June 2023
Coalition conundrums
We analyse the progress of collaborative investor engagement campaigns – and find out what’s next
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Tools of engagement
Engagement was one of the first areas I looked into when I joined ESG Clarity in 2020 – the Boohoo scandal had broken, and the Principles for Responsible Investment had released its Active Ownership 2.0. Three years on, and with fund labelling regulation coming down the line, it’s more important than ever. As FundCalibre’s Joss Murphy says in his comment piece: “The term ‘engagement’ seems to be an inescapable part of fund managers’ dialogue these days. But what does it mean when they say they actively engage with companies on ESG and why is this important?” Back in 2020, Square Mile’s Jake Moeller told us when it comes to navigating the quality of fund managers’ engagement, evidence is key, and in this month’s cover feature we’ve followed up with five multi-trillion pound collaborative investor engagements to determine their progress. Ultimately, engagement is one tool in an asset manager’s toolbox. Another is litigation, where cases of climate suits have doubled since 2015. Here we look at whether asset managers – sometimes the largest holders of companies facing the force of the law – could be next. Earlier this month, ESG Clarity launched its Countdown to COP28 monthly newsletter. Read Columbia Threadneedle’s analysis on fossil fuel involvement in the conference this year and find out more about the Countdown here. We hope you enjoy this issue and please send any feedback to natasha.turner@markallengroup.com
Spotlight
COVER feature
Natasha Turner analyses the progress of collaborative investor engagement campaigns – and finds out what’s next
Matt Christensen of AllianzGI on the power of conviction, disagreeing with academics and having faith in initiatives
‘My kids understand what I’m trying to do’
High-polluting companies are clear targets, but their shareholders – the asset managers – could be next on the list, writes Natalie Kenway
Seismic increase in climate litigation
Also in this issue ...
Engagement on ESG is essential for fund selectors in gaining a dynamic understanding of a company
The evolution of fund engagement
Fossil fuel interests are a key part of the debate in the run-up to COP28 in Dubai
Oil and gas influence at COP28
Stephanie Kelly tells Laura Miller about working with Redwheel’s investment teams and what ESG projects are in the pipeline
‘Partner, don’t police’
The term ‘ESG’ often creates confusion. However, its meaning and value cannot be questioned if we are to urgently address global challenges
Meaning matters
The crucial role shareholders can play through engagement and voting to move companies forward on climate goals
Speak up on climate
ESG Clarity rebalanced its Responsible Ratings Index due to a change in MSCI methodology that saw thousands of ESG funds downgraded in April
A weighting game
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Thiemo Lang, head of Polar Capital’s Sustainable Thematic Equity Team, discusses Europe’s answer to the US Inflation Reduction Act
The European Green Deal
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Q&A LGT’s Phoebe Stone on asset managers’ net-zero pathways, regulation and accessing the blue economy Read >> Sector review Sustainable multi-asset funds were challenged last year but several saved the day Read >> Q&A Luke Barrs of Goldman Sachs AM discusses wise water management and addressing the just transition Read >> ESG Clarity Intelligence Firms must assess the impact of disclosure requirements and start planning Read >> Comment EQ Investors’ Sophie Kennedy explains how B Corps and inclusion go hand in hand Read >> RRI Global sustainable funds are beginning the year on the front foot, writes Laura Miller Read >>
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‘Reporting only gets you so far’
How are asset managers going above and beyond discussions around recruitment and retention to tackle racial inequity?
Power shift?
Where asset managers are going above and beyond discussions about recruitment and retention to tackle racial inequity
March 2023
In September last year, Aviva and Robeco were among a group of investors representing $8trn (£6.4trn) in AUM that signed up to an initiative organised by the Fairr network. The aim was to address the biodiversity impacts of waste mismanagement and nutrient pollution from livestock production by asking 10 animal agriculture firms to disclose a full assessment of how manure is managed in their supply chains. “The first phase of this engagement was designed to foster open-ended discussions on the topic, but it quickly became apparent that companies generally have yet to take biodiversity into account when assessing the impacts of their operations and supply chains on water quality,” says Max Boucher, senior manager, biodiversity research and engagement at Fairr. Without an approach in place, progress on addressing this risk is hindered, Boucher adds, and investors don’t have the data they need to assess it. Despite the challenges, investors see the benefits of a collaborative approach. “We understand the value of working with others,” Garcia-Manas says, to which Law agrees: “It helps augment our voice and is something we will continue to do.”
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‘Building consensus on investor expectations and having fluid conversations with a large group of investors [is difficult]’
Carlotta Garcia-Manas, head of climate transition and ESG engagement, Royal London Asset Management
Mental health at FTSE firms
Case study
Investors collaborate on health
Decarbonisation at chemical companies
Asset managers target animal agriculture
Modern slavery in UK seasonal work
Collaborative engagements make for good headlines (if we do say so ourselves). Big names, big numbers from pooled assets under management (AUM) and big calls for action from companies are an increasingly common sight on ESG Clarity. But how effective are they after the statements have been signed and the communication with companies begins? Engagement is an increasingly important part of a sustainable fund’s toolkit, particularly in light of upcoming sustainable disclosure regulation in the UK, where engagement may be relied on more heavily to justify a particular sustainable fund label. Teaming up with larger shareholders or bondholders, or ones better positioned in a particular jurisdiction, can make it easier to gain access to a company’s management or board, or help to exert greater influence, according to Carlotta Garcia-Manas, head of climate transition and ESG engagement at Royal London Asset Management. But it can also be more difficult to drive change than individual engagements, she says. “Building consensus on investor expectations and having fluid conversations with a large group of investors [is difficult].”
Jennifer Law, head of stewardship at Newton Investment Management, agrees “when you’re in that one-on-one engagement, there are sometimes more direct messages that you can deliver…and sometimes that does land better with the company” and says it can be important investors choose coalitions they and the companies they’re engaging with are familiar with, as well as ones most relevant to the sectors they invest in. Newton joined ShareAction on the call for decarbonisation in the chemicals sector launched just two months ago because “we had partnered with ShareAction on a number of other collaborative efforts in the past, and we knew it was a group that we could work with,” she says. “These companies know ShareAction, they understand it and so there’s a decent level of transparency for the most part,” she adds. Having only launched in March, Law says the group is still waiting for the initial responses from companies to the co-signed letter that was sent out. But for ShareAction’s longer-running Healthy Markets Initiative, which brings together investors to ask food and drink companies to play their part in building a healthier population, Law has seen some success. Unilever had wanted to produce its own standard for disclosure on the traditional nutritional content of its products, but the initiative persuaded it to adopt the government standard set to be rolled out across the market, thus making comparability and disclosure easier. Slow progress For other coalitions, progress has been slower. In December last year, CCLA Investment Management rallied 10 institutional investors with a combined £806bn assets under management and advice, including Quilter Cheviot, Epworth Investment Management, Sarasin & Partners and Schroders, to call on companies to better protect the UK’s migrant seasonal workers. In a statement to retail companies and companies sourcing staff from the UK agriculture supply chain, the investors said: “We have concerns about business models that rely on or benefit from modern slavery and/or precarious working conditions. These models are ultimately unsustainable, and risk destroying value in the long term.” After publishing the statement, in the new year investors in the group wrote to the supermarkets they hold. CCLA also met with the British Retail Consortium and Stronger Together, which has taken over the secretariat of the multistakeholder taskforce on the seasonal worker scheme. “We are still concerned that the fundamentals of the scheme remain the same and that there have been subsequent news stories highlighting the poor treatment and health and safety on some farms employing seasonal workers,” says Martin Buttle, better work lead at CCLA. As a result, CCLA is planning to reconvene this group of investors next month, to discuss what else they can do to push for a responsible seasonal agricultural system. Other snags coalitions have encountered are that companies themselves are not in a position to respond to collective calls from investors.
‘[Working with others] helps augment our voice and is something we will continue to do’
Jennifer Law, head of stewardship, Newton Investment Management
Natasha Turner speaks to Matt Christensen of AllianzGI about the power of conviction, disagreeing with academics and having faith in initiatives
Feeling proud of your work is what draws many people towards impact investing, according to Matt Christensen, who is speaking from experience. “My kids don’t necessarily understand what I do but they understand what I’m trying to do,” he tells ESG Clarity. “When I give demonstrable examples of investments, that’s the moment when it’s clear and I think, that’s why I do all this.” Christensen heads up Allianz Global Investors’ sustainability and impact offering as a managing director at the firm, a job he was drawn to in part because of the firm’s €5.9bn sustainable and impact private markets fund range. He has worked in the sustainable investing field for 20 years but started as an outsider. Seeing a job advertised to be a founding executive director at a sustainable investment think tank, he sent in an application, and after a European-wide search, was given a shot. That think tank is the now influential policy body Eurosif, which, as well as advocacy, helps investors navigate the dynamic landscape of sustainability regulation. Eventually moving into the investment side itself, Christensen worked at Axa Investment Managers, managing its ESG integration and starting the investment programme in private equity. After ESG integration, impact felt like the natural next step, and Christensen was attracted by AllianzGI’s commitment to sustainability and the buy-in from senior management. “What I found very appealing in terms of this next phase of my career was to bring some of the know-how I’d already developed and push it all through the organisation in a company that has both public and private markets,” he says. Nevertheless, implementing company-wide changes is never straightforward. “There’s always resistance in every firm to sustainability, but it’s about how much,” Christensen adds. “For the most part what I have found is there’s a conviction that we need to do things but there’s also the challenge of what’s the right pathway, how much can we trust the data, how do we make clients are on board and what’s the timing.” Watch the video interview with Christensen for more on AllianzGI’s approach to sustainability
ShareAction rankings Timing is not something AllianzGI has always had on its side. In February this year, finance NGO ShareAction published its latest asset manager rankings, in which AllianzGI had dropped 37 places. ShareAction said AllianzGI was held back by its governance and may not have “kept up as standards have improved across the sector since 2020”. Christensen says the issue was timing. “We got caught in a moment of time where we had all this work coming through but was not yet done. We could have been savvier about trying to make sure [ShareAction] understood what was about to happen here.” What was about to happen included mandatory ESG training for all AllianzGI’s 2,000+ employees. The firm also did not have a biodiversity policy at the time, but now has one coming out next month. “On the governance piece [ShareAction] asked who the board member responsible for ESG was. We learned what they meant is that our CIO, who I report into, would qualify for that. We did not answer that correctly. “I was not happy with the ranking, but we have lessons learnt from it, they do as well, I don’t expect to ever see that grade again,” Christensen says. NZAM Another area in which timing comes into play is around target setting. Some 31 of the firms’ mutual funds have now been converted to sustainable products and a target for sustainable funds to reach a certain percentage of total funds has just been set internally. Around half (€251bn) of the firm’s total €506bn AUM was ESG risk, sustainability or impact AUM at the end of 2022 and the firm has a total of 177 sustainable products. The firm has also set decarbonisation targets as a signatory to the Net Zero Asset Managers (NZAM) initiative, having thus far publicly announced roughly 14% of its assets being net-zero aligned, and is looking to announce a higher target in October. “We have a lower number of the assets under management that we have set as fulfilling the target to be a member of that initiative, but we want to show the initiative and others that we’re doing it in a pragmatic and bottom-up way,” Christensen says. In fact, some of the initial targets set by NZAM members Christensen describes as “aspirational” and therefore “not really doable from a pragmatic perspective”. For example, he says some firms have set 7% portfolio decarbonisation targets year on year, whereas AllianzGI’s new carbon footprint tool, which sets a carbon footprint reduction target for an Article 8 fund relative to its benchmark, is set at 5%. Does he see this as a fault of NZAM, which has met with criticism of some members’ fossil fuel investments, questions around its effectiveness, and exits from significant players such as Vanguard? “Any of these initiatives have to sort out what identity they want to have,” Christensen says. “The NZAM is still trying to determine exactly how stringent it should be versus aspirational. “We do believe in the initiative, it’s a hard one to do because net zero is hard, but we need an initiative out there to rally around and work with our peers on this so the market moves and not just single actors, even if there are dropouts.”
‘I’d better try to be part of the solution rather than give up or be part of the problem’
Click to read Matt Christensen’s biography
Matt Christensen’s biography
Matt Christensen is global head of sustainable and impact investing and a managing director with Allianz Global Investors, which he joined in 2020. He is responsible for accelerating the growth of impact investing as part of the firm’s growing private markets platform; he leads continued integration of ESG factors across AllianzGI’s existing range of public markets products, including stewardship activities; and supports the development of new SRI products. In addition, he has investment oversight for the company’s impact investments. Christensen joined AllianzGI from Axa Investment Managers, where he had been global head of impact and responsible investment since 2011. Prior to this, he was the founding executive director of the European Sustainable Investment Forum, where he worked for nine years. He started his career in 1997 as a strategy consultant at Braxton Associates/Deloitte Consulting. He then served as director of business development at Motley Fool, a multimedia financial services company from 1999-2001.
Impact In many areas of sustainable investing, it’s clear Christensen is keen for AllianzGI to be a leader, demonstrating sustainable investment capabilities to the wider market. Where this is most evident is in the area of impact investing, which he says can only currently be done in private markets. “When it comes to public equities there are funds I would call more impact focused but I wouldn’t start calling them impact investment funds,” he says. “There will be standardisations and impact investing [in public equities] is possible but it has to be fit for purpose for the asset class, it will not be the same. But tools like a very good engagement programme, where you have very clear ideas about how you’re linking it to SDGs, would be something you could qualify as an impact-oriented investment approach. Today it’s still too immature a place to do that.” The “shifting regulatory goalposts” also make Christensen wary of impact in public equity and AllianzGI no longer has Article 9 funds in the space, which he says have become a proxy for impact. ESG Clarity recently had London Business School finance professor Alex Edmans on an episode of its podcast, ESG Out Loud, who outlined why impact investment necessitates a returns trade-off. “I have a lot of time for Alex, and we have debates together, but on this I don’t agree,” Christensen says. “Maybe if blended finance was the only option, I would agree with Alex, but there are plenty of impact investment funds making a lot of money.” Blended finance, which is being increasingly called for by institutions such as the World Economic Forum and the World Bank, is a part of AllianzGI’s private markets business, which comprises around 17% of its total book. And it’s one of few firms taking on that challenge. “I was in Columbia recently looking at an investment we’re going to be doing [in the Climate Action private equity fund] which is focused on renewable energy. I read a week later how Columbia is trying to move more to that area, so I thought, OK, our timing is pretty good for this one. “It’s exciting to be part of that first mover, because a lot of the investments we’re doing, there’s not a lot of private capital, which is why we have these blended finance vehicles to bring in private capital and have public institutions that do this first loss guarantee.” But it’s not all blended finance. For example, AllianzGI is in the process of launching an impact credit fund. Christensen says: “There is a lot of interest in private credit impact, it’s a new area for the market, there’s not a lot out there and it has not been well-defined.” Making an impact with his own career is clearly another driver for Christensen, who has been encouraged by the industry’s take-up of sustainable investing during the past 20 years. “Global warming hasn’t shifted – that’s still a big bet that we will figure that out in time before we start to have dramatic shifts in the liveability for all of us on the planet, but I can see shifts in the industry – and my feeling is I’d better try to be part of the solution than to either give up or be part of the problem. It’s working more than it did already, it’s now a question of speed.”
Matt Christensen, global head of sustainable and impact investing, AllianzGI
ESG/sustainability/ impact AUM
€251bn
AUM as at 31 Dec ’22
€506bn
Sustainable products
177
“If asset managers are not worried about climate litigation, they should be.” That’s the stark warning to fund groups amid an explosion of climate litigation cases around the world targeting various sectors and players in the fight against climate change. LSE’s Grantham Research Institute on Climate Change and the Environment, and the Centre for Climate Change and Economics and Policy, reported in June 2022 that climate-change-related cases have more than doubled worldwide since 2015, with around 300 cases filed in the 18 months preceding the report. High-profile cases, such as those put to the Shell board and Volkswagen, are obvious in terms of their targeting of the highest-polluting industries. But their shareholders – the asset managers – could be next on the list. “We are one case away from whole house of cards of finance having a cold east wind blowing over,” says Amy Clarke, chief impact officer at Tribe Impact Capital, and member of the ESG Clarity EU Committee, who also issued our introductory warning. “There has been an unbelievable amount of cases around the world, but we are on the cusp of a massive and seismic increase in the amount of climate litigation.” In terms of corporates, she highlights that so little has been done in tackling climate change that we are now in desperate times, which call for desperate measures. “Had we started this 20-40 years ago it wouldn’t be nearly as disruptive and disorderly as it will need to be now to get the pace of change required. “With this lack of progress, NGOs are now turning to the law to hold these companies to account – we have tried the alternatives and that’s not driving the change.” Clarke refers to Section 172 of the UK’s Companies Act 2006, which requires directors “have regard to a series of factors listed in the section that refer to the promotion of social, environmental and governance objectives” as reason for asset managers to be concerned. They are the ones voting for climate policies or board positions – could the NGOs soon turn their attention to shareholders next? “There are lots of NGOs all sniffing around here. We are a hair’s breadth away from the likes of the BlackRocks, Vanguards and State Streets – that are not stewarding as they should be – facing a big case.” Finance in the firing line One sector NGOs have been sniffing around in is financial services. In February, the UK’s Financial Conduct Authority (FCA) had a case filed against it by the most prominent NGO player in this area ClientEarth, which claims the financial regulator acted unlawfully in approving the prospectus of UK oil and gas company Ithaca Energy. The non-profit, which unsuccessfully also filed a claim against Shell directors for failing to manage the material and foreseeable risks posed to the company by climate change, says Ithaca Energy’s prospectus was approved despite the company’s disclosures failing to adequately describe the climate-related risks faced by the company, and the FCA has therefore breached legal requirements. Also in February, a conglomerate of French NGOs including Friends of the Earth (Les Amis de la Terre) France, and Oxfam France, sued bank BNP Paribas over its “massive support to fossil fuels and for its substantial contribution to climate change”. They say they had given BNP Paribas formal notice to comply with its due diligence obligations last October, but the bank had failed to meet these demands. “It is official, BNP Paribas will have to face its responsibility for the climate crisis before the court,” according to a statement. “We are suddenly seeing finance companies that historically never thought this was in their pond, finding it is very much in their pond and it’s fishing,” says Clarke. Shareholder activism The rise of shareholder activism around ESG concerns may also leave asset managers exposed to claims. Matthew Caples, associate in the commercial litigation department at Stewarts, says: “We are starting to see something that has never happened before: shareholder activists with an agenda that isn’t necessarily purely economical.” Shareholder activists are highlighting projected losses if the company does not act on particular issues. “They are saying ‘you are at risk with the decisions you are making’,” Caples adds, as he points to the Financial Services Markets Act, where claims can be brought against companies for misstatements or sharing false information about the position of the company. “Shareholder activists are looking to the future and saying we can refer back to these claims – you dismissed these claims at the time but it’s turned out to be true.” This is where asset managers, that quite often control a degree of these policies, could find themselves in trouble. “Asset managers are saying we have these ESG policies throughout our portfolios and ensure holdings conform. Increasingly, they are promoting this as a part of their fund management,” comments Justin Williams, partner at Akin Gump. “This gives rise to the possibility that asset managers themselves are high up the ownership chain and are therefore exposed to claims. “It has not been tried yet but seems to me it might provide a basis for aggressive claimant law firms to have a go. “They are out there looking for group actions to bring and it would not be surprising if they didn’t have an eye on asset managers, private equity and fund structures.”
‘With this lack of progress, NGOs are now turning to the law to hold these companies to account – we have tried the alternatives and that’s not driving the change’
Amy Clarke, chief impact officer, Tribe Impact Capital
‘We are starting to see shareholder activists with an agenda that isn’t necessarily purely economical’
Matthew Caples, associate, Stewarts
‘This gives rise to the possibility that asset managers themselves are high up the ownership chain and are therefore exposed to claims’
Justin Williams, partner, Akin Gump
Regulation’s role The obvious way in which asset managers can protect themselves is by ensuring they are following through with policies and, in turn, making sure investee companies are under their microscope for any misalignment – if any is found, they need to be held accountable. Regulators and governments are cracking down on greenwashing and frameworks for corporates and asset managers to align themselves with disclosure of all climate risks have been unveiled. These are in the early stages of development or rollout, however, as the industry is still finding its way. Until we come to a point of firmer understanding and hard lines in terms of disclosure, they will continue to be exposed to more potential climate litigation. “It’s the only direction we can go,” says Caples. “No one has yet decided what greenwashing is. “Until the FCA and governments get to grips with it, the line can’t be drawn. In the immediate short term, we will see more shareholder activism.” The CEO of ClientEarth appears to back this in her comment in the Commercial Courts Report 2023, published by litigation practice Portland. She says: “The law is the best tool we have to secure a liveable future for all life on Earth – in the interests of our economy, society and future generations. “The fact that 81% of people agree that UK courts should intervene if private companies are not delivering on climate goals makes it clear: people expect businesses to act, and to be held to account.” Williams points out the main aim of groups such as ClientEarth, in the nature of an impact investor, is to influence company behaviour and it is not always necessarily about financial returns – many cases do not make it to the court room. “These derivative actions will not be straightforward, but that’s not the point. The NGOs are commencing these claims to put pressure on boards – the last thing the boards want is to be sued, so they are likely to change their behaviour,” he says. This pressure appears to be having some impact. This month, BNP Paribas announced it has strengthened its oil and gas policy for the second time in three months following engagement from ShareAction and other investors. However, the UK High Court recently dismissed ClientEarth’s case against Shell’s board of directors as the non-profit’s application and evidence “[does] not disclose a prima facie case for giving permission to continue the claim”. The NGO has, in turn, asked the judge to reconsider. It will be interesting to see how further claims pan out and how many companies are successfully sued for not addressing and exposing climate risks. Asset managers will be watching their holdings closely for any potential targets – but they also must consider the factors that could make them a target themselves.
Number of strategic climate case numbers over time, outside the US (up to 31 May 2022 )
Engagement on ESG is no longer regarded as a sideline to the investment process but rather essential for fund selectors in gaining a dynamic understanding of a company
The term ‘engagement’ seems to be an inescapable part of fund managers’ dialogue these days. But what does it actually mean when they say they actively engage with companies on ESG and why is this important? ESG engagement at a basic level refers to the collaboration between stakeholders (in this case, fund managers) and companies to encourage them to embrace more sustainable practices. It normally involves engaging in dialogue, exercising their voting rights and influencing corporate behaviour to promote more responsible practices. Interacting with firms also helps build a level of trust and understanding between the two parties. This will help guide a fund manager’s qualitative assessment of a business to determine whether it’s in good hands. The vast majority of funds invest in a wide range of companies that are in truth quite far from having perfect ESG credentials. The suggested implementation of deeper ESG policies can also be met with an unwillingness by some companies, as it often comes at considerable expense and could alter a business model that is functioning effectively and generating healthy profits. But it is important fund managers continue to urge businesses to adopt sustainable practices. The reason ESG engagement has become a fundamental part of a fund’s investment process is there is growing evidence that tackling ESG issues can have a significant positive impact on the long-term financial performance of these companies. Improving ESG can enhance their reputation, drive innovation, help identify and mitigate risks, and allow a firm to receive easier access to capital. As a result, ESG considerations are no longer seen as a separate area, but as an essential and integrated part of the overall investment analysis and decision-making processes when these funds invest in companies. How engagement is evolving There are funds such as EdenTree Responsible & Sustainable Equity and CT Responsible Global Equity that put this at the forefront of their process. They place vital importance on meeting with the management teams of companies and even have their own dedicated in-house team to help these companies to adopt best-in-class ESG practices. However, funds practising ESG engagement are now far from limited to ESG or sustainable funds because of the recognition of these aforementioned factors. A good example would be Chelverton UK Equity Growth. The asset manager specifically doesn’t class any of its funds as sustainability funds. However, it still uses its own ESG team to help support fund managers when they are engaging with companies. It explores management issues such as the integration of sustainability strategy within business plans, as well as companies’ focus on ESG risk and opportunity. This process relies heavily on qualitative data from engagement to enable a dynamic understanding of company resilience and agility. There has even been a newer stance on ESG engagement that has started to emerge recently. Redwheel’s UK Climate Engagement Fund is a good example of this. The portfolio invests primarily in companies that have a significant negative impact on the environment like Shell and BP, and aims – through engagement with the company – to help them reduce their carbon footprint. A couple of years ago it would have been unthinkable to claim you were trying to promote ESG by taking a stake in these companies but, when you dive deeper, their thesis does make sense. What’s better for the environment? Getting a company like Shell that emits millions of tonnes of carbon into the atmosphere each year to not only stick to its climate reduction commitments but to go further and through your engagement with the company speed up the pace at which these emissions are reduced? Or by investing in companies with stringent ESG criteria or those that are involved in providing a cleaner energy source? I would argue they are both needed, yet sentiment and public opinion currently means that one fund would struggle to get a mandate to invest in both types of companies.
Joss Murphy Junior research analyst, FundCalibre & Chelsea Financial Services
‘Funds practicing ESG engagement are now far from limited to ESG or sustainable funds’
The impacts of climate change – and the need for adaptation and resilience – will take centre stage at COP28 in Dubai this year. The world received a clear warning from scientists when the Intergovernmental Panel on Climate Change (IPCC) released its final AR6 ‘synthesis’ report, which is the most comprehensive summary of the state of the climate to date. In the report, the message of urgency was clear. Scientists stressed that we are not on track to achieve the Paris Agreement goals, that climate finance flows need to grow immensely, and that the often-held assumption that climate risks are a ‘future’ – and not a ‘now’ – problem is deeply problematic. Countries across the world, including Spain, Portugal, Morocco, Algeria, Thailand, China, India and Bangladesh, are experiencing record-breaking heatwaves. Climate scientists have also warned that the potential return of the El Niño weather phenomena, combined with the background effects of human-induced global warming, could lead to more record-breaking heat in 2023 and 2024, framing the late 2023 negotiations. COP27 The most celebrated outcome of last year’s COP27 negotiations was the establishment of a loss and damage fund for vulnerable nations. However, a lot of questions were left unanswered about how this fund would work, who would benefit and who will pay. A committee was created to settle on how to operationalise the fund, with the aim to bring clear recommendations for adoption at COP28. Last year, countries established a framework for adaptation, based on the pledge made in Glasgow to (at least) double adaptation finance to $40bn (£32.2bn) by 2025. However, by the close of COP27 much of the debate on how this could be achieved was pushed to 2023. Countries agreed to ask the Standing Committee on Finance to produce a report on the progress to be presented in Dubai. The presentation of the findings on adaptation finance and loss and damage will be central to the outcomes and debates at COP28. With the central tenet of discussion being on how adaptation and loss and damage finance can serve its purpose of delivering funds to those communities on the frontline of climate impacts. Phasing out fossil fuels Discussions on including a phasing out of all fossil fuels in the text will also be at the centre of COP28. Calls for a global fossil fuel phase-out were supported by more than 80 countries at COP27, but the negotiations fell short of including ‘all fossil fuels’ in the text. In March this year, the EU signalled it would “promote and call for a global move towards energy systems free of unabated fossil fuels well ahead of 2050” in its list of the bloc’s priorities ahead of COP28, throwing its heavy weight into the debate. However, as with all COPs, the devil is in the detail, and we will likely see dispute around the nuance of what ‘unabated’ fossil fuels really means. Clear battle lines are developing around the phasing out of fossil fuel emissions – through various ‘low-carbon-technologies’ – as opposed to a decline in the actual extraction and use of coal, oil and gas. For example, the COP28 presidency recently announced the Global Decarbonization Alliance, which is focused on the reduction of oil and gas Scope 1 and 2 emissions (excluding Scope 3) and the role of not-yet-at-scale technologies like carbon capture use and storage (CCUS). Technologies like CCUS can play a role in an energy transition, but the scale and speed of emissions cuts needed to stay Paris aligned warrants a continued focus on the reduction of fossil fuel use and future production. It’s also worth noting that Sultan Al Jaber, head of the Abu Dhabi National Oil Company, has been appointed the COP28 president. As such, the influence of oil and gas interests at COP, which has been a theme of debate over the past few years, will likely continue in the build up to Dubai.
‘Discussions on including a phasing out of all fossil fuels will also be at the centre of COP28’
Claudia Wearmouth (left), global head of responsible investment, and Nina Roth, director, responsible investment, Columbia Threadneedle
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You joined Redwheel in 2022, and became head of Greenwheel at its launch in January 2023, to ‘lead the sustainability ecosystem’ behind Redwheel’s Enhanced Integration, Transition and Sustainable funds – what does that mean in practice? Greenwheel acts as an internal but independent adviser to Redwheel’s investment teams. Being in-house allows us to tailor our research to specific investment team needs and work hand in glove with them to build sustainable strategy frameworks, processes and tools. Being independent of the investment teams ensures investor autonomy and allows Greenwheel to be a partner they can go to rather than police they fear or clash with. Your previous role was in macro ESG and political risk research at abrdn – how does ESG work within a traditional asset manager compare with an ESG-focused firm? Redwheel is an independent asset manager with a range of strategies whereas Greenwheel specifically supports those funds that go beyond traditional ESG risk integration. This is quite different to my previous role, where I got to do a lot of really interesting research, but it wasn’t as closely linked to investment managers and how they construct and make decisions in sustainable funds. At Greenwheel, all our research is directly commissioned by investment teams for investments to build products, do investment research and engage with investee companies. What is the biggest ESG risk you perceive currently? The lack of agreement of what exactly ESG is and why it matters. Some people in the industry think ESG is something they have to tick the box on, rather than recognising ESG risk as a fundamental part of understanding investee companies, and as a result don’t fully understand the huge opportunity it creates. People also often conflate ESG risk with sustainable investing. Even within sustainable investing, asset managers disagree on what counts as a sustainable company. Differing regulatory regimes that are still in flux are exacerbating this issue. What are the most viable solutions to it, and what is asset management’s role? Being really intentional about how to define products and providing transparency to clients regarding the frameworks and processes used. This willingness to commit to rigorous and high standards, particularly on sustainable investments, should mean the end client can understand what the fund manager’s philosophy and investment process will clearly look like. No nasty surprises. What’s your view on the UK government’s Green Finance Strategy? How does it compare to something like the US Inflation Reduction Act? The US Inflation Reduction Act is righty praised both in Europe and the US for creating a much more positive environment to financially incentivise much greater action on climate change through investment in green infrastructure. It is a game changer for the US, where climate change and broader ESG has been under fire. In the UK, we don’t see the same level of politicisation of the issue, which has been helpful, and the UK has made huge progress on decarbonisation in recent decades. However, it remains to be seen how much of the UK’s Green Finance Strategy is backed up with the kind of financial support and incentives seen in the Inflation Reduction Act – the next general election will be key to finding that out. When you joined Greenwheel you mentioned your work would include challenging assumptions and understanding on climate science, and also social issues, which you think is very important for how clients and investment managers are increasingly thinking about investing sustainably – what social issues in particular? We’ve been really focusing on a few key social issues that align to investment team focus. These are human rights due diligence, which we’ve developed a framework for assessing companies against; gender equality, which has involved co-creating an investor tool to assess corporate gender equality practices; and the just transition, which is a nascent topic for the investment industry, but one that is crucial we start to better define and address. I’m a member of the Just Transition Alliance in the London School of Economics, which is doing great work on this. Being connected to great academic and industry initiatives and building research that investment teams utilise in fund management is core to Greenwheel’s success. You also said in partnering with the Redwheel investment teams Greenwheel had some projects in the pipeline this year – can you tell us more about those? It has been really exciting already to see the launch of the Responsible Global Income Fund and the UK Climate Engagement Fund earlier this year, which Greenwheel supported the creation of and continues to support through research provision. Additionally, Redwheel has brought in the new sustainable growth team who will invest in a range of exciting sustainable themes that we are supporting the development of currently. We are also working closely with our emerging markets team on investing for sustainable development in this absolutely key region for the Earth’s long-term survival.
Stephanie Kelly, head of Greenwheel, Redwheel
‘Some people in the industry think ESG is something they have to tick the box on, rather than recognising ESG risk as a fundamental part of understanding investee companies’
Click for Stephanie Kelly’s biography
Stephanie Kelly’s biography
Stephanie Kelly joined Redwheel in 2022. As head of Greenwheel, she leads the sustainability ecosystem that powers Redwheel’s Enhanced Integration, Transition and Sustainable funds. She began her career within the investment industry in 2014 and prior to joining Redwheel was the deputy head of the abrdn Research Institute, where she led on macro ESG and political risk research.
Matt Christensen is global head of sustainable and impact investing and a managing director with Allianz Global Investors, which he joined in 2020. He is responsible for accelerating the growth of impact investing as part of the firm’s growing private markets platform; he leads continued integration of ESG factors across AllianzGI’s existing range of public markets products, including stewardship activities; and supports the development of new SRI products. In addition, he has investment oversight for the company’s impact investments.
A frequently hijacked term, ‘ESG’ can often create confusion and ambiguity. However, its meaning and value cannot be questioned if we are to urgently address the pressing global challenges faced today
There have been several instances where I’ve heard the acronym ESG used when the speaker has overestimated how each individual member of the audience may have identified with the meaning of the term. Often there is a mistaken presumption that the speaker’s interpretation is tacitly understood. Together, those three letters evoke a wide range of stances and sometimes surprisingly visceral reactions, from crusaders against implementation to proponents who see the opportunity presented to problem-solve societal issues in innovative ways. When ESG is improperly referenced, there is often confusion, alienation and indifference. Unfortunately, the term is frequently hijacked for all sorts of nebulous political agendas, as well as lazily ascribed to pathways and actions that are contextually at odds with the spectrum of sustainable investing. Unhelpfully, a few disingenuous, virtue-signalling ESG claimers also besmirch what ESG investing stands for. ESG data in investment processes ESG reporting is an evolving field intrinsically linked with climate-related reporting. Understanding the expanding amount of annual ESG data generated is important to assist in navigating the complexities of investment decision-making in an environment where extraneous variables have a material impact. Whether or not one believes that ESG investing is a big part of how we can affect climate change and reduce global warming, in exercising fiduciary duty, investors need to be vigilant to holistic risk assessment when considering risk/return aspects on behalf of beneficiaries. Given that ESG funds incorporate a focus on climate-related financial disclosures, perhaps no cohort should be apathetic or dismissive of ESG investing. Directing capital commitment to support more ESG resolutions with a focus on how companies manage their key exposures and consider longer-term competitiveness and profitability, improves effective stewardship and enhances clients’ long-term investment values. Talking to critics about the rationale behind resistance to ESG investing has been enlightening. Many of us in the field regularly resort to apologist mode when faced with difficult questions upon hearing misinformed opinions and, in a few cases, meritless concerns about the acronym. Although there isn’t a global agreement on what these three letters mean together, each individual factor – ‘E’, ‘S’ and ‘G’ – can be strongly supported and examined separately. Why ESG? Many argue achieving long-term, sustainable investment returns is linked to having a stable, well-operating and well-managed environmental, social and economic system. Furthermore, when it comes to transitioning to a more climate-friendly economy, the social aspect plays a crucial role. It involves maximising the positive social and economic impacts of climate action while minimising and carefully handling any challenges that arise. This helps create a sustainable economy that is fair to everyone. By adopting an ESG-driven investment approach, we can practically align investment portfolios with these principles and allow for better management of risks and identification of opportunities that support both social and environmental sustainability. Collectively, portfolio companies have a significant impact on how the world is shaped. They exist within a wider ecosystem encompassing their employees, suppliers, customers and society at large, and in the long run, no company can prosper without high-quality governance and a healthy corporate culture. Unethical or neglectful behaviour can be devastating to shareholders and other capital providers, as evidenced by the resulting significant fines paid by corporates due to ‘E’ and ‘S’ violations, thereby reducing free cashflow generation and destroying shareholder value. The lack of a universally agreed-upon definition for ESG has created confusion and ambiguity surrounding the concept, leaving many questioning its true meaning and value. However, when we delve into the specifics, it becomes evident that ESG factors can be objectively identified, assessed and quantified. Investment professionals have already recognised the material impact of such factors and are increasingly incorporating them into their decision-making processes. While the philosophical arguments around ESG continue to evolve, we cannot afford to wait for universal consensus before taking action. The urgency of addressing pressing global challenges such as climate change, social inequality and corporate accountability requires us to utilise the existing tools and frameworks at our disposal – and continue as investment professionals to do the right thing.
Sylvia Solomon ASIP member board of directors, CFA UK
‘In exercising fiduciary duty, investors need to be vigilant to holistic risk assessment’
David Shugar, manager of the Say on Climate initiative, on the crucial role shareholders can play through engagement and voting to move companies forward on climate goals
Given the growing costs of climate change, it is more important than ever for shareholders to support climate resolutions this AGM season. Shareholders play a crucial role in reducing greenhouse gas emissions and climate-related risks. As part of the investment process, shareholders frequently engage with portfolio companies seeking to improve corporate climate readiness and reduce climate emissions. Shareholder engagement tools include active dialogue, filing of shareholder resolutions where necessary, voting on resolutions and even escalation to the board level where companies remain non-responsive. By using these engagement tools, including voting in favour of climate-related resolutions, investors can underscore their expectation that issuing companies take responsibility for aligning their full value chain emissions with global climate goals. At the time of writing, investors were poised to vote on As You Sow climate proposals at Travelers, Mosaic, Exxon and Chevron. Raising the bar The good news is that progress is being made. Some 4,982 companies have joined the Science-Based Targets initiative, setting Paris-aligned emissions reduction targets and/or committing to net-zero emissions by 2050 and more than a third of the world’s largest publicly traded companies have set net-zero targets. This progress sets the bar for competitors and increases the likelihood that supply chain companies are taking some form of climate-related action, setting the stage for many more public companies to disclose their emissions, set reduction goals and create transition plans. Companies that do not establish credible climate transition plans risk losing investor support, and the ability to compete with peers in a rapidly changing business environment. Large investor coalitions are working to ensure that the companies in which they invest have credible climate transition plans, including 1.5C-aligned targets, disclosure commitments and strategies for meeting such targets. Members of the Climate Action 100+ initiative, a coalition of more than 700 investors with $68trn (£54.2trn) in assets under management, are engaging with the world’s largest corporate greenhouse gas emitters. The CA 100+ benchmark provides clarity to issuers on what investors seek with regard to climate action, including disclosing 1.5C-aligned emissions reduction targets, setting net-zero by 2050 goals and other climate accountability metrics. The Net Zero Asset Managers initiative, a coalition including BlackRock, Fidelity and State Street, with $59trn in assets under management, is also committed to supporting the goal of net-zero emissions by 2050.
‘Companies that do not establish credible climate transition plans risk losing investor support, and the ability to compete with peers in a rapidly changing business environment’
David Shugar Say on Climate manager, As You Sow
Percentage of climate resolutions supported at companies in 2022
Percentage of climate resolutions supported at companies in 2023
Caterpillar
97%
Boeing
91%
Chubb
72%
Travelers
56%
Raytheon
38%
Public Storage
35%
Wells Fargo
31%
Bank of America
29%
Goldman Sachs
30%
Success amid headwinds As might be expected, this success has met with headwinds. Fossil fuel companies and their supporters have formed a loud, but baseless, front to block progress. While climate-obstructionism is in full force among conservative US legislators, and the cabal that funds them, company concern about climate change and investor support for climate action continues as evidenced by strong votes on recent climate proposals. In 2022, climate resolutions received 97% support at Caterpillar, 91% at Boeing, 72% at Chubb and 56% at Travelers. Early shareholder voting in 2023 indicates strong support for climate action despite certain large asset managers apparently walking back their support for 1.5C climate targets. More than 38% of shareholders supported such targets at Raytheon, 35% at Public Storage, 31% at Wells Fargo, 29% at Bank of America and 30% at Goldman Sachs supported transition plan proposals. Through shareholder engagement and voting, investors can help ensure that companies are taking the necessary steps to address climate change, are transitioning to a net-zero economy – and supporting a sustainable future for generations to come. We urge all shareholders to leverage their power to move companies forward on climate.
ESG Clarity has rebalanced its Responsible Ratings Index due to a change in MSCI’s methodology that saw thousands of ESG funds downgraded in April
In March, ESG Clarity reported that data provider MSCI would be downgrading many of its ESG funds. Changes to its methodology meant 31,000 funds received a one-off ratings downgrade as MSCI looked to raise the requirements for a fund to be assessed as AA or AAA, and improve stability and transparency in fund ESG ratings. In a statement, MSCI said removing the adjustment factor would mean a fund’s ESG ratings would be “based solely on the ESG scores of its underlying holdings”, while the decision to exclude swap-based funds comes as it “actively explores” methods to provide a rating for swap-based ETFs based on the underlying index. The changes will mean the proportion of funds rated as AA will fall from 32.8% to 22.4% and those rated AAA will fall from 19.9% to 0.2%. As a result, ESG Clarity has rebalanced its Responsible Ratings Index (RRI) earlier than planned and, while index funds rarely are chart-topping, changes to the top spots dominated by active funds can clearly be seen. Most notably, Royal London’s Sustainable World Fund has dropped from first to 10th place to be replaced by Morgan Stanley’s Global Brands Fund – a £17.2bn strategy weighted heavily to the US. The RRI was launched in 2020 to provide a one-stop-shop for readers looking for the top-rated ESG funds. It uses research from our in-house data team at Mark Allen Financial to collate the sustainable ratings from housings such as Morningstar, MSCI and Square Mile and find the best-rated funds. To compare this month’s ratings (above, left) with those from the last rebalancing in January 2023, click here.
‘The changes will mean the proportion of funds rated as AA will fall from 32.8% to 22.4% and those rated AAA will fall from 19.9% to 0.2%’
RRI ratings providers and methodologies
• Responsible Ratings Index (RRI) combines the scores of ESG ratings agencies. ESG Clarity’s bespoke index provides a comprehensive analysis of the top ESG funds available to investors. • Square Mile’s Responsible ratings combine a fund’s positive impact on the investor’s financial wellbeing alongside the positive impact it has on the world around them. Three factors are considered before being awarded a rating: exclusion – excluding those that have a negative impact on society or the environment; sustainability – rewarding and encouraging positive change and leaders in sustainability; and impact: those that have positive impact on society or the environment. • 3D Investing provides independent evidence of whether a fund or company lives up to its claims that it is ESG compliant. These are based on the 3D Investing Framework – Do Good, Avoid Harm, Lead Change. 3D investing is a subsidiary of Square Mile. • MSCI Ratings identifies the leaders and laggards in the ESG space. Based on their rule-based methodology, their seven stage ratings range from the top scorers (AAA, AA) to average (A, BBB, BB) to those behind when it comes to ESG (B, CCC). • Morningstar Sustainability ratings provide an objective evaluation of how funds are meeting ESG challenges. Each fund is ranked within their peer group. • MSCI ESG Fund ratings measure the resilience of funds to long-term risks and opportunities from ESG issues. • Overall Morningstar ratings award funds one to five stars based on past performance. These rankings are based on the performance over the past three years, with risk and costs also taken into consideration, and judged against funds in the same category. • Morningstar Analyst ratings provide forward-looking analysis of a fund based on five pillars: process, performance, people, parent and price. Top-scoring funds receive a ‘gold’ rating.
Click for the top 25 Responsible Ratings Index listings
The sustainable global growth equity market has turned a corner after a gruelling 2022. Here, Morningstar’s Ronald van Genderen shares three strategies to watch
Including ESG considerations into an investment approach often leads to portfolios that have a growth bias. But with investors shunning the growth style and favouring more value-oriented investments in 2022, sustainable investors had to stomach a substantial loss. As an indication of this, the MSCI World Index lost 7.83% (in GBP), the MSCI World Growth Index bled 20.29%, while the MSCI World Value Index rose 5.26%. Against this backdrop and with a turbulent market environment in mind, it is no surprise that investors’ interest dropped. Inflows into sustainable funds across all asset classes fell by roughly 70% in comparison with 2021’s flows. Despite the considerable decrease in new money flowing into sustainable funds, they still proved to be more resilient than the broader market. Moving into 2023, the market took a turn once again as growth funds rebounded in the first four months of the year. The MSCI World Growth Index returned 11.92% versus 4.91% for the MSCI World Index and a negative 1.57% for the MSCI World Value Index. Here we look at three sustainable growth strategies demonstrating a solid approach. Impax Global Equity Opportunities Impax Global Equity Opportunities has a solid foundation in Impax’s strong heritage of investing in environmental markets, extended here to sustainable investing. It benefits from a comprehensive team that sports experience and stability. This strategy resides within Impax’s listed equity team, and is managed by two seasoned portfolio managers, Kirsteen Morrison and David Winborne, both of whom have multiple decades of relevant investing experience. They are end-responsible for the strategy, but portfolio decisions are taken in a six-member portfolio construction group, which adds to the robustness of the decision-making process. Next to the two managers, this group consists of Chris Eccles and Evie Paterson from the investment team, head of sustainability and ESG Lisa Beauvilain, and head of investment risk and process Simon Higgo. The managers are backed by a 36-member group blending industry veterans and more junior staff who have eclectic backgrounds, though often with experience in sustainable investing. This team has been strengthened over the years and has been very stable with only four departures since 2015.The managers apply a well-considered approach that targets competitively advantaged companies likely to benefit from the transition to a more sustainable economy, with the team considering both opportunities and risks stemming from this trend. The team follows a structured 10-step process designed to evaluate, among other things, companies’ management quality, regulations and risks. It also includes a comprehensive valuation assessment that applies discounted cashflow and relative valuation techniques and considers various scenarios, resulting in a well-considered range of intrinsic values. The portfolio has a clear growth tilt, although generally this has been considerably softer compared with category peers and the MSCI ACWI Growth category benchmark. It typically avoids this index’s largest constituents as they are considered too expensive or don’t pass the approach’s sustainability assessment. Therefore, the portfolio shows a clear underrepresentation in stocks at the top end of the market-cap scale. Click here to see performance chart Schroder ISF Global Sustainable Growth Despite the departure of co-manager Katherine Davidson in July 2022, we retained our conviction in Schroder ISF Global Sustainable Growth’s team as she has been adequately replaced by Scott MacLennan, and co-manager Charles Somers remained at the helm. We appreciate the team’s structure that warrants effective use of the firm’s comprehensive analyst resources. Somers and MacLennan can leverage comprehensive supporting analyst resources, giving the strategy an edge. A team of 10 sector specialists filter out the best ideas from Schroder’s broader global analyst team, which employs more than 100 analysts located in 11 countries around the world. Furthermore, the Sustainable Growth Investor Group, which is formed by the management duo, portfolio manager Simon Webber from the global and international equity team and several (senior) members of the firm’s sustainability teams, provide additional scrutiny and oversight on the sustainability characteristics of the portfolio’s constituents. The process, which has been applied since inception of the strategy in 2017, remains intact. It is well-established and structured and has been left largely unchanged. It targets growth companies demonstrating positive sustainability characteristics. The approach is anchored around the team’s concept of a growth gap between its expectations and market consensus. While it typically focuses on identifying well-entrenched companies with underappreciated growth prospects, it also has leeway to invest in shorter-term opportunistic plays, which can be in more-cyclical businesses. This feature can make the portfolio distinctively less ‘growthy’ than many of the high-growth-focused peers in the global large-cap growth Morningstar Category. Indeed, the portfolio moves toward the core column of the Morningstar Style Box instead of the high-growth column at times, which has been the case since the end of 2020. Portfolio construction is purely bottom-up and benchmark-agnostic, leaving the co-managers without formal limits on, for example, sector and country allocations. The concentrated 30-50 stock portfolio can therefore look markedly different than the MSCI ACWI Growth Index category benchmark, and active share will generally be above 80%. Click here to see performance chart Stewart Investors Worldwide Leaders Sustainability Stewart Investors Worldwide Leaders Sustainability’s unique, risk-aware approach makes it a strong choice for global equities. This team is relatively small, uses a generalist analyst model, and has a focus that is spread across a range of strategies. The continuing lack of a single-strategy focus, with multiple strategies managed by the team, slightly tempers our conviction. Sashi Reddy is the lead portfolio manager on this strategy, a position he has held since 2016. He is backed up by David Gait, who is also the lead on Stewart’s Asia-Pacific strategies. The process focuses on high-quality, lower-risk stocks. Companies are targeted that can contribute to sustainable human development with the lowest ecological impact. The team looks for durable franchises with high-quality management that possesses strong alignment to shareholders. The process is genuinely long-term and patient, resulting in relatively low turnover. Little heed is paid to the benchmark, leading to a portfolio that is unique relative to global peers. The portfolio has a growth bias and, for a global fund, a large exposure to India. The average market cap for this strategy is larger than its all-cap sibling, but it remains well below the benchmark and peer group. Click here to see performance chart
‘Companies are targeted that can contribute to sustainable human development with the lowest ecological impact’
‘The approach is anchored around the team’s concept of a growth gap between its expectations and market consensus’
‘The managers apply a well-considered approach that targets competitively advantaged companies likely to benefit from the transition to a more sustainable economy’
Ronald van Genderen Senior manager research analyst, Morningstar
Stewart Investors Worldwide Leaders Sustainability
Schroder ISF Global Sustainable Growth
Impax Global Equity Opportunities
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‘The EU’s Green Deal should lead to a tremendous increase in renewable capacity and green hydrogen production, though many hurdles still remain’
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The US Inflation Reduction Act (IRA) was signed into law in August 2022 to accelerate the transition of the US economy to clean energy. Regrettably, it has also led to significant transatlantic tensions as encouraging local manufacturing through massive tax credits is seen as protectionist, violating World Trade Organisation rules. In response, in early 2023 the European Commission presented the Green Deal Industrial Plan, an update to the European Green Deal. It repeats its 2050 climate neutrality goal, targeting the reduction of greenhouse gas emissions (GHG) from 1990 levels by 55% by 2030. To achieve this, the European strategy relies on higher carbon taxes and prefers to negotiate free trade agreements rather than include stronger protectionist elements. The sum of the Green Deal’s parts The Green Deal Industrial Plan consists of the Net-Zero Industry Act and the European Critical Raw Materials Act, providing a framework to rely less on imports and more on their own supply chains. The objective is also to accelerate the permit-granting process through an upper time limit of two years, down from up to seven years currently. Funding will come from a combination of state-aid rules and direct subsidies. The Net-Zero Industry Act’s aim is to scale up the manufacturing of clean technologies in the EU, with at least 40% of the EU’s capacity needs by 2030 being manufactured locally, while supporting the EU’s 2030 climate and energy targets and the 2050 net-zero target. The beneficiaries should be the companies across the supply chain for wind turbines, heat pumps, solar panels, renewable hydrogen, batteries and CO2 storage. In the Critical Raw Materials Act, the EU is looking to ensure access to strategic and critical raw materials like lithium, cobalt and rare-earth elements, aiming to boost security of the EU’s supply. It also includes a target that no third country supplies more than 65% of any strategic raw material. The European Green Deal also relies on the REPowerEU plan and the Circular Economy Action Plan, reset in 2022 to deal with the impact of the Russian invasion of Ukraine. The REPowerEU plan revolves around saving energy and diversifying the EU’s energy supplies – both largely successful – as well as producing clean energy, which is lagging. On 30 March 2023, a proposal to increase the target of renewable energy’s share of total energy use to 45% in 2030 was agreed, a step up from the former target of 32% and the 22% level in 2022. Wind and solar are expected to see a more than threefold increase from current levels. Sector-specific targeting The revised directive now strengthens targets for buildings, industry and transportation. Building energy use is the largest sector in the EU, responsible for over 40% of energy consumption. The new indicative target of at least 49% renewable energy share in buildings by 2030 should push member states to incentivise heat pump technology, one of the most efficient ways to lower energy use and raise green energy use through electrification. Transport is the second-largest sector in terms of energy use and has a new framework for renewable energy incentivising GHG reduction and promoting advanced biofuels and renewable fuels. While we welcome the pressure on the transportation sector to move to green energy, synthetic fuels are a poor choice for passenger vehicles as they have a much lower overall efficiency than electric vehicles. They might be a good choice for aviation, the fastest-increasing transport segment in the past few decades. Industry is also included for the first time. Along with the European Hydrogen Bank, hydrogen is a clear pillar of the EU green energy framework. This new bank will help accelerate investment and cover the cost gap between green and grey hydrogen through a programme expected to start in the autumn. To reach the hydrogen production target by 2030, €335-471bn of investment is necessary, including €200-300bn for additional renewable energy production, a significant growth driver for the leading companies in that area. Overall, the EU’s Green Deal should lead to a tremendous increase in renewable capacity and green hydrogen production, though many hurdles still remain. We expect a great deal of simplification in the legislative and permit-granting process to come through this year and next, leading to real momentum for all the companies active in these exciting sectors. Discover more about the Polar Capital Smart Energy Fund
Discover more about the Polar Capital Smart Energy Fund
