Energy crisis creates tough decisions for asset owners

Hello from London, where Liz Truss has kicked off her tenure as prime minister by drawing up plans for an energy rescue package that could cost more than £150bn ($172bn).

Jacob Rees-Mogg, an MP who has expressed scepticism about climate change, has been given responsibility for the UK’s business, energy and industrial strategy.

It’s not just politicians who have been forced into tough decisions by the global energy crisis. It has raised tortuous questions for financial institutions about whether to abandon fossil fuel investments that could be needed to fill short-term gaps in supply and keep prices stable.

And like a high-speed train approaching from the opposite direction, the UN’s Race to Zero campaign, a net zero policeman of sorts for more than 10,000 corporate, regional and national climate pledges, has increased pressure on members to ditch oil, gas and coal.

In recent weeks we’ve been writing about challenges the alliances face in decarbonising in line with Race to Zero’s criteria. The Net-Zero Asset Owner Alliance is among the UN-affiliated groups grappling with how far and fast to move away from fossil fuel assets, as its chair Günther Thallinger told me.

For more hot takes on how to integrate ESG factors into investing decisions, tune in to the two-day Asian edition of our Moral Money Summit, which kicked off today in Singapore. (Kenza Bryan)

Asset owners weigh how to cut carbon amid energy crisis

The Net-Zero Asset Owner Alliance (AOA) has a stronger position on excluding thermal coal investments than other net zero financial sector groups and was also the first of these to launch in September 2019. Its formation coincided with the establishment of the UN’s Race to Zero initiative, which the AOA immediately joined, adopting the Race to Zero’s carbon-slashing criteria as its own.

So it is revealing that, amid the turmoil of today’s energy wars, the AOA is assessing whether it should remain part of the UN alliance at all.

Its 74 members with $10.6tn under management include some of the world’s biggest insurers and investment managers, such as Axa, Munich Re and M&G.

They have been given until the end of the year to comment on the benefits and drawbacks of aligning with the Race to Zero’s tough new criteria that it outlined in June. The AOA says that remaining part of the UN group is in its interest — but also notes that it must balance this with remaining independent and in charge of its own membership requirements. 

“We have to clarify how we deal with the topic of falls in energy [output],” its chair Günther Thallinger told Moral Money. As well as leading the alliance, Thallinger, an ex-McKinsey consultant, is chair of German insurer Allianz’s sustainability board and a member of a UN expert group on corporate and regional net zero commitments that was launched earlier this year.

“We clearly have players who state they are implementing 1.5 degree, low, no overshoot transition plans, and at the same point in time, argue how they are investing in new oil and gas,” he said, in reference to pledges made by businesses across the financial sector. “There is really a diverging communication [and action] discrepancy that we now need to work on.”

Climate finance alliances are assessing how closely to follow the UN criteria within their own voluntary guidance, which is tailored to groups of bankers, asset managers, insurers and asset owners.

Among the more contentious asks by the UN Race to Zero body are a ban on new coal financing, a phaseout of most fossil fuel investments and setting near-term decarbonisation targets for 2030.

This has sparked speculation that many members of the sectoral groups within the Glasgow Financial Alliance for Net Zero, spearheaded by ex-Bank of England governor Mark Carney, could struggle to meet the rules. Bankers in the US have privately expressed concern about being asked to publish estimates of the emissions attributable to their financing work.

The AOA already asks its members to commit to eliminating all net carbon emissions by 2050 and to cut portfolio-linked gross emissions by at least 49 per cent by 2030. It has also called on the European Commission to widen the scope of mandatory reporting in the region to include non-carbon emissions such as methane.

Most oil and gas industry players will probably be covered by the alliance’s updated position, which will be announced in the next few months, according to Thallinger. It is also reviewing recommendations around target-setting and is undertaking a performance review of its members and updating its stance on coal.

Scaling challenges

Things could become more complicated as the AOA tries to attract a wider scope of members.

“For players who are headquartered in Europe, it is really a different story than for players who are headquartered, let’s say, in Japan, Africa, Australia or the US,” Gunther said, in reference to differing regulatory approaches to sustainable investing. The EU’s emphasis on promoting climate finance disclosures and decarbonisation means it is considered unlikely to stand in the way of net zero alliances by citing antitrust or fiduciary duty barriers.

Net zero alliances have been caught in crossfire from the culture wars in the US. A letter from Republican state attorneys-general in August accusing BlackRock of forcing the phaseout of fossil fuels and increasing energy prices repeatedly refers to the influence of GFANZ, an umbrella group for alliances including the AOA.

The AOA has four members in the US, including the California Public Employees’ Retirement System, which will probably be watching these developments carefully.

Membership of GFANZ, Race to Zero or a net zero sectoral alliance is by no means a guarantee of hostility towards fossil fuels. Just one in four GFANZ members has any policy restricting coal developers according to analysis by Capital Monitor, which used data from NGO Reclaim Finance.

This is partly because there are wide differences in interpretation of the rules governing the framework. The Net Zero Asset Manager’s initiative, for example, lets members choose between different frameworks on fossil fuels, including two which do not mandate shunning all new coal financing.

Remco Fischer, climate lead for the UN Environment programme finance initiative, which convenes the bankers, insurers and asset owners’ alliance, recently said it was unlikely alliances would need to make changes to their core commitments in response to the new Race to Zero rules, and raised the possibility that its no new coal ruling — mentioned in an interpretation guide to the criteria — could be seen as optional.

Quality assurances

For Thallinger, the job of providing quality assurances on net zero pledges “cannot be delegated upwards to Race to Zero” because of the overwhelming number of investors and businesses that come under the UN body’s remit, from steel producers to insurers.

“For the credibility mechanism, the overall governance part, there needs to be, we believe, something that is independent,” Thallinger said, referring to the AOA’s own secretariat, which is convened by the UN and the Principles for Responsible Investment, and reports annually on the progress of its members. “In order to see whether a certain form of press report is credible, you to need to be an expert in the field,” he added.

Simon and I recently reported alongside other colleagues that a new accountability body at the UN could soon be able to examine external complaints about breaches of Race to Zero rules. This means individual banks as well as financial institutions that refuse to phase out fossil fuels could lose hard-won credibility on core climate pledges if they are shown to be out of step.

Allianz and the AOA have both contributed to the OS Climate Data initiative, an open source library of data points including on financial institutions’ emissions data. A similarly broad data initiative by UN special climate envoy Michael Bloomberg and French president Emmanuel Macron could also help shine a light on misdemeanours. (Kenza Bryan)

Peace declared in Tuscany’s big ESG fight

In May we flagged the ESG showdown between Belgian chemicals company Solvay and London-based activist hedge fund Bluebell Capital Partners, which has been pursuing Solvay over the sea pollution from its soda ash factory in western Italy.

The dispute between the two sides was becoming increasingly acrimonious, with Bluebell condemning Solvay for creating an “open landfill”, while the company accused the fund of lacking relevant expertise.

Yesterday, peace abruptly broke out between the two. In a joint press release, Solvay said it would now aim to reduce the limestone residue entering the sea from its Tuscan plant to 20 per cent below the legal maximum by 2030, and bring it to zero by 2050. That prompted Bluebell co-founder Giuseppe Bivona to declare an end to hostilities, cheering “huge steps forward”.

Solvay has resisted the idea that it was pushed into this move by the activist shareholder campaign. Chief executive Ilham Kadri told our colleague Peggy Hollinger that Solvay’s researchers have just made a scientific breakthrough that could enable its factories to operate with much less pollution. The company now plans to invest about €15mn ($14.9mn) in gradually rolling out this system across its factories.

That’s a pretty modest sum for a company that booked €10bn in revenue last year. Solvay has been careful to couch its pollution-cutting plans in the language of goals and ambitions, rather than hard commitments. And even if it hits its targets, its Italian plant will continue to spew limestone residue into the Mediterranean for nearly three more decades.

But when I spoke to Bivona yesterday, he told me that this was not the point. For all Solvay’s protestations, he was adamant that Bluebell had forced the company’s hand. And by waging a successful campaign with just a single share of Solvay stock, he said, Bluebell had provided a blueprint for other activist investors, and added to the pressure on big asset managers to speak out on ESG issues.

“This is about how the financial community can play a constructive role,” Bivona said. “If we can do this with one share, imagine what BlackRock can do.” (Simon Mundy)

Smart read

• Billionaire former New York mayor Mike Bloomberg has hit out at Republican states’ moves against ESG investing, in a sharply worded column for his eponymous news service. Material ESG factors need to be considered by any serious investor, Bloomberg writes. “That’s investing 101, and either Republican critics of ESG don’t understand it, or they are catering to the interests of fossil fuel companies. It may well be both.”