ESG+ Newsletter – 19th May 2022

Biodiversity – an essential element of the ESG mix

Biodiversity should be a critical consideration for investors according to Marie-Justine Labelle, Head of Responsible Investment at Desjardins Investments Inc. “Companies across the economy rely on all aspects of nature to be able to operate, and to produce goods and services, prosper and, in turn, make your portfolio prosper” says Labelle. While biodiversity has been second to climate considerations, there is now a growing consensus that acting on biodiversity is critical and that the two issues are fundamentally intertwined. As we have previously covered, nature is following the path of climate through the development of a nature-related risk framework TNFD and the creation of nature markets. As with all risks, nature-related risk should be considered an investor priority. Much like views of climate change, both a company’s impact on biodiversity and the impact of biodiversity loss on companies represent unique risks which should be tackled for effective portfolio management, argues Labelle. With the upcoming biodiversity COP in Q3 of 2022, many think this year could be the year of biodiversity. As we see a growing number of reporting frameworks, increasing stakeholder focus, and a recognition of the inextricable link between biodiversity and climate, we may be at a turning point in the recognition of biodiversity as a core component of ESG.

The first China-focused ESG disclosure standard is here

The China Enterprise Reform and Development Society (CERDS), a government think tank, in collaboration with Ping An Insurance Company of China and “dozens of other companies in China” published the Guidance for Enterprise ESG Disclosure, the first China-focused ESG disclosure standard. While there had been a growth in awareness of ESG issues in China in recent years, the ESG frameworks used internationally have been difficult to match with the operating conditions in China, a point noted in the Ping An statement. The recently published guidance is based on relevant Chinese laws, regulations and standards while considering China’s context, and also specifies disclosure principles, indicators, requirements, applications, responsibilities, and supervision for different companies.

The standard incorporates Ping An’s CN-ESG evaluation system, which was created in 2020 based on the sustainability disclosure requirements for the Hong Kong and the Shanghai Stock Exchanges to provide a standardised scientific approach for corporate ESG information disclosure. While the names of other companies that participated in this guidance were not disclosed, the development of these guidelines were also based on input from both governments and some of the most influential companies in China, marking the start of an important journey for one of the world’s largest economies.

ESG Industry faces continued pushback from corporations and business leaders

Following on from Tesla’s criticism of ESG – both this and last week – a number of other prominent individuals in the US have entered into the debate. While speaking about energy policy in Texas, Former U.S. Vice President Mike Pence criticized investor-activist campaigns for forcing companies to follow the socially conscious investing principles. He claimed that they elevate left-wing goals over the interests of businesses and their employees. While Bill Ackman came out in support of ESG last year, he is now investing in a new money management firm co-founded by Vivek Ramaswamy, a staunch opponent of ESG. Pushback against ESG is not new; however, the recent propagation of anti-ESG rhetoric by high-profile individuals presents a new challenge to its advocates. The SEC’s climate risk proposal has thrust ESG into a more politicized, contentious space in the US, but proponents of ESG have attempted to defend it. Jeffrey Younger of the NYU Stern School of Business argued that if shoppers and investors are looking for environmentally sustainable offerings, then there is a profit motive for businesses to respond. Furthermore, a recent IBM study surveying approximately 3,000 CEOs found that nearly half (48%) of CEOs cited sustainability as one of the highest priorities for their company in the next two to three years, up from just a third last year, and echoing similar research from us at FTI.

Increasing SEC enforcement action involving ESG disclosures

Last month, the SEC charged Vale, one of the world’s largest iron ore producers, with “making false and misleading claims about the safety of its dams prior to the January 2019 collapse of its Brumadinho dam.” Gurbir S. Grewal, Director of the SEC’s Division of Enforcement, stated: “Many investors rely on ESG disclosures like those contained in Vale’s annual Sustainability Reports and other public filings to make informed investment decisions.” The litigation against Vale is notable in that many of the alleged misleading statements were made in Vale’s sustainability reports, which were furnished to the SEC. which were furnished to the SEC. The SEC cited the anti-fraud provision in Rule 10b-5 of the Securities Exchange Act of 1934, which imposes liability for any misstatement or omission of a material fact. As shown by the SEC’s complaint, the bar for the level of diligence and oversight of information to be contained in sustainability reports is being raised, even when the sustainability disclosures are not filed with the SEC. A failure to meet that standard could expose a registrant to Rule 10b-5 claims. Additionally, the SEC’s description of this as an ESG disclosure case may signal that certain instances that would have simply been described as disclosure cases in the past may now be characterized under the ESG umbrella.

Pushback against mandatory EU Green Bond Standard

The European Commission is moving forward with plans for a European Green Bond Standard in an effort to steer more private-sector money towards the push to reach targets under the European Green Deal. Although market turbulence has not helped, this comes on the back of a slowdown in the growth of green bond issuances so far in 2022, which has intensified calls for greater transparency and standardisation. The European standards were formally proposed a year ago with the aim of making it easier for issuers to raise funds for climate-focused investments. The Commission has proposed an initial voluntary period, to be followed by a phase after which the standard would become mandatory. This approach has received significant pushback, partly because of the fear that small operators might be excluded from the market as they may struggle to meet the level of reporting and disclosures required. The 27 European Member States in Council agreed their position on the proposal in April and will soon begin negotiations with the European Parliament on a final version of the text, with final approval unlikely before summer 2023.

Regulatory oversight of forced labour in the supply chain grows

Alongside existing regulations such as the California Transparency in Supply Chains Act and UK Modern Slavery Act, the Uyghur Forced Labor Prevention Act (“UFLPA”) signed by President Biden in December 2021 comes with proposed legislation that targets forced labour in supply chains. Across the ESG and sustainability spectrum, company responsibility for supply chains has grown, with extensive due diligence and numerous reporting requirements the minimum required, in a similar vein to scope 3 emission accounting. The proposed UFLPA gives the U.S. government additional tools to prevent goods originating in the Xinjiang region from entering U.S. markets. A hearing was held by the Forced Labor Enforcement Task Force (“FLETF”) on April 8, 2022, to solicit comments from the public to inform the FLETF’s decision on the implementation of the UFLPA.  Last week, the National Law Review published an article that summarizes the comments that were presented at the hearing. The FLETF will review the comments to provide companies with guidance on complying with the UFLPA by June 21, 2022, the date that the UFLPA goes into effect.

Are fossil fuels a necessary evil in the green energy transition?

The deputy editor of the Financial Times, Patrick Jenkins, this week joined the debate on the role of fossil fuels in the transition to a greener future. His article centres on the developing practical realities of ESG, rather than the ideological view, specifically referencing Mark Carney’s comments at May’s Net-Zero Delivery Summit that further investment in fossil fuels is a necessity to ensure a smooth transition, and BlackRock’s 2022 proxy positioning that we discussed in this newsletter last week. The overarching argument made is that “the world is not ready for an immediate shift to green energy” and that instead, it is acceptable, and more realistic, for owners of fossil fuels to decarbonise parts of their operations – with a view to the next step being the push to renewables. This perspective is reflective of wider discussion at the moment, which is in part being driven by fears around energy security and oil and gas prices. Whether the reliance on fossil fuels is actually part of the problem in terms of solving energy security concerns and thus forcing a self-fulfilling prophecy of sorts, is a debate for another day.

In Case You Missed It

• Last week, Euronext launched its new ESG Reporting Guide, a reference document for listed companies on ESG reporting and interactions with investors. The Guide was revised to focus on alignment with the 1.5°C trajectories, as part of Euronext’s “Fit For 1.5°” commitment, and to align with the latest developments in climate-related standards.
• The Global Real Estate Sustainability Benchmark (GRESB) launched two new products, the Transition Risk Report and GRESB TCFD Alignment Report. This will help asset managers understand which assets are most exposed to climate-related risks and reporting challenges and help them address reporting challenges related to TCFD.
• Last week, BlackRock announced that it will vote against most shareholder resolutions on climate change in 2022. The asset manager argues that the resolutions are too prescriptive. Over the past few years, BlackRock has worked to develop its image as a sustainability pioneer, but Russia’s invasion of Ukraine and the changes in the energy markets have impacted the company’s voting strategy.
• State Street Global Advisors released its 2021 Asset Stewardship Report which illustrates the company’s voting and engagement activity. The company voted at 20,902 meetings and had 878 comprehensive engagements on topics such as climate change, diversity, equity and inclusion and responsible governance. As climate change is one of the company’s core themes, State Street Global Advisors almost doubled its climate engagements, reaching 254, in 2021 compared to 2020.

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