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Global Perspectives
ESG COP - Out?
With COP 27 taking place in Sharm el Sheikh from the 6th to the 18th of November, global attention is shifting to the subject of ESG and climate action.
With climate lobby activists ramping up publicity ahead of the global gathering of countries, pressure is building for participants to beef up their report cards, whilst the activist lobby is determined to hold the politician's feet to the fire.
A decade of low growth induced by the global financial crisis was followed by the worldwide pandemic, the re-emergence of inflation, and now energy and food security challenges arising from the Russian invasion of Ukraine. These factors have combined to push climate change down the public policy agenda.
Tensions created by strained national budgets and a renewed focus on fossil fuel security have created a vortex of cross currents. In the US, Republican politicians were recently accused of ‘weaponising’ ESG, as they pulled over $1bn of funds from Blackrock, amid a chorus of criticism of the 'climate cartels'.
Things have gotten to such a pitch that the authorities in Texas have drawn up a list of banned companies that they say are acting against the interests of oil and gas energy producers. West Virginia and Idaho are set to follow suit. The real-world consequences are that retirement and municipal funds with connections to these States are likely to pull their funds out of institutions and funds they deem to be hostile to their interests.
A dozen states have passed anti-ESG legislation or implemented a no-ESG investment strategy. Given that the combined value governed or administered by these states amounts to $1.18 trn of investable assets, it's clear this is a severe challenge to the ESG engine.
Add to this a rising trend of action by regulators in the US, UK and Europe, levelling accusations of greenwashing. A move to challenge the naming protocols around funds is underway, with the SEC's Gary Gensler again leading the charge. But he is not alone; ESMA, the European Securities and Markets Regulator, have voiced concerns over the use of labels such as 'sustainable' or 'impact' with allegedly too little by way of substance sitting behind the claim.
The latest salvo has come from Britain's Financial Conduct Authority (FCA), who announced a substantive consultation on new rules to tackle greenwashing.
The FCA consultation contains the following statements:
"There has been growth in the number of investment products marketed as 'green' or making wider sustainability claims. Exaggerated, misleading or unsubstantiated claims about ESG credentials damage confidence in these products. The FCA wants to ensure that consumers and firms can trust that products have the sustainability characteristics they claim to have."
"Greenwashing misleads consumers and erodes trust in all ESG products. Consumers must be confident when products claim to be more sustainable than they are. Our proposed rules will help consumers and firms build trust in this sector. This supports investment in solutions to some of the world's biggest ESG challenges. This places the UK at the forefront of sustainable investment internationally. We are raising the bar by setting robust regulatory standards to protect consumers in line with our wider FCA strategy."
The FCA proposes introducing sustainable investment product labels that will give consumers the confidence to choose the right products. There will be three categories – including one for products improving their sustainability over time – underpinned by objective criteria.
The FCA will introduce restrictions on how particular sustainability-related terms – such as 'ESG', 'green' or 'sustainable' – can be used in product names and marketing for products which don't qualify for the sustainable investment labels. It is also proposing a more general anti-greenwashing rule covering all regulated firms. It is intended this will help avoid misleading marketing of products.
Further Consumer-facing disclosures to help consumers understand the key sustainability-related features of an investment product are also in train – this includes disclosing investments that a consumer may not expect to be held in the product.
New and more detailed disclosures, suitable for institutional investors or retail investors that want to know more, will be mandated. And there will be new requirements for distributors of products, such as investment platforms, to ensure that the labels and consumer-facing disclosures are accessible and clear to consumers.
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The FCA are just one of the authorities busy on the ESG front. In the EU, a raft of directives is making its way through the system, with the Corporate Sustainability Reporting Directive following hard on the heels of the Sustainable Finance Disclosure regulations.
Previously 'no regret' moves by banks and asset managers are now floundering in controversy as institutions try to escape the ire of legislators and regulators for doing too much or too little.
Mark Carney, former Bank of England Governor and champion of sustainable investment, has seen defections from Gfanz, the private sector alliance he founded to tackle climate change. Other group members voiced concerns over the high compliance costs and the threat of legal action.
Private capital has readily adopted the ESG mantra in recent years. Many, if not most Private Equity managers consider ESG factors, with a good number running 'green teams' and sophisticated screening processes as part of their deal team due diligence work. The difference with Private Equity is that it can more readily tailor mandates to meet the requirements of large LPs or Co-investment partners. And private capital does not have the 'pooling' problem to the same degree as public funds.
Despite the political and regulatory headwinds, a considerable proportion of the asset management industry remains committed to ESG values, including climate change. Product design, labelling, and monitoring require detailed attention when observed through the ESG lens. If a fund claims to have ESG characteristics, it had better be sure it can back up that assertion with solid evidence and high-quality data.
What would help is a widespread adoption of model international standards as a clear basis for regulatory measures at the national level. The EU, UK, and US follow conceptually similar paths but differ at the granular level. It would help greatly if the regulatory community could harmonise standards with an emerging universal consensus.
Given the importance of financial services to many small state economies, the engagement of IFCs and the many firms that operate in and through them are critical in facilitating the direction of sustainable capital and a meaningful response to the call for climate action. IFCs and their firms will need to closely monitor developments as a nascent challenge to ESG emerges.
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Global Perspectives provides regular, on-point commentary on relevant topics in a pithy and accessible way. Our observations and points of view are based on listening hard to clients global needs, priorities and concerns. We draw on insights from every area of our business and collaborate to deliver this global thinking; something that clients tell us is distinctive and sets us apart. If you'd like to find out more, please get in touch.
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About Mourant
Mourant is a law firm-led, professional services business with over 60 years' experience in the financial services sector. We advise on the laws of the British Virgin Islands, the Cayman Islands, Guernsey, Jersey and Luxembourg and provide specialist entity management, governance, regulatory and consulting services.
