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Tackling the climate emergency requires a socially just transition

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    The world is not equal under climate change, as both its impacts and the resources needed for mitigation and adaptation are distributed unequally. However, for active investors, capital markets could be a force for climate justice.  

    Last December’s 27th Conference of the Parties, or COP27 saw a small breakthrough on the central climate justice issue with an agreement to establish a loss and damage fund, paving the way for the ‘Global North’ to support the ‘Global South’ in fighting climate change and mitigating its impacts.

    The Intergovernmental Panel on Climate Change estimates 3.3 billion people already live in climatically vulnerable areas. The private sector can play a large role in financing a just transition and climate adaptation in communities that need it. For investors, this means ensuring social factors are integrated into capital allocation and stewardship activities or investing in social bonds, among other actions.

    Renewables in developing countries

    While COP27 underwhelmed on emissions commitments, the conference placed capital markets in the spotlight, underlining their potential contributions to financing a just transition that supports adaptation in developing countries. Blended finance – a mix of public and philanthropy-backed finance alongside private capital – could be one way.

    Indonesia signed a USD 20 billion agreement with developed countries and major international lenders to help it transition away from fossil fuels towards renewable energy sources. The Just Energy Transition Partnership deal is an important step for the country as it is the world’s third-largest coal producer.

    South Africa, another developing country with high coal production, was the first nation to sign a JETP deal, swiftly followed by Vietnam. India, the Philippines and Senegal will be watching how these deals progress as they are considering signing similar agreements.

    “JETP deals not only aim to reduce power sector emissions and accelerate the energy transition in coal dependent countries. They also help support economic growth, create new skilled jobs, reduce air pollution, and contribute to a resilient, prosperous future.”

    Thibaud Clisson, Climate Change Lead

    Investor engagement for the planet and our health

    The agriculture & food sector was another major focus addressed during COP27. There are several challenges relating to justice: the current food system generates 37% of global emissions, yet one third of food is wasted, while hunger persists in the ‘Global South’ and food insecurity is prevalent even among poorer populations in middle and high-income countries.

    To deliver the essential global transition to net zero emissions, food systems must undergo their own transition. This means substantial shifts in diets towards plant-based and alternative proteins, more efficient supply chains generating less methane and waste, and reducing deforestation. Today’s unsustainable food practices also carry increasing financial, regulatory or reputational risks.  

    “The successful transition of food and land use systems depends on a host of actors working together, including investors. We must not only shift to live within the planetary boundaries, but also redress the inequity created by the current system in relation to access to adequate healthy diets.”

    Rachel Crossley, Head of Stewardship – Europe

    Say-on-climate management proposals growing worldwide

    Tools are emerging to take action on climate priorities, including in the field of traditional corporate governance. Initially promoted by non-governmental organisations and investors, the practice of say- on-climate proposals has been growing in popularity among companies in the last wo years.

    Aiming to offer shareholders a consultative vote on the corporate climate strategy and/or report, and to enhance climate-related shareholder dialogue, those ballot measures are more and more voluntarily added by companies to the agendas of their annual general meetings.

    However, the practice remains at an early stage, with only 2% of global AGMs within our 2022 voting perimeter presenting say-on-climate votes. It is still uncertain whether the practice is going to become more general. Some investors suspect these management proposals could create a distraction from effective climate action.

    Despite differing viewpoints, and considering the current multitude of corporate approaches, a common framework is needed to facilitate a global understanding and alignment of say-on-climate proposals.

    “For now, say-on-climate is voluntary. This leaves companies free to decide on the best strategy. Eventually, it may become regulated, much like climate-related disclosures.”

    Paula Meissirel, Stewardship Analyst

    Markets need transparency, investors need clarity

    COP27 heralded increasingly high disclosure and reporting standards, notably this year’s launch of the Net-Zero Data Public Utility repository and CDP’s planned integration of IFRS 2 standards in 2024.

    While navigating the flurry of regulations can be challenging, they are moving in the right direction. The adjustment period will be challenging in the short-term for capital markets as various Sustainable Finance Disclosure Regulation (SFDR), European Union Taxonomy and MIF2 (Markets in Financial Instruments 2) dispositions come into effect before they are fully aligned.

    In Q4 2022, Article 8 and Article 9 funds had gathered EUR 15.8 billion, while assets in Article 6 funds dropped by EUR 3.3 billion (source: Morningstar Direct). This shows that the market’s strong appetite remains. Asset managers have a key role to play in providing clarity to clients, so that their preferences will translate into concrete results that contribute to a more just and sustainable global economy.

    “Regulation is still evolving, yet the guiding principle remains one of greater transparency, which is key to building investors’ confidence.”

    Laurence Caron-Habib, Head of Public Affairs

    This article is part of the COLLECTIVE INSIGHTS section of our 2022 Sustainability Report where our experts share their views on three key topics: climate, biodiversity and geopolitics.


    Please note that articles may contain technical language. For this reason, they may not be suitable for readers without professional investment experience. Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice. The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns. Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions). Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.
    Environmental, social and governance (ESG) investment risk: The lack of common or harmonised definitions and labels integrating ESG and sustainability criteria at EU level may result in different approaches by managers when setting ESG objectives. This also means that it may be difficult to compare strategies integrating ESG and sustainability criteria to the extent that the selection and weightings applied to select investments may be based on metrics that may share the same name but have different underlying meanings. In evaluating a security based on the ESG and sustainability criteria, the Investment Manager may also use data sources provided by external ESG research providers. Given the evolving nature of ESG, these data sources may for the time being be incomplete, inaccurate or unavailable. Applying responsible business conduct standards in the investment process may lead to the exclusion of securities of certain issuers. Consequently, (the Sub-Fund's) performance may at times be better or worse than the performance of relatable funds that do not apply such standards.

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