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HSBC $2bn for new L&G fund, FSB TCFD out 14 Dec, climate on German G20 agenda

by Joel Kenrick

The Kenrick Chronicle round up of finance and climate change news from November is pretty full – turns out was quite a busy month. I’ve focused on four topics. First action by 1) investors and asset managers including HSBC UKPension fund's £1.85bn investment in the new LGIM Future World Fund

 promising both a climate ’tilt’ and ‘engagement with consequences’, more US AGM climate resolutions than ever, and sovereign wealth funds launch climate inquiry. In 2) carbon risk disclosure news, all eyes are on the FSB TCFD launch on 14 Dec, with an Economist preview, a new Aviva report on ‘Seeing Beyond the Tragedy of Horizons’ and ET Index’s 2016 ET Carbon Rankings3) Regulators and governments continue progress, including the German G20 presidency prioritising climate, a new International Insurance regulators forum and EU IORP2 pensions directive provisions on ESG passing. Finally a November round-up wouldn’t be complete without some 4) COP22 and US election reaction highlights, with companies and investors urging Trump not to turn back on Paris Agreement, and a new NCDi.global platform for putting words into action. 

1) INVESTORS AND ASSET MANAGERS: L&G PROMISE ENGAGEMENT WITH CONSEQUENCES

HSBC invest £1.85bn in new Legal and General Investment Management Future World Fund that incorporates a climate ‘tilt’ to address investment risks associated with climate change and an engagement ‘Climate Impact Pledge’ that excludes those who fail to meet required standards after a certain engagement period. FTfm report the move 'signals a hardening of the UK asset manager’s stance on environmental issues affecting investors’. HSBC will invest £1.85bn of its UK employees’ pension savings in the LGIM Future World fund as ‘the default equity option for its defined contribution pension scheme.’ HSBC’s UK pension scheme CIO Mark Thompson told the FT: “This fund will offer our members better risk-adjusted returns, incorporate greater climate change protection and deliver improved company engagement.” (HSBC’s UK pension scheme to invest £1.85bn in eco-friendly fund, FTfm, 7 Nov)

Meryam Omi, LGIM’s head of sustainability, said: “Companies that fail to meet the minimum environmental standards will be excluded from the Future World fund. This is a powerful message that we are sending to companies that they need to step up to meet the challenges of moving to a low-carbon economy.” LGIM are calling this approach ‘Engagement with consequences’ and set out the LGIM Climate Impact Pledge to directly engage initially with the largest companies in the oil and gas, metals and mining, electric utilities, automobiles, banks and insurance, and food retail and distribution sectors. The largest companies will be ranked on factors including whether they recognise impact of climate change, transparency, board governance, strategy, brand / reputation and public policy. Those that fail to meet their minimum thresholds will be divested. (More details are at www.lgim.com/futurefund and LGIM launches multi-factor fund that also addresses climate change risk; HSBC Bank UK Pension Scheme first to adopt, LGIM Press Release, 7 Nov)

The fund was welcomed by UKChancellor Philip Hammond who said “Three of Britain’s biggest companies have come together for the launch of this groundbreaking new fund, which is a testament to our status as the world’s leading financial centre.” The Guardian report that 'The fund will invest in firms in the FTSE’s new Climate Balanced Factor Index, which delivered a 15.94% return between September 2011 and October 2016. This return meant it outperformed the 15.26% rise in the FTSE All World Index, which has no weighting based on climate criteria.’ (L&G launches fund to invest in new FTSE climate index, Guardian, 7 Nov)

Investors plan a record number of climate change resolutions at US company annual meetings in 2017, report Reuters. 'Based on filings so far, U.S. companies are on track to face roughly 200 resolutions on climate matters at their shareholder meetings next year, according to Rob Berridge‘ of Ceres. 'There were 174 such resolutions this year, Berridge said, compared with 167 in 2015 and 148 in 2014. Many have been directed at big oil and gas companies, though other sectors have also been targeted, including technology and retail.’ (More company climate votes ahead, as Trump may loosen energy rules, Reuters, 25 Nov)

Sovereign wealth funds launch climate inquiry with the International Forum of Sovereign Wealth Funds (IFSWF) launching a working group on the investment implications of climate change, Responsible Investor report (Sovereign wealth fund body launches study group on climate change

RI ($), 22 Nov) The annual meeting of  in New Zealand 'agreed to explore the investment implications for sovereign wealth funds of the global commitment to curb greenhouse gas emissions. The Forum will convene a working group to introduce members to the major questions raised by this new and important challenge. Over the next year they will identify the most relevant and pressing challenges and opportunities with a view to establishing a long-term programme on this subject. (Sovereign wealth funds focus on governance and investment risk in a climate of uncertainty, IFSWF: Press Release, 10 Nov). 

Aviva considers coal divestment: the insurance and asset management company 'might consider a potential divestment action with regard to a pool of coal-exposed Asian companies, mainly in China and South Korea’ according to its latest climate change strategy update. Of the '40 companies with more than 30% in revenues earned from coal mining or coal power generation activity’ identified in July 2015 Aviva have undertaken ‘meaningful engagement’ with the majority of them, but eight have not responded. In addition two companies have been '“marked for divestment” due to their “further planned investment in coal capacity”. Aviva … will continue its attempts to engage with the unresponsive companies and deferred any divestment decision till the first quarter of 2017.’ (Aviva marks out two coal firms for divestment and keeps eight on watch, Responsible Investor ($), 23 Nov)

The Rockefeller family fund vs Exxon Mobil is explained in an in-depth set of two articles by the Fund’s President and Director in the New York Review of Books (The Rockefeller Family Fund vs. Exxon, 8 Dec and The Rockefeller Family Fund Takes on ExxonMobil ($), 22 Dec). Exxon Mobil are ‘accusing the Rockefeller family of masterminding a conspiracy against it’, writes the New York Times. 'Yet where Exxon Mobil and its allies see a tangled conspiracy, members of the Rockefeller family see an effort to use the vast wealth generated by fossil fuels to combat the damage done by fossil fuels. Now the family has taken the unusual step of going public to state its case in a rare interview and in a two-part essay in The New York Review of Books that lays out in detail Exxon Mobil’s research and funding of climate denial. David Kaiser, an author of the essay and a fifth-generation Rockefeller, said dryly, “The family generally doesn’t do public things in this way.” (Exxon Mobil Accuses the Rockefellers of a Climate Conspiracy, New York Times, 21 Nov)

2) TASK FORCE ON CLIMATE-RELATED FINANCIAL DISCLOSURE REPORT DUE 14 DECEMBER 

The recommendations of the FSB Task Force on Climate-related Financial Disclosures (FSB TCFD) report will be launched on 14 December.

The Economist: Disclosure could give oil companies chance to avoid fate of European utilities. The Economist previews the Task Force report, writing that there has been 'a change in attitude towards oil companies by governments, financial regulators and investors that has become clearer since the Paris climate-change agreement last December.’ Mark Carney’s speech setting out the ’transition risks’ that could jeopardise financial stability is described as a ‘bombshell on the oil industry’ and left oil companies 'incensed by the idea that they may be the next Lehman Brothers.' Over the last year 'activist shareholders have had unprecedented support from mainstream investors for their efforts to force oil companies to explain how their businesses would be changed by full-scale decarbonisation.

Task Force member Mark Lewis of Barclays tells the Economist that if 'if measures to stop global warming are fully implemented, oil-company revenues could fall by more than $22trn over the next 25 years, more than twice the predicted decline for the gas and coal industries combined. Mr Lewis sees a cautionary tale in the woes of European utilities, hit by government action to penalise coal and nuclear power. They have suffered such a devastating collapse in their share prices in recent years that some of the biggest, including Germany’s E.ON, have been forced to split off their fossil-fuel businesses. If the big oil companies are encouraged to discuss climate-change risks openly, they will have a better chance of avoiding such a fate.’ (Taken to task: how to deal with worries about stranded assets, The Economist, 26 Nov)

Aviva: Six recommendations to drive uptake of TCFD recommendations: Aviva’s Steve Waygood and Stephanie Maier have published ‘Seeing Beyond the Tragedy of Horizons’ (pdf), setting out their proposals for six key elements to drive success for the uptake of the TCFD recommendations and ‘contribute to the management of a rapid yet stable transition to a lower carbon economy’. Steve Waygood is a high profile member of the FSB TCFD but the report represents the views of the authors and has "not been written on behalf of either the FSB or the TCFD.”

Responsible Investor focus on the authors proposal for longer term disclosure through public league tables of corporate climate risk disclosure. The report argues that 'concurrent with the conclusions of the TCFD, the Carbon Disclosure Standards Board (CDSB), working closely with CDP, the Global Reporting Initiative, the International Integrated Reporting Council, the Sustainability Accounting Standards Board, and the World Business Council on Sustainable Development (WBCSD) should work together to build a multi-stakeholder initiative to assemble best practice corporate disclosure benchmarks.' (Aviva calls for CDP, SASB and others to form ‘multi-stakeholder initiative on climate disclosure, Responsible Investor ($), 30 Nov).

The other 5 elements the authors propose are:

  • Longer academic horizons: promoting an increase in climate risk literacy among key market participants including in MBA and chartered analyst and find manager syllabus. 
  • Longer term corporate horizons: promoting a seismic shift in climate risk governance by enhancing the G20/OECD Principles of Corporate Governance to clarify that governing long terms risks such as climate change is a board function.
  • Longer term horizons by financial regulators: promoting climate risk accounting through the International Organisation for Security Commissions (IOSCO) coordinating more consistent international listing rules on disclosures of emissions by energy intensive companies, and the International Accounting Standards Board (IASB) to standardise disclosure of embedded carbon in the physical reserves of oil, gas and coal companies. 
  • Longer term horizons by institutional investment intermediaries: integrating climate risk into investment including by the global Credit Rating Agencies updating their published assessment methodology on how they factor in physical, transition and liability climate risks, by sell side brokers using the increased availability of two degree scenarios to provide transition price forecasts in addition to target price they consider likely, and by strengthening G20-OECD guidance that fiduciary duty is focused on the long-term explicitly including climate risk.  
  • Longer term fund management: the development of climate risk aware asset management system standards by the International Organisation for Standardisation (ISO) that include climate risk across all investments, the role of owner engagement and stewardship, and shaped by a technical working group including asset owners and managers. 

Ahead of COP22 Stephanie Maier also wrote that investors should consider how ‘transition risk’ impacts on their portfolio, and welcoming the TCFD process as way of enabling investors to 'develop a comprehensive picture of their portfolio companies’ climate-related exposures.' (Stephanie Maier: The transition to a low-carbon economy brings investment risks and opportunities, Responsible Investor ($), 17 Nov)

ET Index: Largest companies can save same as Japan emissionsaccording to the 2016 ET Carbon Rankings report published today. The report ‘shows that nearly half of the largest listed companies have disclosed their emissions, and that the dirtiest 50% have the potential to save 1.4 billion tonnes of CO2’ reported The Actuary (Largest companies can save as much CO2 as Japan emits in a year, 5 Dec). 'Out of the word’s 800 largest listed companies, 363 have fully disclosed their direct emissions from operations, seen as the first step to setting targets and putting carbon management initiatives in place. These disclosers have increased their carbon efficiency by an average 15% from 2015 to 2016, saving 360 million tonnes of CO2, equivalent to the annual emissions of Turkey.’

The report from ET Index shows there remains 'a huge range of carbon efficiency performance even within particular sectors. In the chemicals industry, for example, Malaysia's Petronas Chemicals Group emits 13,961 tonnes of carbon (tCO2) for every million dollars of revenue, making the firm 51 times less carbon-efficient than the industry average, and 481 times less than the industry leader - the UK’s Johnson Matthey.’ (Energy efficiency: 'Champions and dunces' exist in every industry, Edie, 5 Dec). The report was covered today in Business Green (Avoiding carbon risk already better for the pocket, ranking reveals ($)), France’s Les Echo (Un nouvel outil pour distinguer l'efficacité carbone des enterprises), and Germany’s Handelsblatt (Das Große Reinemachen ($) & Study: World’s Largest Companies Make CO2 Gains).

3) REGULATORS AND GOVERNMENTS: GERMANY PRIORITISES CLIMATE CHANGE FOR 2017 G20 PRESIDENCY

The German Presidency of the G20 will include transparency of financial market risks resulting from environmental risks. The Presidency began on December 1st, with priorities set out in a letter from Angela Merkel (Priorities of the 2017 G20 Presidency, 1 Dec 2016). Climate Home report that: 'Securing the world against the challenges posed by climate change will be one of the central pillars of its G20 presidency', the German government has said. On Wednesday it released its first policy guide to the Hamburg summit, which is scheduled for July 2017. That statement listed global warming among only a few headline issues it wants discussed. “One main concern is to make progress on realising the goals of the 2030 Agenda for Sustainable Development and the Paris Agreement on climate change" (Germany makes climate change G20 priority, 1 Dec).

Under the Building Resilience theme the document says: 'The G20 regards it as important to continue the activities on green finance launched under the Chinese Presidency in 2016. The focus will be on making the financial market risks resulting from environmental risks more transparent and on presenting options to reduce them.' (p.6)

Under the Improving Sustainability theme the first section is on 'Protecting the climate and advancing sustainable energy supply' (p. 8) including reiteration that: 'A secure, economically efficient and greenhouse gas neutral energy supply accessible to everyone is a fundamental prerequisite for economic growth and prosperity, and one of the main priorities of the G20.'

Sustainable Insurance Forum launched for international regulators and supervisors: the new network was launched in San Francisco and co-hosted by UN Environment and the California Insurance Commissioner Dave Jones. The network includes the UK’s Prudential Regulation Authority – whose report 'The impact of climate change on the UK insurance sector’ (pdf) was published alongside Mark Carney’s September 2015 speech – and the California’s Insurance Commissioner Dave Jones, who has called for insurance industry to divest from thermal coal, as well as Brazil, France, Ghana, Jamaica, Morocco, the Netherlands and Singapore regulators. Last year the UNEP Inquiry and Principles for Sustainable Insurance (PSI) Initiative published ‘Insurance 2030: Harnessing Insurance for Sustainable Development (pdf). For more see Press Release: International insurance regulators establish forum to address sustainability issues, UNEP, 5 Dec)

European IORP2 Pensions Directive ESG provisions approved: The European Parliament has ‘approved the revised European pension fund directive, enshrining environmental, social and governance provisions into European Union law in what is being hailed as a “landmark moment” and a “breakthrough”', reported Responsible Investor (Revised European pension fund directive with ESG provisions approvedRI ($), 24 Nov). ShareAction has urged the UK to transpose the new rules into UK law despite Brexit, with CEO Catherine Howarth urging the government to 'clarify its intentions and to transpose the parts of the text on ESG and transparency, and members’ rights to information.”'

4) COP22 AND US ELECTION REACTION: WORLD TO TRUMP – DON’T ABANDON GLOBAL CLIMATE DEAL

365 companies tell Trump: failure to build a low-carbon economy puts America prosperity at risk: 'Hundreds of American companies, including Mars, Nike, Levi Strauss and Starbucks, have urged President-elect Donald J. Trump not to abandon the Paris climate deal, saying a failure by the United States to build a clean economy endangers American prosperity reported the New York Times (U.S. Companies to Trump: Don’t Abandon Global Climate DealNYT, 16 Nov). The FT reported 'Matt Patsky, chief executive of Trillium Asset Management, the US investment firm, said the business community’s support for policies to address global warming “cannot be reversed and cannot be ignored by the Trump administration. That train has left the station and to stand in its way is folly”'(Big businesses call on Trump to keep faith with Paris climate dealFinancial Times, 16 Nov). The statement presented at at the UN climate talks in Marrakesh said: "Failure to build a low-carbon economy puts American prosperity at risk. But the right action now will create jobs and boost U.S. competitiveness. Implementing the Paris Climate Agreement will enable and encourage businesses and investors to turn the billions of dollars in existing low-carbon investments into the trillions of dollars the world needs to bring clean energy prosperity to all.” (Business calls for Trump, world leaders to support Paris climate pactReuters, 16 Nov). CNN reported that 'If President-elect Donald Trump is going to go soft on climate change regulations, big business is going to put up a big stink.’ (Starbucks, Gap, Nike and others demand Trump stand by climate dealCNN Money, Nov 17). The statement and full list of signatories is at lowcarbonusa.org

Investors insisted the US election didn’t change the fundamentals of the climate transition, even if most were surprised and thought could lead to a lack of leadership at US Federal level. IIGCC chief executive Stephanie Pfeifer said the changes towards green growth were ‘irreversible’ and that 'the urgency implied by the latest science and the economic imperative for action will continue to inform growing efforts by investors to manage climate risk assertively and to seize the opportunities presented by the need to secure a swift and smooth transition to a low-carbon economy.' (US election: Trump win raises questions about low-carbon momentum, IPE, 9 Nov), (Trump win stokes fears over climate change goals, hits renewable stocks, Reuters, 9 Nov). Ceres and IIGCC also hosted a press conference at COP22 three days after the election ‘Beyond Paris and the US election: investor perspectives’ at COP22 with Pete Grannis, First Deputy Comptroller, New York State Comptroller’s Office, Gerald Cartigny, CIO, MN (the third largest pension asset manager in the Netherlands) and Anthony Hobley, CEO, Carbon Tracker Initiative. You can watch the event here.

French PM calls for tax on imports from non-Paris Agreement countries, echoing a call previously made by Nicolas Sarkozy. Reuters reported that French Prime Minister Manuel Valls, who has now entered the race to be the centre-left candidate for President, wrote in Les Echo 'that Europe should take action to prevent companies from moving to countries that spurn the Paris Agreement. "If for that Europe needs to tax imports from countries that don't want to implement the Paris agreement, well then, let's do it.” (French PM urges taxes on imports from countries snubbing climate pact, Reuters, 23 Nov)

‘Growth for renewables and other forms of clean energy will continue to outstrip fossil fuels' in 2017, and despite the election of President Trump the energy transition at a global level will continue to ‘roll on incrementally’ the Economist Intelligence Unit predict in a new report. (Economist Intelligence Unit: Clean energy transition will not be ‘trumped’, Business Green ($), 29 Nov)

City mayors have announced new plans to tackle air pollution at the annual C40 Cities Mayor’s summit. Mayors of Paris, Mexico City, Madrid an Athens announced that by the mid-2020s they would phase out cars and tricks powered by diesel engines’ report Climate Home (Mayors signal desire to fight climate change at city level, 1 Dec)

NDCi.GLOBAL new portal launched for professionals working to finance and implement the Paris climate commitments: the site, launched ahead of COP22, is run by Tessa Tennant and Ian Callaghan. Early articles include interviews with Amal Lee Amin, Chief of the Inter-American Development Bank (IDB) Climate Change Division on a new ‘one stop shop’ for NDC Finance in Latin America and the Caribbean,  Sagarika Chatterjee of PRI on how institutional investors are aligning with climate and country goals, Andrew Pidden of Deutsche AM on how its new GCF-backed programme will crowd in private investment to offgrid and mini-grid energy access in Africa, and preview of Bloomberg New Energy Finance’s new ClimateScope 2016 update. You can follow them on FacebookLinkedIn and Twitter.

Right that’s about enough for one month. If there is anything I’ve missed out – that wasn’t in my update of 23 November on the oil and gas majors under investor pressure over climate risk – then please let me know. I’ll be doing a round up of the FSB TCFD reactions around the 14 December, so let me know if anything you want me to include. 

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