ESG+ Newsletter – 3rd November 2022

COP 27 – FTI’s key themes

As COP27 kicks off this week, FTI has published a research report outlining the five themes that businesses must consider as they balance increased scrutiny of their sustainability work and a tough operational landscape. Kicking off on the shift from commitment to outcomes, we also look at the role of sustainable finance, the recognition of “loss and damage”, the growing role of developing nations and regions, and finally, how stakeholders are increasingly acknowledging the link between issues – biodiversity and decarbonisation, for example.

Shareholders yet to exercise the full extent of powers on sustainability

The election – and re-election – of directors is one of the greatest powers afforded to shareholders. While mechanisms such as votes on remuneration reports and policies constitute a point of accountability for investors on company pay practices, the same phenomenon has not applied to sustainability matters.  As noted by Sarasin Partners in a recent ESG Clarity article, “It is time they [shareholders] voted in a way that ensures they are listened to. This must be part of routine voting determining core governance practices at businesses”. Climate considerations constitute a key strategic concern for companies and risk for shareholders, which may ultimately result in evaluations of a similar nature to strategic financial considerations.

Holding non-executive directors accountable for failures in a company’s sustainability strategy, particularly in light of the unclear guidance on say-on-climate proposals, may be the most effective strategy for investors who are increasingly being called upon to align their policies with the Paris climate targets. The urgency of the climate crisis, and the lack of commitment from the majority of listed global carbon emitters to align with the 1.5-degree pathway, may be proof points of failures in the shareholder empowerment system.

EU Due Diligence Directive having global impact

The EU Corporate Sustainability Due Diligence Directive (CSDD), which applies to EU businesses and those that generate €150 million within the EU, will require companies to understand and mitigate their social and environmental impacts throughout their supply chains. The impact of the legislation is already having effects across the globe, with changes in buyer behaviour already being felt in the APAC region, where there are increasing inquiries regarding suppliers’ human rights and environmental impacts, and the policies and mitigation practices they have developed. The focus and uncertainty around the area were a focus of a recent Sustainable Fitch conference on Tuesday. With the majority of the world’s consumer goods coming from APAC and having in mind the existing policy gap, and the lack of data availability and transparency, it seems that the region will be heavily impacted by the CSDD directive.

LGIM outlines dangers of antimicrobial resistance – and response plan

Two ESG specialists at Legal & General Investment Management this week penned an article for ESG Clarity looking at why and how antimicrobial resistance (AMR) is material to investors.

Referencing the impact of the COVID-19 pandemic on both society and the economy, Maria Ortino and Alexander Burr write that there are systemic risks associated with AMR – ones that have financial implications. More specifically, they outline the widespread misuse of AMR across the food system, and how the water sector contributes to the crisis, which the World Bank believes may result in a 3.8% loss in global GDP by 2050, a similar level of economic damage to the 2008 financial crisis.

As the experts see it, there are four steps required if solving the challenge is to be successful. Firstly, improved education across stakeholder groups on the dangers of AMR and how it currently exists. Secondly, the integration of the risks posed into the sustainable finance system. Next, the development of an “independent accountability mechanism and a focal point” to guide governments, the market, and society on how to tackle the risks. This would be building on current WHO initiatives. Finally, improved mechanisms and frameworks to help monitor, implement, and enforce while improving transparency.

Uncertainty on ESG designation of funds doesn’t halt flows

According to Morningstar, hundreds of ESG funds may lose their designation under recently updated EU rules designed to determine the level of sustainability of investment products; however, that has not stopped the capital from flowing in. The continued inflows to Article 9 funds, which are defined as “a fund that has sustainable investment as its objective or a reduction in carbon emissions as its objective”, have raised questions as to whether investors should be more cautious. The situation has led to criticism of the SFDR and stakeholders seeking clarification from the EU Commission on several key pillars within the framework. Across the globe in Japan, another impact of similar legislation is occurring, with no new fund using ESG labels after the regulator made efforts to crack down on greenwashing, in similar steps to last week’s FCA announcement.

Scope 3 emissions pressure hitting financial institutions

On the back of the differing approaches detailed in last week’s newsletter, the debate around Scope 3 emissions continues this week, with the Glasgow Financial Alliance for Net Zero (GFANZ) indicating that Scope 3 emissions are going to be key to net zero plans created for financial institutions. These institutions must start looking to scope 3 to understand (and reduce) their impact, as businesses seek to understand what emissions they are financing.

GFANZ and other NGOs support of companies disclosing scope 3 emissions align with the ISSB requirements announced last week, which set the expectation that scope 1,2 and 3 emissions are disclosed in full, in contrast to reports that the SEC likely may drop scope 3 emission disclosure requirements. If large companies provide scope 3 disclosure across the globe, we may well see investors demand similar detail from all companies, regardless of the final approach in the US.

In Case You Missed It

• A survey by Honeywell indicated that 90% of business leaders directly involved in executing environmental sustainability goals were satisfied with their efforts. Despite over 90% of companies planning to increase their environmental sustainability budget over the next year, only two-thirds said that they were optimistic about achieving goals over the next 12 months.
• Large US companies are linking executive pay to ESG performance, with the share growing from 66% in 2020 to 73% in 2021, however, few see it as critical to sustainability goals. The top two arguments for not tying executive pay to ESG is the challenge of defining specific goals, followed by scepticism about their effectiveness.
• Bloomberg launched a series of 24 indices covering sustainable finance instruments including green, social and sustainability bonds – ranging across corporates, sovereign, supranational and agency bonds, municipals and structured products. The indices will enable Bloomberg Terminal users to access underlying bond documentation such as the use of proceeds allocation to the eligible project categories, and SDG alignment.
• ESG investors welcomed the victory of Brazilian President-elect Luiz Inacio Lula da Silva, with Nordea Asset Management saying it is considering lifting its ban on buying more Brazilian government bonds, which was in place since the 2019 Amazon rainforest fires. Vowing to create an environmental policy on par with the U.S. Green New Deal, Silva promised to protect the Amazon rainforest from the surging deforestation it suffered in the past years and said that Brazil would demand rich countries provide financing to poor countries to respond to climate change.

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