ESG+ Newsletter – 11th March 2021

Push for global ESG reporting standards

On Tuesday, the Chairman of the Sustainable Finance Task Force at the International Organization of Securities Commissions (IOSCO), Erik Thedeen, told Bloomberg that the lack of global standards for ESG reporting has resulted in an “alphabet soup of standards or semi-standards.” This, he argues, allows companies to choose reporting methods and certifications that portray the company favourably to investors. His comments follow on from ISCO’S warning last month – whose members regulate more than 95% of the world’s securities markets – that there is an “urgent need” for reliable sustainability disclosure standards. A harmonized global ESG reporting standard would be a welcome development for investors but would require national authorities to expand their oversight and a unified approach across various markets.

One market that has been proactive in pushing ahead with ESG regulation has been the European Union, which this week introduced rules in regulating ESG and sustainable financing. As reported by the WSJ, the rules, which form part of the Sustainable Finance Disclosure Regulation (SFDR), require fund and asset managers to detail their investment plan and measurements for any ESG investments and came into effect on March 10th. The aim is to mitigate the freedom that fund managers and ESG ratings firms have had in setting, or as has been perceived in some cases exaggerating their own definitions . These rules follow calls made by the European Securities and Markets Authority (ESMA) in January for new rules and tighter regulations regarding ESG aspects and ratings of companies to avoid investors being misled. Although focused on investors, the regulatory push is equally impactful for public companies, whose reporting is likely to play a growing role in the ability to enter ESG funds and attract sustainably focused capital.

Just this morning, a day after the rules became effective, Reuters reported on Blackrock’s announcement to its clients that as it stands, 17% of its assets are classified as sustainable under the EU’s new rules. More significantly though, based on the asset manager internal assessment, 70% of new funds will meet the EU requirements, reaffirming the shift towards sustainable investing.

Gender diversity investing is not just about making the world a better place

A study by the National Women’s Law Center shows that nearly 2.2 million women in the US left the workforce between February and October 2020, implying that women have been hit harder by the pandemic than men. In part, this is due to the fact that women are disproportionately employed in critically affected sectors. With International Women’s Day earlier this week, gender diversity is at the top of people’s minds and is a crucial aspect of ESG that companies must address. Morningstar’s Women’s Empowerment Index highlights US companies that have strong gender diversity policies and shows a strong correlation between these companies and a positive financial performance. This underscores that companies committed to gender equality are not just advancing human rights but are also maximising shareholder value. In addition, 19% of the MSCI ACWI Index had at least three women directors on their Board for at least three years. A third of these were overall MSCI ESG leaders, showing that companies with more sustained board diversity also had better overall environmental practices. During these critical times, issues such as gender diversity should not be overlooked, but embraced as a path to a stronger corporate environment and increasingly linked to strong performance in a number of wider areas central to developing a robust ESG strategy.

Equal pay for equal work

The European Commission has recently presented a proposal around equal pay for men and women in the EU and to ensure better access to justice for employees experiencing pay discrimination. New measures, such as “a right to know the pay levels for workers doing the same work, as well as gender pay gap reporting obligations for big companies,” also take into account the impact of the pandemic and aim to “increase awareness about pay conditions within the company and give more tools to employers and workers to address the pay discrimination at work.” The proposal will now go to the European Parliament and Council for approval. Once adopted, Member States will have two years to turn it into national law. After eight years, the Commission will carry out a full evaluation.

SEC and Department of Labor ratchet up focus on climate and ESG

The SEC has announced that it is to create a 22 person-strong Climate and ESG Task Force in the Division of Enforcement. According to a statement released by the SEC, the new body will be tasked with developing “initiatives to proactively identify ESG-related misconduct” and is set to initially focus on identifying “any material gaps or misstatements in issuers’ disclosure of climate risks under existing rules” and to “analyze disclosure and compliance issues relating to investment advisers’ and funds’ ESG strategies.” If previous taskforces are anything to go by, we are likely to see robust enforcement in these areas, in what is yet another demonstration of how different the US regulatory landscape has become in the first two months of a new administration.

Outside of the SEC, as covered by Pensions & Investments, yesterday the Department of Labor announced a change of tack, confirming that it will not enforce two rules brought in during the Trump administration. The rules had sought to reduce the focus on ESG criteria in both investment decision-making and proxy voting.

UK Government pressures companies to link ESG metrics with executive remuneration

Last Friday, the Environmental Audit Committee (EAC), a select committee of the House of Commons, published a letter its Chair had sent to Boohoo which asked for an update on whether the online fashion retailer had agreed to link its remuneration packages to ESG metrics – particularly in relation to welfare of its employees and environmental sustainability of its products. In the letter, EAC Chairman, Rt Hon Philip Dunne MP, stated that Boohoo needed to “put its money where its mouth is.”

This public pressure follows on from Boohoo CEO Mahmud Kamani’s appearance before the EAC last year following allegations of low pay and poor working conditions for Boohoo employees at its Leicester supplier. A subsequent independent review conducted by Alison Levitt QC corroborated the allegations and highlighted that the company’s oversight at its Leicester supplier was “inadequate” and attributed this to “weak corporate governance”. As outlined in previous newsletters, and in our own research, the ‘S’ in ESG will continue to attract significant attention from investors,  regulators, Government, customers and employees while there is a trend towards greater integration of ESG measures in executive remuneration.

COVID-19 could kickstart wave of unionization

There are signs that the global decline in unionization rates could be on the verge of reversal. Trade union membership has almost halved since the mid 1980s across all OECD countries. Now, as reported by the Financial Times, the fallout from COVID-19 has prompted a new wave of predominantly young workers, many of whom operate in the so-called gig economy, to explore trade union membership as a means of securing better terms and conditions such as sick pay. Far from being a champion of socialism, the OECD makes the argument that collective bargaining “should be mobilised to help workers and companies face the transition and ensure an inclusive and prosperous future of work”. A new era of social dialogue in a post-pandemic world could be one means of addressing concerns of growing income inequality and a perceived power imbalance between capital and labour.

Unsurprisingly, investors are not far behind in terms of strengthening their focus on how companies are managing their workforce, with an IR magazine study finding more than three-quarters of IR teams have received questions on Human Capital Management over the past two years.

Nordea has no plans to shut polluters out from its sustainable finance services

As issuers and investors grapple with Europe’s SFDR which came into force yesterday, the Danish financial services group has left little doubt about the future direction of its sustainable finance services. In an interview with Bloomberg Green, Jacob Michaelsen, head of sustainable finance advisory at Nordea’s investment banking unit said there were no plans to shut polluters out from its sustainable finance services: “It’s just such a new area that we’re venturing into that setting very high, strict definitions on the requirements is basically infeasible”.

Indeed, Nordea expects to make the “biggest impact” on climate not by forcing clients to go from being “a little bit green to being super green,” but from “being dirty to being less dirty, and maybe a little bit green”. The distinction goes to the heart of a discussion on what sustainable finance should be, but it is clear that Nordea’s stance is a win for those on the “engage” side of the divestment/engagement debate.

China to speed up tapping new energy sources, but coal stays in mix

China has announced plans to increase its nuclear energy capacity by 40%, from 50GW to 70GW by 2025 but according to Reuters, has largely left its coal industry alone, as it “has to play a delicate balancing act to support its energy needs for growth”. The new 2021-2025 plan called for a rapid boost to both wind and solar power generation, as well as promotion of electricity generation from waste in order to help China meet its goal of having non-fossil fuels meet around 20% of its total energy consumption.

The new plan will not prohibit the development of new coal-fired plants and did not set a target for curtailing their capacity. China has called for “appropriately managing” the pace of coal power expansion and let electricity partially replace coal. As a result, it intends to lower the price of energy for its energy and commercial sectors this year.

Companies look to exit State COVID-19 loans to capitalize on potential recovery

Vaccination programmes are well underway across many markets and the positive effect they appear to be having on curbing the spread of COVID-19 has allowed companies to look towards the recovery with certain sectors – such as travel automotive and consumer goods – trying to position their business to capitalize on the expected release of pent-up consumer demand.

Bloomberg reported this week that one such effort is for companies to remove Government-backed loans, or State aid, that they received over the past year to help them survive the COVID-19 pandemic from their balance sheets. There are a number of motivations for doing this including high or rising interest costs on Government loans; the low cost of capital in the markets; and, restrictions accompanying Government backed loans on capital expenditure, dividends, share buybacks and executive remuneration. More recently, this has included “Green strings” which links financing to emission targets. With large European companies raising over €50 billion of Government backed loans or state-owned lenders since March 2020, it is clear they have a long way to go to fully de-leverage and gain back their “freedom”.

Chart of the Week

Source: Fidelity

In Case You Missed It

• Goldman Sachs updates 2030 Sustainable Finance Commitment: the investment bank has announced a target of $750 billion in financing, investing, and advisory activity to put climate transition and inclusive growth at the forefront of their work with clients.
• Nomura Holdings Inc, Japan’s largest brokerage, expects more mergers as governments and investors put mounting pressure on companies to improve ESG scores. Shinsuke Tsunoda, global head of mergers and acquisitions at Nomura revealed to Bloomberg that he expects more deals by companies seeking to “change the way they do business or the quality of it” by simplifying operations or shedding assets to meet climate goals.
• France Finance Minister Bruno Le Maire said on Wednesday that Europe and the United States should agree on common rules to determine how “green” a financial investment is.  Le Maire suggested to President Joe Biden’s climate envoy John Kerry that that Europe and the US should have an identical taxonomy to avoid confusion between the two continents.

Upcoming events

March 22-23: Impact Investing World Forum

March 22-25: 25 Economist 6th Annual Sustainability Week

March 22-25: Ceres 2021

March 23-25: Citi Bank Pan-Asia ESG Conference 2021

March 23-25: JP Morgan Global ESG Conference

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