California’s groundbreaking emissions law on the brink of shattering global standards!

This week started with a “big bang” for climate regulations. California lawmakers have advanced landmark legislation for climate disclosure rules. As I will point out below, this is a great development by the United States, which has been slow to act on climate rules this year.

Also today, Simon investigates how Brexit could have surprising benefits for parts of the UK impact investing sector.

Finally, New York Climate Week starts Sunday, all week long and we’ll be out and about. Please let us know what events you might be able to attend. Climate Editor Emiliya Mychasuk and I will moderate this talk FT event on September 20 on rainforests. We hope you can join us. —Patrick Temple-West

California Passes Groundbreaking Emissions Rule, But Will It Stand?

California lawmakers on Monday passed a law — unprecedented in the United States — that will require companies to disclose carbon emissions. Starting in 2027, this will include feared Scope 3 emissions (from suppliers and customers), which companies say are difficult to accurately collect and disclose.

California, which weighs on Germany to become the world’s fourth largest economy, it has a history of writing regulations that set the global agenda. These are the rules for 2022 stop sales of new petrol cars by 2035 has pushed automakers to accelerate the production of electric vehicles.

Analysts tracking the legislation assured me that California Governor Gavin Newsom would sign the bill into law. And some companies – notably Apple – have expressed strong support for it. But dissenting companies still have some options to stop or tone down emissions reporting.

First, they can challenge the law in court. TD Cowen’s John Miller pointed out that companies have successfully fought California’s requirement that boards of directors include at least one minority candidate.

And he said the details of the emissions legislation still need to be written by the California Air Resources Board. Then there would be a public round-trip process in which the technical details could be watered down, she said.

If they persist, California’s rules would be a game changer for businesses, particularly 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 leads the United States in environmental regulations, surpassing Washington. The Securities and Exchange Commission proposed climate disclosure rules more than a year ago, but they have not yet been finalized.

Despite all the anti-climate rhetoric from Republicans in other states, California’s legislation is set to become the most sustained climate action by the United States in 2023. (Patrick Temple-West)

A Brexit silver lining for impact investing

When Conservative politician and arch-Brexiter Jacob Rees-Mogg was asked last year to cite examples of oppressive EU rules that had held back the UK economy, inexplicably at the forefront of his mind was the question frequency of road signs in tunnels.

Rees-Mogg would have seemed less foolish if he had thought to mention the insurance sector, where EU laws had restricted companies’ investment in illiquid assets. In the context of the post-Brexit overhaul of capital adequacy rules, the recent launch of a fund suggests that the changes could unlock a substantial pool of capital for parts of the impact investing sector.

Impact investor Big Issue Invest – affiliated with anti-homelessness organization and magazine publisher Big Issue – today announced its first close in a private debt fund with initial capital of £20 million. Investors include two large insurers: FTSE 100 constituent Beazley and Aspen Insurance Holdings.

The fund, which aims to raise capital of up to £100m ($125m), will offer loans of £1m to £5m to businesses “creating impact across the housing, care and infrastructure sectors social”. Potential investment targets range from inner-city nurseries to affordable housing to hospices, said John Gilligan, director of the Finance Lab at Oxford University’s Saïd Business School, who sits on the BII’s investment committee .

Aileen Mathieson, chief investment officer at Aspen Group, told me that such investments now look increasingly attractive to British insurers thanks to the government’s decision to ease their capital requirements. The UK government hopes to complete the rule change by the end of the year.

“Regulation developed to reconcile insurance markets for 28 different European Union countries has never worked well for us,” said Treasury Secretary John Glen he told a gathering of insurers when it announced the policy last year. “Now that we are out of the EU, this government is determined to solve this problem.”

Regulators at the Prudential Regulation Authority they estimated that the reform could reduce the special capital requirement for illiquid assets by 30% for general insurers (such as Aspen and Beazley) and by 60% for life insurers, which have more assets and long-term liabilities.

The move has drawn attention from critics who say it risks making the insurance industry less stable. But relaxed capital requirements will mean investments in things like impact debt funds will now be more attractive, Mathieson said.

Of course, regulatory change will not automatically bring a big boost to investment by insurance companies. The conversation around this rule change, among both government officials and insurance executives, has focused primarily on infrastructure – probably rightly so, given the UK’s serious need for investment in that sector.

But this comes at a time when insurance companies and their shareholders are paying increasing attention to the social and environmental impact of this sector’s investment decisions. According to the International Association of Insurance Supervisors, globally, insurance companies manage approximately $44 trillion in assets. While attempts by large insurers to collaborate on climate action have faced political opposition – triggering a series of exits from the Net-Zero Insurance Alliance – any tilt towards impact investing in their portfolios could yield significant sums.

Beazley created an impact investing strategy in 2021, managed by Linda Zuberi, previously an investment manager at British insurance group Lloyd’s and Australian insurer QBE. She has so far been allocated $100 million for the portfolio, a “relatively small sum” that Beazley wants to increase over time. “We hope that by demonstrating that you can invest in these types of investments in your portfolio and achieve a commercial return, we can encourage other institutional investors to enter the market,” Zuberi said.

Aspen is also looking to invest in more impact funds, but will have to work to find them, Mathieson noted. “They’re harder to find: they don’t get picked by fund selectors because, you know, they don’t have big active sales teams,” he said.

None of the above is likely to influence the opinion of the clear majority of Britons who now think Brexit was a mistake (this powerful FT film he might convince you on his own). But if this regulatory reform ends up stimulating a productive new wave of social impact investing – without destabilizing the insurance sector – this could prove to be something of a silver lining. (Simon Mundy)

Intelligent reading

EU lawmakers voted to increase the bloc’s share of renewable energy to more than 40% by 2030 and to relax permitting procedures. The European Parliament’s vote on Tuesday to increase the share of renewable energy in the EU’s energy mix from a target of 30% to 42.5% by 2030 comes amid a global push to accelerate clean energy. Please read the FT story Here.