create ‘impact’ in support of net zero is limited.
We strongly disagree with this assumption and see three key ways in which investors can support net zero ambitions. Specifically, we believe active equity investors can create impact in their role as engaged public market participants through:
- Directing capital to finance and reward businesses which are creating solutions to the climate crisis.
- Using active engagement to push for, assess and ultimately price the presence and credibility of net zero emissions reductions targets.
- Policy engagement, education and broadening the adoption of key tools and frameworks to aid pursuit of climate targets.
Achieving this transformation will require a significant increase in low-carbon investment. At the global level, the Intergovernmental Panel on Climate Change (IPCC) estimates an immediate investment requirement of US$2.4 trillion per year in the energy system until 2035.1
We believe the only way of generating this kind of capital commitment requires leveraging the full power of markets in support of achieving the goal of net zero. This will involve both the redirection and growth of capex in support of transitioning business, the growth of new businesses and funding new green infrastructure projects
This article which is the third in our series on net zero in the run up to COP 26 will focus on how we as active, engaged, long-term investors facilitate this change through our investment activities and the role of the wider equity market in creating incentives for innovative climate solutions.
This paper can be found here:
Updated Responsible Investment Policy
In response to the SFDR regulation we recently updated the Martin Currie Responsible Investment Policy to include sections on Sustainability risks and Principle Adverse Impacts as well as updating to reflect the recent work we have been doing on aspects of Responsible Investment including the UN SDGs.
This policy is now loaded onto our website. The policy can be found here:
FT Stewardship and Sustainability Council (SSC) meeting
At the end of the month we held the first SSC meeting which David Zahn and I co-chair. This was more of an introductory meeting bur provided an opportunity for members to outline what they are looking for from the SSC. In terms of the initial priorities coming out of the first discussions these are likely to be focused on ESG data and the Net Zero Asset Managers Initiative. The next meeting will take place at the end of May.
Franklin Templeton CSR report 2020
We are very conscious of the asks we have of the companies that we invest in and as such it is important that we turn this lens on ourselves as well (hence the discussion on MC and sustainability).
Franking Templeton has just published it’s 2020 report which establishes three key goals for 2021:
- ESG Investing: In March 2021, we published our first ESG Stewardship Report. Additionally, we launched our firm-wide Stewardship and Sustainability Council, connecting the dedicated ESG leaders from across our 19 specialist investment managers (SIMs) to guide the continued evolution of our ESG infrastructure and best practices.
- D&I: We plan to publicly disclose gender and EEO-1 ethnicity representation data in 2021; launch efforts to invest in female and Black entrepreneurs; and expand strategies to increase the attraction, recruitment and development of underrepresented employees, including a focus on further building our inclusive leadership capabilities.
- Environment: As we continue to work to reduce our emissions, we will expand our scope 3 emissions reporting, set emissions targets, and launch an Environmental Committee that will advance our existing green initiatives.
The report can be found here:
Following feedback the PRI has extended the deadline for reporting to May 10th - this will be a key focus at t the start of the month. This month is also the main proxy season in Europe and the US. Executive remuneration and the alignment with the experience of the broader workforce and the business outcomes will be a key focus as will both diversity and climate change. In the case of the latter the ‘Say on Climate’ campaign is likely to result in a number of shareholder resolutions appearing on AGM agendas. It is likely that there will be a considerable amount of engagement over the course of the month.
In addition, this month we are will be working on the next paper in the series on Net Zero.
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