Five ESG updates you missed last week
The world of Environmental, Social, and Governance (ESG) investing is evolving quickly. Keeping up with the latest trends and regulatory changes is crucial as ESG factors increasingly impact investment decisions and corporate strategies. Here’s a brief on the ESG stories last week that are shaping investment decisions and corporate strategies.
This overview covers five key updates that could significantly influence your financial planning and sustainability efforts.
Regulators are cracking down on greenwashing claims, enforcing stricter standards for ESG-related disclosures and marketing. At the same time, investors are pushing for greater transparency through pass-through voting, giving them more oversight on how their money is stewarded.
These developments reflect the growing importance of authentic ESG practices. While much of the ESG content out there can seem dense and dry, this overview aims to provide a clear, concise snapshot of the current ESG landscape in a way that resonates with your role.
A recent survey by the Thinking Ahead Institute and the UN-supported Principles for Responsible Investment revealed significant differences in engagement strategies between asset owners and managers. Asset owners dedicate only half of their stewardship resources to issuer-level engagement, while asset managers spend nearly three-quarters of their time on this activity. Conversely, asset owners invest more in industry-level (30%) and policy-level engagement (20%).
This trend reflects larger asset owners’ view of themselves as universal owners addressing systemic issues to protect long-term portfolio value. It also explains why asset managers have supported fewer ESG proposals at AGMs compared to asset owners.
Italy’s recent €9 billion green bond issuance attracted record demand, driven by expectations of a European Central Bank rate cut. The bonds, offering a nine basis point spread above conventional Italian government debt, received orders totalling €84 billion from institutional investors.
This success comes amidst challenges for Italian issuers in the labelled bonds sector. Enel, a power utility, faces higher interest payments on €11 billion of sustainability-linked bonds for failing to meet emissions targets. Additionally, oil and gas firm Eni’s controversial sustainability-linked bonds and loans highlight the need for greater simplicity and ambition in this market.
European regulators are stepping up efforts to eliminate greenwashing in the investment sector. The European Securities and Markets Authority (ESMA) recently released final guidelines for naming ESG- or sustainability-related funds. Previously, funds could achieve Article 8 classification under the Sustainable Finance Disclosure Regulation (SFDR) with as little as 10% of assets allocated to green investments. The new guidelines require at least 80% of investments to meet environmental or social characteristics or sustainable investment objectives.
Initial reactions to the guidelines have been mixed. The market welcomed clearer definitions for ‘impact’ or ‘transition’ labels but was confused by the decision to abandon a requirement for 50% sustainable investments in favour of a more ambiguous commitment to invest “meaningfully” in sustainable assets.
The days of portfolio managers filling ‘green’ portfolios with tech stocks to boost returns are over. Microsoft, a tech giant that pledged to become carbon negative by 2030, recently reported a 30% increase in carbon emissions due to its AI market pursuits. This revelation, coupled with a significant renewable energy project with Brookfield, highlights the challenges of truly sustainable operations.
Microsoft’s AI strategy might face additional social and governance challenges, especially as data centers’ energy needs are projected to double by 2026, driven by AI and cryptocurrency demands. This shift underscores the importance of genuine sustainability practices over superficial green credentials.
The Superannuation Arrangements of the University of London (SAUL) took a significant step in stewardship transparency by adopting pass-through voting for their £3 billion in assets. This allows SAUL to directly vote on AGM resolutions for shares held in pooled funds, previously managed by Legal & General Investment Management.
This move towards greater voting control aligns with similar developments championed by BlackRock. However, transparency remains a contentious issue, as highlighted by Follow This, which criticised French asset managers’ reluctance to publish voting rationales. Effective stewardship strategies require adequate resourcing, and some argue that transparency demands should make direct voting control unnecessary.