don’t just take their word for it

Welcome back.

The rise of corporate emissions goal-setting and disclosure has been a hugely important development over the past decade. But as our first story today highlights, a divide is emerging between companies that get their carbon reports audited and those that don’t.

Also today, we look at whether happier days lie ahead for the bruised and battered offshore wind sector.

And in our third story: there has been innovation galore in ESG bonds — but are investors buying them?

Have a great weekend.

What does a responsible approach to artificial intelligence look like in business and finance? That will be the focus of our next Moral Money Forum deep-dive report – and, as always, we want to hear from readers. Please have your say by completing this short survey.

EMISSIONS REPORTING

It’s the audit, stupid

Since its launch in 2015, more than 2,000 companies, including many of the world’s largest, have signed up to the Science Based Targets initiative, under which they lay out plans to reduce their carbon emissions.

The SBTi is widely seen as the gold standard in corporate climate accountability. But is it actually serving to lower companies’ emissions?

Yes, according to new research — but only among companies that subject their climate reports to third-party assurance.

Researchers at the Massachusetts Institute of Technology used data from analytics firm Clarity AI to assess the carbon emissions of companies that did and didn’t have SBTi-approved targets in place. Among the companies that had signed up to the SBTi, they also compared those that had their climate reports audited with those that didn’t.

The results — which used a blend of reported emissions data and Clarity AI’s “imputed data” using machine learning — were striking. Companies that set SBTi targets, but didn’t obtain assurance on their climate reports, performed no better on emissions reduction than non-SBTi signatories.

In contrast, SBTi signatories that obtained assurance reduced their carbon intensity (emissions relative to output) by an average of 3.3 per cent a year.

Interestingly, those that obtained assurance initially reported 9.5 per cent higher carbon intensity than their peers who didn’t obtain assurance. That suggests that the assurance process helps companies to give a fuller picture of their emissions — and that those who skip that process often end up understating their numbers.

The paper, which was published online this week, has not yet been through peer review. But it raises important issues that anyone designing or looking at corporate emissions targets should think about very seriously.

The authors make an eminently sensible suggestion to regulators: if carbon emissions disclosure is to be made mandatory, then third-party assurance should be made mandatory too (though opponents of this argument will complain about the cost to companies).

In the meantime, investors looking at a company’s climate reports should ask themselves two simple questions. Have they been audited? And if not, why not?

RENEWABLE ENERGY

Outlook brightens for offshore wind

From recent headlines, it would be easy to assume that the offshore wind sector is set for another very ugly year.

Earlier this month, Danish industry giant Ørsted said it would suspend its dividend and lay off up to 800 staff. This week, the UK head of German utility RWE told the FT that the UK government was being too stingy with its financial support for the sector, and that this could bring a disappointing result in this summer’s auction for offshore wind licences.

But analysts are forecasting brighter weather ahead for this industry. A recent report from Morgan Stanley predicts that global offshore wind capacity will surge to more than 350 gigawatts in 2030, up from less than 100GW today. This energy source has particularly strong growth potential in northern European countries such as the UK, where high population density and relatively limited sunshine have hampered the rollout of onshore wind and solar power.

Last year was a terrible one for the offshore wind sector, however. The biggest factor was higher interest rates, which sent financing costs skyrocketing for this capital-intensive business. Rising commodity prices and supply chain disruptions also played a role.

Ørsted ended up taking a $4bn writedown on cancelled offshore projects in New Jersey; BP and Equinor petitioned state authorities (ultimately successfully) to let them out of a contract for a wind farm off the coast of New York. Last September, a UK offshore wind auction failed spectacularly, not attracting a single bid.

Yet investors have been cautiously poking their toes back into these offshore waters. Ørsted’s share price — while still less than a third of the peak it hit in early 2021 — has risen 52 per cent from its nadir at the start of last November. Danish wind turbine maker Vestas’s valuation is up 35 per cent from the trough it hit last October.

What’s driving this warming sentiment? For one thing, governments are responding to the industry’s higher costs by substantially increasing financial support.

Since September’s fiasco, the UK government has increased its effective guaranteed price for offshore wind power providers by 66 per cent. That’s not sufficient to satisfy RWE country head Tom Glover, who is agitating for still stronger government commitments. But it’s high enough to give developers a healthy profit margin, and could well spark a bidding war among them at this summer’s auction, according to Morgan Stanley.

It’s also important to keep last year’s setbacks in perspective. Despite the cancelled projects and falling share prices, global offshore wind investments raised a record $77bn in financing last year, according to BloombergNEF.

And while western offshore wind developers seek to bounce back from last year’s turmoil, analysts at Wood Mackenzie say growth in Asia is set to roar in the next five years, driven by powerful new economies of scale in Chinese manufacturing. China will install about 15GW of offshore wind annually in the next five years, estimates Wood Mackenzie. That’s more than the total current installed capacity of the UK, Europe’s offshore wind leader by that metric.

Morgan Stanley reckons investors currently have “a buying opportunity” to load up on shares in Ørsted, as well as utilities such as RWE and the UK’s SSE, which are increasing their exposure to offshore wind. Other options are turbine makers such as Vestas and China’s Goldwind, or companies deep in the offshore wind supply chain including Italy’s Prysmian and Germany’s Siemens Energy.

More gusty spells in this market are likely — but the case for long-term growth appears strong.

ESG INVESTING

Europe drives the growth in ESG bond funds

We’ve been writing a bit lately on various innovations in the fixed-income market to channel capital towards environmental and social goals, from blue bonds to sovereign transition bonds.

But how much appetite are investors showing for these securities? The answer depends heavily upon geography.

New research from analysts at Bank of America shows that globally, ESG bond funds had $5.2bn of net inflows in January. That’s nearly double the rate of net inflows last year, which averaged $2.7bn a month.

But a closer look at the numbers makes clear that this is a largely European story. ESG bond funds in western Europe enjoyed $2bn of net inflows in January, bringing their managed assets to a record $350bn — just under a quarter of the total for all bond funds in the region.

There has been similarly strong investment into cross-region ESG bond funds, which had net inflows of $2.1bn in January.

But the picture is very different in the US, where two years of stagnant growth for ESG bond funds are a striking symptom of the financial sector’s wider cooling on the sustainable investment agenda. January net inflows of $1.2bn for US ESG bond funds might sound decent — but this accounts for only 2 per cent of the month’s net inflows for US bond funds overall. And at $100bn, assets managed by ESG bond funds in the US are still below the $101bn record set in February 2022.

The picture is still rockier in developing nations. Emerging market-focused ESG bond funds suffered $168mn of net outflows in January. That reflects souring appetite for emerging market debt in general, as investors steer towards rising yields in safer rich nations. This segment of the ESG bond market still has managed assets of $35bn — comfortably higher than the level two years ago. But given the vast need for investment towards sustainable development in poorer nations, that number looks much too small.

Smart read

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