War & the ESG existential crisis
Newsletter #24
Students occupied the Sorbonne in Paris to protest the unfortunate binary they face at the polls
The war in Ukraine has unleashed an ESG existential crisis which, for now, is taking the form of hard questions and behind the scenes strategy rethinks. The true impact will play out in months and years to come.
In this newsletter, we’ll look at some of the visible effects of the war, an initiative to raise ambition (which is the high road out of this crisis), and the stand-out good news from the IPCC report on mitigation solutions.
Highlights from Green and Sustainable Finance
Russian President Vladimir Putin, in an oil and gas meeting this week, invoked the spectre of a “dash back to dirty energy” in the West. He said:
They are ready to abandon the so-called green agenda and resume their reliance on energy with a so-called high carbon footprint, which until recently they wanted to shut down completely as out-of-date and dirty. Many political forces used environmental slogans in their election campaigns. Where is all of this now? It has been thrown on the scrapheap, and they are now acting quite differently.
French students who occupied the Sorbonne this week in protest at the unfortunate binary they face at the polls next Sunday - far-right candidate Marine Le Pen or Emmanuel Macron - are also hollering rage that climate change and social issues have been mostly absent from public debate around the elections.
This “dash back to dirty energy” effect is also apparent in ESG - from calls to rethink the entire approach, to get rid of it, to up the ambition. Here are just some of the more visible impacts to date:
👉 Flows into ESG are down. In Q1 cash into ESG funds fell to $75bn, the lowest level since the third quarter of 2020, according to a note published by the Institute of International Finance. The inflows in March, $15bn, were at their weakest since March 2020. Reasons for this include concern about tech stocks and higher oil prices.
👉 Flight from China. Global investors have been pulling out of Chinese equities; in the third week of March, international investors took out over $3 billion, the highest since the first week of 2021. According to the Institute of International Finance in a report from late March:
Outflows from China on the scale and intensity we are seeing are unprecedented (…) Russia's invasion of Ukraine may be pushing global markets to look at China in a new light.
👉 The weapons debate. It’s unclear whether the EU’s much anticipated social taxonomy will label weapons as “socially sustainable”. This was the original intention as of last year, but the war has revived the debate in light of the argument that Ukraine needs access to weapons. ESG funds are already heavily exposed - more than half of funds classified as sustainable by research firm Morningstar contain a total of $7.3 billion of exposure to military weapons, according to Capital Monitor analysis of shareholder advocacy group As You Sow’s database.
👉 Russia: who’s in and who’s out? Although the list of voluntary corporate exits from Russia continues to grow (over 600 companies at present), there is an equally robust list of “remainers”.
The Sonnenfeld list gives a country breakdown, and it reveals, for example, that France is an EU champion of “business as usual in Russia”, with 26 companies still “all-in” compared with the UK (1) and Germany (9). Outside the EU there is China, at 43 companies. The French list includes utilities (Veolia, Engie, EDF), consumer (Auchan), banking/finance (Group BPCE) and hair salons (Jacques Dessange, Jean Louis David, Camille Albane).
👉 Change the rules of the ESG game. This is the high road approach, articulated by a recent discussion paper “The Future of Investor Engagement” from the UN-Convened Net Zero Asset Owner Alliance. It basically argues that investors can change the game by leaning into positive lobbying - for example with regulators, with asset managers and via sectoral engagement.
Their problem statement is a good summary of what’s wrong with ESG.
the significant resources needed for effective corporate engagement
A narrow, single company focus
The inefficiencies of focusing on voluntary, company-by-company disclosure
An uneven investor focus across companies and asset classes
The boundaries set by the rules of the game
There are several interesting examples of this approach. On sector engagement, for example, it cites the Investor Mining and Tailings Safety Initiative. Following a major dam failure at the Córrego do Feijão mining facility in Brumadinho, Brazil, a group of institutional investors engaged over 700 extractive companies seeking improved disclosure on the management of tailings storage facilities (TSFs). This initiative resulted in a first-of-its-kind global database of TSFs and a new globally recognised tailings safety standard.
All of this, of course, will not derail the high-speed train of consulting firms piling into the decarbonization advice sector. Just this week Deloitte announced a $1 billion investment in a global sustainability/climate practice.
It’s worth looking at their latest report on top trends for mining to put that announcement into context:
(…) the energy transition absolutely presents a rare opportunity for leaders to reorganise, generate new value, and forge partnerships to create a more responsible and attractive future for the industry.
The way in which Mining organizations position themselves today in preparation for this more sustainable future could redefine competitive advantage over the next decade.
Don’t miss our upcoming podcast next week for a bracing reality check on this particular mining industry narrative. Details below in “From the podcast”.
IPCC update: the good news
The release of the IPCC’s third installment of its Sixth Assessment contains a brand new “good news” chapter on demand-side solutions (consumption, human behaviour, transport systems, lifestyle etc) to climate mitigation.
Amy Luers, Global Sustainability Lead at Microsoft, wrote:
This is a major shift, previous reports focused almost exclusively on the supply-side, such as shifting the supply of energy from fossil fuels to solar and other renewables.
👉 The report states with high confidence that demand-side strategies can reduce 40-70% of emissions across all sectors.
This is big, important, and exciting all at once, and you can learn more in an upcoming podcast (details below).
From and beyond the podcast
Next week, we’ll publish an episode with Thea Riofrancos and Ian Morse on one of the hottest issues in the world today, the issue of critical minerals for the energy transition and how the “race” to secure supply is weaponizing the narrative in the media and politics, and why this is exactly what mining companies want.
We’re doing a mini-series on the IPCC in the coming weeks. We know there’s a lot happening in the world - but these are important reports, and its a lot to take in. So we decided to curate a selection of what’s new, exciting and important.
Last week we started with our episode on human vulnerability and the report on adaptation, do catch up here.
Among the higlights of my interview with Coordinating Lead Authors Joern Birkmann and Edwin Castellanos are:
the first ever mention of the word “colonialism” in the history of the IPCC as a historical and ongoing driver of the climate crisis.
how a map of the “global hotspots of human vulnerability” became highly politicized, leading to its removal from the Summary for Policy Makers.
Upcoming episodes on the IPCC’s latest report on climate mitigation solutions (Working Group 3) will look at:
The “good news” chapter on the huge mitigation potential of demand-side solutions (with author Joyashree Roy)
Highlights from the Finance & investment chapter + Mitigation pathways compatible with long-term goals (with authors Christa Clapp and Glen Peters)
🗳️ Survey on sustainable finance. Former podcast guest Nadine Strauss is conducting a survey with colleagues at the University of Zurich to understand how financial industry practitioners perceive and understand the topic of Sustainable Finance. If you’re a finance professional, please consider taking part in the survey, it takes just 15-20 minutes.
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