ESG+ Newsletter – 25th February 2021

S&P Global joins ESG data disclosure trend

S&P Global has made more than 9,000 ESG scores publicly available in an attempt to increase transparency around corporate sustainability efforts. The S&P Global ESG Scores are the primary factors used for companies to gain entry into the Dow Jones Sustainability Indices (DJSI). The announcement follows a similar move made by Refinitiv at the end of January. ESG rating market leaders, Sustainalytics and MSCI, also made a cohort of their ratings available during 2020, meaning that companies and investors alike can now readily access a range of data and scores free of charge. While the inputs into the ratings are far more insightful, evaluating the lay of the land as to overall scores and peers is a reasonable first step for companies. Notably, the S&P scores also reflect engagement between their ESG team and companies, in contrast to the approach of others, where only publicly disclosed information is relied upon.

SEC issues Statement of Intent on climate change reporting

Last night, the Securities and Exchange Commission (SEC) Acting Chair, Herren Lee, issued a statement outlining that the regulatory agency would be reviewing how companies are reporting climate related risks and disclosures. The intention of the review is to focus on assessing companies whether companies are complying with “disclosure obligations under the federal securities laws” and to “engage with public companies on these issues”, while also absorbing “critical lessons on how the market is currently managing climate-related risks”. While current guidance, introduced in 2010, invites companies to use regulatory filings to disclose how they could be affected by climate change, few choose to do so. In the statement, Acting Chair Lee stated that, as investors are more conscious of climate-related issues and risks when making investment decisions, it is the SEC’s “responsibility to ensure that they have access to material information when planning for their financial future.” She also signalled that updates to existing guidance could be the first step towards a more comprehensive framework that enables consistent and comparable climate disclosure.

Purpose and Value

The idea of the purpose of an organisation has dominated discussions of academics, large institutions and, increasingly, companies over the past two years. In what was seen as a victory for purpose proponents, Danone secured 99% support from shareholders to adopt a new legal framework and become a “purpose driven company.” However, as reported by the Financial Times this week, the company’s CEO and Chair have come under increased pressure from shareholders in light of an historically wide discount to larger peers Nestlé and Unilever. While the shift in approach from Danone must surely be viewed against a longer time-horizon and wider criteria, it is a useful insight into the ongoing debate over aligning purpose with profit.

McKinsey presents economic case for racial equity

Earlier this week McKinsey released a memo on the economic case in the USA for racial equity and inclusive growth. This argues that as the U.S. seeks an exit from the COVID-19 pandemic and a return to economic health, business leaders must understand and improve performance drivers such as racial equity and inclusive growth. The management consultancy has previously estimated that closing the Black–white and Hispanic–white racial wealth gaps would boost consumption and investment within the U.S. economy by an additional $2-$3 trillion. That’s equivalent to 8-12% of U.S. GDP.

Removing the roadblocks to Boardroom diversity

Diversity as a business imperative is also set to be a hot-button issue this AGM season in light of the Black Lives Matter movement and the societal inequalities that COVID-19 has exposed. Yet it seems that commitments to diversity on the one hand, may be undermined by staff policies on the other. A recent example from Salesforce highlights one of the challenges facing  US companies’ efforts to diversify their boards: many of the nation’s biggest companies do not allow their employees to join outside boards, especially those just below the most senior ranks, who arguably should be the board members of tomorrow, if not today. With so many employees trying to overcome barriers to promotions at their own firms, this creates a kind of “systemic impediment” as the New York Times puts it to diversifying boardrooms. And with companies facing growing calls from investors and society to diversify their boards, a new fault line is being exposed in corporate America: Should companies let their managers spread their wings?

The widening of the pressure through proxy voting

For the first time, The Investment Association (IA), the UK’s trade body for asset managers, has announced that, along with turning up the pressure on companies to improve ethnic diversity on their boards in this year’s AGM season, it will also be issuing an “amber-top”, which signals a serious issue to investors, to companies in sectors identified by the Task Force on Climate-related Financial Disclosures (TCFD) as high risk, if they fail to provide adequate TCFD-aligned disclosure. This ties into a recent article from Reuters, reporting that Amundi, Europe’s biggest asset manager, plans to seek more specific information from companies at upcoming shareholder meetings about their plans to reduce carbon emissions.

In addition to diversity and climate, the IA has also added an addendum to its guidance on pay, setting out acceptable parameters for Committees in delaying the setting of targets for long term incentive plan (LTIP) grants in 2021.

Quantum versus structure – a compensation debate

At the end of last year, Willis Towers Watson published an interesting analysis of CEO pay in Japan, France, Germany, the U.K. and the U.S. The report, detailed by IR Magazine, assessed publicly available data for more than 420 companies and revealed that Japanese executives received a 20.5% increase in their compensation from 2018 to 2019. The author of the report, Naoo Ogawa, cites the focus on performance-based pay and the significant expansion of executive’s long-term incentives (LTIs) under the new iteration of Japan’s Corporate Governance Code as the primary factors in the growth of executive pay, something that may sound familiar to UK readers, following similar criticism of LTIPs over the past five years. LTIs, as a composition of executive pay, increased from 21% to 29% year-on-year, with the report stating that compensation plans are now “starting to mirror those of European companies that place a heavy emphasis on performance-linked pay.”

While the report also outlines that Japanese executive pay still lags that of its peers in the US and Europe, it is clear that the structure and scale of compensation plans in the market are changing quickly. By evolving pay structures toward the more Anglo-Saxon model of emphasis on larger variables as a means of aligning the interest of management and shareholders, the outcome is higher pay. While many investors view such a structure as preferable, there is a growing push toward restricted shares in Europe. Ultimately, as quantum of pay represents a material risk to a company’s reputation and impacts its interactions with stakeholders, whether a one-size-fits all approach that fails to reflect company and market nuances is a short-term fix is a discussion that will continue amongst the stewardship and investment communities.

Credit rating agencies continue to expand integration of ESG

The three leading global rating agencies, Standard & Poor’s, Moody’s and Fitch Ratings have each taken significant steps over the last number of years to integrate ESG themes into their credit rating methodologies and decision making. The process has been accelerated through acquisition of a variety of third-party ESG data providers and analysis companies, with S&P acquiring RobecoSAM in 2019 and Moody’s completing its acquisition of Vigeo Eires in 2020.

As has been highlighted previously in this newsletter, the continued rise in influence of ESG amongst investors, and its growing importance in financial decision making requires a need for enhanced and more nuanced understanding around companies’ ESG performance. Credit ratings agencies recognise this fand can play  bridge the information gap, by pressurising companies’ reporting through active engagement. The further embedding of ESG from “traditional actors” emphasises how important ESG factors are to companies’ financial health, capital structure and outlook when assessing a company’s credit risk or ability to meet debt obligation. These developments are already materially changing debt capital markets, impacting companies’ credit ratings and ability to source and attract cost efficient capital.

Carbon price boom a double-edged sword for EU as green investments outweigh fossil fuels

The Emission Trading Scheme (“ETS”), the world’s longest-running cap and trade scheme to reduce carbon emissions, is, according to the Financial Times, providing both a vote of confidence and a warning to the European Union. The cost of EU carbon allowances reached a record high of €40 a tonne for the first-time last week. For many, this is a sign that it is working exactly as intended and exemplifies how investors are taking Brussels’ Green Deal ambitions at face value. However, there is some concern amongst policymakers as a growing number of hedge funds get in on the market, predicting it goes only one way. While the behaviour of speculators is unlikely to sit well with officials in Brussels, there will be a reluctance to make any kind of intervention which could upset overall faith in the ETS.

The rising price of carbon use, which the EU has sought to make “prohibitive” is aligned with data released this week from the French Institute of Petroleum. As reported in Novethic, for the first time in 2020, investment in renewables surpassed those in oil and gas production. While clearly the fall in the price of oil due to COVID played a key role in 2020, as regulatory and stakeholders demand action on climate, it remains to be seen whether a return to full economic force in 2021 and 2021 will result in a return to fossil fuel dominance.

In case you missed it

• Final report from Hampton-Alexander Review shows 220 of FTSE 350 boards now have at least 33% board positions held by women – a four-fold increase on 2015 – and, for the first time, no all-male boards
• By 2026 all new Ford cars in Europe will be fully electric or plug-in hybrid. According to The Times, the company confirmed that its plant at Cologne in Germany would become the central location for its drive into electrification in a $1 billion investment programme. BMW’s CEO pointed to this fact in questioning Tesla’s dominance in the space, with traditional players ramping up production of EVs.
• Komatsu, Japan’s top construction equipment maker, plans to develop hydrogen power as an alternative to diesel for heavy-duty mining dump trucks, according to Nikkei. The company will start its hydrogen development program in 2021 and aims to have the trucks ready for practical use by 2030.
• The European Union is planning to create a new system to rank flights and aircraft according to their carbon footprint, Reuters reported. The European Union Aviation Safety Agency (EASA), said the project is aimed at “providing reliable, comparable and verifiable information” to clients to help them make sustainable decisions and aims to have eco seal tender firmed by the end of 2022.

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