The climate credit trap

Hello from Washington, where the IMF and World Bank have kicked off their annual spring meetings. Alongside concerns about inflation and geopolitical risks, climate change is a key area of focus for this year’s gathering.

“We are seeing, in fact, increased weather shocks related to the climate transition, and that is impacting sometimes countries at a macroeconomic level,” Pierre-Olivier Gourinchas, director of research at the IMF, said at a press conference on Tuesday. “Often, what we have is that countries that are among the low‑income countries might be more vulnerable to these extreme weather events,” he added.

The climate theme at the meetings in Washington’s Foggy Bottom is the focus of today’s first item. I report how the IMF identified climate as a key concern for low-income countries — and how credit rating agencies are already incorporating climate risks into their analysis for these sovereigns. Separately, far from Washington, I have a report about a Texas state fund adopting an “ESG sceptical” voting policy for the 2024 annual meeting season.

Please read on.

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Climate finance

The cost of climate change for low-income countries

At the joint spring meeting of the IMF and World Bank here in Washington DC, global warming concerns quickly jumped to the fore. As finance ministers gathered in Foggy Bottom, a long-simmering theme resurfaced: who will pay for the economic and physical damage brought by climate change?

“Dealing with the climate emergency . . . requires a volume of resources that cannot be fully mobilised domestically in emerging market and developing economies,” Fernando Haddad, Brazil’s finance minister, said on Tuesday. What was needed, Haddad said, was “a concerted international effort to effectively mitigate climate change”. Brazil is hosting the next G20 meeting in November.

The global problem of climate change is especially pronounced in low-income countries, according to an IMF report released earlier this month.

The report identified 69 low-income countries where governments need to reduce high debt levels to “allocate part of their revenues to critical climate change adaptation investments”. They include Haiti, Moldova and Kenya, to name a few.

These countries had been stung by elevated food inflation stemming in part from “the ongoing El Niño weather pattern, and the likely incidence of other negative climate events”, the report said.

As debates about climate change costs take hold during this week’s meetings, they are already affecting countries’ credit ratings.

“Rising physical climate risks will cause mounting economic and financial losses for governments,” Atsi Sheth, chief credit officer for Moody’s Ratings, told me. “The climate finance gap, particularly in emerging markets, will remain an obstacle, even as efforts to mobilise private finance could start to bear fruit.”

S&P Global warned in November of a “poverty trap” in low-income countries hit by climate change. Countries might be unable to rebuild infrastructure after being hit by extreme weather, therefore exacerbating development challenges in the places “least ready to cope”.

“The increasing frequency — as well as severity — of physical climate-related risks could result in environmental factors becoming more certain and material” when examining a country’s credit rating, Prerna Divecha, head of market development for climate credit risk at S&P, told me yesterday.

“Given the vulnerability of the population and socio-economic impact on health, food, infrastructure and sanitation, climate stresses may be more pronounced for a developing country in comparison to a developed country.”

More news on the cost of climate change is on the agenda for this week. We will keep you posted in Friday’s newsletter.

ESG investing

A Texas fund’s ‘ESG sceptical’ voting screen

The Texas Permanent School Fund earlier this year announced it would withdraw $8.5bn from BlackRock’s management because of concerns about the asset manager’s environmental, social and governance (ESG) investing.

Now, the $54bn fund, which invests to generate funds for Texas schools, has taken a step further. On Monday, it announced it had adopted an “ESG sceptical” shareholder voting policy. This will entail assessing shareholder proposals at companies’ annual meetings and voting against “attempts to pressure companies to diminish the use of fossil fuels” or proposals that oppose gun rights, among other things.

“ESG efforts have targeted Texas’ oil and gas economy,” said Aaron Kinsey, chair of the state board of education. “We are making sure our votes are not cast in a way that is incompatible with our fiduciary duty to Texas.”

The fund said it casted between 40,000 and 50,000 votes at annual meetings each year.

The Texas fund appears to be the first body of its kind to adopt an official ESG-sceptical screen. Other Republican states might be looking at changing their voting behaviour now that Texas has announced this move.

“The motivation here is not to impose conservative ideology on companies, but rather to depoliticise the world of proxy voting,” Jerry Bowyer, founder and president of Bowyer Research, who is running the ESG-scepticism voting screen for the Texas fund, told me.

“These [voting] guidelines aim at getting hot-button culture war advocacy out of corporate governance and getting companies back to neutral on those issues,” Bowyer said. “Opining on contentious social issues does not promote shareholder value.”

Right to reply

Last week we published an email from Paul OBrien in Wyoming, who argued that critics of fossil fuel financiers should focus more on governments’ failure to act. David Hunter, senior counsel at UK law firm Bates Wells, wrote this in response:

I think he is spot on to highlight the need for investors to “act on the basis of the most likely future, not the future they want to happen”. However, when he goes on to suggest that investors should not be criticised unless and until governments and voters combine to define the energy policy outlook, he defaults to the zero-sum option of “we won’t act till others do”. This in turn heavily determines the most likely future (being the one he takes some steps to describing). This is one (one would hope) that is not the future that investors want, but without demonstrating more initiative, will be the one they create.

In other words, we are at the stage where no one is off the hook if they are not doing enough, and seeing as the FT’s constituency is the world of finance, please do keep the pressure on finance to do all it can to enable the future we all want. A positive response will go a long way to making it the “most likely future”, bringing the two alternatives OBrien describes together, rather than assuming it must be an either/or.

Meanwhile the rest of us, lawyers, regulators or whomever must strive to match or exceed those endeavours also.

Have your say: drop us a line at moralmoneyreply@ft.com.

Smart read

I recommend the reporting by our colleagues Tom Wilson and Antoine Gara on Shell’s former chief executive Ben van Beurden joining KKR as a part-time adviser on climate strategy. The Dutch executive spent 39 years at Shell, and as chief executive, he set Shell’s first climate targets.