Are the G7 ESG ‘wonders of the world’ or ‘deadly sinners’?
Cornwall is hitting the headlines this week, not for its popularity with ‘staycationers’ drawn to its beautiful sandy beaches, rolling countryside, and rather tasty pasties, but for the meeting of the leaders of the world’s seven largest more-advanced economies.
While newsreaders have lately been drawing our attention to concerns on whether the UK/US relationship should be described as ‘special’ (which, for many reasons, I rather hope it continues to be), or ‘Mount Recyclemore’ that highlights the damage from e-waste, my interest has been rather more captured by the G7 finance ministers’ communiqué released on 5 June.
The communiqué includes some significant commitments from the G7 that I feel would not have been possible just one year ago. It’s not perfect, but it included positive commitments, from vaccine financing through the World Bank to supporting heavily indebted low-income countries. It’s worth reading the whole document should you have the time. If you don’t, below are a few topics on which I focused.
Sustainable & resilient recovery
Not unexpectedly, the ministers reiterated their strong commitment to a sustainable, resilient, and – critically – green recovery. COVID-19 recovery packages are an opportunity for G7 members to speed up the transition to net zero across their economies. Last year we recommended to policymakers a few ways of doing this (e.g. phase out fossil-fuel subsidies).
Climate change & biodiversity
Climate change is mentioned no fewer than 22 times over the mere four pages, and biodiversity five times. While COVID-19 was at the forefront of minds last year (and rightly so), the G7 finance ministers didn’t mention either ‘climate change’ or ‘biodiversity’ once in 2020. 2019 was slightly better, with the climate mentioned five times. My point is that the climate and biodiversity are now at the top of the political agenda, while ‘pricing carbon’ and central banks assessing financial-stability risks posed by climate change were mentioned this year too. We have gone from the ‘why’ (or it’s a ‘hoax’) discussion, to the ‘how do we do this’ discussion. As ever, the key will be whether this stays at the top of the agenda. Having said that, with President Biden insisting that “it’s the number-one issue facing humanity and it’s the number-one issue for me”, I have hope.
G7 ministers have committed to ‘properly’ integrate climate and biodiversity considerations into policymaking across government. A few may say this is hot air, but I think it’s a very welcome and much-needed statement. Far too often we see proposed policies or regulation that seemingly have not been aligned with commitments made elsewhere in government. Take the EU’s work on revising the Common Agricultural Policy as an example: it has no reference to the EU’s Climate Law, Green Deal, Farm to Fork, or biodiversity strategy. We have written on both the EU CAP reform and why we believe investors should take note on biodiversity.
Again, very welcome comments from G7 ministers here, not only mandating TCFD reporting but also endorsing the work of the IFRS to establish a ‘Sustainability Standards Board’ that will pull together the often-confusing world of ESG reporting.
The nod to ‘double materiality’ interested me (one quote included, “We recognise the growing demand for more information on the impact that firms have on the climate and the environment”), a concept central to the EU’s approach to non-financial reporting and one LGIM supports.
However, I felt ministers could have elaborated on the extent to which TCFD reporting would become mandatory along the investment chain. We have said before that adopting a strategy that mandates TCFD reporting throughout is the most appropriate and effective way to encourage stronger accountability to end investors and greater investment in companies that have credible net-zero strategies. In addition to this, it would have been welcome if ministers had spoken of efforts to harmonise i) ‘taxonomies’ that categorise sustainable activities, and ii) efforts to bring greater transparency on ‘sustainable investments’ by market participants.
A more commonly discussed point has been the commitment to set a global minimum corporate tax of at least 15%, and to take this forward with the G20. In our view, this is another significant policy step in ensuring multinational corporates pay their fair share in the country where their earnings are generated. Now, while this goes a long way, we would hope that any future agreements include reference to greater tax transparency specifically disaggregated to ‘country-by-country’ reporting, as we and others argued in a recent letter to the EU.
The so-called ‘silent pandemic’. Some may expect this to sit more appropriately in a health ministers’ communiqué, but we all now appreciate the economic impact pandemics can have. My colleagues have elaborated on why investors should care.
Again, a welcome re-commitment to international climate finance. I note this only as a reminder that climate change is not limited to specific markets, so international coordination and investment is much needed.
In short, the finance ministers’ communiqué included aspects that we believe are very positive for the broader ESG ‘sector’, although further detail and expansion in some areas would have been welcome.
We hope the next few days will support this ambition further and encourage countries (in and outside the G7) to produce clear and sector-specific decarbonisation roadmaps, and align their National Determined Contributions with 1.5 degrees and net zero by 2050. You can also read more in the ‘2021 Global Investor Statement to Governments on the Climate Crisis’, released today, which has been coordinated by The Investor Agenda and is signed by 457 investors representing $41 trillion of assets.
As COP26 approaches, we’ll look forward to this agenda gaining momentum.