…and be cut by 45% by 2030 to stay sub-1.5 degrees.
Hello from Impact Delta.
Enjoy our periodic newsletter, containing insights and news related to ESG and impact investing. In this edition, we look at the link between E and S, more reports on ESG and investment performance, as well as the latest SEC and IPCC activity.
IPCC Working Group II: Distinctions between 'E' and 'S' can be a false dichotomy - The IPCC released the Working Group II contribution to its Sixth Assessment Report on February 27. This looks at the impacts of climate change, and capacity of the natural and human world to adapt. In its summary for policy makers, it placed climate change in the context of a complex global system, highlighting the "interdependence of climate, ecosystems and biodiversity, and human societies” and its goal of integrating “knowledge more strongly across the natural, ecological, social and economic sciences than earlier IPCC assessments." Put another way, E and S are almost always linked, and best addressed in combination rather than isolation.
IPCC Working Group III: “It’s now or never” On April 4, The IPCC released the Working Group III contribution to its Sixth Assessment Report. This provides an update on climate change mitigation progress. The punchline? The window to stay under 1.5 degrees is closing. GHG emissions must peak by 2025, and need to be reduced by 45% by 2030, while current stated commitments will only reduce emissions by 14%. But the authors note “we have options in all sectors to at least halve emissions by 2030.”
The debate about ESG and investment performance tradeoffs continues – HBR published an article (An inconvenient truth about ESG investing) that contradicts other recent studies that claim a strong commitment to ESG is associated with investment outperformance. The HBR piece pointed to work from the University of Chicago, which found that high-ESG-rated mutual funds did not deliver superior investment returns relative to poor ESG performers (based on Morningstar ESG ratings) – although they did attract more capital. The idea that investors would be willing to trade off return (e.g., superior performance) for better ESG outcomes could explain this. However, a recent survey of investments in ESG-branded funds and non-ESG funds “found that the companies in the ESG portfolios had worse compliance record for both labor and environmental rules” and that “companies added to ESG portfolios did not subsequently improve compliance.” ESG done poorly, in other words, may be the worst of all worlds. And greenwashing continues.
The SEC has set in motion revised ESG reporting requirements - The SEC released its report on "The Enhancement and Standardization of Climate-Related Disclosures for Investors” in March. If adopted, the proposed reporting would be integrated into public filing (10-K annual reports and 10-Q quarterly reports). This would apply to all classes of securities, meaning all publicly traded companies. What's particularly notable is that the integration of the reporting in formal filing documents puts this non-financial data on the same footing as financial reporting. This implies that unlike current voluntary climate disclosures, any misinformation in climate data in filings will carry the same liability as financial data misrepresentations.
Asian debt is decidedly exposed to ESG risks – In an article in Environmental Finance, the authors identify $4 trillion of Asian debt that is exposed to ESG risks. For comparison, this represents roughly 80% of Japan's GDP in 2020. Among the risks identified, roughly 2/3 of the exposure is related to environmental factors, with increasing sea level being a substantial driver given the percentage of the population living near shorelines.
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About Impact Delta
A secular shift towards a more responsible capitalism is underway. Impact Delta is a specialist consultancy founded to help investment firms capitalize on this shift. We believe good environmental and social thinking helps investment firms raise capital and earn better returns. More about us here.