The $4bn bet on cleaning up emissions

Greetings from a steamy New York, where some investors are scratching their heads to work out what the latest package of EU green reforms means for global companies with operations on the continent — and what response it might provoke from Washington. We give a sense of how some parts of industry are reacting (hint: not well).

But while the “E” of environmental, social and governance issues is dominating headlines this week — particularly given fresh signs of climate change emerging from Europe’s floods — nobody should overlook the “G” factor. Check out our report on the new “purpose-driven pay package” for executives to see how the zeitgeist is shifting.

And another consequence of the pandemic: “S” is sparking growing investor debate, which our latest animated cartoon explains further. This is the fourth in a six-part series that aims to illustrate the significance of ESG to the general public. Please share it with anyone who might be interested — it can be found on the FT website and also on YouTube.

Uggla and General Atlantic team up on climate fund

General Atlantic, the powerhouse private equity firm, is teaming up with John Browne, the former BP chief executive, to launch a new climate solutions fund.

The fund aims to raise $3bn, with an additional $1bn coming from General Atlantic, and has just started marketing to investors, according to people familiar with the matter. Notably, Lance Uggla, the head of IHS Markit, is expected to lead the new fund once his firm’s acquisition by S&P closes this year (General Atlantic declined to comment on the fundraising).

New York-based General Atlantic, which has $65bn of assets under management, is seeking opportunities to reduce CO2 and methane emissions. Potential targets would involve energy conservation, efficiency or outright decarbonisation. To verify the pollution reductions, the fund has partnered with Systemiq, a sustainability consulting and investment company.

Bill Ford, GA’s chief executive, told Moral Money there were a number of good candidates for the fund already in the firm’s pipeline — companies that had proven revenue, but were still growing quickly.

Among investors looking for green opportunities, the midsized companies “have largely been underserved”, Ford said. Energy investors are focused on green power generation while venture capitalists “want to write a $5m cheque for some new, hot technology”, he added. “There is lots of money going into [both]. But that is not what we are after.”

Browne, who in the 1990s led BP to develop solar and other renewable initiatives, was widely seen as having moved too early in the market. He told Moral Money that he wanted to start this type of fund two years ago, and that he was looking for companies that could potentially be taken public.

Though Browne and Ford are confident the fund is operating in an underserved market segment, the climate transition space is getting more crowded by the day. TPG is raising $5bn for a climate and clean technology fund, with former Treasury secretary Hank Paulson to serve as chair. 

But with Europe racing ahead with tough environmental regulations as part of its green deal, surely investors will have plenty of opportunities. (Patrick Temple-West and Gillian Tett)

Prepare for the purpose-driven pay package

Sir Adrian Cadbury, the British corporate governance reformer, used to remind Anne Simpson that the word “governance” derives from the Latin “gubernare”, which means to steer the ship. 

Simpson now oversees governance at Calpers, the California pension fund, and is among the contributors to the Enacting Purpose Initiative, which today issues its second report on how to turn corporate purpose from a buzzword into something that creates value for all stakeholders. 

Many directors and investors are still confused about what purpose means, write the authors. Since BlackRock chief executive Larry Fink and the Business Roundtable endorsed the idea of companies serving a social purpose, the idea of corporate purpose has been “very ambiguous”, notes Amelia Miazad, who leads Berkeley Law’s Business in Society Institute.

“This sense of a sea change is profound but there’s a huge amount of uncertainty,” echoes Simpson, flashing back to Cadbury’s maxim. What this report provides is “a navigation guide”. 

The subject still divides boards and shareholders, the report finds. Directors feel that many investors are uninterested in purpose unless it drives short-term profits, and investors are frustrated that boards provide too little information to show how purpose creates value. 

But the authors find that common ground is emerging on subjects from how purpose should guide decision-making to how it should be communicated to shareholders. Notably, both directors and investors now see “an urgent need” to tie executives’ incentives to purpose-led goals.

“Both investors and directors are looking for ways to make purpose real and executive compensation seems to be an obvious way to signal that companies are taking this seriously,” Miazad noted.

Pressure has been building for new approaches to executive pay, as shown by the rise of ESG factors in CEOs’ packages and a new study from London Business School’s Alex Edmans and Tom Gosling along with Dirk Jenter of the London School of Economics, which points to the need for new models that emphasise fairness. So compensation committees should pay heed. 

With investors now conscious of a wider array of off-balance sheet risks, Simpson adds, they will not be fobbed off with “quotes from philosophers or photographs of children skipping about in fields of daisies”. (Andrew Edgecliffe-Johnson)

Knives come out for EU climate regulations

A day after Brussels unveiled an unprecedented regulatory attack on global warming, companies most vulnerable to the changes started to push back.

Carmakers, airlines and heavy industry all hit out at the proposals, which include a de facto ban on new diesel and petrol cars in the EU from 2035, a tax on aviation and maritime fuel, and the decision to phase out from 2026 free pollution credits allocated under the EU’s Emissions Trading System.

The International Association of Oil and Gas Producers (IOGP), whose members include BP and Saudi Aramco, said the EU plan would limit natural gas use as a way to transition away from more heavily polluting fuels.

“We regret to see new barriers which would restrict access of industry to large-scale and efficient gas-based solutions,” said François-Régis Mouton, IOGP’s Europe regional director. 

Aluminium producers have also cried foul over the Carbon Border Adjustment Mechanism’s costs, scheduled to begin in 2026.

“This does not make sense,” said Greg Barker, executive chair of EN+, a producer of low-carbon aluminium. The proposal would drive up the cost of aluminium and hit downstream manufacturers in Europe, he added.

Companies were likely to fight the regulations in member countries and in their courts, said Michael Gerrard, a professor at Columbia’s law school. The Carbon Border Adjustment Mechanism was almost certainly going to be challenged at the World Trade Organization, he added.

But corporate opposition was not unanimous. Herbert Diess, Volkswagen’s chief executive, said his company “is ready” for the transition to electric vehicles. (Patrick Temple-West)

Breaking: China launches national emissions trading system

After some delay, China today launched its national emissions trading system. If successful, the program would create the world’s largest carbon market. It will allow regional governments to set emissions caps for big power companies and lets firms buy the right to pollute from others with a lower carbon footprint, according to AFP. But it only covers electricity emissions to start.

“While China continues to rely on coal to meet growing power demand, the launch of the carbon market is a further indication that China remains committed to its de-carbonisation agenda for the longer term,” said Bruno Brunetti at S&P Global Platts. “It remains to be seen to what extent the carbon price will drive investment decisions and retirements of existing operational units, especially as coal prices remain elevated.” (Patrick Temple-West)

Charts of the day

Global sustainable debt issuance exceeded $680bn in the first half of 2021, already closing in on the $700bn total issued in all of 2020, according to the Institute of International Finance. Social bond issuance reached $140bn in the first half of this year, more than three times higher than this point last year, boosted in part by increasing interest in Europe in the wake of the EU Sustainable Finance Disclosure Regulation (SFDR), the IIF said.

Reforestation can be a profitable activity, and an environmentally-minded one, Credit Suisse found in a recent report. If carbon were to be priced at $50 or even $25 per tonne, growing trees could be more lucrative than dairy farming or growing crops for food.

Smart reads

• A dozen years ago, the phrase “bad bank” was all the rage among investors. The 2008 financial crisis had left the balance sheets of western financial groups poisoned by sub-prime assets, forcing them to ring fence these toxic assets in “bad banks”. The aim was to clarify the problem, prevent the infection of the entire balance sheet — and then wind those assets down. Today, when considering what to do with carbon-intensive stranded assets, should the bad bank be revived? The answer is “yes”, but with qualifications, Gillian says in her latest FT piece.

• Humanity’s response to the Covid-19 pandemic foreshadows how we will deal with climate change. Rich countries will manage to adapt while poorer ones will suffer terribly, Simon Kuper writes for the FT magazine. “There’s no vaccine for climate change but as floods worsen, New York and London will beef up their protective barriers,” he writes. “The destruction of the Amazon is climate’s Delta variant. When Brazilian rainforests shrink, rich countries heat up too.”

Recommended reading

• It’s been a good week for carbon pricing (FT)

• ESG stocks are not in a bubble (FT)

• ESG Bond Sales Sprint to $1 Trillion as Investors Force Change (Bloomberg)

• What the growing federal focus on ESG means for private markets (Tech Crunch)

• We need to look beyond the market to beat climate change (FT)