Apple’s Launches $200M Climate Fund to Remove One Million Tons of Carbon Dioxide by 2030

Welcome to the ESG Policy Roundup, a weekly summary of the most important news and developments in the field of environmental, social and governance (ESG) policy and regulation. In this edition, we cover topics such as carbon removal, sustainable finance disclosure, low-carbon transition ratings, climate reporting and green investing. Here are some of the highlights:

• Apple launches $200 million carbon removal fund. The tech giant announced a new initiative to support natural solutions for removing carbon dioxide from the atmosphere, such as restoring forests and wetlands.

• EU regulators propose changes to sustainable finance disclosure rules. The European Supervisory Authorities (ESAs) published a consultation paper on proposed amendments to the Regulatory Technical Standards (RTS) under the Sustainable Finance Disclosure Regulation (SFDR). The proposed changes aim to address some of the issues raised by stakeholders during the previous consultation, such as clarifying the scope of application, simplifying the presentation of indicators, and aligning the RTS with the EU Taxonomy Regulation.

• Morningstar Sustainalytics launches its Low Carbon Transition Ratings.  

• The Hong Kong Stock Exchange to make climate disclosures mandatory for issuers. The exchange operator announced that it will require all listed companies to disclose their climate-related risks and opportunities in accordance with the Task Force on Climate-related Financial Disclosures (TCFD) framework by 2025.

• Ilmarinen, Finland's largest private pension insurance company has defended its inclusion of fossil fuel and tech stocks in the new NYSE-listed ‘Xtrackers MSCI USA Climate Action Equity ETF'.  

These developments show that ESG policy and regulation is evolving rapidly and dynamically, creating both challenges and opportunities for investors, issuers, lenders and borrowers. To stay ahead of the curve, market participants need to keep abreast of the latest trends and best practices in this fast-growing field.

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Apple Launches $200 Million Fund to Support Carbon Removal Projects

Tech giant Apple has pledged up to $200 million to launch a new fund aimed at supporting carbon removal projects. The goal of the fund is to remove 1 million metric tons of carbon dioxide annually while generating a financial return for investors. This new fund adds to the existing Restore Fund, established in 2021, which aimed to encourage investment in protecting and restoring ecosystems and scaling natural carbon removal solutions.

• Managed by Climate Asset Management, the new fund will invest in a diverse range of projects that will preserve, protect, and enhance nature over the long-term. It will target agricultural projects generating income from sustainably managed farming practices, as well as projects that conserve and restore critical ecosystems that remove and store carbon from the atmosphere.

• Christof Kutscher, CEO of Climate Asset Management, said he was "genuinely proud" of the collaboration with Apple in delivering carbon removal as a step forward towards carbon neutrality.

• The new fund forms part of Apple's roadmap to achieve carbon neutrality across its entire business, manufacturing supply chain, and product life cycle by 2030. The company's goal is to reduce 75% of all emissions, with the remaining addressed through high-quality carbon removal.

• Apple's Vice President of Environment, Policy, and Social Initiatives, Lisa Jackson, said the fund was "an innovative investment approach that generates real, measurable benefits for the planet, while aiming to generate a financial return." She added that "innovation like this can help accelerate the pace of progress" towards a carbon-neutral economy.

In conclusion, Apple's new fund is a significant step towards achieving carbon neutrality across its business and supply chain by 2030. The company's commitment to sustainable practices and investment in carbon removal projects is commendable, and its partnership with Climate Asset Management is expected to yield positive results for the environment and investors alike.

EU Regulators Propose Significant Changes to Sustainable Finance Disclosure Rules

The European Supervisory Authorities (ESAs) have proposed amendments to the EU’s Sustainable Finance Disclosure Regulation (SFDR) aimed at extending and simplifying disclosure rules for financial market participants. The new proposals would require financial products to disclose decarbonization targets and include a dashboard providing information about sustainable and taxonomy-aligned investment.

• The SFDR aims to establish harmonized rules for financial market participants, including investors and advisers, to promote transparency regarding sustainability risks, adverse sustainability impacts, and the provision of sustainability-related information with respect to financial products. The regulation includes classification levels for sustainability-focused investment funds, including the more stringent 'Article 9' funds, "which have sustainable investment as their objective."

• While the requirement for asset managers with sustainable investment products to provide disclosures under SFDR took effect in January 2023, uncertainty remains around some of the key reporting details, such as the principal adverse impact (PAI) requirements. To address this complexity, the ESAs have proposed consulting stakeholders on changes to the layout, structure, and language of the regulation's template, and developed a dashboard of key information for pre-contractual and periodic disclosure.

• The proposals also include extensions to the list of universal social indicators for the disclosure of the PAIs, refinements to the content of other indicators for adverse impacts, GHG target disclosures, and other technical revisions to improve and simplify disclosure requirements.

• The ESAs have launched a consultation into the proposed rules, which is open until July 4, 2023. While the ESAs were initially requested to present the rules this month, they informed the EU Commission last year of a six-month delay, with the final report now expected to be released by the end of October 2023.

In conclusion, the proposed amendments to the SFDR aim to improve transparency and disclosure of sustainability risks and impacts for financial market participants. While the regulations are already in effect, the proposed amendments will simplify the reporting process and provide greater clarity around sustainability disclosures. It is expected that the consultation will yield positive results for investors, advisers, and the broader financial industry.

Morningstar Sustainalytics Launches Low Carbon Transition Ratings to Assess Net-Zero Pathway for Companies

Morningstar Sustainalytics has launched Low Carbon Transition Ratings to provide investors with a science-based assessment of a company's current alignment to a net-zero pathway that limits global warming to 1.5 degrees Celsius. The ratings evaluate a company's strategy and actions toward meeting its net-zero commitments, offering investors a clear and comparable view of a company's policies, governance practices, and investment plans.

• The Low Carbon Transition Ratings cover approximately 4,000 of the largest public companies and plan to expand to over 12,500 companies by 2024. The innovative ratings include more than 85 management indicators grouped by TCFD themes and provide investors a contextual signal that shows a company's exposure to transition risks and opportunities. The methodology of Low Carbon Transition Ratings uses the Required Policy Scenario (1.5 degrees Celsius RPS) from the Inevitable Policy Response (IPR) to keep global warming below 1.5 degrees Celsius beyond current stated policies.

• Morningstar Indexes will introduce a new suite of global climate indexes later this year underpinned by the Low Carbon Transition Ratings. The indexes will provide exposure to companies committed to delivering business model transformation and managing climate transition risks.

• According to early research from Sustainalytics, only 25 percent of companies have strong emissions reduction targets, and only 8 percent of companies have strong greenhouse gas (GHG) performance incentive plans. These ratings provide investors with in-depth insights into the climate-related risks and opportunities facing the companies they invest in, helping them manage material climate-related risks and respond to regulatory initiatives. The ratings will be particularly useful for investors who aim to track the net-zero trajectory of their portfolios.

In conclusion, the Low Carbon Transition Ratings offer investors a comprehensive and transparent assessment of a company's preparedness to transition to a low-carbon economy, providing them with information to help identify and manage transition risks, respond to global regulatory requirements and disclosure initiatives, build climate investment strategies, and advance engagement activities.

Hong Kong Stock Exchange Proposes Mandatory Climate Disclosures for Listed Companies

The Hong Kong Stock Exchange (HKEX) has announced plans to make it mandatory for all its listed companies to disclose climate-related information in their ESG reports. The move, which marks an upgrade from the current “comply or explain” regime, is expected to strengthen the exchange's position as an international financial centre while aligning it with the International Sustainability Standards Board Climate Standard, a global framework expected to be finalised by mid-2023.

• Under the new rules, issuers would be required to report on four aspects of governance: strategy, risk management, metrics and targets. The HKEX plans to launch a three-month consultation on the proposal, which aims to bolster Hong Kong's bid to become a green and sustainable financial centre while reducing carbon emissions to achieve carbon neutrality by 2050.

• The HKEX's move comes as investor interest in sustainable investments has grown, prompting more companies to consider the financial risks and opportunities of climate change. The exchange is also among those seeking to capture the estimated $29 trillion opportunity in the transition to a low-carbon economy, which is expected to grow with climate policies, regulations, and rising demand for clean energy.

• The new disclosure regime is expected to encourage greater transparency and accountability on climate issues, enabling investors to better understand climate risks and opportunities in their investments.

This move is a significant development in the ongoing shift towards mandatory climate disclosures by companies. If implemented successfully, it could have a significant impact on the behaviour of companies listed in Hong Kong, as well as setting a precedent for other exchanges to follow.

Record-breaking Climate ETF Raises Eyebrows with Holdings in Fossil Fuel and Tech Stocks

Ilmarinen, Finland’s largest private earnings-related pension insurance company, has defended the inclusion of fossil fuel and technology stocks in the new NYSE-listed ‘Xtrackers MSCI USA Climate Action Equity ETF’, which includes Chevron, JP Morgan and Google among its top 20 stocks.

• Last week, Ilmarinen seeded the largest-ever ETF launch to date with US$2 billion. The Climate Action Equity ETF is managed by German fund manager DWS and is designed for investors seeking exposure to large and mid-cap companies in the US that are leading on the climate transition.

• While the ETF has come under scrutiny for holding fossil fuel giant Chevron as one of its top 14 stocks, with seven out of its top ten stocks from the technology sector, including Amazon and Google, Ilmarinen claims that the stocks are “pretty similar” to the stocks in the MSCI USA Paris-Aligned Index (USCA) with one of the important differences being that the energy sector was not excluded.

• According to Juha Venäläinen, Senior Portfolio Manager at Ilmarinen, the company picked the “better half” of each sector based on four different criteria: emissions intensity, approved emission targets or credible track record, climate risk management, and green revenues. He also added that the climate transition will likely not be linear and cutting out a lot of companies in a portfolio will make it too concentrated.

As more pension funds and investors invest in ETFs for their climate strategies, the debate over the inclusion of fossil fuel companies will likely continue. But as the climate action ETF market continues to grow, it remains to be seen if investors will prioritize carbon neutrality over other goals such as diversification and risk and return.