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A recent survey by PwC showed that 71% of institutional investors want stronger ESG regulatory requirements to guide the actions of the fund management industry. The hope is that extra rules “can act as an important lever to build trust and decrease the risk of mislabeling,” PwC wrote.
The issue of how to treat ESG fund labels is growing increasingly thorny. In the US, the Securities and Exchange Commission has proposed rules that would require firms to provide more data to justify the environmental, social and governance labels they use. In the European Union, asset managers are struggling to keep up with regulations that are based on an unclear definition of “sustainable investment,” and have already reclassified hundreds of funds amid widespread confusion.
Meanwhile, fund managers are trying to keep up with demand for sustainable investment products by reclassifying thousands of old products to fit with the EU’s Sustainable Finance Disclosure Regulation. An analysis by PwC shows that of 8,017 so-called Article 8 funds — an EU designation that requires a product to “promote” sustainability — only 989 were new at the end of the second quarter. The rest were reclassified. A similar analysis of 1,061 Article 9 funds — whereby a product needs to have sustainability as its “objective” — showed that only 286 were new.
As lawyers warn of the potential legal risks attached to reclassifying, renaming or mislabeling an ESG fund, clients are trying to make sense of the ESG claims made by their portfolio managers.
Yet there’s also a risk that extra regulations are drawing fund managers’ “resources away from much-needed strategic planning and product development,” PwC said.
“Our survey finds that regulatory and compliance costs have increased by more than 10%,” the consulting firm said. “This development favors large asset managers with the scale and resources to absorb these extra demands and spread the costs. For others, it creates a barrier to entry or puts further pressure on an already squeezed middle.”
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Pensions | A US Labor Department plan to ease restrictions on green private-sector retirement investing is on track for release later this year amid a new wave of anti-ESG policies clouding what was supposed to be a victory for socially conscious investors.
Auto Industry | Renault SA is joining a growing field of carmakers with a push to boost recycling of used-car parts and materials in a bid to meet tightening regulation and reduce reliance on increasingly scarce commodities.
Cybersecurity | Two decades ago, a cascade of accounting scandals in the US led to one of the most comprehensive packages of financial rules of the past century. Now, it’s time for regulators to act on escalating cybersecurity breaches to offer similar protections to consumers and investors.
Unions | An upcoming US Supreme Court case has the potential to chill unions’ use of strikes as a bargaining strategy and tilt the balance of power in labor-management relations more toward businesses.
Department of Labor | A final rule that’s expected to ease Trump-era restrictions on socially conscious retirement investing has been submitted to the White House’s regulatory office for review, signaling it may be released in coming weeks.
SFDR Articles | Asset managers are being told by their lawyers not to reclassify any ESG funds, as European clarifications of rules that are global in reach have the potential to “upend market practice.”
UK Taxonomy | UK regulators have been advised to avoid a number of key planks in the EU’s green taxonomy, including the bloc’s handling of real estate, as Britain tries to build an ESG investing framework of its own.
Double Materiality | An ESG strategy that’s too controversial for US regulators and some major ratings companies has been embraced by Fidelity International and other European financial firms as a way to safeguard long-term returns.
Climate Commitments | The biggest climate event of the calendar looks set to draw far fewer chief executive officers than it did just a year ago. BlackRock Inc. CEO Larry Fink won’t be at the COP27 summit in Egypt next month and will instead attend a meeting of the firm’s board of directors. Citigroup Inc. CEO Jane Fraser also will stay away, as will Bill Winters of Standard Chartered Plc. All three made a point of attending in 2021.
Lab-Grown Meat | Companies creating lab-grown steak, chicken and fish see a recent White House announcement as a signal that meat grown without animal slaughter is on the cusp of being legally sold and eaten in the US.
Antitrust | The passage of one or more new antitrust laws is likely, but none would drastically impact any company. A largely procedural measure on M&A fees and state lawsuit venues may be the extent of it, despite momentum for greater antitrust reform and regulation of big tech. It’s likely that more disruptive bills will languish given the lame duck session and probable 2023 gridlock.
Diversity | Investors and regulators will keep pressing companies on diversity, though the US has taken a step back on the regulatory front following California’s gender quotas being struck down and the challenge facing Nasdaq’s rule. Japan trails on gender diversity, but new pay-gap disclosure rules might provide some support.
Low US Risk | The US asset management industry continues to have subdued policy risk — both in terms of legislation and regulation — and that trend will continue into next year. Most of the already released regulatory proposals focus on transparency, which may lead to small increases in compliance and technology spending. In a worst-case scenario, which has a low probability of occurring, the SEC may embark on a new definition for family offices that would increase their regulatory burdens. New reporting rules for private equity funds are unlikely to affect fees, while a plan to scrutinize leveraged ETFs won’t be finalized anytime soon.
EU Emergency Measures | The EU’s emergency energy-crisis measures mandate that member states recover any revenues exceeding €180 per megawatt-hour ($175/MWh) from inframarginal generators and use it to ease energy bills. This may recoup up to €871 million in Germany in December, according to BloombergNEF. However, that’ a high-end estimate, and the revenue governments will be able to recover depends on the share of inframarginal technologies in the supply mix and contract composition of power producers.
Germany’s Power Supply Stack in 2022
Dodging Sanctions | In the rounds of sanctions imposed on Russia over its eight-month war in Ukraine, metals have been largely spared. That may be about to change, with the Biden White House considering a complete ban on Russian aluminum as Moscow escalates the conflict. Two other options under discussion are a punitive hike in tariffs to levels that effectively end imports, and sanctioning the company that produces Russian aluminum, United Co. Rusal International PJSC, more commonly known as Rusal.
Energy Storage | Global installations of energy storage will likely get a big boost thanks to sweeping climate legislation around the world, including in the US and the EU.
COP27 | This year’s UN climate summit in Sharm el-Sheikh is billed as the “implementation COP,” with host nation Egypt wanting to focus on the enactment of pledges and initiatives that arose from last year’s talks. COP27 won’t command the same fanfare as COP26, but it has a much harder task — making governments deliver on their commitments. BloombergNEF estimates the summit has a 43% chance of success, with a better outlook for areas like carbon market mechanisms than 2030 emission targets.
Solar | The solar supply chain will be able to support 1 terawatt of annual installations by 2025 or sooner, according to BloombergNEF.
Aviation | A UN body will aim to reduce greenhouse gas emissions from international aviation to net zero by 2050 and will use a new emissions limit for its flagship climate change program.
OFF THE SHELF
Taxonomies | Floods, droughts and food shortages are just some of the effects of climate change, as exploitation and corruption drive social injustice around the world. Governments tackling these issues are realizing that to solve them, they need to first define and measure them. Some are turning to so-called taxonomies that establish which economic practices and products are harmful to the planet and which aren’t. The idea is the price of goods and services must reflect the human and environmental cost of both production and disposal, which in turn would spur much-needed change. But designing a code is fiendishly difficult.
Double Materiality | Should a business or an investment fund care only about making money, or should it also worry about the environment, social justice and good governance? Can the two goals overlap? Do they already? These questions get at the heart of something called “double materiality.” While the concept has been built into new European regulations, it has yet to make significant inroads in the US — even as Wall Street behemoths like JPMorgan Chase & Co. embrace the idea. At issue is what information should be mandatory to report, and who decides?
ESG Loans | Virtue can bring rewards, as more companies are discovering when they reach out for a loan. Some banks offer borrowers discounts if they meet targets for cutting pollution, reducing food waste or even assisting job seekers. To give incentives teeth, there are penalties for missing goals. Global issuance of loans linked to borrowers’ ESG performance surged to almost $500 billion in 2021 from $4.9 billion in 2017 when the first such deal was created.
Circular Economy | Take, make, use, dispose. For decades, this has been the standard approach to production and consumption. Companies take raw materials and transform them into products, which are purchased by consumers, who ultimately toss them out, creating waste that ends up in landfills and oceans. Worried about climate change and environmental degradation, people are challenging the sustainability of this linear model and urging a so-called circular economy of take, make, use, reuse and reuse again and again.
ABC | You’ve probably heard of ESG, and may know it as a form of investing and finance that involves considering material financial risks from environmental factors, social issues and questions of corporate governance. If you’re like most people, you’re probably not clear on the difference between ESG and socially responsible investing, impact investing and similar, sometimes overlapping approaches — in part because ESG has come to mean different things to different people. That vagueness has helped fuel rapid growth in recent years. But accompanying those gains has been increased scrutiny from regulators cracking down on banks and investment firms making exaggerated claims.