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Weekly ESG Express Mar 28 | MSCI to strip ESG ratings from hundreds of funds

MioTech Research2023-03-28
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En Imgs9 1More than 400 European ETFs may be stripped of their environmental, social and governance (ESG) ratings and thousands more will be downgraded from AAA (highest possible) by index provider MSCI.

According to a client note from BlackRock, the number of European ETFs with MSCI’S triple-A ESG ratings would plummet from 1,120 to 54, shrinking by more than 95%, while the number of ETFs that would lose their ratings entirely would grow 18-fold to 462, reported by Financial Times.

MSCI’s tightening of rating standards may be part of the increasing green-washing concerns from regulators. In recent days, UK’s Financial Conduct Authority (FCA) issued a strongly worded warning that the overall quality of ESG-related disclosures made by index providers was “poor” and FCA may extend its remit to include ESG rating providers.

The changes will be effective at the end of April and will apply to all ETFs and mutual funds globally. ESG-focused investors will likely have fewer investment choices and the fund values with top ratings are likely to remain high.

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The Intergovernmental Panel on Climate Change (IPCC) released the Sixth Assessment Report (AR6) Synthesis Report (SYR) last week, addressing that global warming will exceed 1.5°C during the 21st century and that worldwide climate resilient development action is more urgent than ever.

For nearly three decades, the IPCC has been warning of the dangers of global warming. Summarizing the main findings from all five previous reports, the newly released AR6 report outlines that, without a strengthening of policies, global warming of 3.2°C is projected by 2100, posing even more intensified climate risks and adverse impacts.

IPCC also calls for prioritizing equity, justice and inclusion to enable adaptation and ambitious mitigation actions and climate resilient development.

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Employees of Chinese financial services companies may be facing a sector-wide pay cut. China Merchants Securities (06099.HK, 600999.SH) and SDIC Capital (600061.SH) have lowered their per capita salary expense by 33% and 16% respectively, from an average of USD 90k-100k in 2021, shown in their recently released FY22 annual reports.

The topic has stirred up discussions in public since China’s Ministry of Finance issued a notice to cap its financial sector pay last August. In February this year, again, the national officials published an article to target so-called financial elites with ‘extravagant’ lifestyles in its anti-corruption campaign, calling for a stronger sense of social responsibility among all financial practitioners.

As early as 2009 and 2010, the Ministry of Finance and the CBRC had issued a series of rules on remuneration mechanisms for the financial sector. In May 2022, the China Securities Association also released guidelines for securities companies, limiting “excessive incentives” in remuneration distribution.

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In the final stages of UBS's acquisition of Credit Suisse (CS), UBS still needs to take on its former rival’s carbon emission-intensive portfolio.

Despite having an A grade from MSCI, CS holds a higher emissions profile than UBS due to a function of its larger investment bank. In 2021, CS had a so-called energy-supply banking ratio of 1.0, meaning the bank invested as much in fossil fuels as clean-energy projects, Bloomberg reported.

As UBS Chairman Colm Kelleher has acknowledged last week that the bank planned consolidation with a portion of CS as part of the deal, Credit Suisse’s higher emission assets may be an unexpected burden for UBS, given its better ESG performances. Improving the emissions profile of the acquired loans and investment portfolios might be costly and take time.

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Being the International Sustainability Standards Board (ISSB)’s sister body, the International Accounting Standards Board (IASB) announced a project to explore whether and how companies can provide better information about climate-related risks in their financial statements.

The project is not seeking to develop an IASB Standard on climate-related risks, but rather for minor amendments to the current standards. The IASB noted that it will take the two ISSB standards into consideration, adding that any information required by the two boards would be complementary.

This February, ISSB agreed that the two global disclosure standards IFRS SI and S2 would have their official release by the end of Q2 this year. The S2 climate-related disclosures focus on climate risks and may be extended under IASB’s new research project.