(Bloomberg) -- Regulators look set to reserve their harshest interventions for firms caught making misleading statements about climate strategies, according to an assessment by JPMorgan Chase & Co. analyst Jean-Xavier Hecker.
“Climate change is likely to become the ESG theme where the crackdown on greenwashing will be the hardest, given that it represents a theme where scientific knowledge is widely available and points to the need for bolder and faster action,” Hecker said in a note to clients.
The development will probably impact some of the biggest climate coalitions, including the Glasgow Financial Alliance for Net Zero, as well as the Science Based Targets initiative and Climate Action 100+, he said. These groups “are likely to face pressure to level up their standards,” he said.
(GFANZ is co-chaired by Michael Bloomberg, the founder of Bloomberg News parent Bloomberg LP.)
After years of exuberance around all things ESG, regulators across jurisdictions are collectively removing the punch bowl. As a result, financial professionals are growing considerably more circumspect around making ESG statements in general, with net-zero claims in particular triggering concerns of potential litigation.
In Europe, where environmental, social and governance regulations are furthest advanced, asset managers are in the process of downgrading tens of billions of dollars worth of funds that had tracked climate transition and Paris-aligned benchmarks, after stricter guidance from the European Union. As a result, fund bosses are no longer comfortable applying the EU’s top ESG designation to funds that track such benchmarks.
“We expect anti-greenwashing actions to go beyond disclosures to also include an assessment of the alignment between the fund’s stated investment philosophy and the final investment decisions,” Hecker said. He highlighted recent guidance from the European Securities and Markets Authority that sets minimum thresholds for ESG and sustainability claims as a further tightening of the screws on the industry.
Overall, the development in the EU means national regulators “may engage with fund managers by requiring explanations and- or documentation to validate the composition of their portfolio,” which in the JPMorgan analyst’s view is a level of regulatory intervention in the ESG market that “would be unprecedented.”
That said, such an approach remains in line “with the more transformative approach adopted by the region on ESG regulations,” Hecker said.
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Tariffs | The US and European Union are weighing new tariffs on Chinese steel and aluminum as part of a bid to fight carbon emissions and global overcapacity, according to people familiar with the matter.
SFDR Consultation | The asset management industry has allowed itself a softer interpretation of the EU’s ESG rulebook than was intended by its authors, according to the bloc’s financial markets and services commissioner, Mairead McGuinness. Speaking to lawmakers on Monday, McGuinness said the EU is now preparing a comprehensive assessment of how market participants are adapting to the Sustainable Finance Disclosure Regulation.
Issuance Freeze | Investors will struggle to find top-ranked ESG funds after Christmas, as asset managers shy away from Europe’s strictest sustainability tag in response to tougher regulations, according to an analysis by Jefferies International Ltd. After mass downgrades of Article 9 funds, the number of new issues “will be close to zero” in the new year, Luke Sussams, head of ESG and sustainable finance for Europe at Jefferies, told Bloomberg.
Article 9 | The asset management units of Deutsche Bank AG and BNP Paribas SA are adding to a tidal wave of ESG fund downgrades, bringing industry assets under management to have been hit by such reclassifications to well over $100 billion.
ESMA Guidelines | European regulators are considering imposing tougher rules for ESG investment products amid growing concerns that fund managers are misleading investors. The European Securities and Markets Authority is considering limiting the use of ESG or sustainability-related terms in fund names. The authority said it also may introduce “quantitative thresholds” for a minimum proportion of investments needed to back up fund names, which it called “powerful” marketing tools.
Railroads | Joe Biden signed legislation imposing a deal he negotiated between freight railroads and organized labor, averting a possible strike but risking a divide with rank-and-file union workers who opposed the settlement.
IRA Moves Barclays Targets | The Inflation Reduction Act is starting to change the way bankers view their climate targets. Barclays Plc, one of Europe’s biggest coal financiers, said its analysis of the IRA has led it to commit to winding down its funding for coal in the US five years earlier than planned. Chief Executive Officer C.S. Venkatakrishnan said recently that the bank now expects to phase out its financing of thermal coal power in the US by 2030.
Transition Hurdles | It may be harder for investors to pursue so-called green transition strategies within Europe’s ESG framework than under proposed UK rules, according to analysts at Berenberg.
Ratings Gap | A lack of reliable ESG data in emerging markets is proving a boon for some of the heavyweights of global finance. Federated Hermes Ltd. is among investment firms that have spent the past year building its ESG exposure to emerging markets, where it says “artificially low” environmental, social and governance ratings have created openings for investors willing to do their own research.
Plastics | The European Union is targeting coffee pods, hotel toiletries and throwaway water bottles with a set of proposals intended to save space at landfills and reduce carbon-dioxide emissions.
Forever Chemicals | The EPA’s plan to speed Superfund cleanups of two “forever chemicals” to make polluters rather than taxpayers foot the bill raises concerns that the law’s limited flexibility will shift the burden of costs back to communities, attorneys and groups representing public services.
Fed Plan | Wall Street banks are a step closer to getting guidance from Washington on how to manage the risks that a warming planet might pose to their operations.
Meta Fine | Meta Platforms Inc. was slapped with a €265 million ($277 million) fine for failing to prevent the leak of the personal data of more than half a billion users of its Facebook service.
Labor Department Ruling | Workplace retirement plan asset managers stand to gain more regulatory freedom under the Biden administration’s new approach to 401(k) climate change investing, even though the regulation’s immediate effects on actual plan offerings may be less dramatic. A new US Labor Department rule announced last week will let employers consider environmental, social and corporate governance factors when choosing and monitoring the investments their workers use to save for retirement.
Gas Price Cap | The European Commission proposed an emergency brake on natural gas prices way above current levels, as it seeks to contain the economic damage from Russia’s tightening squeeze on energy supplies.
Russian Oil Price Cap | The EU agreed to put a price cap on Russian oil at $60 a barrel, paving the way for a wider Group of Seven deal.
- Russia won’t accept the $60 per barrel price cap for its crude oil agreed upon by the European Union, the state news agency Tass reported, citing Kremlin spokesman Dmitry Peskov.
Singapore | The Monetary Authority of Singapore is exploring a code of conduct for ESG ratings providers, joining the UK and Japan in scrutinizing the firms that pass judgment on corporations’ environmental, social and governance practices.
Goldman Fine | Goldman Sachs Group Inc. will pay $4 million to settle US regulators’ claims that its asset-management unit didn’t properly weigh ESG factors in some of its investment products.
2023 Outlook | More ESG transparency driven by multiple stakeholders is likely next year across the globe, but inconsistencies may bring short-term confusion, we believe. The EU will impose new rules to bring greater corporate disclosure on climate and ESG, while Asia is catching up. But the US will have a rockier road with political opposition from Republicans gaining more power in Congress.(Bloomberg Intelligence)
Solar | Companies prioritizing occupational health and safety management in complex solar supply chains will be best placed to navigate potential regulation to address allegations of forced labor. Human rights concerns in China’s Xinjiang region, where 45% of the world’s polysilicon is made, have put the true cost of decarbonization into question. (Bloomberg Intelligence)
ETF Sentiment | ESG ETF sentiment remains positive in Europe, while the US has seen a decline mirroring the global trend. European ESG ETFs may continue to see inflows, especially with funds seeking Article 9 labels under the EU’s Sustainable Finance Disclosure Regulation (SFDR), and an amendment in MiFID II regulations on disclosing investors’ sustainability preferences can also support demand for ESG ETFs. (Bloomberg Intelligence)
ECB Tilt | The ECB is tilting its corporate bond portfolio toward climate-friendly credits using redemptions. Though the ECB will hand pick those bonds, there are some sectors that may be seen as affecting climate change that could be replaced with greener alternatives. Calculating the ECB’s credit QE redemptions will see maturities peaking in 2026-27 and gradually winding down. There will be an estimated 32-38% of the redemptions from climate-damaging sectors until 2028, and then 25-29% from 2029 onwards. This means that climate-damaging maturities are front-ended. (Bloomberg Intelligence)
Trade War | President Joe Biden has largely maintained his predecessor Donald Trump’s hard-line trade policies against China. In 2021, Biden blocked solar imports from a major manufacturer in Xinjiang province for alleged forced labor. This past April, Biden’s Commerce Department began investigating solar imports from four Asian countries that use China-supplied materials, chilling US solar investment. Biden responded with an executive order in June suspending new tariffs on these imported Southeast Asian solar panels for two years. However, in December, Commerce ruled against the importers. (BloombergNEF)
US Biodiesel Credits | The price of credits for US bio-based diesel, known as D4 RINS, plunged 7% Thursday in response to the release of proposed blending requirements for 2023-2025, which increase incentives for bio-based diesel by only 6% while supply is expected to more than double. (BloombergNEF)
Green Hydrogen | Europe is ahead when it comes to embracing hydrogen as an energy source to help curb climate warming, with 20 countries on the continent releasing H2 strategies among 38 globally. A further five nations -- Morocco, Namibia, Oman, South Africa and the UAE -- with H2 plans are grouped with Europe in the EMEA region. The strategies reflect a strong commitment to the alternative fuel needed to reach net-zero targets. About half of the countries with a strategy also have a target for electrolyzers, which produce carbon-free H2 by splitting water using renewable electricity. Final investment decisions on big hydrogen electrolyzer projects are coming in 2023-2025 as recent European Union and US subsidies, and potential rule relaxations, help developers’ business cases. (BloombergNEF)
Windfall Tax | A couple of weeks ago, the UK announced a new windfall tax on what the government calls “excess” profits of nuclear and renewable energy generators. With natural gas prices soaring, these technologies now generate power at a much lower cost than gas-fired power plants, making them much more profitable. The Electricity Generator Levy, which goes into effect Jan. 1, will enact a 45% tax on revenues from power sold at prices above £75 ($90) per megawatt hour. (Nathaniel Bullard)
OFF THE SHELF
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 at 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 embrace the idea. At issue is what information should be mandatory to report, and who decides?
ESG Loans | Virtue can bring rewards, as more companies are discovering when they reach out for a loan. Some banks offer borrowers discounts if they meet targets for cutting pollution, reducing food waste or even assisting job seekers. To give incentives teeth, there are penalties for missing goals. Global issuance of loans linked to borrowers’ ESG performance surged to almost $500 billion in 2021 from $4.9 billion in 2017 when the first such deal was created.
Circular Economy | Take, make, use, dispose. For decades, this has been the standard approach to production and consumption. Companies take raw materials and transform them into products, which are purchased by consumers, who ultimately toss them out, creating waste that ends up in landfills and oceans. Worried about climate change and environmental degradation, people are challenging the sustainability of this linear model and urging a so-called circular economy of take, make, use, reuse and reuse again and again.
ABC | You’ve probably heard of ESG, and may know it as a form of investing and finance that involves considering material financial risks from environmental factors, social issues and questions of corporate governance. If you’re like most people, you’re probably not clear on the difference between ESG and socially responsible investing, impact investing and similar, sometimes overlapping approaches -- in part because ESG has come to mean different things to different people. That vagueness has helped fuel rapid growth in recent years. But accompanying those gains has been increased scrutiny from regulators cracking down on banks and investment firms making exaggerated claims.
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