Capital Monitor provides you with data-guided insights into the themes, controversies and impact of sustainable capital globally. Last year yielded a rich platter for sustainability news, whether it was Russia’s invasion of Ukraine, the climate fight engulfing US politics and spilling out into the financial sector, or the damp squib that was Cop27.
It’s nigh on impossible to cover all developments, controversies and trends in a subject as encompassing as sustainability, so it’s important as a news team to make sense of the events that may have the biggest impact on it.
We’re not suggesting Capital Monitor’s editorial team managed that perfectly, but we offered up our trademark deeply researched analysis, rich case studies and inspiring interviews all aligned to share best industry practice across disparate financial and investment disciplines.
And it seems our readers agreed with us. As 2022 drew to a close, Capital Monitor picked up no less than five industry press awards for our efforts – something we are very proud to have received.
For those of you interested to find out what took our readers’ fancy, below are the 12 most visited articles – on a monthly basis, in chronological order – published by Capital Monitor in 2022. Click on each heading to read the full story.
Cop26 targets pushed back under threat of being sued
January: In what proved a very popular scoop, Capital Monitor established that countries such as Denmark and New Zealand were sitting between a rock and a legal hard place.
Cop26 and other climate commitments were effectively being tailored to suit fossil fuel companies because they had signed up to the Energy Charter Treaty, an investment pact that allows companies and their shareholders to sue foreign governments if they feel they have not been treated fairly in policy decisions relating to fossil fuel assets.
The Energy Charter Treaty (ECT) protects some €345bn ($396bn) worth of fossil fuel infrastructure in the EU. Most cases have ruled in favour of investors, and around 80% have been brought in the past ten years. More are expected as climate scientists stress the need for rapid policy action to phase out fossil fuels.
Update: The EU and the UK have been pushing for a modernisation of the treaty to address the above concerns. In June 2022, an agreement was reached, including a “flexibility mechanism”, which would allow parties to exclude investment protection for fossil fuels in their territories. This comes into effect in August this year.
Who is closing the ESG education gap in sustainable finance?
February: Reader surveys will often tell you that audiences don’t wish to sully themselves with grubby stories linked to jobs and pay, but the data never lies – they love them! And this story proved no different.
The rapid rise in demand for ESG jobs, particularly within the financial sector, is not being matched by the number of staff with the right skills and education. This was according to a January 2022 report from Toronto Finance International (TFI), which assessed the sustainability skills gap within Canada’s financial sector.
Every one of the 100-plus finance professionals surveyed by TFI agreed that development of sustainable finance skills was important. Nearly seven in ten said the supply of sustainable finance skills within their organisation did not meet demand, while 77% said the shortage was having at least a moderate impact on their organisations.
Update: More evidence across the globe seems to re-affirm the TFI’s findings. For example, Asia Pacific has seen 30% growth in hiring for green jobs — defined as jobs that cannot be done without sustainability skills — between 2016 and 2021, according to a global study of job searches on business social network LinkedIn.
German companies keep cards close to chest on Russia
March: With Russia having just invaded Ukraine in late February, it was no surprise attention moved quickly to the political and investment implications of relations with the former USSR.
Given its proximity to Russia, we were keen to see how corporate Germany was responding to the invasion. Research conducted by Capital Monitor revealed that almost half (18) of the constituents of Germany’s Dax 40 stock index – comprising the 40 biggest companies by market capitalisation and liquidity listed in Frankfurt – said in March they were retaining their business in Russia or declined to comment.
There were a few notable exceptions. BMW, Mercedes-Benz and car parts manufacturer Continental stopped the export of vehicles to the country and halted production in Russia. Daimler Truck went a step further, closing off the sale and production of its vehicles in Russia and suspending cooperation with Kamaz, Russia’s largest truck manufacturer.
Update: Since the invasion of Ukraine began, the Yale School of Management has been tracking the responses of more than 1,200 companies and their official position on working in Russia. As of December last year, more than 1,000 companies have announced they are curtailing exposure beyond legally required international sanctions.
Why SEC climate disclosure plan is a “game changer”
April: The world’s most influential securities regulator published in March its position on mandatory corporate reporting on climate risk. Many were disappointed the US Securities and Exchange Commissions had chosen not to pursue double materiality – how corporate information can be important both a firm’s financial value, and its impact on the world at large – but the 510-page paper did yield some very important new concepts.
One such requirement is that, before filing their climate reports, both company management teams and an independent third-party sign off carbon emissions data, with a phased-in approach according to the level of attestation required and the size of the company. The third-party assurance requirement could mean the SEC goes further than other capital market regulators on climate risk disclosure, argued Wes Bricker an executive at PwC at the time of publication
Update: Many opponents have expressed their dislike of the proposed rules, with many companies warning of painful new costs in complying with climate risk disclosures. Republican state attorneys-general have threatened lawsuits. Despite the pressure, the SEC is expected to run the course with its plans and formalise it in early 2023..
Why HSBC’s response to Kirk’s climate speech was damaging to responsible investment
May: In what proved a career-ending presentation on stage at an FT event on climate, Stuart Kirk, head of responsible investment at HSBC Global Asset Management, upset a lot of people with his contrarian views on why he believes climate change is real, but is not a financial risk worth worrying about.
Capital Monitor took the view that, while Kirk had overplayed his hand, the real issue was how HSBC chose to handle the fallout. In treating Kirk like a scapegoat, the financial institution was distancing Kirk’s view from that of itself. However, information came to light to indicate that his opinions were neither a shock to senior management or possibly even novel. By clamping down hard on Kirk, HSBC ran the risk of both looking hypocritical and of suppressing open debate.
As we said at the time: “But while many deride Kirk’s fundamental argument and his delivery, they were at least party to it. The biggest worry is that contrarian views get smothered for fear they contradict any existing public commitments and damage ‘the brand’. That road leads to increasingly anodyne and PR-safe remarks about being on a ‘journey’ – something Kirk rightly derided.”
Update: HSBC’s top executives were quick to disavow Kirk and eventually kick him out, but it turns out he aired similar comments in a panel discussion some eight months before delivering his infamous speech at the FT Moral Money Summit on 19 May, Capital Monitor revealed in July.
Data vendors’ taxonomy alignment scores vary widely
June: Variation in ESG ratings and scores is in part accepted by sustainable investors who value diversity of opinion and acknowledge that no two asset owners will have the same investment objectives.
But the same should not be said for the regulatory products that data vendors offer. Assessing whether a portfolio is aligned with the EU’s banner green taxonomy, should, Capital Monitor assumed, yield more consistent responses, given it is prescriptive. Yet, this did not prove to be the case.
In a product road test, we established major scoring discrepancies between even eligible revenues as calculated by the three providers who were happy to share their scores with us – ISS ESG, FTSE Russell and Sustainalytics.
Because of the nature of the taxonomy, carbon-intensive companies provide the best illustration of data discrepancy. For instance, FTSE Russell puts Spanish utility Iberdrola’s eligible revenues at 9.7%, while Sustainalytics gets 40.1% and ISS ESG 61.5%. According to its annual report, Iberdrola’s own assessment puts it at 50.2%.
Conservative leadership race: Which candidate is the most climate-friendly?
July: In a year that proved beyond all doubt that Conservative leadership elections in the UK are none other than soap operas, Capital Monitor attempted to review public statements and historic voting data from the crop of ten leadership hopefuls vying to take over from Boris Johnson to establish their stances on climate change.
We have sourced voting records from TheyWorkForYou, which tracks this data, along with actions on 11 of the most significant climate policies since 2008, according to the UK Youth Climate Coalition, a youth-led non-profit that collates data on MPs' green credentials.
The front runner in the leadership race at the time, former Goldman Sachs analyst Rishi Sunak, was the only candidate, along with Suella Braverman, to have ‘almost always’ voted against measures to prevent climate change, according to TheyWorkForYou. This places him behind Johnson, who ‘generally’ voted against such policies.
In fact if anyone was hoping there was a candidate amongst the ten who had strong pro-environment positions, they would have been disappointed. Only Jeremy Hunt had showed any green appetite in voting behaviour between 2010 and 2020
Update: If anyone has been living under a rock for the past six months, they’ll be surprised to know that Liz Truss actually won the original race for PM only to blow her opportunity – along with the UK economy – and was forced to resign with Sunak taking over. For what it’s worth, Sunak seems less interested in the climate than Truss, based on voting behaviour.
Climate scenarios: “Narratives eat modelling for breakfast”
August: Climate scenario analysis is gradually gaining traction despite pushback and disagreement over data and metrics. One area increasingly being seen as key is improving qualitative analysis – that is, putting more narrative context around climate-related metrics.
As Capital Monitor found out, some work in this area is being kick-started by the Real World Climate Scenarios initiative, a group of climate risk professionals hosting a series of roundtables on the topic. The first took place in May, incorporating a range of practitioners and policy experts named in the summary of findings.
Publicly available scenarios, such as those from Network on Greening the Financial System, have models that are not fit for purpose. Shorter time frames – potentially five years or less – are needed to align with organisations’ decision-making horizons, and hard-to-model uncertainty – such as wars or pandemics – needs much greater recognition. In addition, climate scenarios are often not suitable for providing outcomes for developing countries.
There was consensus that narratives would help create explicit assumptions about non-modellable drivers such as politics.
Update: Whether narratives are enjoying a hearty breakfast is unclear, but more than a third of climate exercises being conducted around the world do not factor physical risks to stability, their scope narrowed to transition risk, according to a new survey conducted by the Financial Stability Board.
Link between ESG and profitability exists: New research
September: A report published by global accounting firm Moore Global argues that companies seeking to embrace ESG principles in recent years have enjoyed higher revenues, stronger growth of profits and greater access to finance.
Moore Global commissioned London-based economic consultancy, the Centre for Economics and Business Research (CEBR) to survey senior decision-makers at 1,262 companies with more than 250 employees in Australia, France, Germany, Italy, the Netherlands, the UK and the US between May and June this year to consider the impact of ESG on business performance. The research broke down ESG into environmental, social and governance pillars.
In total, companies which have engaged with ESG factors have seen revenues grow by $3.1trn. The US leads the way with $2.1trn, followed by Europe at $930.5bn and Australia at $58.8bn. For companies that have not engaged with ESG, the whole sample saw revenues of $402.4bn. Again, this was led by the US at $254.2bn followed by Europe at $144.3bn and Australia lagging at $3.9bn.
Update: There seems to be a decent body of research supporting the link between ESG and profit. For example, fresh research conducted by the Infosys Knowledge Institute revealed that 90% of executives said ESG spending led to moderate or significant financial returns. Most respondents (two-thirds) experienced ESG-linked returns within three years.
Mapped: The polarisation of ESG in the US
October: In what seems to have been a frenzied rush by US lawmakers in recent years to legislate on climate, Capital Monitor decided it was worth mapping out all the US states where ESG-linked bills have been introduced, their status and whether they fit into a broad pro or anti-ESG camp.
Out of the 17 Republican states, all introduced bills against integrating ESG principles into investment decision-making. Eleven of the 14 Democrat-leaning states put forward bills in support
As Capital Monitor concluded at the time: “ESG investing is a clear target of the ongoing culture wars in the US, joining critical race theory, trans rights and Covid masks. It would now appear to be ‘woke’ for fiduciary managers to take major risks into account.”
Update: The US mid-term elections did not go as Republicans had hoped, but they did manage to secure primacy in the House. Given the present farce of electing a house speaker, and Democrat control of the Senate, it seems that any federal movement on climate will be hard to achieve. That shouldn’t stop the individual states from pursuing their own environmental goals, however.
Explainer: What are the SFDR regulations?
November: Investment managers, from the end of 2022, were expected to begin reporting on the regulations put in place to ensure companies comply with global standards, such as the UN Guiding Principles on Business and Human Rights. We assume, then, that our explainer story covering EU Sustainable Finance Disclosure Regulation (SFDR) drew such attention.
Although SFDR was conceived as a disclosure-based regulation, market participants are using the categories as a “quasi-standard or proxy” as a means to interpret what ESG, responsible and sustainable investing means. Interpretation and application of its provision has therefore been mixed at best.
It has therefore been levelled that SFDR provisions do not make clear how to qualify an investment product as Article 6, 8 or 9 (outlined below), the boundaries between are therefore blurred leaving many to classify their own products.
Like them or not, SFDR is here to stay… so get used to it.
Update: Level 2 of the SFDR went live on January 1. It attempts to boosts transparency requirements for asset managers and means they will need to supply detailed sustainability-related disclosure obligations, and complete mandatory reporting templates beyond what was expected for Level 1, which went live 18 months ago.
Sustainable Impact Banking Awards winners announced!
December: After considerable blood, sweat and tears were sacrificed, Capital Monitor was able to announce the winners of our inaugural Sustainable Impact Banking Awards, celebrating the most sustainable banking institutions and their positive influence on the world.
The awards are a blend of rankings and case study-based awards highlighting the banking institutions with the biggest impact on sustainability throughout 2021. Underpinned by rich data, these inaugural awards serve to promote transparency, innovation and real-world positive impact, matching Capital Monitor’s mission to track the impact capital has on our environment and our societies. Our work is underpinned by the highest-quality data and created by the industry’s top capital markets journalists.
To find out who won, please watch our winners video:
