ESG | Feature


Financial Conduct Authority fires greenwashing warning


The regulator plans to step up efforts to protect consumers from misleading envi- ronmental claims in investment products.


The market for ESG-compliant investment funds is booming. ESG mandates for the 500 largest asset managers rose by 23.3% in 2018, according to a survey by the Think- ing Ahead Institute, while the number of bonds labelled “green bonds” increased by 48% in the first half of 2019, according to the Climate Bonds Initiative. But there is also growing concern that the investment strategies of many vehicles labelled ESG funds are not materially dif- ferent from mainstream funds. The financial conduct authority outlined in its recent Feedback Statement how it plans to tackle Greenwashing and protect inves- tors by challenging firms with misleading environmental claims.


“It is not always clear what firms or con-


sumers mean by, or expect from, ‘green products’. Common definitions and stand- ards are being developed, but this will take time. Without these, there is a risk that con- sumers suffer harm from ‘greenwashing’” the regulator warned. The feedback statement, which comes in response to a one year survey among indus- try stakeholders, highlights that there is currently a lack of consistency in terms of issuer disclosures, time horizons for meas- uring climate impacts, and that issuer dis- closures lack comparability.


The regulator aims to tackle these incon- sistencies by introducing new rules on cli- mate-related disclosures and clarifying existing obligations. It also wants to enhance the role of Independent Govern- ance Committees (IGCs) in overseeing ESG reporting. The FCA also plans to chal- lenge firms directly where it sees evidence of greenwashing.


There are currently no globally defined


standards, for example, on what constitutes a green bond, although the International Capital Markets Association Principles on green bonds are the most widely accepted guideline. However, there are controversies, particu- larly on loans to carbon heavy industries which claim to invest in relatively less pol- luting technology. In terms of country allo- cation, China is currently the world’s sec- ond biggest green bond issuer but also the world’s biggest carbon emitter due to its population size. It has faced criticism for using green bonds to finance coal plants. This widening of the definition on what constitutes a “green bond” has significant implications, given that China consumes half the world’s coal. Bermuda-based Teekay Shuttle Tankers has also faced investor criticism over its issu- ance of a green bond aimed at the produc- tion of fuel efficient oil tankers. The firm struggled to raise capital.


Climate activists target reinsurance industry on fossil fuels


Greenpeace activists have staged a pro- test outside the annual reinsurance meet- ing in Baden Baden, Germany aimed at urging the sector to divest from fossil fuels.


Activists argue that reinsurance firms could potentially play a big role in tackling the cli- mate crisis by divesting from fossil fuels. Carbon intensive forms of energy produc- tion such as burning coal are heavily dependent on insurance companies to underwrite their risks. As such, reinsur- ance firms could contribute to a reduction of coal plants by not renewing their con- tracts with these firms, climate activists argue.


“Over half of reinsurance companies still provide coverage for single coal-fired power plants or coal mines, and continue to have clients that insure power suppliers generat- ing significant proportions of their electric-


ity from coal,” said Adam Pawloff, climate and energy campaigner, Greenpeace Cen- tral and Eastern Europe.


Their demands have struck a chord: Between 2016 and 2018, almost half of the global reinsurance market has tightened their underwriting standards for the coal industry. This includes Hannover Re, the world’s largest reinsurer. Talanx Group, the parent company of Hannover Re announced earlier this year it had introduced a new exclusion policy and would “in principle” no longer be insuring companies that depend on coal for more than a quarter of their revenue. However, it says that it will still insure coal plants in countries where coal accounts for a large share of the energy mix and access to renewable energy is insufficient, Talanx stated. Other insurance firms that have partially divested from coal include Swiss Re, Munich Re, Scor, Lloyds and Generali.


Besides public pressure, there are also financial incentives for reinsurance firms to stop insuring coal. This is captured in concept of the “inevitable policy response” outlined by PRI, which warns investors that they might have to factor in a dramatic tightening of regulatory standards on cli- mate change over the next eight to 10 years, leaving investors exposed to the risk of stranded assets. Moreover, almost half, 42% of global coal plants are currently running at a loss and wind and solar energy is set to become cheaper than 96% of existing coal ppwer by 2030, according to research by the Carbon- tracker think tank. The report, which is based on data from 6,685 coal plants world- wide, representing 95% (1900GW) of all operating capacity, also predicts that up to 72% of all coal plants could become unprof- itable by 2040 due to tighter carbon pricing and air pollution rules.


Issue 88 | November 2019 | portfolio institutional | 37


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