#3 Net Zero, Rivers and Impact

Disclaimer: the views expressed in this letter are my own and are not attributable to anyone else.

Welcome back everyone to the third edition of Cut the Crap, my personal update to get you thinking about the challenges and opportunities of the fast-paced world of sustainable finance and impact investing.

What stood out to me in the last fortnight?

[1] Governmental Greenwashing: another encouraging precedent that governments too can be held to account for vague promises

As the UK faced its hottest day on record, and the World passed Earth Overshoot Day on July 28th, the High Court ruled the UK government's landmark net-zero strategy, published with aplomb as recently as last October in the run-up to COP26 in Glasgow, to be inadequate and unlawful, following a successful legal challenge by the Friends of the Earth . The court held the strategy is too vague, meaning there were no assurances that targets under the strategy to decarbonise the UK economy to net-zero by 2050, could be met. Also, the government was ordered to publish an updated strategy with more detail by March 2023. This landmark ruling continues a powerful trend started by the Urgenda case in The Netherlands to hold governments to account on their commitments, and shows that political greenwashing can and will be tackled. The judgment also serves as a reminder to corporates and banks that empty promises, whether on net zero or otherwise, will boomerang.

Another meaningful step at the governmental level was the recognition in the UN General Assembly of the human right to a clean, healthy and sustainable environment (R2HE in ESG lingo), calling on States, international organisations but also businesses to take their responsibility. For a neat summary, please read Anna Triponel 's write-up here. Whilst the pessimist may argue the resolution is non-binding and various high emitting countries abstained; the optimist will point to the power and influence of soft-law (one need only think of the UN Guiding Principles on Business and Human Rights, the Task Force on Climate Disclosure and the ICMA - International Capital Market Association principles for green and sustainable bonds).

So what should governments do to take their responsibility under the UN resolution? Australia, in quite a change following its recent elections, provides a neat example (though it's early days). The government lodged its updated NDC under the Paris Agreement, committing Australia to an ambitious GHG reduction target of 43% below 2005 levels by 2030, backed up by a brand new Climate Change Bill before Parliament, which, if passed would significantly alter the course of a country thus far not exactly the shining example. A great write-up here by Sati Nagra and her esteemed colleagues at KWM. (By way of update, the bill passed the lower house, as per this newsflash.) What a welcome change of course for the environment!

[2] Rivers Granted Legal Rights and what it could mean for finance

A recent trend, perhaps a bit under the radar, but not to be missed and definitely food for thought: increasingly activists, often indigenous, have been pushing, at times successfully, to grant rivers legal personality. The Whanganui river in New Zealand, the Magpie river in Canada, the Ni'ska or Arkansas River in the US and all rivers in Bangladesh have become legal persons.

On a slightly different vein, the Yarra (or 'upside down') river in Australia has been legally recognised as a living entity.

This trend raises many questions; too many in fact for a newsletter like this. The big one is what the impact is of legal rights for rivers (or for that matter other parts of nature). To get you thinking about this: as the river does not express itself in a legal sense, guardians or trustees may be appointed to protect it. This trend may in turn impact for instance hydro project financings, the rights of farmers to take water from the river and add to the meaning of prior informed consent of communities affected by projects. O and the river can sue third parties if they harm its well-being. My colleague at Melbourne Law School Dr Erin O'Donnell has been exploring this intriguing legal area from the outset.

[3] What is Impact?

Yes, a bit of a fundamental question. As a practitioner, I have seen my share of impact reporting clauses and the challenges posed by data and negotiations.

Just as the Paris Agreement may have been the catalyst for the ESG movement (derided as 'woke' by conservatives in the US, for a refreshing read on this see Robbert Eccles' article in Forbes), green bonds have championed sustainable finance. Or have they? Impact investing is also an essential part of the challenge to channel finance to initiatives reducing greenhouse gasses as well as addressing the plight of those in need.

For impact investors, a key risk is impact washing. And whilst the definition of green is gradually advancing, it is by no means clear, as it may depend on the eye of the beholder (who), its jurisdiction (where) and the timing (when) - one need only think of the recurring discussions on the removal or inclusion of companies in ESG indices, as recently for UK power group Drax, as this investigation from the FT points out). It is equally difficult to agree on a definition of impact. And even if the parties agree on the tools and measurements they seek for impact (for instance the social: creation of jobs, economic: value-add, and environmental: GHG reduction), there are many challenges to the credibility and comparability of these data.

And there is a parallel to sustainability-linked bonds: there too the challenge is to demonstrate not just a result, but an ambitious one.

In this context initiatives providing transparency to impact should be applauded. A challenge hiding in plain sight; thus kudos to those working on the Joint Impact Model, to be used by financial institutions in emerging economies, and the new metrics for impact reporting for green projects published by the ICMA.

Stay tuned for some other Sustainability Stories I'm following:

• the fascinating (yes) EC proposal for Corporate Sustainability Due Diligence Directive and its impact on fast fashion (which brands do you think are washing up daily on the shores of Ghana?) and international finance generally,
• Dutch Airline KLM sued for greenwashing, just as Lufthansa unveils its 'Green Fare',
• the evolving nature of director's duties on sustainability, and
• the new resources published by ICMA in support of sustainable finance (among others for green securitisation, and a registry of key performance indicators for sustainability-linked bonds), and the impact on SLBs in practice,
• lawyers stepping up to the plate for sustainability, an opportunity too good to be true?

Final Thoughts and Tips:

For anyone keen to take a deep dive in the Green and Sustainable Bonds Market, this course of the Florence School of Banking and Finance is offered in September. I will be hosting the occasion together with Oxford friends from various disciplines, sharing our insights and engaging with attendees on the challenges and opportunities of the market. We have our work cut out, as recent research shows a quarter of ESG-labelled bonds is not sustainable.

As always, feel free to share your comments and suggestions. It's amazing to see so many more subscribers (670) to Cut the Crap over the holiday season. Stay tuned.