What does the inflation reduction act mean for business and investors and how does it impact the energy transition?
We are talking to Samantha Gross who is a fellow and director of the Energy Security and Climate Initiative at The Brookings Institution. Her work is focused on the intersection of energy, environment, and policy. Gross has more than 20 years of experience in energy and environmental affairs. She was director of the Office of International Climate and Clean Energy at the U.S. Department of Energy. Before that, Gross was director of integrated research at IHS CERA. She has also worked at the Government Accountability Office on the Natural Resources and Environment team and as an engineer, directing environmental assessment and remediation projects. Gross holds a Bachelor of Science in chemical engineering from the University of Illinois, a Master of Science in environmental engineering from Stanford, and a Master of Business Administration from the University of California at Berkeley. Follow her on Twitter for more, and see her latest article on the Inflation Reduction Act here.
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ESG Book, registered with Companies House under Company No. FC035689 and UK establishment no. BR020774, and with registered office at Fifth Floor, Jamestown Wharf, 32 Jamestown Road London, NW1 7BY, is the UK branch of ESG Book GmbH, a limited liability company organized under the laws of Germany, with registered number HRB 113087 in the commercial register of the court of Frankfurt am Main, and having its seat and head office at Zeppelinallee 15, 60325 Frankfurt am Main, Germany.
PROFESSIONAL ADVICE – This podcast is provided for general information purposes only and does not constitute professional advice. If professional advice is required, services of a competent professional should be sought. THIRD PARTY INFORMATION – Certain information contained in this document has been obtained from sources outside ESG Book. While such information is believed to be reliable for the purposes used herein, no representations are made as to the accuracy or completeness thereof and none of ESG Book or its affiliates accepts any responsibility for such information. RELIANCE – ESG Book makes no representation or warranty, express or implied, as to the accuracy or completeness of the information contained herein, and accepts no liability for any loss, of whatever kind, howsoever arising, in relation thereto, and nothing contained herein should be relied upon. VIEWS EXPRESSED – Any views or opinions presented are solely those of the speaker, and do not necessarily represent the views or opinions of ESG Book. ENQUIRIES – Any enquiries in respect of this podcast should be addressed to ESG Book or its affiliates.
As a growing number of investors have Net Zero targets, the question comes up: what does a Net Zero pathway look like?
We are talking to climate scenario wizard Sven Teske, who researches energy decarbonisation pathways at the Institute for Sustainable Futures, University of Technology Sydney. Most recently, Sven Teske led the work on the One Earth Climate Model (OECM) commissioned by the UN-convened Net-Zero Asset Owner Alliance and the European Climate Foundation. In this episode, he presents a clear picture of what decarbonizing the world looks like, and puts this ambition in context with actual developments, such as the recent US Supreme Court’s decision to curb the power of the Environmental Protection Agency (EPA).
DISCLAIMER
ESG Book is the trading name of Arabesque S-Ray GmbH, UK Branch. Arabesque S-Ray GmbH, UK Branch, registered with Companies House under Company No. FC035689 and UK establishment no. BR020774, and with registered office at Fifth Floor, Jamestown Wharf, 32 Jamestown Road London, NW1 7BY, is the UK branch of Arabesque S-Ray GmbH, a limited liability company organized under the laws of Germany, with registered number HRB 113087 in the commercial register of the court of Frankfurt am Main, and having its seat and head office at Zeppelinallee 15, 60325 Frankfurt am Main, Germany.
PROFESSIONAL ADVICE – This podcast is provided for general information purposes only and does not constitute professional advice. If professional advice is required, services of a competent professional should be sought. THIRD PARTY INFORMATION – Certain information contained in this document has been obtained from sources outside ESG Book. While such information is believed to be reliable for the purposes used herein, no representations are made as to the accuracy or completeness thereof and none of ESG Book or its affiliates accepts any responsibility for such information. RELIANCE – ESG Book makes no representation or warranty, express or implied, as to the accuracy or completeness of the information contained herein, and accepts no liability for any loss, of whatever kind, howsoever arising, in relation thereto, and nothing contained herein should be relied upon. VIEWS EXPRESSED – Any views or opinions presented are solely those of the speaker, and do not necessarily represent the views or opinions of ESG Book. ENQUIRIES – Any enquiries in respect of this podcast should be addressed to ESG Book or its affiliates.
“What gets measured gets managed.” This quote by Peter Drucker also applies the other way around. Failing to measure corporate climate exposure and impact results in a lack of management, or even mismanagement in the face of climate risks and opportunities. Among the wide range of ESG topics that might be relevant information to investors, emissions can be seen as the ‘clearest’ data point to measure. Hence, it is emissions disclosure we must focus on to optimize our investment for positive (financial) impact, according to The Economist. Indeed, the recent Inflation Reduction Act in the US indicates a new momentum for the US pushing ahead on addressing climate change, with subsequent transition risks for companies.
Amidst all the media focus on climate and environmental concerns, it is easy to overlook another important facet in sustainability – the ‘S’ of ESG. Unlike the Environmental dimension, social impacts are often subjective, and identifying what to measure is a key first step in quantifying a firm’s social impact on the community in which they operate. While social indicators such as diversity ratios, presence of human and labour rights policies, and workplace accident rates have been used by ESG data providers to quantify a company’s social impact, many other possible indicators of a company’s impact on the community still pass by under our radar due to a lack of awareness or understanding about how they can impact society.
One such unknown aspect that can greatly impact society is design. The design of a physical or virtual object or space is traditionally viewed as simply the aesthetic inclination of the designer. However, the design of objects and spaces defines how we interact and engage with our daily lives. At its heart, design is as much a social tool as it is an aesthetic one, where design choices that does not account for disabilities for instance is discriminatory and can be a source of lawsuits. More importantly beyond legal risks, we must be conscious about how we design our society to not only ensure that everyone in our community can participate equally, with comfort and dignity, but also to guide individuals towards more sustainable decisions for themselves and for society.
As wildfires in the US and rising temperatures in European countries augment the Anthropocene reality, regulators worldwide underscore the responsibility of corporations to mitigate the effects of climate change. Europe’s central bank published results illustrating the capacity, or lack thereof, of banks to verify climate risk stress-testing against existing frameworks. EU’s Platform on Sustainable Finance issued a call for feedback on EU Taxonomy and will soon update the minimum safeguards for upholding governance and human rights principles. Asset managers in the EU will now be accountable for meeting investor ESG expectations under a new MiFID II obligation. In a separate call for attention to biodiversity, TNFD published the second version of its nature-related risk framework. The UK introduced legislation to support the redirecting of capital flows towards green activities. In the Americas, the US Fed released a study on climate-related financial stability risks. Brazil’s judiciary branch set landmark precedent in the region by acknowledging climate rights as human rights. Brazil also identified pension funds as a vehicle for sustainability risk management, issuing guidance for soon to be mandatory materiality assessment for insurers. Asia’s path towards sustainable finance continues with Singapore leading by example. The country’s exchange authority MAS published sustainability reporting guidelines for ESG-labeled funds. In India, the central bank RBI is taking steps to assess the banking sector’s climate resilience. This month’s regulatory roundup indicates continued concerns around sustainability issues extending beyond the ‘E’ in ESG.
Europe Draft report by the Platform on Sustainable finance on minimum safeguards
On 11 July 2022, the Platform on Sustainable Finance issued a call for feedback on a draft report on minimum safeguards. The minimum safeguards set out in Article 18 of the Taxonomy Regulation require that companies implement procedures to comply with OECD Guidelines for multinational enterprises and the UN guiding principles on business and human rights. The report on minimum safeguards aims to provide advice on how compliance with minimum safeguards could be assessed. The deadline for comments on the draft report is 22 August 2022. Read more.
ECB’s climate stress test exercise results published
Banks must sharpen their focus on climate risk, ECB supervisory stress test shows. The results of the European Central Bank (ECB) climate risk stress test published on 8 July 2022 show that banks do not yet sufficiently incorporate climate risk into their stress-testing frameworks and internal models, despite some progress made since 2020. The results of the first module show that around 60% of banks do not yet have a climate risk stress-testing framework. Similarly, most banks do not include climate risk in their credit risk models, and just 20% consider climate risk as a variable when granting loans. Banks currently fall short of best practices, according to which they should establish climate stress-testing capabilities that include several climate risk transmission channels (e.g., market and credit risks) and portfolios (e.g., corporate and mortgage). Read more.
Share of banks currently including climate risk in their stress test frameworks
ECB (2022 climate risk stress test – Findings on bank’s climate risk stress-testing capabilities), ING
New MiFID II obligation requires asset managers to identify client sustainability preferences A new ESG rule requiring discretionary fund managers to identify clients’ sustainability preferences came into force on August 2. The rule which was introduced as an amendment to the Markets in Financial Instruments Directive (MiFID II) requires asset managers and financial advisers to consider and incorporate the preferences of retail clients. First, the rule creates a redressal mechanism for investors who otherwise would not be able to hold asset managers accountable for low performing ESG funds. Second, it provides clients with three options under its definition of sustainability – an alignment with the EU Taxonomy, percentage investments defined in SFDR and consideration of PAIs. Read more
TNFD releases beta version of nature-related risk framework TNFD released the second version of its disclosure framework that includes metrics and guidelines for producing nature-positive outcomes. The Taskforce was established in June 2021 to create an integrated nature-related risk management and disclosure framework for companies. Currently, TNFD is developing a science-based approach with measurable objectives by building on feedback from market participants and aligning with standard setters, regulatory bodies, and other policy practitioners. Read more.
United Kingdom UK Parliament introduces Financial Services and Markets Bill
The UK House of Commons has introduced legislation to implement the outcomes of the Future Regulatory Framework and regulate the financial services sector within the context of an EU-emancipated market. The government seeks to maintain the UK’s position as an international financial hub in a post-Brexit world and encourages the financial services sector to become globally competitive, green, and technology driven to deliver its vision. The omnibus bill also aligns the growth objectives of the financial services sector with net zero emissions targets. If adopted, the net zero principle would be codified in UK environmental law. In the bill, new powers have been delegated to UK authorities – the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA).FCA and PRA will provide guidance and conduct reviews of regulated entities in the financial services sector. Read more.
Americas
US Federal Reserve released a climate-related financial stability study
The United States Federal Reserve published a study on financial system vulnerabilities of climate change. In the report, the Fed uses several modeling approaches and literature review of Climate-Related Financial Stability Risks (CRFSRs) to identify and assess vulnerabilities in the United States. A key objective of this report is to illustrate the use of major methodologies to evaluate the potential vulnerabilities of the financial system to climate change. The key findings reveal “thin” CRFSRs data and lack of certainty due to qualitative assessments. The Fed concludes that a single methodology fails to address, in practice, salient challenges such as long-time horizons, incorporating technological change and modeling disruptions to measure economic impacts of climate change. For a comprehensive analysis of CRFSRs the report recommends using several combined methodologies. Read more.
Brazilian Supreme Court recognizes the Paris Agreement as a human rights treaty Brazil’s judiciary issued a ruling related to a series of climate change litigation cases acknowledging the underuse of resources in the Climate Fund that should be annually allocated. The ruling indicts the Federal Government that is tasked with the allocation of fund resources towards sustainability issues. Read more.
Brazilian regulator issues sustainability requirements guidelines for the insurance sector
The Brazilian Superintendence of Private Insurance has set forth mandatory ESG reporting requirements for the Brazilian insurance sector. The regulation includes guidance for integrating sustainability-related risk management. Upon enforcement, regulated entities including insurance companies and pension funds must prepare a triennial materiality assessment to identify and classify the risks to which entities are exposed. The materiality assessment extends to indirect exposure through product and services. Read more.
Asia Singapore exchange authority issues guidelines for issuing ESG funds
Singapore financial regulatory authority MAS has declared that any ESG labeled fund will have to provide evidence of compliance in accordance with its recently published reporting and disclosure guidelines. The latest regulation tackles the issue of greenwashing and increases transparency for retail investors. ESG funds will be monitored on an ongoing basis and investors will be required to provide disclosure as the need arises. Funds will have to account for the integration of ESG KPIs in the investment strategy and portfolio construction. Funds that use “sustainable” and “green” as a key or limited aspect of communication must ensure that net assets are invested according to the non-financial investment strategy included in the prospectus. Read more.
India’s Central Bank calls on industry to set green finance targets
The Reserve Bank of India (RBI) has released a discussion paper on Climate Risk and Sustainable Finance and invited comment from regulated entities in the banking sector and relevant stakeholders. The comment period closes by September 30, 2022. In the discussion paper, the RBI assesses the preparedness and resilience of banks in the face of climate risks and environmental risks. The RBI proposes an elaborate strategy or “risk appetite framework’ for assessing climate-related risks which can be implemented in the short, medium, and long-term. Examples of good practices for the integration of climate-related risk indicators include carbon metrics such as carbon intensity and absolute emissions. The proposed strategy, if adopted, would also require banks to publish stress tests and scenario analysis. Read more.
Other News & Resources
International Securities Lending Association calls for clarity on ESG collateral rules: Industry body suggests the market would benefit from regulatory certainty on the extent to which asset owners and managers should consider ESG risks when accepting collateral.
ICMA issues KPI Registry for sustainability linked bonds: The association published guidelines to clarify targets for SLBs and support the growth of the sustainable bond market.
ISSB publishes ‘landmark’ draft sustainability disclosures: The standard-setting body released much awaited draft disclosure framework that could serve as a global baseline for sustainability disclosures.
ISSB request for feedback to inform the development of its disclosure for digital reporting: IFRS is consulting on the first two proposed disclosure standards until July 29, 2022.
CBI formulates a climate resilience taxonomy: The Climate Bonds Initiative announced its plan to release a ‘climate resilience taxonomy’ once it has revised its methodologies for green bonds, social and sustainability bonds.
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