December 2022 Newsletter
Happy New Year! We hope you had a lovely break. Please see below our December round-up of top ESG stories.
Biden’s Climate-Friendly 401(k) Rule Unties Hands on Wall Street
Under a new US Labor Department rule, employers are permitted to consider ESG factors when selecting investments for workers’ retirement savings. Asset managers, who often already integrate ESG criteria for institutional and retail investors, therefore no longer need to carve out special conditions for retirement plan customers. Historically, asset managers might have under-emphasised ESG criteria for retirement-business clients since such clients faced legal pressures due to acting as fiduciaries. Fund managers may have also saved time and money when no longer obliged to segregate retirement accounts. Although the new rule alleviates pressure about ESG considerations upon retirement plan sponsors, many such plans are under pressure from participant-driven lawsuits finding fault with the investments offered by employers to workers in 401(k)s. Moreover, although the DOL’s jurisdiction doesn’t extend to public pension plans, the new rule has caused some private-sector retirement plans to fear litigation in future. LINK
ISSB Scope 3 guidance for companies will help asset managers report
The International Sustainability Standards Board (ISSB) has provided more guidance for companies disclosing their Scope 3 greenhouse gas (GHG) emissions. At COP15 (addressing biodiversity) in Canada in December 2022, the ISSB agreed a framework which allows companies to include information in their reports from supply chain companies with different reporting cycles. Moreover, there is a temporary exemption for a minimum of one year after the Climate-related Disclosures Standard, thus allowing time to implement their processes. The ISSB also said it had approved amended financed emissions disclosures for asset managers. LINK
COP15: New global deal for nature agreed despite objections from developing nations
It was announced on 19th December, at the UN’s 15th Biodiversity COP, that nations had formally adopted the Kunming-Montreal Global Biodiversity Framework. The new deal will target “action to halt and reverse biodiversity loss”. Critically, the framework will ensure that 30% or more of degraded terrestrial, inland water, and coastal and marine ecosystems are under effective restoration by 2030. With its 23 targets to be achieved by 2030, the framework will “progressively close” the $700bn finance gap on biodiversity and nature. Among other targets is the goal to “eliminate, phase out or reform incentives, including subsidies harmful for biodiversity” by 2025 and “progressively reducing” such subsidies by $500bn or more by 2030. Signatories are expected to mobilise $20bn per year from 2025, and $30bn per year from 2030 for biodiversity (compared to a collective $10bn today). LINK
Florida to pull $2bn from BlackRock in spreading ESG backlash
$2bn of Florida’s state Treasury funds are to be divested from BlackRock after the state passed a resolution whereby its fund managers would invest “without considering the ideological agenda of the environmental, social, and corporate governance (ESG) movement”. State chief financial officer, Jimmy Patronis, said “Florida’s Treasury Division is divesting from BlackRock because they have openly stated they’ve got other goals than producing returns”. Of the $2bn to be divested, $1.4bn will be long-term securities; $600m will be short-term funds. Although a fraction of BlackRock’s $8tn under management, it is noted that Republican states had already divested over $1bn from BlackRock as of October 2022. Of at least 19 states to act on restricting the role of ESG in investing, Florida is the first to divest from longer-term investments over ESG concerns. LINK
ECB to Step Up Action on Climate Risk at Banks as a Top Priority
In outlining its top supervisory priorities for 2023-2025, the European Central Bank (ECB) proposed “stepping up efforts to address climate change” as a key focus area. Supervisory priorities are set annually with a three-year focus; also among the ECB’s priorities were strengthening resilience against macro-financial and geopolitical shocks, and addressing digitalisation effectively. The increased climate focus follows ECB findings in July, via its climate stress test, that banks must urgently accelerate the incorporation of climate risk into risk management frameworks. A thematic review into banks’ climate risk-related strategies, governance and risk management frameworks subsequently found that many banks have put basic practices in place but lack sophisticated methodologies to assess climate risk. LINK
Vanguard exits Net Zero Asset Managers initiative
Vanguard is to withdraw from the Net Zero Asset Managers (NZAM) initiative. The asset manager stated its exit from NZAM was aimed to clarify its role as an index fund provider, citing confusion surrounding the “applicability of net-zero approaches to […] broadly diversified index funds”. Against a backdrop of anti-ESG legislation from Republican-leaning states, the Vanguard announcement came a day after a report issued by Republicans on the Senate Banking Committee, which criticised BlackRock, State Street and Vanguard. Unlike BlackRock, Vanguard has always held that it has no objectives beyond financial returns. LINK