IPCC Warning, Biden Vetoes Anti-ESG Bill, and More 

March 24, 2023

The top five climate risk and disclosure stories this week.

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IPCC warns of escalating climate risks

Each fraction of a degree of human-induced global warming will result in worse climate-related physical risks, the Intergovernmental Panel on Climate Change (IPCC) said in the final part of its sixth assessment report on Monday.

Drawing on the contributions of over 700 climate scientists, the so-called Synthesis Report said continued warming would intensify multiple climate impacts, including heat waves, droughts, tropical storms, and very dry weather that can lead to wildfires. Higher global average temperatures would also increase food and water insecurity around the world.

But the authors insisted that drastic action to slash greenhouse gas (GHG) emissions could save humanity from the worst effects. “This Synthesis Report underscores the urgency of taking more ambitious action and shows that, if we act now, we can still secure a liveable sustainable future for all,” said IPCC Chair Hoesung Lee.

Limiting global warming to 1.5°C above pre-industrial levels is still possible, according to the report. However, this depends on the amount of GHG reductions that are made this decade. If annual carbon dioxide (CO2) emissions stay around 2019 levels this decade, the IPCC estimates that the resulting cumulative emissions would be almost enough to tip the planet over the 1.5°C threshold. Emissions have to be cut roughly in half by 2030 for the warming limit to be achieved, the report adds. As of now, the IPCC says projected future emissions from existing fossil fuel installations “already exceed the remaining carbon budget for limiting warming to 1.5°C.”

United Nations Secretary-General, António Guterres, called the Synthesis Report “a how-to guide to defuse the climate time-bomb” that demands a rapid scaling up of climate efforts “by every country and every sector and on every timeframe.”

Biden vetoes anti-ESG investing bill

On Monday, US President Joe Biden vetoed a Republican-led attempt to kill a rule that allows retirement plan managers to incorporate environmental, social, and governance (ESG) analysis in their decision making. 

The rule, drafted by the Department of Labor (DoL) and put into effect this January, enables managers to consider climate change and other ESG factors when choosing retirement investments and exercising shareholder rights — as long as these factors are relevant to a risk and return analysis. Republican lawmakers argue the rule prioritizes “woke” ESG interests to the detriment of retirees’ savings. However, the rule does not force managers to make investment decisions based solely on ESG factors.

“There is extensive evidence showing that environmental, social, and governance factors can have a material impact on markets, industries, and businesses,” Biden said in a statement accompanying his veto. “But the Republican-led resolution would force retirement managers to ignore these relevant risk factors, disregarding the principles of free markets and jeopardizing the life savings of working families and retirees,” he added. “In fact, this resolution would prevent retirement plan fiduciaries from taking into account factors, such as the physical risks of climate change and poor corporate governance, that could affect investment returns.”

The Republican majority in the House originally passed the bill attacking the DoL rule on February 28. The Senate followed suit on March 1, with Democratic Senators Joe Manchin and Jon Tester voting with the GOP.

An attempt to override Biden’s veto on Thursday failed to garner the two-thirds majority required in the House. The tally ended 219-200 in favor of overturning the veto.

Climate shareholder proposals surge at US firms

Hundreds of climate resolutions have been filed by investors at US public companies in advance of the annual general meeting season, research by advocacy groups show.

The Proxy Preview 2023 report, which compiles data on shareholder resolutions, shows a record 542 environmental, social, and sustainable governance (ESG) filings have been submitted to companies, many of which will be voted on in the coming weeks. The tally at this time last year was 529 resolutions.

Of this year’s ESG resolutions, 23% relate to climate change, compared to a 21% share the year before. Many of these call on companies to set GHG emissions reduction targets and report their progress toward them. A number also press boards to factor climate risk into their business strategies and to disclose low-carbon transition plans. As of mid-February, 72 proposals asked about emissions, and 42 about climate strategy and risk assessment.

The authors of the report — As You Sow, Sustainable Investments Institute (Si2), and Proxy Impact — say the surge in climate and environmental proposals shows the anti-ESG political backlash fomented by Republican lawmakers is having a limited impact on shareholder activism.

“[T]here’s no indication attacks on ESG investing are going to dampen investor appetite for facts and disclosure, which make the capital markets work better,” said Heidi Welsh, executive director of Si2.

ESG policy war spooks investors — report

Institutional investors say both pro- and anti-ESG policies could hinder their ability to do business in certain jurisdictions.

The 2023 Global Climate Survey, the latest in a series of annual polls conducted by European investment manager Robeco, reveals how 300 of the world’s largest institutional investors are thinking about climate risks and opportunities. It shows a divergence in geographic attitudes toward climate and ESG issues and approaches to climate risk management.

On the topic of ESG investing, 61% of North American entities said adopting climate-friendly investment policies that exclude fossil fuels could make it harder for them to operate in jurisdictions that are hostile to ESG efforts. In contrast, only 48% of European institutions said the same, while 60% of Asia-Pacific expressed this concern.

European entities are more afraid of pro-ESG policies. Almost two-thirds (63%) agree they are nervous about political pressure if they fail to take positive climate and ESG action. Only 40% of North American institutions took this stance, and 57% of Asia-Pacific firms. 

Many survey respondents also said they are worried about future potential climate and ESG litigation if they make detailed ESG disclosures — 42% of European firms, 50% of North American entities, and 56% of Asia-Pacific investors.

Robeco found that despite these political headwinds, global investors continue to set net-zero targets and incorporate climate change into their investment policies. But just 29% of respondents have set interim decarbonization targets that consider periods before 2050.

With regards to climate investing strategies, more institutions said they scrubbed carbon-intensive assets from their portfolios last year. Thirteen percent of institutional investors said they divested from high-emitting assets over the last 12 months, compared with 7% in the year-before period. Fifteen percent expect to divest over the next 12 months. 

Global accounting standard-setter to enhance climate risk disclosure

The International Accounting Standards Board (IASB) has launched a project to identify ways companies can improve reporting of their climate-related financial risks.

The global standard-setter, which oversees accounting rules used in over 140 jurisdictions, wants to respond to company and investor concerns that climate risks are not appropriately reflected in the nitty gritty of financial statements. The IASB will explore whether there are unclear or insufficient requirements on climate-related financial risks disclosure in its standards, whether companies are currently failing to comply with existing requirements, and determine if investors’ information needs exceed the boundaries of traditional financial statements.

The IASB said the project, which is focused on financial disclosures, will complement the work of its sister organization, the International Sustainability Standards Board (ISSB), which is finalizing climate and sustainability disclosure requirements. 

“[S]ustainability-related financial disclosures may explain the sustainability-related risks and opportunities arising from an entity’s activities and its assets and liabilities. Such disclosures may also provide early indications of matters that will subsequently be reflected in financial statements. For example, a company’s commitment to net zero emissions could, over time, result in liabilities being reported in the financial statements,” IASB Chair Andreas Barckow wrote. 

The project may result in “minor amendments” to the IASB accounting standards, but it is not intended to produce a fully-loaded IASB standard on climate-related risks or comprehensive new guidance.