Institutions pull back on climate action as regulations intensify
The ESG (environment, social and governance) backlash has kicked up a gear, with resistance to more stringent investor reporting and engagement requirements resulting in significant pushback by global and regional players.
As AsianInvestor has reported, new rules are creating greater clarity for investor-focused sustainability reporting.
Yet as investors get to grips with the practicalities of their reporting requirements, the enormity of the task is forcing some to retreat from their commitments.
“I think people are starting to realise how much work it requires and the challenges,” Singapore-based managing director of Pacific Harbor Group Edward Foo told AsianInvestor.
PAINFUL PROCESS
Foo said the alternatives asset manager is not committed to any such reporting requirements at the moment: "We have elected to not subject ourselves to that. We were under that regime for several years and it was painful."
“From what I know, global firms and the major Asia corporates are actively involved in reporting. They have allocated the budget and resources to do so. For everyone else, it's a bit of a balancing act between doing some reporting or not at all."
Until recently, companies and investors have focused their attention on emissions from their own operations that fall within the greenhouse gas (GHG) protocol’s scope 1 and scope 2 framework.
They now need to also account for GHG emissions along their value chains and product portfolios, which is covered by scope 3 of the protocol.
“It's really a challenging exercise to clearly and robustly map scope 3. How far up the value chain can operations realistically go? If one were to trace all the way up the chain to the origin node, my view is that the majority of the reviews would fail scope 3 tests," Foo said.
Pacific Harbor
Scope 2 reporting is also fraught with complications, he added.
"For example, if you operate in frontier emerging markets that are largely all coal-fired power plants and maybe some renewables - all the investing or contracting company can rely on is a certificate from the power grid stating "your power is green". But in reality - do we really know?”
And while there is still strong demand for electric vehicles, Foo questions whether we should get excited about the decarbonisation potential.
"For scope 1, say I replace my entire fleet with electric vehicles (EVs) - the EV still needs to be charged, but again I am relying on just a certificate to say my fleet is being charged by renewable sources. Also, EV vehicles don't exactly report the emissions and environmental damage of the supply chain for those batteries in the vehicle."
US INVESTORS UNDER PRESSURE
Meanwhile, the world’s biggest asset managers, BlackRock, Vanguard, State Street Global Advisors (SSGA) and JP Morgan Asset Management (JPAM) have all recently backtracked on their sustainability commitments.
Two weeks ago, SSGA and JPAM announced their withdrawal from the Climate Action 100+ initiative. BlackRock has also shifted its association with the CA100+ to its international division.
In December last year, Vanguard made the decision to pull out of the Net Zero Asset Managers (NZAM) initiative, launched in late 2020 to encourage fund firms to reach net zero emission targets by 2050.
In total, this represents over $20 trillion of assets that have been removed from the global decarbonisation drive by the investment community.
The reason for this stems partly from a desire by these big US-owned asset managers to drive their sustainability efforts more internally, at the risk of falling foul of anti-trust rules in the US.
This applies equally to investors in Asia Pacific. “For asset owners there are challenges in that most of our portfolio holdings are incorporated in other countries not subject to Australian regulation,” Michael Wyrsch, chief investment officer at Melbourne-based Vision Super told AsianInvestor.
This creates several layers of complication for globally invested institutions, having to meet reporting requirements in many different jurisdictions with varying levels of due diligence, said Wyrsch.
Ceres
Additionally, regulations such as the EU’s Corporate Sustainability Reporting Directive are driving global institutions to reconfigure their operations and minimise their climate commitment liabilities.
There are other factors at play, particularly in the US where Republican politicians are ramping up their anti-ESG lobbying.
Kirsten Snow Spalding, vice president at sustainability non-profit Ceres, a NZAM founding partner, said in a statement, "It is unfortunate that political pressure is impacting this crucial economic imperative and attempting to block companies from effectively managing risks - a crucial part of their fiduciary duty."