Billions Unleashed in Climate Battle as EPA Launches Climate Bank
ESG Policy Roundup: A Week of Decisive Actions and Regulatory Shifts
This week in ESG policy, we witnessed a series of significant developments across the globe, reflecting the growing urgency to address environmental, social, and governance issues.
Shell Dodges Climate Lawsuit Bullet: In the UK, a court rejected an attempt to revive a climate lawsuit against Shell directors. The case, brought by ClientEarth, sought to hold Shell's directors personally liable for not adequately preparing for the transition to a low-carbon economy. The court's decision underscores the complexities of climate litigation and the challenges in holding individual directors accountable for corporate climate action.
India Tightens ESG Fund Rules: Moving east, India announced new disclosure and investment rules for ESG funds. The Securities and Exchange Board of India (SEBI) has mandated that ESG funds must invest at least 80% of their total assets in ESG-compliant companies. This move is expected to bring greater transparency and standardization to the rapidly growing ESG investment sector in India.
US EPA's $20 Billion Climate Initiative: Across the Atlantic, the US Environmental Protection Agency (EPA) launched a $20 billion climate bank program to curb climate change. The initiative aims to leverage public and private investments to support clean energy, energy efficiency, and climate resilience projects. This marks a significant step in the US's efforts to combat climate change and transition to a green economy.
EU's Green Ambitions on Track: In Europe, the EU Missions under Horizon Europe are reportedly on track to meet their 2030 ambitions towards a greener and healthier continent. The missions, which focus on areas such as climate change adaptation, cancer, clean cities, ocean and waters restoration, and soil health, have demonstrated their potential to accelerate change and are poised to achieve their ambitious goals by 2030.
EU Taxonomy Alignment Lags: Lastly, a report by MSCI revealed that fund managers are failing to disclose the extent to which their EU-domiciled sustainability-labeled products align with the environmental objectives of the EU taxonomy. The lack of alignment disclosure is attributed to the incomplete nature of the taxonomy and the high bar set to determine sustainable activities.
These developments reflect the dynamic and evolving nature of ESG policy worldwide. As regulators tighten rules and corporations step up their sustainability efforts, the ESG landscape continues to shift, underscoring the importance of staying abreast of these changes.
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Shell Dodges Climate Lawsuit: UK Court Upholds Dismissal
The UK High Court has upheld the dismissal of a climate-focused lawsuit against the board of directors of energy behemoth Shell. The lawsuit, initiated by environmental law organization ClientEarth, sought to hold the directors personally accountable for the company's climate plans.
ClientEarth launched the lawsuit in February, alleging that Shell's energy transition strategy was flawed and put shareholder value at risk. The organization requested the court to mandate the board to bolster the company's climate plans.
The lawsuit was dismissed in May, with the court agreeing with Shell's argument that the duties ClientEarth sought to impose were vague and against principles that require directors to determine the weight to attach to the factors they consider.
ClientEarth sought reconsideration of the dismissal in an oral hearing earlier this month. However, the request was denied in the recent decision.
The court's decision highlighted that ClientEarth's small stake in Shell, holding only 27 shares, suggested that its real interest was not in promoting the success of Shell for its members' benefit.
The court's decision underscores the complexities of holding corporate directors personally accountable for climate-related strategies. While the ruling is a setback for ClientEarth, it highlights the growing pressure on corporations to align their strategies with climate goals. The case also raises questions about the role of shareholders, regardless of their stake, in influencing a company's climate policies. ClientEarth's intent to appeal the decision indicates that the debate on corporate responsibility for climate change is far from over.
India's SEBI Unveils Stringent ESG Investment Rules
The Securities and Exchange Board of India (SEBI) has introduced a new set of rules for ESG investment funds, marking a significant step towards green financing and mitigating the risk of greenwashing. The new regulations mandate ESG funds to invest at least 80% of their assets in securities that align with their specific strategies and require asset managers to provide monthly ESG scores for holdings.
SEBI has introduced a new ESG investment sub-category for funds, allowing mutual funds to offer multiple ESG schemes to investors, a shift from the previous rule that permitted only one ESG scheme under the thematic category.
The new rules define several strategies for ESG funds, including Exclusion, Integration, Best-in-class & Positive Screening, Impact investing, Sustainable objectives, and Transition or transition-related investments.
New disclosure requirements mandate the name of the fund to include the ESG strategy, and for Business Responsibility and Sustainability Report (BRSR) scores to be included in monthly portfolio statements.
Asset managers for ESG schemes will also be required to disclose their voting on resolutions with rationale supporting their voting decision, including whether the vote was made for ESG reasons.
The new rules by SEBI represent a significant step towards enhancing transparency and accountability in ESG investing in India. By introducing stringent investment and disclosure rules, SEBI is facilitating green financing and mitigating the risk of greenwashing. The impact of these new regulations on the ESG investment landscape in India will be closely watched in the coming months.
EPA's $20 Billion Climate Bank: A Game-Changer in the Fight Against Climate Change
The U.S. Environmental Protection Agency (EPA) has made a groundbreaking move in the fight against climate change, launching two Notices of Funding Opportunity for a whopping $20 billion. These funds, part of the historic $27 billion Greenhouse Gas Reduction Fund, are central to President Biden’s Investing in America Agenda and environmental justice goals.
The funds will be distributed across two grant competitions, aiming to mobilize private capital into clean technology projects. The goal is to create jobs, lower energy costs, and reduce pollution, particularly in low-income and disadvantaged communities.
The $14 billion National Clean Investment Fund will support national clean financing institutions, enabling them to partner with the private sector to finance clean technology projects nationwide. At least 40% of these funds will be dedicated to low-income and disadvantaged communities.
The $6 billion Clean Communities Investment Accelerator will support hub nonprofit organizations, providing funding and technical assistance to community lenders working in low-income and disadvantaged communities.
This initiative builds on the $7 billion Solar for All competition launched by the EPA in June 2023, which aims to expand the number of low-income and disadvantaged communities primed for residential solar investment.
The EPA's $20 billion investment marks a significant step towards achieving the President’s climate goals of reducing greenhouse gas emissions by 50-52% below 2005 levels in 2030 and achieving net-zero emissions by 2050. It also underscores the administration's commitment to environmental justice, ensuring that the benefits of clean energy and climate investments flow to disadvantaged communities. This initiative is a testament to the power of strategic investment in driving the transition to a clean-energy economy.
EU Missions: Pioneering a Greener, Healthier Continent by 2030
The European Union's Horizon Europe Missions are making significant strides toward a greener and healthier continent. These missions, which focus on the European Green Deal, digital readiness, and Europe's Beating Cancer Plan, are demonstrating their potential to accelerate change and are on track to achieve their ambitious 2030 goals.
The EU Missions have successfully connected and supported EU policies and programs with local action and citizen engagement, primarily through Horizon Europe funding.
The Communication on EU Missions under Horizon Europe adopted recently highlights the main achievements of the current five individual Missions, identifies challenges, and proposes actions to address these.
The Communication proposes to spend 11% of the Horizon Europe Pillar 2 budget on EU Missions in the last part of the Programme, amounting to over €3 billion for the period 2024-2027.
The Commission is launching preparations for a new EU Mission on the New European Bauhaus, which has already developed synergies between research and innovation investments, other funding instruments, and private sector investment.
The EU Missions are proving to be an effective tool in galvanizing change toward a greener and healthier continent. With the proposed increase in budget and the introduction of a new mission, the EU is poised to further accelerate its progress towards its 2030 goals. The success of these missions will largely depend on the continued collaboration between the EU, member states, and citizens, as well as the effective integration of private sector participation.
EU Taxonomy Alignment: Asset Managers Struggle with Disclosure
Asset managers are grappling with the challenge of disclosing the extent to which their EU-domiciled sustainability-labeled products align with the environmental objectives of the EU taxonomy. The issue stems from insufficient corporate disclosures, creating a ripple effect that hampers fund managers' ability to report accurately.
MSCI's new paper reveals that out of 6,603 assessed Article 8 and 9 funds, only 126 reported a figure for EU taxonomy-aligned revenue, with 114 claiming zero aligned revenue.
The lack of taxonomy-alignment reporting is attributed to the "incomplete nature of the EU taxonomy, and the high bar set to determine sustainable activities," according to Rumi Mahmood, Head of ESG Fund Research at MSCI ESG Research.
Asset managers need information from portfolio companies to make these disclosures, which is expected to be provided through the Corporate Sustainable Reporting Directive (CSRD), applicable to the largest companies from 2024.
MSCI estimated that only 12 out of 11,691 European-domiciled equity funds have a taxonomy alignment of over 60%, suggesting a lack of sector diversification.
The gap in corporate reporting, particularly from companies outside Europe, presents significant challenges for achieving taxonomy-aligned global portfolio diversification. However, this also opens up opportunities for fund providers to innovate and service the large gap that exists in the market, particularly for Article 9 funds. As sustainability becomes a key focus, the need for comprehensive and accurate reporting will only grow, necessitating a concerted effort from all stakeholders.