ESG+ Newsletter – 13th May 2021

Investor dissent on pay spreads

As AGM season rolls on at pace, companies across the globe are under increasing pressure from their investors through proxy voting. While the focus in previous years may have been disproportionately on Europe and the UK, the Financial Times reports this week on data from Equilar that indicates compensation votes in the US  this year have received record-low support from investors after boardroom moves to “loosen performance targets during the pandemic backfired.” So far in 2021, shareholder support is at its lowest since 2011, the year that “say on pay” votes were made mandatory. This year, average support for pay packages has dipped to 87.6% from a high of 91.8% in 2015. Such votes are, of course, only advisory but can still be damaging for companies. The FT highlights a Morgan Stanley view that from 2017 to 2019, most companies that failed pay votes underperformed the S&P 500 and their sector peers. Additionally, activist investors see failed pay votes “as blood in the water”, according to Lawrence Elbaum, a partner at law firm Vinson & Elkins. “A bad say on pay vote is one of the clearest, initial warning signs that an activist is going to be knocking on your door because they have seen that shareholders are upset” , Elbaum said.

PRI pushes BEIS to go further on TCFD

As readers of this newsletter will no doubt be aware, back in November 2020, Chancellor Rishi Sunak announced that the UK government will make TCFD-aligned disclosures fully mandatory across the economy by 2025. A period of consultation has recently closed led by the Department for Business, Energy & Industrial Strategy (BEIS). This consultation has drawn the ire of the PRI, the UN-supported initiative on responsible investment with over 3,800 signatories globally with approximately $100 trillion in assets under management. PRI CEO Fiona Reynolds was “surprised and concerned by the low ambition” set by BEIS stating that the proposals were “out of step with other reforms on climate-related financial disclosures and critically – would water down, rather than implement, the TCFD framework.” Chief among the PRIs concerns are the “comply or explain” approach currently being pursued rather than a mandatory reporting obligation and a call to extend the scope of TCFD reporting to companies with 250 employees and/or a turnover of £36 million a year, in line with Streamlined Energy and Carbon Reporting (SECR) requirements. The full PRI response can be accessed here.

High Pay Centre calls for investor action on pay issues

A UK think-tank, along with a number of trade unions have written to investors in order to highlight the importance of pay ratio disclosures that have been mandatory in annual reports since 2020. The Financial Times reports that some of Britain’s largest unions such as Unite and UNISON, along with the High Pay Centre, have issued a fresh call for investors to vote against remuneration reports and the re-election of board members at companies with unjustifiably wide pay gaps between directors and workers. While much of the furore is often aimed towards pay at the top end, the letter goes on to say that low pay should now be considered a material issue for companies and their investors because of the negative effect on employee engagement, staff turnover and productivity. Along with the letter, the High Pay Centre also issued guidance for investors in relation to weighing up company performance in this space.

On purpose: 14 major UK employers make pledge

Having a purpose beyond a simple profit motive “brings strategic clarity, operational discipline around what’s material to stakeholders and more meaningful work for employees”. That’s according to The Purposeful Company, an NGO which claims to have brought together business leaders from leading FTSE 100 companies and large accountancy firms, whose businesses employ 2 million people and manage £1 trillion of investment assets. The Guardian reports that the heads of 14 big organisations including Capita and Unilever “have pledged to put the wellbeing of staff, local communities and broader society higher on the boardroom agenda, after concluding it will enhance the long-term profitability of their businesses.” Coverage of the company pledges comes alongside the launch of The Purpose Tapes, a set of interviews (conducted between November 2020 and March 2021) with 14 organisational leaders who have a stated commitment to purpose. The discourse on the purpose of the corporation has continued to gather pace in recent years. It remains to be seen whether this latest intervention along with others, particularly from the World Economic Forum, represent a long-lasting shift towards so-called stakeholder capitalism. At the very least, minimum standards of corporate behaviour are shifting with such initiatives.

Growth in ESG ETFs raises concerns about their composition

ESG ETFs have experienced exponential growth, with AUM growing by 223% in 2020. The continued growth reflects the emergence of ESG in the consciousness of mainstream investors and the increased demand for sustainable financial products and investment opportunities. In response to investor demand, index providers have been forced to rapidly expand their range of indices; however, a recent Financial Times article has detailed that there is now growing concerns at how these ESG ETFs are being compiled. The article highlights that critics of ESG ETFs have questions in relation to why certain companies appear in some benchmarks but are being excluded from others. Nizam Hamid, an independent index and ETF consultant, attributes this to the complex and diverse ways that indices are designed by differing providers and which aspect of ‘ESG’ investors are prioritising; stating that there is “no common model for defining how a company meets ESG criteria” which results in a “very wide variation for the same company by different providers”. Ultimately, as more investors seek exposure to ESG or sustainability, there is a risk of the quality of products being negatively impacted, something SFDR is designed to prevent in part.

Carlyle to tie CEO and worker pay to diversity goals

EUS Private Equity giant Carlyle has announced that it will tie employee bonuses and CEO compensation at the firm to its level of success in meeting goals around diversity, equity, and inclusion. Bloomberg reports that this is the latest example of Corporate America trying to “make good on promises to boost underrepresented talent.” Among a “comprehensive set of metrics” set to be attached to CEO Kewsong Lee’s pay package is a requirement for meeting the company’s target of having 30% of board seats of its portfolio companies filled by diverse candidates by 2023. Employees at Carlyle will also be able to participate in an incentive programme that will allow them to nominate their peers who have stood out in their contributions to progressing diversity. While the firm would not outline how much will be committed to the programme, it said that more than half its $260 billion assets-under-management are managed by women.

Head of Sustainable Finance at Goldman Sachs wants better, but not more, ESG Data

John Goldstein, who has been running Goldman Sachs’s sustainable finance group since 2019, stated a   concern for businesses in terms of having to account for too many ESG metrics. Specifically, he discussed a meeting with a CFO, where the CFO told him that she had been asked for 2,000 different ESG data points over the previous year. With so much data being asked for, it is easy to see how companies and asset managers could lose track of those metrics that matter most. In addition, Goldstein discussed how there is an increasing need for a fuller “ESG story” from companies. Instead of purely attempting to hit every ESG metric, companies can try to build an overarching story on where they currently stand with ESG and where they are heading.

Diversity in sustainable bond market issuers further highlights investor demand

Over the course of the past week, both Amazon and Stanford University issued sustainability bonds joining a growing list of debt issuers tapping the capital markets for sustainable financing. On Monday, Amazon announced the issuance of a $1 billion sustainability-focused bond – its first-ever sustainability bond – with the proceeds being used to support environmental and social projects, primarily across five areas: Renewable Energy, Clean Transportation, Sustainable Buildings, Affordable Housing, and Socioeconomic Advancement & Empowerment. Meanwhile, Stanford became the first higher-education institution to issue a sustainable bond that would focus on reducing the adverse impact of the university on the climate, while also supporting sustainable campus developments. Proceeds from the $375 million issuances will be used to finance a new school that will focus on climate, sustainability, and to invest in Sustainable Stanford, the university’s effort to reduce its environmental impact. These two separate sustainable bond issuances, by two uniquely different and contrasting entities, only serve to further highlight investor’s willingness to support “green” projects.

In Case You Missed It

• The German government is planning a new green financing strategy to steer capital towards environmental projects, according to Today. The plan aims to support the European Union in becoming carbon neutral by 2050 and to assist investors, by creating a sustainable “traffic light” system that makes it easier to identify green investment opportunities.
• A study co-authored by Harvard academic George Serafeim has concluded that daily share prices react only to corporate ESG news identified as financial material by the Sustainability Accounting Standards Board (SASB). The study also found that daily share price movements were more pronounced for ESG news that was positive, received more coverage and was related to product impacts – such issues concerning product safety, quality, affordability, and access.
• Demand is growing for executive courses focused on environmental, social and governance concerns, according to Financial Times. Executives in companies around the world are under increasing pressure to address social, environmental and ethical problems. The Covid-19 pandemic has fuelled the debate about the purpose of a company and has led some to enlist the help of business schools to build more inclusive business models.
• Companies are scrambling to bolster Brazil’s environmental credentials following reputation fears, according to the Financial Times. That pledge had been suggested in an open letter to Bolsonaro from the CEOs of around 30 leading Brazilian companies — and it is an indication of the growing power of the business lobby to influence government environmental policy.

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