ESG+ Newsletter – 13 June 2024

This week’s newsletter begins with a look at what EU election results may mean for the green agenda across Europe. We then look at the continuing ESG backlash in the US, which is resulting in both anti-ESG shareholder proposals and antitrust accusations. We finish by considering the evolution of ESG investing, the launch of GRI’s labour rights standards, and who will pay for the decarbonisation of global agriculture.

Europe’s Trump moment on climate?

As the dust settles in the aftermath of last week’s European Parliament Elections, two pictures have emerged. Firstly, while the centre has held, there can be no doubt that the far-right have made considerable gains. Secondly, the Greens have taken the biggest hit out of all the political groupings in the European Parliament, only capturing about 7% of total seats. It’s a very different picture from 2019 when Europe experienced a green surge, resulting in five years of ambitious climate policy delivery. The future progress of the EU’s Green Deal could hang in the balance, with concerns Europe may follow in the footsteps of President Trump who – during his first months in office – walked away from the Paris Agreement. Support for green policies has waned across Europe, facing backlash by those involved in industries that have been impacted by EU’s green measures. Opposition to climate measures was among the many issues adopted by right-wing parties and candidates across the 27 member states.  

In the coming weeks, the European People’s Party (EPP), which remains the largest group, will look to form a coalition and nominate Ursula von der Leyen for a second term as President of the European Commission. The Greens will only support a candidate that commits to the Green Deal, a challenge for the EPP if their support is required, as some delegations in the group took a strong stance against environmental issues during the campaign. Nevertheless, with less representatives to champion green policies and more voices of opposition, it’s possible the EU’s recent progress on climate will stagnate in the next five years.

The rise of anti-ESG shareholder proposals 

According to The Wall Street Journal, 70 shareholder proposals opposing companies’ ESG initiatives have been filed at S&P 500 companies by the end of May, more than twice the number observed two years ago. Data from proxy advisor, ISS, show that this is the fastest growing category of shareholder proposals. Both the proponents and the opponents of such proposals argue that the opposite party is politically motivated. The proponents of these anti-ESG or “anti-woke” shareholder proposals use arguments that are very similar to those used by filers of (pro-)ESG proposals, arguing that existing corporate policies create reputational risks, which may translate into a loss of shareholder value. However, their arguments appear to be gaining only limited traction with other shareholders. The median level of support on anti-ESG shareholder proposals that went to a vote by the end of May only reached 2% of votes cast. Nonetheless, the politicisation and polarisation of views on ESG in the US cannot be ignored, notably given the impact they may have on global efforts to reach climate objectives.  

The consequences of ESG maturity 

According to AXA Investment Management (AXA IM), ESG investing has moved into ‘Phase 2’ of its evolution. Their belief is based upon a combination of increased scrutiny, and a more thorough understanding of what the term fundamentally means – principally value creation over a long-term horizon, and risk identification and mitigation. Phase 1 was initially predicated on potential growth opportunities in sustainable solutions and developed into a marketing-led phenomenon aimed at maximising capital attraction rather than fully integrating ESG as an investment strategy. More recently, ESG’s credibility has been impacted by greenwashing concerns, the politicisation of ESG and other headwinds. AXA IM argues that this, coupled with attractiveness of other sectors given geopolitical uncertainty and the relative sell-off of technology stocks, which have long been overweight among ESG funds, has resulted in ESG entering a rebalancing phase.

Phase 1, while potentially inevitable, has led to the current swathe of regulation aimed at rectifying the direction that ESG has taken. The EU’s naming rules are set to have far-reaching consequences beyond facilitating ESG maturity. As covered by Bloomberg, regulation will pose a question to investors on whether to divest from equities which cause fund breach of the rules, or effectively remarket the fund by omitting ESG-aligned language from its name. If the former, Morningstar research predicts that the US stock market may see a material impact as a result of divestments. A nuance to consider here is the reputational impact of leading asset managers rebranding funds, particularly following the mass-recategorisation under SFDR, not least within the asset owner section of the market. 

GRI launches review of labour rights standards 

This week the Global Reporting Initiative (GRI) initiated a major review of its standards on worker rights, with the aim to help businesses report on employment practices and increase transparency around working conditions. The initiative, known as the GRI Topic Standards Project for Labor, is being kicked off with a global public consultation on proposed changes to three standards, covering labour and management relations, employment practices, and the social impact of an organisation’s market presence. The GRI’s revisions are part of a broader effort to bring the standards into alignment with global best practices, such as the UN Guiding Principles on Business and Human Rights and the ILO’s Decent Work agenda. The update is expected to enhance corporations’ accountability around living wages and gender pay gaps, in addition to improving fair recruitment practices and offering guidance on approaches to upskilling, reskilling, and termination of employment. The GRI stated that the proposed amendments have been drafted with input from experts, and in collaboration with the ILO, the International Trade Union Confederation, the Global Unions Federations, and the International Organisation of Employers. The GRI’s move reflects the evolving understanding of corporate responsibility when it comes to workers’ rights and human rights. 

Who pays the cost of decarbonising the food system?

The food sector is one of the biggest contributors to nature loss, responsible for 70% of freshwater withdrawals and one third of global greenhouse gas (GHG) emissions, however this week Reuters asks who will shoulder the burden of the costs of greening the food system? Half of food system emissions stem from agricultural production and associated land use change, and increasingly food manufacturers are asking producers to use regenerative production methods which place less strain on the environment and natural resources. According to a report by Future Fit Food and Agriculture, these practices could halve global GHG emissions by 2030, but who pays is a persistent question. The report highlights the vastly different cost burden of implementing these practices for different actors in the supply chain. According to the report, producers would potentially risk insolvency by funding regenerative practices whereas it would cost as little as 1% of revenues for a multinational food company to fund. Food and agricultural supply chains are complex, and who pays for change is an age-old issue. Despite this, institutional investors are being vocal about their support for regenerative agriculture, and perhaps with investor support, we may see a more concrete resolution.  

ICYMI 

• Institutional investors urge ESG data providers to enhance ocean-related data to better address risks and opportunities. According to Funds Europe, investor groups are emphasising the need for credible, consistent data to support informed investment decisions, highlighting gaps in sectors such as aquaculture, marine tourism, and offshore energy. 
• UAE’s SFWG launches ‘Principles for Sustainability-Related Disclosures for Reporting Entities’ which serves as a declaration of common standard of sustainability disclosures among the UAE SFWG members. The initiative aims to promote transparency, improve reporting on ESG factors, and support the UAE’s transition to a sustainable economy in line with the National Climate Change Plan 2050, Zawya  reports.  
• Biodiversity and carbon credits are “poised for massive expansion” according to the UN Environment Programme Finance Initiative. As reported by Environmental Finance,  UNEP FI states that integrating these mechanisms could drive emissions reductions and generate over $100 billion annually from biodiversity credits by 2050.