TBLI Weekly - May 16th 2023


TBLI Weekly - May 16th 2023

Your weekly guide to Sustainable Investment

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‘Sustainable’ pension funds accused of greenwashing over billions held in oil and gas firms

People investing their pensions in funds that claim green credentials are being warned they may actually be backing the world’s largest oil and gas companies.

Carbon Tracker Initiative said that asset managers have invested $376bn (£295bn) in oil and gas companies, despite publicly pledging to back efforts to limit global temperature rises to 1.5C. The environmental thinktank based in London and New York found that more than 160 funds with a green label held $4.6bn in 15 companies including ExxonMobil, Chevron and TotalEnergies.

It also found that 25 members of the Net Zero Asset Managers initiative had invested in those companies and some had increased their holdings in 2022. NZAM said its international initiative started two years ago and investors needed time to change their strategies.

The warning comes as the UK’s Financial Conduct Authority prepares to publish anti-greenwashing rules that are intended to clean up how investment funds are labelled.

Just under 50% of all UK employees now pay into employer schemes or private pensions where they can make a choice about how their money is invested – a huge rise since 2012 when employers became legally obliged to automatically enrol workers in a workplace scheme. Most people with a private pension or a stocks and shares ISA make a choice as to how their money is invested and many emphasise sustainability.

The financial industry has reacted by creating funds badged as sustainable, climate, carbon, transition or ESG – short for environmental, social and governance.

“What we found is that these funds, despite their names, can often include sometimes large positions in fossil fuel companies,” said Maeve O’Connor, one of the report’s authors, and an analyst at the Carbon Tracker Initiative. “For retail investors that could be seen to be misleading. If I’m investing in a green fund, do I want my investment to be going to ExxonMobil? Probably not.”

According to the report, BlackRock’s ACS Climate Transition World Equity Fund says it invests in companies “well-positioned to maximise the opportunities and minimise the potential risks associated with a transition to a low-carbon economy” – but it has $219m in 10 of the 15 leading oil and gas companies.

O’Connor said asset managers were usually given performance targets over short periods, which might influence their thinking. She said: “They could be assessed over two to five years and that timescale doesn’t really fit with the realities of the energy transition.”

Coalitions such as UK Divest and Share Action campaign for pension funds to be invested sustainably. Robert Noyes, an energy economist at Platform London, part of UK Divest, said that with about £2tn invested in pensions, it was the largest source of investment in the UK and people should ask their pension providers for information.

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Intensive farming is biggest cause of bird decline in Europe, study says


Use of pesticides and fertilisers identified as most significant factor behind loss of 550 million birds from skies

The use of pesticides and fertilisers in intensive agriculture is the biggest cause of the dwindling number of birds in the UK and the rest of Europe, scientists have said.

Compared with a generation ago, 550 million fewer birds fly over the continent, with their decline well documented. But until now the relative importance of various pressures on bird populations was not known.

A team of more than 50 researchers, analysing data collected by thousands of citizen scientists in 28 countries over nearly four decades, found that it is intensive agriculture, above all, that is behind the decline in the continent’s bird populations.

They found the number of wild birds of all kinds across the continent has fallen by more than a quarter since 1980, but that this decline deepened to more than half among farmland species.

Birds that rely on invertebrates for food, including swifts, yellow wagtails and spotted flycatchers, were the hardest hit. “It’s more than a smoking gun,” said Richard Gregory, a senior conservation scientist at the RSPB, and one of the lead authors of the study.

“I don’t think a study has looked at all these factors in one go, in such a sophisticated fashion, correcting for one variable alongside another; and it comes out with a very clear message.”

The study, published in the Proceedings of the National Academy of Sciences, examined how 170 bird species had responded to four widespread manmade pressures, including agricultural intensification, forest cover change, urbanisation and the climate crisis.

Farmland species suffered the most precipitous decline, with numbers falling by 56.8% since research began, the study said. Numbers of urban dwelling birds were down 27.8%, and among woodland dwelling birds the fall was 17.7%.

But in all contexts, intensive agriculture, which has been on the rise across Europe, was identified as a major factor in decline, with the mass slaughter of invertebrates as pests creating a “trophic cascade” up the food chain.

“The losses are quite huge,” Gregory said. “And a lot of them go back to that kind of an insect diet or linkage with insects, which is suggestive of a link to the way we’re farming land.”

Urbanisation, also on the increase across Europe, was identified as the next most important factor putting pressure on bird populations. Many cities are steadily losing to development what little plots of green space they had, while modern architecture also played a role, Gregory said.

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The UK needs a new industrial strategy or it will lose the global green subsidy race

UK businesses have criticised the government for the lack of a clear industrial policy. Industry body Make UK has warned the country “risks being squeezed” by US and EU green subsidy packages.

Outside the UK, industrial policy is back – and in a big way. Around the world, there has been a noticeable shift towards greater government intervention in the economy.

Recent shocks such as the COVID pandemic and the energy price spike arising from the Ukrainian war, have led to breakdowns in global supply chains and high inflation. In Europe and the US they also exposed fragility and a lack of resilience – especially in key areas such as energy security and the supply of medical equipment.

These governments seem to recognise the role of industrial policy in supporting domestic manufacturing to safeguard against future crises, reduce reliance upon Chinese imports, and in dealing with the climate emergency. They are also promoting industrial policies to enhance competitiveness, productivity and economic growth.

New industrial policies

The US has been the most prominent flag-bearer for these new industrial policies. President Joe Biden’s 2022 Inflation Reduction Act (IRA) allocates almost US$700 billion (£555 billion) of federal funding over the next decade to support US industries, particularly healthcare, renewables and clean-tech sectors.

This includes subsidies and tax breaks to US manufacturers and consumers to encourage investment in, and use of, low carbon technologies (such as electric vehicles, heat pumps and carbon capture), as well as semiconductors. There are also new rules to encourage the use of local supplies to support US manufacturing.

The US has also recently enacted the Bipartisan Infrastructure Deal and the Chips and Science Act to boost transport and communication networks, and promote R&D, especially in regional high-tech hubs. Over the next decade, these three packages are expected to total over US$2 trillion of industrial policy support for US businesses.

Yet, there are concerns that these interventions are protectionist and violate rules set by the World Trade Organisation (WTO) – the global body that oversees trade between countries – on procurement and subsidies by unduly favouring US firms. The EU has spoken out about the possible impact of the IRA on its own clean-tech industries, particularly in terms of harming its exports and diverting investment away from Europe.

The EU has also questioned China’s industrial subsidies, possible infringements of intellectual property rights by Chinese companies, and the difficulties European businesses face in operating in China.

To combat these issues, the EU announced its own €250 billion (£217 billion) Green Deal Industrial Plan in February. This includes relaxing EU state aid rules to allow member states to fast-track investment in green sectors. The emphasis is on support for skills and supply chains, alongside smarter and simpler regulation.

A European Sovereignty Fund is also expected to offer subsidies for clean-tech innovation and infrastructure, while net-zero industry academies will train European workers for the green transition.

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Impact investor Illumen Capital closes $168M vehicle

Illumen Capital, a fund-of-funds focused on racial and gender diversity in investing, has closed its second fund on $168 million, led by the Ford and WK Kellogg foundations along with more than 100 other investors.

The firm's second fund was oversubscribed, passing its initial target by around $50 million and nearly doubling the fundraising of its $88 million predecessor. Illumen Capital invests in venture, growth and PE funds with a focus on racial and gender equity in its investments. This fund family invests across education, health and wellness, climate and sustainability, and financial inclusion.

"Each of these areas represent massive markets that are undergoing increasing disruption and volatility. We know from our research that this increase in volatility and disruption leads to many retreating to their biases," said Daryn Dodson, managing partner and CEO at Illumen Capital.

The firm helps fund managers implement strategies to reduce racial and gender bias in hiring, investments, and company operations, in partnership with Stanford SPARQ, a behavioral science think tank at Stanford University.

In 2019, Illumen Capital conducted joint research with the university to evaluate the biases of 180 asset allocators and found evidence of racial bias in their investment decisions. The coalition asked respondents to rate VCs based on their evaluations of a one-page summary of a fund's performance history, which included information about the race of the managing partner and the strength of the fund's credentials.

When presented with VC firms that have strong credentials, allocators tended to favor white-led, less-diverse teams. When evaluating management teams with weaker credentials, allocators favored Black-led, diverse GPs. Even then, the study found that allocators still didn't express a high likelihood of investing in those teams.

"The basics of financial analysis often get interrupted when race or gender is present," Dodson said.

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Greenwashing era is over, say ad agencies, as regulators get tough

Insiders welcome stricter rules in the UK and EU over the use of terms such as ‘carbon neutral’ in adverts, and claims concerned with offsetting

Across the advertising industry, agencies are wrestling with their role in greenwashing scandals and their support for clients driving the climate and nature crises.

Companies are to face stricter rules from regulators in London and Brussels over what they can tell consumers about their role in the climate crisis and the loss of nature. Terms such as “carbon neutral”, “nature positive” and those concerned with offsetting are to undergo greater scrutiny by organisations such as the Advertising Standards Authority in the UK. In order to take meaningful action, agencies must also reconsider their relationships with major polluters, industry insiders have said.

“The era of unspecific claims such as ‘environmentally friendly’ is over,” said Jonny White, senior business director at AMV BBDO, which works with companies including Diageo, Unilever and Bupa. “Misleading environmental claims are under the microscope from advertising regulators, consumer watchdogs and even governments. The risks of getting it wrong are huge, with brands being shamed publicly when they are guilty of misleading the public,” he said.

Creative members of advertising agencies are having to work closely with their legal teams when advising clients on their climate claims, insiders have said, with an increased risk of fines and advert bans in some countries.

In the UK, the Ad Net Zero programme was launched in 2020 in a bid to reduce the carbon impact of the advertising industry’s operations to net zero by 2030, but many agencies are developing in-house teams for sustainability-focused campaigns.

“In many client organisations, there is still a big gap between the marketing and sustainability teams. They have different, often competing objectives, and are accountable in very different ways,” said Ben Essen, global chief strategy officer at the global marketing agency Iris Worldwide, which works with firms such as Adidas, Starbucks and Samsung, and is also doing the campaign for Cop26.

Essen said there is an “inherent tension” between the need to engage audiences through “often hyperbolic stories” and the need for sustainability teams to deal in the substance.

On Thursday, the European parliament voted to ban claims of carbon neutrality that are based on offsetting. The EU environment commissioner, Virginijus Sinkevičius, said firms would face greater scrutiny about their claims with offsets, but stopped short of supporting a ban, given their potential to fund climate crisis mitigation.

“Climate-related claims have been shown to be particularly prone to being unclear and ambiguous, misleading the consumer. Claims like ‘climate neutral’, ‘carbon neutral’, ‘100% CO2 compensated’ and ‘net zero’ are very often based on offsetting. We need to set things straight for consumers and give them full information,” he said.

Blake Harrop, president of Wieden+Kennedy Amsterdam, which works with Airbnb, Meta and Nike, said that the greenwashing clampdown in the EU and UK would provide competitive opportunities for companies that had genuine environmental credentials. “For good brands with good intentions and responsible messaging, I expect there will be little change. But for companies that have oversimplified and overstated their sustainability claims, then life is about to get complicated,” he said.

“It’s an interesting time to work in the legal department of an advertising agency. We need to pay a lot of attention to the opportunities and risks generated by AI, government policies regarding media platforms like TikTok around the world, and of course greenwashing laws.

“If all brands can claim they’re green, then you remove the incentive to win consumers based on superior commitments to the environment. This will hopefully make being an environmentally responsible brand even better for business,” he said.

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Sustainable packaging investment ‘set to rise’

plastic packaging

Research for material technologies firm Aquapak has found that investment in sustainable packaging materials will increase in the next five years as producers move towards using more of them.

It said in a report Sustainable Packaging in Europe: the drive for change that the European packaging industry is shifting the balance of materials it plans to use.

The report drew on research in the UK, Italy and Germany, which found that 62% of specialists in this field expected their company to increase budgets for sustainable packaging material during the next five years, with a further 23% expecting to see dramatic increases.

Respondents predicted increases in the use of multi-material – a combination of paper and plastic – new polymers and paper but said the use of polyethylene would decline. It found 83% expected to increase multi-material use and 72% would make more use of paper.

For new polymers such as PVOH and bioplastics, 69% and 65%, respectively, expected increased use. By contrast, 45% of respondents foresaw a decline in the use of polyethylene during the next five years.

Mark Lapping, chief executive of Aquapak, said: “Our research shows that the European packaging industry is moving towards more sustainable materials such as paper and new polymers as they focus on the circular economy.

“However, it is also clear that the job packaging has to do is paramount, with product protection and functionality a priority. The good news is that new barrier film technologies exist, offering both performance and environmental responsibility at scale.”


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