ESG funds barred from fossil fuel investments after French government ruling

January 10, 2024|Written by |National Bank of Cambodia, Bank of Thailand

ESG funds may have to divest from fossil fuels after a French ruling, Cambodia’s central bank partners with the IFC on green regulation, ESMA says regulators must step up action on greenwashing, and more in the latest roundup.

ESG funds may have to divest fossil fuel investments after French ruling

ESG funds worth billions of euros will be barred from investing in companies financing coal, new oil and gas, or unconventional hydrocarbons following a tightening of criteria for the French ISR sustainability label.

The ISR label sets a standard for socially responsible financial products in France and is used by many pan-European funds. ISR-labelled funds currently hold €7bn of stock in traditional energy companies, and 45% of these funds hold oil and gas stocks, according to data from investment analysts Morningstar Direct reported in the Financial Times.

As the new exclusions apply to fixed-income funds, the rule changes may lead to billions of forced divestment in the coming year. The sweeping regulations will also have cross-border implications.

The French economy and finance ministry said the new criteria will also include a requirement for ISR funds to invest at least 15% of their portfolios in companies with Paris-aligned transition plans.

Cambodia and IFC partner up to mobilise green markets

The National Bank of Cambodia has signed an agreement with the International Finance Corporation to create a conducive regulatory framework for inclusive green growth and climate resilience.

The three-year partnership project will deliver a national green taxonomy and prepare relevant climate-informed guidelines, including reporting and disclosure requirements on green lending.

Cambodia is highly exposed to droughts and recurring flooding. Without sufficient climate adaptation, Cambodia could face a 9% GDP loss by 2050 and a 6% increase in the poverty rate by 2040, according to a World Bank report.

The report also states that US$36bn of additional investment will be needed over the next three decades for Cambodia to achieve net zero by 2050.

ESMA: regulators must step up action on greenwashing to combat market failures

Market-based methods for preventing greenwashing are failing and regulators should strengthen efforts to ensure credibility of sustainability related claims, says a European Securities and Markets Authority (ESMA) report.

The report documented a rise in greenwashing controversies in the news, but did not find conclusive evidence that they significantly impacted stock returns or price-to-ratio earnings in the European bloc.

While the report focussed on the impact of greenwashing in the news, a separate report the London School of Economics’ Grantham Institute found that climate-related litigation has an significant and adverse impact on firm value.

EU Commission expects green bond markets to ‘gather pace’ in 2024

The EU Commission told Environmental Finance it plans to accelerate issuance of NextGenerationEU green bonds in the first half of 2024.

In 2021, the EU announced its goal to use green bonds to fund 30% of its €800bn Covid-19 recovery measures. To meet its goals, the EU will have to issue an average of €50bn in green bonds annually. However, issuance to date has fallen behind schedule, averaging €16bn yearly to date and €12.5bn in 2023.

A spokesperson for the commission told Environmental Finance that green bond issuance will “gather pace” in 2024, but some market participants have expressed doubts as to whether targets will be met.

Separately, EU member states are ramping up national efforts. For instance, Romania has published its green bond framework which finance minister Marcel Boloș expects to “[catalyse] new green bonds issued by the private sector by creating an important reference in the foreign market for Romanian corporate bonds”.

Meanwhile, Germany aims to raise up to €19bn in green bonds during 2024.

UBS: benefit of integrating ESG into investment portfolios is clear

Integrating ESG considerations into investment processes may enhance stock selection and improve financial performance of investment portfolios, according to a UBS report.

The report analysed 1,295 stocks and found that top ESG-rated portfolios outperform the bottom ones by 30% over a 10-year period. This translates to a 1.6% annualised additional return, 0.9% of which is unexplained by traditional factors and so can be attributed to ESG factors, according to the authors.

Though the results were “theoretical”, UBS says they show that the estimation of intrinsic value is enhanced by structural inclusion of material ESG considerations.

IMF: Asian central banks should take an active role in climate risk

Central banks in the Asia Pacific region should play an “active role in climate risk supervision” to enable the region to manage its unique combination of climate-related economic opportunities and exposures, said a representative from the International Monetary Fund (IMF) at an event hosted by the Bank of Thailand in December.

As the driver of global economic growth in recent years, it is important that the region “[strikes] a balance between maintaining growth levels, managing climate risks, and contributing to global climate goals”, said Tobias Adrian, the IMF’s financial counsellor and director of monetary and capital markets.

Adrian identified various measures central banks can take within their mandates to increase climate finance flows to Asia. These include closing data gaps, incorporating climate risks in supervisory frameworks, and increasing climate risk assessment capacities through measures such as climate stress tests.

According to International Energy Agency research, approximately US$2tn investment is needed annually by 2030 for the low-carbon transition in the Asia Pacific region.

This page was last updated January 12, 2024

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