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Welcome back. This week brought the third in an important series of reports from the Intergovernmental Panel on Climate Change — and it was as sobering as any produced by that body to date.
If we are to limit global warming to about 1.5C, warned the report from 278 leading climate scientists, net carbon emissions must peak within the next three years, and be eliminated by the early 2050s. On our current trajectory, we are heading for a catastrophic temperature rise of more than 3C.
Avoiding that fate will require massive and concerted global action in everything from agriculture to cement production. And that in turn will require the mobilisation of vast sums of capital — the subject of a 157-page chapter in the IPCC report. Below we highlight some of the key messages from that chapter on investment and finance, which could have a strong influence on discussions among global policymakers in the run-up to COP27 in Egypt.
Also today, Patrick has an exclusive story on rising shareholder pressure at Unilever, and Tamami explores whether a vaunted corporate governance reform in Japan is all it appears. See you on Friday. (Simon Mundy)
Five investment and finance takeaways from the latest IPCC report
1. Investor action has far to go
Since the 2015 Paris Agreement, a growing number of institutional investors have publicly thrown their weight behind climate action — but “there is limited evidence that this attention has directly affected emission reductions”, the IPCC report warns. It reckons that the lack of clear policy signals from governments has led to nervous investors holding back from aligning their portfolios to climate goals. And despite the rise of environmental, social and governance-focused investing, the report concludes that “ESG strategies, by themselves, do not yield meaningful social or environmental outcomes”.
2. Transparency push is needed
The IPCC urges more robust assessment of ESG scores, with an emphasis on standardisation. It decries a lack of mandatory reporting frameworks, which have created a risk that companies will boost their reputations through lofty net zero pledges that lack any serious action plan. While many consultancies now offer services related to climate risk, it finds that these are often non-transparent and too narrowly focused on “carbon footprinting”. And even after many financial institutions have embraced the risk reporting framework of the Taskforce on Climate-Related Financial Disclosures, the IPCC finds that climate risks “remain greatly underestimated” by the financial sector — a problem that it says is holding back the low-carbon transition.
3. Carbon taxes: use with care
Carbon taxes — the favoured climate solution of many an economist — are a relatively simple and easy approach to raising the cost of emissions, the report says. But it warns they must go hand in hand with policies that protect against potentially adverse impacts on incomes, jobs and industrial competitiveness. Specifically, it says proceeds should be used to fund compensating measures for those adversely affected. In developing countries with weaker institutions, it says, alternative policies — such as revamped market regulation and public investment in low-carbon infrastructure — may be preferable.
4. The future is in blended finance
The world’s developing countries will need $1tn a year in green energy investment by 2030, according to the International Energy Agency. Where will that money come from? The IPCC report calls for a scaled-up deployment of public funds to pull private-sector investment into the climate finance space. In particular, it argues for a greater use of public guarantees for low-carbon investments in developing countries: each dollar put to use in this way can pull in $15 in additional financing, it says. But multilateral institutions such as the World Bank have made relatively little use of this approach, it warns, because such guarantees are not yet included in their official definitions of overseas development assistance.
5. Climate action vs Covid recovery?
As governments plough vast sums into the economic recovery from the coronavirus pandemic, what will this mean for the climate agenda? If the low-carbon transition is put at the core of this investment push, “Covid-19 may well be a turning point for sustainable climate policy and financing”, says the IPCC. But if the stimulus drive lapses back into a business-as-usual approach, it warns, there will be a near-term decline in climate finance and investment. It warns against any assumption that voters will be supportive of lavish spending on a climate agenda, suggesting that fiscal conservatism among the public will hold back deficit spending on the low-carbon transition. And in any case, it cautions, only countries with the highest credit ratings will be able to take such an aggressive countercyclical approach to the climate challenge. (Simon Mundy)
Exclusive: Activist campaign at Unilever draws short-termism worries
In January, the FT reported that activist investor Nelson Peltz had built a stake in Unilever. Despite positioning itself as a leader on corporate sustainability — especially under former chief executive Paul Polman — the company’s shares have underperformed, making it a juicy target for activists.
Now comes the question ESG investors have been whispering about for some time: will activists take aim at corporate sustainability leaders to slash costs and drive up the share price? We have seen some activists such as Jeff Ubben steer companies toward eco-friendly business practices. Carl Icahn launched a campaign at McDonald’s concerning the fast-food chain’s animal welfare policies.
But Peltz’s hedge fund, Trian Partners, has some Unilever shareholders anxious that he might go after the company’s sustainability bona fides. In a letter obtained by the Financial Times, New York City’s comptroller Brad Lander has asked Unilever’s board to give all shareholders a chance to vote on board changes sought by Peltz.
Lander said he does not trust Peltz’s record on sustainability. “I am particularly troubled about Trian’s record of seeking short-term results with a weak commitment to sustainability,” Lander said in the letter to Nils Andersen, chair of Unilever’s board.
The New York City Retirement Systems, which holds nearly $200mn of Unilever shares, pointed to concerns about Trian’s activist agitation at Procter & Gamble. In November 2020, MSCI downgraded P&G’s ESG rating to A from AA. Peltz started on the company’s board in 2018. The downgrade stemmed in part from “allegations of forced labour in Malaysia involving human rights of migrant labourers on palm oil plantations,” Lander said.
Peltz also sits on the board of Wendy’s, a fast-food chain, while the company has declined to join coalitions to prevent human rights abuses in supply chains, Lander said.
Unilever’s annual meeting is May 4. Trian did not immediately respond to a request for comment on Tuesday. Unilever’s potential showdown with Peltz raises the stakes for other activists and ESG investors. (Patrick Temple-West)
Japan tries to catch up with the west on corporate governance
Spring’s budding cherry blossoms represent a new beginning for many Japanese. As the country’s fiscal year kicks off in April, pupils are finding new classmates and fresh-faced salarymen are knocking on the door of new employers.
The Tokyo Stock Exchange on Monday also celebrated the season with once-in-a-generation reform, welcoming a new set of companies into its top-tier group ― this was the intention at least.
The Tokyo bourse implemented its biggest overhaul in 60 years to more closely align Japan Inc’s financial and corporate governance standards with those of its western counterparts. The thought was that this would attract more overseas investment. But the outcome has disappointed foreign investors, our Tokyo colleagues Eri Sugiura and Leo Lewis reported.
The exchange is now split into three sections — prime, standard, and growth — instead of the previous four-tier system. The prime section was meant to include only companies with the highest standards. Instead, more than 80 per cent of the companies listed in the old first section stayed in the prime section — with weak enforcement of the standards.
While the exchange’s reshuffle has largely been seen to have fallen flat, some specialists in the field believe that Japanese companies are shifting in the right direction following an update to the corporate governance code in 2021.
Japanese companies may not evolve at the same pace as their US and European counterparts, but “it doesn’t mean these companies are hopeless,” said Kei Okamura, portfolio manager of the Japanese equities team at Neuberger Berman.
Okamura, who serves as the chair of the Asian Corporate Governance Association’s Japan working group, has observed that some well-known corporations in Japan — including a few with patchy track records when it comes to governance — have recently made important changes within their corporate governance frameworks. These include steps such as changing leadership, implementing a first-ever committee structure, and increasing the number of independent directors. “It’s quite clear that the boards [of these companies] have been discussing these issues,” he added.
Masakazu Hosomizu, partner and portfolio manager at RMB Capital, said the exchange’s reform was “just a beginning” and more positive adjustments would follow among Japanese companies. He also warned that “the sense of urgency” was missing. Foreign investor patience is wearing thin.
“Japan has very limited time to spare to catch up with its rivals” not only in the US and Europe but also in the emerging markets, he said. (Tamami Shimizuishi, Nikkei)
Chart of the Week
Many oil and gas companies have benefited from surging hydrocarbon prices in recent weeks — but clean energy stocks have also been outperforming the MSCI world equity index, notes a new report from BlackRock.
The Russian invasion of Ukraine has actually helped to accelerate the energy transition in Europe, by highlighting the dangers of depending on Russian fossil fuels, according to the report. “We could . . . see carbon emissions edge up as the EU burns more coal and oil to make up for less Russian gas,” says BlackRock. “But this isn’t a sign that the transition to clean energy is being derailed.”
It is fair to worry about the economic disruption from aggressive climate action, but it will save far greater pain in the future, according to this compelling new paper from asset management group Legal & General and mining giant BHP Billiton. Under its “disorderly” scenario, where serious climate action is badly delayed, the world would face annual additional costs of $5.1tn by 2050. The question of whether or not to accelerate the energy transition “is not in our gift”, L&G head of climate solutions Nick Stansbury told Moral Money. “What is in our gift is when we choose to do it. If we don’t do it for another ten years, we end up with a worse climate outcome, and a worse economic outcome.”
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