(Bloomberg) -- The asset-management arm of Deutsche Bank AG says it’s seeing a clear jump in demand for ESG services from institutional investors, amid growing regulatory pressure to screen for environmental, social and governance risks.
Over the past year, there’s been an increase in the extent to which pension funds have expressed a desire to “talk about ESG and to invest in ESG products, and even to consider ESG risk in their investments,” Dennis Haensel, the head of ESG advisory at DWS Group, said in an interview.
In the first half of 2024, DWS has seen as many as “70 client interactions in the institutional world globally,” he said. The asset manager also has seen a doubling in the ESG filters it’s being asked to apply to services for institutional investors, he said. The development is global, though concentrated in Europe, Haensel said.
In Europe, investors now face requirements to measure the negative impact of their investment strategies and exposures, via metrics called Principle Adverse Impact indicators. Such disclosures may now become mandatory for a larger group of investors, according to a July report by the European Parliament’s policy department.
Against that backdrop, Haensel says that more and more pension funds are now choosing to comply. “They also want to offer pension products that promote sustainability factors,” he said.
In general, the trend in Europe “is definitely” driven by regulations, he said.
A recent survey by data provider Preqin found that 60% of limited partners — a group that spans pensions funds, venture capitalists and private equity investors — say they either would or have turned down attractive investment opportunities because of concerns over ESG standards.
The “second huge building block” driving ESG after regulations “is really net zero alignment,” which translates into carbon reduction and lower exposure to fossil fuels in portfolios, Haensel said. He also says that “uncertainty around the energy crisis” has eased and “now this lag in strategic implementation of ESG is over.”
For now, though, almost 90% of occupational pension funds don’t conduct environmental stress testing as part of risk management, according to a European Commission review of climate risks to financial stability. And in a scenario that tested for a disorderly transition to renewable energy sources from fossil fuels, the value of fund assets would fall as much as €255 billion, which would only be partly offset by lower liabilities, the June report said.
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NEWS ROUNDUP
Hard Line | Europe’s financial markets watchdog said companies shouldn’t anticipate that the complexity of new ESG reporting requirements will excuse sloppy disclosures.
Cars | The European Union’s largest political party is set to urge the bloc to revise its car emissions rules in order to keep the combustion engine alive past 2035 as it aims to boost industrial competitiveness during the ambitious green shift.
Deforestation | The EU should postpone a regulation to tackle deforestation beyond its borders and use the time for a revision that would reduce the bureaucratic burden, according to senior European Parliament member Peter Liese.
SBTi | The world’s largest verifier of corporate climate goals risks lasting reputational damage unless it works quickly to address a string of missteps, according to the council of technical experts advising it.
Methane | Lawmakers from the US and the EU are calling for the International Energy Agency to do more to encourage its members to crack down on global emissions of methane, one of the most potent greenhouse gases.
Wall Street | Wall Street is poised to win more battles with the US Securities and Exchange Commission after the Supreme Court weakened a decades-old legal doctrine that gave federal agencies expansive leeway to interpret the law.
Coal Pact | South Africa is seeking to alter the terms of a landmark agreement under which it promised to cut its reliance on coal in exchange for access to financing
Batteries | Europe is running out of time and money in its ambition to become a hub for electric-vehicle batteries.
Germany | Germany is set to fall far short of its climate obligations for sectors like transport and buildings that it risks triggering a damaging race for carbon credits across the EU.
Offsets | The market for carbon credits is facing a renewed wave of opposition as climate activists deliver a fresh warning to companies and governments not to use such financial instruments to offset their emissions.
Litigation | Companies accused of misrepresenting their progress on tackling climate change are increasingly finding themselves the target of litigants, as activist groups look to hold some of the world’s worst polluters to account.
SFDR | The EU’s Sustainability-Related Financial Disclosures Regulation should be revised to support transition strategies and provide clear labels for ESG products, according to the EU Parliament’s economic policy department.
NGFS | The Network for Greening the Financial System is advising central banks, supervisors and financial institutions to closely monitor nature-related litigation amid growth in cases targeted at protecting planetary boundaries and nature itself.
Insurance | The European Insurance and Occupational Pensions Authority warned that financial stability is at risk from climate change if more isn’t done to close insurance protection gaps.
Projects | The European Commission approved a €10.8 billion ($11.7 billion) French offshore wind energy package; a €3 billion Swedish plan to support carbon capture and storage projects; and a €158 million Dutch plan to back investments for the production of equipment necessary to foster the transition to a net-zero economy.
BLOOMBERG RESEARCH
UK Election | Labour’s landslide victory in the UK election has shaken up the political landscape, but the country’s energy sector is likely to see fewer shock waves. (BloombergNEF)
Offsets | After receiving a major public endorsement from the federal government, the voluntary carbon offset market seemed poised for takeoff across US states. Yet while Alaska has doubled down on this endorsement by green lighting new projects across the state, the market was met with more sobering news related to offsetting enforcement in California. (BloombergNEF)
US Election | As the 2024 US election heats up, President Joe Biden’s goal of slashing the country’s economy-wide greenhouse-gas emissions at least 50% by 2030 from a 2005 baseline is increasingly coming under pressure. (BloombergNEF)
California | The California Department of Finance introduced Budget Trailer Bill Language on June 28 that would push back the start of the state’s climate-disclosure plan by two years to 2027. The proposal is consistent with Governor Gavin Newsom’s initial concerns that the bill’s implementation deadlines weren’t feasible. (Bloomberg Intelligence)
Expected Timeline
Chevron Ruling | The Supreme Court’s decision to overturn the Chevron rule may widen the climate gap between low-impact leaders Exxon Mobil Corp. and Constellation Energy Corp. and their higher-impact peers. Challenges to the EPA’s methane rule and carbon capture might curb cleaner investments and potentially put US 2035 climate targets at risk. (Bloomberg Intelligence)
US Oil and Gas Production, Methane Output (2023)
OFF THE SHELF
ABC | In one sense, defining ESG is easy — it’s an approach to finance and investing focused on managing risks from environmental factors, social issues and questions of corporate governance. Sorting out the differences between ESG and similar, sometimes overlapping strategies is harder, in part because the term has come to mean different things to different people. The widespread use of ESG factors has fed skepticism that the approach is nothing more than a marketing gimmick, fueling a backlash and a regulatory crackdown.
‘Greenwashing’ | Over the last decade, companies and investors have come to pay more attention to environmental concerns, often with a goal of offering “green” products or making “green” investments. But the companion of green is often what’s known as greenwashing. In some countries, regulators are trying to clean up the field, launching investigations and levying fines. They have the backing of some advocates of environmentally minded investing worried that greenwashing’s taint may undermine the field.
Central Banks | Some of the world’s largest central banks are joining the fight against climate change. Though melting glaciers may be a huge leap from monetary policy, policymakers say they must respond to threats that have the potential to disrupt the global economy. Some critics say climate policy is better left to politicians, particularly in countries where central banks are hemmed in by explicit government mandates.
Taxonomies | Floods, droughts and food shortages are just some of the effects of climate change, as exploitation and corruption drive social injustice around the world. Governments tackling these issues are realizing that to solve them, they need to first define and measure them. Some are turning to so-called taxonomies that establish which economic practices and products are harmful to the planet and which aren’t. The idea is the price of goods and services must reflect the human and environmental cost of both production and disposal, which in turn would spur much-needed change. But designing a code is fiendishly difficult.
Double Materiality | Should a business or an investment fund care only about making money, or should it also worry about the environment, social justice and good governance? Can the two goals overlap? Do they already? These questions get to the heart of something called “double materiality.” While the concept has been built into new European regulations, it has yet to make significant inroads in the US — even as Wall Street behemoths like JPMorgan Chase & Co. embrace the idea. At issue is what information should be mandatory to report, and who decides?
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