ESG & Sustainability

ESG+ Newsletter – 15th April 2021

Your weekly updates on ESG and more

This week, we review the latest regulatory developments – and criticisms – globally and discuss the potential impact on markets. As technology advances and the UN PRI announces its three-year plan, we ask whether AI will outperform in the ESG sphere and look at the latest pressure on company disclosures as well as their efforts to remain attractive to their employees. Finally, we dive back into the bond markets where evidence of a “greenium” may be starting to emerge.

SEC’s fight to find an ESG standard setter

As trillions of dollars continue to flow into ESG investments, the US Securities and Exchange Commission (SEC) is fighting to try and draw up uniform rules for how public companies report on ESG. Currently, investors can only rely on what companies choose to disclose, causing widespread discrepancies. However, Bloomberg Law reports that despite progressive groups pushing for the SEC to take swift action on this, the Republican party is pushing back. The leading Republican on the Senate Banking Committee says that the SEC “can’t endorse a standard-setter without congressional authorisation,” and that “Congress should reject such an idea out of hand.” The acting SEC Chair, Allison Lee, who has been pushing for better ESG corporate disclosure since she started her role earlier this year, is midway through a public consultation on consistent reporting of climate change information which lasts until June.

Warning that credibility of European ESG Regulations is at risk with compromise

The head of the group advising the EU on its green finance rules has warned the EU Commission not to sacrifice scientific evidence in favour of political compromise. The chair of the EU’s advisors on the rules, Nathan Fabian, wrote to the EU Commission last Friday outlining that political pressure and lobbying disputes between member states have the potential to not only weaken the rules but also undermine the credibility of the regulations. The EU has committed to publishing the first section of its sustainable finance taxonomy on 21 April, which is a list of economic activities that will decide which ones can be labelled as ‘green’ investments in the EU from next year. Recently, there has been debate as to whether natural gas, bioenergy and forestry sectors deserve a green label and should be included on the list.

The letter, which Fabian posted on his personal Twitter page, warned that “deviating from environmentally sound parameters within the taxonomy, by stretching the current taxonomy framework beyond scientific rigour, introduces substantial risks to its intended purpose and to the credibility of the project overall.” In a previous opinion piece, Fabian explained how companies that are currently not considered “green” could still claim some investments as taxonomy-aligned and that the “taxonomy defines what is ‘green’. It does not say that everything else is bad for the environment.”

U.S. SEC review of socially responsible funds finds “potentially misleading” claims

In a Risk Alert on 9 April, the SEC announced that it has found “potentially misleading statements” and inadequate controls regarding ESG issues upon a review of investment advisors and funds. In particular, the alert identified instances of firms improperly handling proxy voting on behalf of investors and cases where firms did not have formal processes in place for ESG investing, despite claiming too. Importantly, the alert was prescriptive in nature and did not act against specific firms. The SEC clarified that the alert was intended to highlight the risks and issues identified by SEC staff to better inform market participants’ compliance programmes and make changes as appropriate. On 12 April, SEC Commissioner Hester Piece released a public statement reinforcing the risk alert’s primary purpose in aiding firms and compliance officers to pre-emptively evaluate ESG claims within their own organisations. She also clarified that firms will not need a special set of policies and procedures for ESG investment strategies. Indeed, the alert marks another instance of increasing interest by the SEC and US regulatory agencies to factor ESG issues into their policy decision making and rulemaking, a trend that will most surely accelerate.

UN PRI to launch new three-year strategic plan

Principles for Responsible Investment (PRI), the organisation at the forefront of promoting responsible investment, that is supported by the UN, this week announced the launch of a new three-year strategy, forming the next step in the organisation’s mission to foster an economically efficient, sustainable, global financial system. Established by a group of investors in 2006, the PRI now has nearly 4,000 signatories, representing more than $110 trillion in assets under management. Their new strategy is built on the theme of “building a bridge between financial risk, opportunities and real-world outcomes.” In a blog post introducing the strategy, PRI Chair Martin Skancke and CEO Fiona Reynolds explained: “At its core, it will focus on ESG incorporation and we will continue to develop resources for those new to responsible investment as well as to respond to industry developments with work on asset classes and strategies where incorporation continues to progress.” 

Goldman Sachs believes ESG investing in the Nordics needs a human touch

Bucking the trend of recent years where electronically traded funds were seen to edge out more “hands-on portfolio management”, Goldman Sachs has found that successful sustainable investment decisions require a human touch which algorithms have so far been unable to match. In Copenhagen, where Goldman is expanding to grab a greater share of the “cash-rich” Nordic asset management market, smart “environmental, social and governance investing calls” are seen as key to winning business. The Nordic countries are seen as the forerunner of many ESG initiatives and often the template for progress in other parts of the world. Thomas Konig, Goldman’s head of asset management in the Nordic region, says that to “do ESG, activism and stewardship, it requires people.” Investors in the Nordic region are seen as among the most demanding when it comes to ESG, and “clearly, active management has a role to play again,” Konig added, noting that it’s “not just something that is fading out versus ETFs and private markets.”

Business schools urged to integrate ESG topics in core courses

In a parallel track to what’s happening in the capital markets, universities and colleges need to hasten the pace at which they are integrating ESG topics into business courses. That’s according to Sarah Murray’s report in the Financial Times which discusses the role that higher education could be playing in shaping the “new paradigm”. Murray spoke to Erika Karp, founder of Cornerstone Capital who outlined that while strides have been made in academia, much of this has come from student demand. There is a need for schools to go beyond merely offering electives on sustainable business and instead, “schools should be teaching sustainability in a way that helps shift capitalism towards a more regenerative, inclusive economic model.”

Integrating topics such as biodiversity and social enterprise into core courses, such as operations and finance, remains a challenge and one that business schools should not shy away from. Furthermore, places of education need to help students ‘join the dots’ between so-called core disciplines and social and environmental factors. MoceanLab’s COO, Dave Gallon, agrees, highlighting the importance of weaving sustainability into operations when nurturing the next generation of business leaders: “If you’re a finance person going to work on Wall Street, you need to understand that the businesses you’re investing in are multi-faceted, human organisations… Not enough people take that holistic view.”

UK Post Office chief suggests profit-sharing plan for postmasters

Speaking to senior executives last week, Nick Read CEO of the UK’s Post Office claimed that the restructuring of the company could create a “partnership of equals” by potentially allowing thousands of people who run post offices, known as postmasters, to receive a share of profits. According to Sky News, Read also made the company’s most significant admission of culpability to date for the IT scandal which led to dozens of postmasters being wrongly convicted of theft, fraud and false accounting. The crisis, according to Read, turned Post Office into Britain’s “most untrustworthy brand”.

Profit-sharing naturally only applies when a company is in-profit, so it remains to be seen whether changes are really afoot at Post Office, whether this can amount to a meaningful ‘social’ stride for the company. Profitability could be a while off yet, as Post Office has indicated that it will require Government assistance in the event of a compensation package being needed to address the quashed convictions.

Just this morning, Entain announced its plans for a firm-wide all employee share scheme, perhaps to reinforce its efforts to attract and retain staff.

Investor focus on modern slavery

Investor scrutiny over ethical risks linked to supply chains is widening across various industries. The investor coalition Find It, Fix It, Prevent It, launched by CCLA Investment Management and backed by a large number of investors with £7tn in assets under management, has recently announced its plan to broaden its oversight over modern slavery issues beyond the hospitality industry to construction and materials. The move follows the increased focus by investors over forced labour risks in these sectors which, according to the key findings of KnowTheChain, are considered among those with the highest risks. Investors are continuing to heighten scrutiny in this area, with a focus on modern slavery documented by a growing number of initiatives all aiming at promoting higher levels of disclosure and accountability, and ultimately mitigating workforce issues. The Workforce Disclosure Initiative is among those.

The growing focus over modern slavery has intensified the demands for data able to support investors in the assessment of these risks and created pressure for ESG rating agencies to incorporate indicators on this issue in their ratings products. Investors, academics and NGOs under the coordination of Find It, Fix It, Prevent It are seeking to collect data points needed for the development of a new rating tool.

Launch of largest ever ESG ETF – but what about the ‘greenium’?

Last week, institutional investors ploughed into BlackRock’s newly launched US Carbon Transition Readiness fund, investing $1.25 billion into the ETF focused on the winners in the transition to a low-carbon world. This was the largest ETF launch of all time, eclipsing the $850 million iShares ESG MSCI USA Leaders fund launched in May 2019. The success of the launch underscores the surging investor demand for ESG financial products, particularly carbon transition ETFs which are being pitched as a way to encourage companies, governments and asset managers to commit to a net-zero greenhouse gas emissions target by 2050. Speaking on the launch Larry Fink, Chairman and CEO of BlackRock, singled out the growth in demand for ESG products, stating that many of Blackrock’s clients share their low-carbon economy conviction and that the ETF will help them “be at the forefront of the energy transition through next-generation climate analytics and sustainable strategies.”

However, some within the financial community have recently highlighted that green debts and sustainability-focused capital products are benefitting from what has been described as a “greenium”,  which is effectively driving better pricing for issuers simply on the back of heightened investor demand for sustainable linked and backed financial products. As we have noted over a number of editions of this newsletter, the popularity of ESG-linked financing has grown significantly over the past few years, with total ESG assets reaching $1.7 trillion in 2020. While ESG is en vogue in the capital markets and driving this ‘greenium’ – based on what the FT describes as a “ravenous demand for sustainable assets”, we anticipate that investors will continue to increase their scrutiny on the ‘green-ness of these financial products and that the influence that simply ‘chasing ESG-backed products’ is having on the cost of finance could wane over time.

In Case You Missed It

  • New Zealand is to become the world’s first country to bring in a law forcing its financial firms to report on the effects of climate change, BBC reported. The new law will force financial firms to assess not only their own investments but also to evaluate the companies they are lending money to, in terms of their environmental impact. Legislation is expected to receive its first reading this week.
  • Norway’s Sovereign Hedge Fund released its Strategy Plan for 2021-2022, with ESG concerns on its priority list. The fund has set aside about $14 billion to invest directly in clean energy infrastructure.  They also announced its first transaction last week, a $1.6 billion agreement to buy 50% of the world’s second-biggest offshore windfarm from Denmark’s Orsted A/S.
  • Hasty and imperfect ESG can be harmful to companies, according to FT. Without a clear, unified compass, companies that measure themselves against today’s standards risk seeming off base once a more consistent regulator-led direction emerges.
  • Most business travellers in the UK will take fewer flights than they used to, according to a new poll reported by The Guardian . The poll surveyed business travellers in seven European countries including the UK and overall, 45% said they would be flying less often in future, with one in five saying the shutdown had had a positive impact. Green campaigners argue that the aviation shutdown provides an opportunity to put the sector on a sustainable trajectory, as carbon emissions from aviation were growing at 5.7% a year before the pandemic.

Upcoming events

27 April: Spotlight on ESG – Latest policy & marketplace perspectives | BritCham EU&BE in collaboration with FTI Consulting Brussels

30 April: Stakeholder Governance: From Theory to Practice | The Stanford Rock Center for Corporate Governance

 

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The views expressed in this article are those of the author(s) and not necessarily the views of FTI Consulting, its management, its subsidiaries, its affiliates, or its other professionals.

©2021 FTI Consulting, Inc. All rights reserved. www.fticonsulting.com

 

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