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This week started with a “big bang” for climate regulations. California lawmakers advanced landmark legislation for climate disclosure rules. As I highlight below, it is a big development from the US, which has been slow to act on climate rules this year.
Also today, Simon investigates how Brexit may have surprising benefits for some parts of the UK impact investment space.
Finally, NYC Climate Week starts on Sunday, running through the week — and we will be out and about. Please let us know which events you might be attending. Climate editor Emiliya Mychasuk and I will be moderating at this FT event on September 20 about rainforests. We hope you can join us. — Patrick Temple-West
California passes game-changing emissions rule, but will it stick?
California legislators on Monday passed a law — unprecedented in the US — that will require companies to disclose carbon emissions. Beginning in 2027, this will include the dreaded scope 3 emissions (from suppliers and customers), which companies have argued are hard to accurately collect and disclose.
California, which is bearing down on Germany to become the world’s fourth-largest economy, has a history of writing regulations that set the global agenda. Its 2022 rules to halt sales of new-petrol cars by 2035 prompted carmakers to accelerate their electric vehicle production.
Analysts following the legislation assured me that California governor Gavin Newsom would sign the bill into law. And some corporations — notably Apple — have voiced strong support for it. But dissenting companies still have a few options to stop or dilute the emissions reporting.
First, they can challenge the law in court. John Miller at TD Cowen pointed out that companies successfully thwarted California’s requirement that boards of directors must include at least one minority candidate.
And he said the details of the emissions legislation still needed to be written by the California Air Resources Board. So there would be a public back-and-forth process where technical details could be weakened, he said.
If it sticks, California’s rules would be a game-changer for companies, especially banks. In January, the Federal Reserve published research showing that only eight of the world’s 30-largest banks were measuring their scope 3 emissions — and these were only partial reports.
And once again, California is leading the US on environmental regulations — outpacing Washington. The Securities and Exchange Commission proposed climate disclosure rules more than a year ago, but they still are not finished.
For all the anti-climate rhetoric from Republicans in other states, California’s legislation is poised to be the most enduring climate action from the US in 2023. (Patrick Temple-West)
A Brexit silver lining for impact investment
When the Conservative politician and arch-Brexiter Jacob Rees-Mogg was asked last year to name examples of oppressive EU rules that had been holding back the UK economy, inexplicably at the top of his mind was the frequency of road signs in tunnels.
Rees-Mogg might have looked less silly had he thought to mention the insurance industry, where EU laws had restricted companies’ investment in illiquid assets. Amid a post-Brexit overhaul of capital adequacy rules, one recent fund launch suggests the changes could unlock a substantial pool of capital for parts of the impact investment sector.
Social impact investor Big Issue Invest — affiliated with the Big Issue, the anti-homelessness organisation and magazine publisher — today announced its first close in a private debt fund with initial capital of £20mn. Investors include two large insurers: FTSE 100 constituent Beazley, and Aspen Insurance Holdings.
The fund, which is aiming to raise capital of up to £100mn ($125mn), will offer loans of £1mn-£5mn to businesses “creating impact in the housing, care and social infrastructure sectors”. Potential investment targets range from inner city nurseries to affordable housing to hospices, said John Gilligan, director of the Finance Lab at the University of Oxford’s Saïd Business School, who sits on BII’s investment committee.
Aileen Mathieson, Aspen’s group chief investment officer, told me that such investments now looked increasingly attractive for UK insurers thanks to the government’s decision to loosen their capital requirements. The UK government hopes to complete the rule change before the end of the year.
“Regulation developed to reconcile insurance markets for 28 different countries in the European Union never worked well for us,” Treasury minister John Glen told a gathering of insurers when announcing the policy last year. “Now we’re outside the EU, this government is determined to fix that.”
Regulators at the Prudential Regulation Authority have estimated that the reform could reduce the special capital requirement for illiquid assets by 30 per cent for general insurers (such as Aspen and Beazley), and by 60 per cent for life insurers, which have more long-term assets and liabilities.
The move has drawn fire from critics who say it risks making the insurance sector less stable. But the less arduous capital requirements will mean that investments in things like impact debt funds are now more attractive, Mathieson said.
Of course, the regulatory shift won’t automatically bring a big boost to impact investment by insurance companies. The conversation about this rule change, among both government officials and insurance executives, has focused primarily on infrastructure — probably rightly, given the UK’s serious need for investment across that space.
But it comes as insurance companies and their shareholders are paying growing attention to the social and environmental impact of this industry’s investment decisions. Globally, insurance companies manage assets of about $44tn, according to the International Association of Insurance Supervisors. While big insurers’ attempts to collaborate on climate action have met political opposition — sparking a flurry of exits from the Net-Zero Insurance Alliance — any tilt towards impact investing in their portfolios could yield significant sums.
Beazley in 2021 set up an impact investing strategy, run by Linda Zuberi, previously an investment manager at UK insurance group Lloyd’s and Australian insurer QBE. So far she’s been allotted $100mn for the portfolio — a “relatively small sum” that Beazley wants to scale up over time. “We’re hoping that by showing that you can invest in this type of investment in your portfolio and get a commercial return, it might encourage other institutional investors into the market,” Zuberi said.
Aspen is also looking to invest in more impact funds — but will need to work to find them, Mathieson noted. “They’re harder to find — they’re not picked up by the fund selectors because, you know, they don’t have big sales teams running,” she said.
None of the above is likely to sway the opinion of the clear majority of Britons who now think Brexit was a mistake (this powerful FT film might convince you of that on its own). But if this regulatory reform ends up driving a productive new wave of impact investment — without destabilising the insurance sector — that could prove a silver lining of sorts. (Simon Mundy)
EU legislators have voted to increase the bloc’s share of renewable energy to more than 40 per cent by 2030 and to loosen permitting procedures. The European parliament’s vote on Tuesday to increase the share of renewable power in the EU’s energy mix from a 30 per cent target to 42.5 per cent by 2030 comes against the backdrop of a global push to accelerate clean power. Please read the FT’s story here.
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