ESG & Sustainability

ESG+ Newsletter – 20th May 2021

Your weekly updates on ESG and more

This week’s edition opens with a look at the role of worker directors on a Board and the experiences at one of the only UK companies to adopt this approach in pushing the employee voice into the Board room. Continuing with the focus on employees, the SEC has also this week highlighted potential changes to mandate greater disclosure and reporting of “human capital” metrics. Moving from the ‘S’ to the ‘E’, we share a view by two colleagues on incorporating the ‘E’ into ESG strategy; and, on the ‘G’ we look at the voting trends in the year to date at FTSE350 and ISEQ20 companies and the level of opposition, which is growing. As usual, we take a spin around the world to highlight interesting ESG developments and also a couple of upcoming events including one on ‘pay and ESG’ where we are participating alongside leading proxy advisor, Glass Lewis.

A look at Capita’s first worker directors

This week, the two employee directors at Capita were in the spotlight as The Guardian reported on their experience to date. Both directors and the company Chief Jon Lewis identified the different perspective that the worker representatives had brought to the Board, with Lewis pointing out the value of this in a year when COVID-19 “prompted such a shift in how we do business and how we interact with our colleagues.” He also welcomed the “unvarnished view of the operational and strategic challenges facing the company”. As well as providing valuable oversight for the annual employee survey, it is reported that the worker directors have often listened more carefully to what employees are trying to tell the company than other non-executives might. Of course, it is not always a positive experience, as one Director spoke of the difficulties of wearing multiple hats, where they are an employee but also keen to strive for parity of esteem with other directors.

We noted earlier this month how not a single FTSE 100 company has opted to appoint an employee representative to their respective Boards as part of their adherence to the updated UK Code. When this was updated in 2018, the FRC opted to point to meaningful engagement with stakeholders as a core component of effective governance and sustainable business practice. In the clamour for ESG strategies since, surely that guidance provides a healthy foundation.

Private equity eyes opportunity in sustainability advisory businesses

One of the globe’s largest private equity groups, KKR, announced this week that it had signed an agreement to acquire a majority position in ERM, a sustainability focused consultancy firm. Positioned as “the largest global pure play sustainability consultancy”, ERM works with companies and organisations to help them shape their ESG strategies, implement ESG best practice and address their key sustainability issues. The deal, which is reported to be valued at roughly $2.7 billion, will help ERM “expand and accelerate our client impact, and bring new capabilities and technologies to the business of sustainability” according to its CEO, Keryn James. KKR is a long-standing client of ERM’s consulting services, having first-hand knowledge of the business. The purchase is another snippet of evidence of the alignment between ESG and value. The growing number of market participants who point to the ESG or sustainability fallacy will likely struggle when opposed by large private equity investors who see the value of such businesses.

New era of disclosure continues to emerge in America

In what could be a potentially transformational development for corporate disclosures in the US, Reuters reports that the Securities Exchange Commission (SEC) may move to make workforce metrics disclosure a requirement for public companies. Chair Gary Gensler announced on Thursday that SEC staff would propose a new rule on disclosing “human capital” metrics such as employee turnover, diversity and workforce composition (part-time versus full-time workers).

Gensler, who took up the position of SEC Chair last month, has signalled that this is one of his top priorities. Speaking at an academic conference on financial market regulation, Gensler told the audience that is time for the SEC to “catch up” to investor demand for information from companies on how they are managing climate risk and human capital. The Human Capital Management Coalition, which is comprised of 25 institutional investors boasting $2.8 trillion in assets submitted a proposal to the SEC in 2017 which contained nine categories, including one on workforce culture and empowerment, which seeks to build toward a norm of disclosures in relation to work-life balance.

In a week where the World Health Organisation warned that long working hours are killing hundreds of thousands of people a year, perhaps it shouldn’t need a regulatory intervention for investors to receive information of how companies are treating their employees.

Incorporating E into an ESG strategy

The link between the “E” in ESG and business value is the subject of a new piece of thought leadership from FTI’s Strategic Communications Global Leader Mark McCall and other senior colleagues. FTI’s leaders set out six strategies to help companies increase their environmental engagement, taking as their starting point that a core tenet of successful business practice is the integration of environmental factors into a company’s established risk evaluation process. This in turn enables the setting of targets to drive and track progress. Business leaders must evaluate how environmental impact will be perceived, the influence on commercial prospects and the business case for making investments or policy changes to maximize success. More insight on how to pivot businesses to an increasing imperative is set out here.

2021 Proxy Season: Overview and trends

The 2021 AGM season has reaffirmed that investors continue to scrutinise how businesses handled the economic challenges posed by COVID-19 while taking into account stakeholder interests in their decision-making process. Since the beginning of 2021, there have been 71 resolutions that have drawn more than 20% of shareholder opposition at FTSE 350 and ISEQ-20 companies, compared with 66 from January 1 to May 30, 2020. Once again, remuneration has provided a window into Board decision-making but other areas increasingly have risen to the top of investor voting.

  • Remuneration

FTI data points to an increase in the number of resolutions highly opposed to 13% of total remuneration resolutions, up from 8% until May 2020. With the average opposition increasing to 33%, from 31% in 2020, it’s not surprising that executive remuneration resolutions remain the most contentious. After investors vocally requested that companies adopt a restrained approach on pay practice during the wake of the pandemic, according to a PwC study the total CEO pay at the UK’s largest companies decreased by a median of 22% in 2020. Boards that decided to disregard investor expectations despite furloughing employees, cutting dividends and using government financial supports have experienced pushback.

  • Election of directors 

Despite the high focus on executive pay by media and investors, directors at FTSE 350 and ISEQ-20 companies remain likely to face significant dissent on remuneration-related resolutions. In line with the data at the end of May 2020, 20 elections of directors’ resolutions received an average opposition of 27%. Nonetheless, for the first time, Board diversity has become a flashpoint at an equivalent level to remuneration – Chairs of Boards at FTSE 350 companies run the risk of failing to gain re-election for failure to oversee a sufficiently diverse Board and executive pipeline.

  • Share issuance    

A notable portion of shareholder dissent at UK and Irish companies continues to be triggered by Board’s seeking authority to issue shares both on a non-pre-emptive and pre-emptive basis. A total of 9 issuances of share resolutions received more than 20% dissent, up slightly on the 7 resolutions in 2020. While UK and Irish companies point to compliance with company law, investors have clearly communicated that ‘good governance’ goes far beyond legal compliance.

US Federal Reserve to data gather for climate finance

The US Federal Reserve has asked lenders to start providing information on the measures they are taking to mitigate climate change-related risks to their balance sheets, accelerating already existing climate scrutiny on Wall Street and highlighting a changing regulatory approach under the Biden administration.

The Fed has indicated that the information gathering will be primarily a data collection exercise, mainly through a new scenario analysis to help assess how climate change may impact the assets under management by America’s biggest banks, but will also include the testing of geographical exposure of bank assets to physical risks such as flooding, drought, and wildfires, and test exposures to different sectors. The Fed’s approach follows a March announcement by the European Central Bank to conduct climate-change “stress tests” and assess the economic risk of climate change on the European economy. Although the Fed will only gather data, it points to the work towards policymaking and regulatory action for environmental disclosures from US financial institutions. Scenario analyses remain the gold standard of disclosure and strategy integration, as evidenced by the expectations and challenges of the TCFD guidance in this space.

Central banks link climate change to their traditional nemesis: inflation

Until recently, much of the progress on combatting climate change has been within the remit of corporates and institutions across the world but as the Wall Street Journal reports this week, central banks, the most powerful financial institutions in the world, want to become the guardians of the environment as well. The article highlights how central banks are increasingly viewing climate change as a significant financial and economic risk given consequences such as rising sea levels, more wildfires and more frequent extreme weather events which could cause shortages that spur inflation, the regulators’ traditional nemesis. The Federal Reserve is proceeding cautiously, worried about financial risks but wary of expanding its mandate, which would put it in the middle of the partisan debate over climate change. Meanwhile in the UK, Treasury Chief Rishi Sunak this year changed the remit of the Bank of England’s interest-rate-setting committee to include “strong, sustainable and balanced growth that is also environmentally sustainable” as well as maintaining price stability. Time will tell whether central bankers are felt to be overstepping their mandates but as Fed Chair Jay Powell recently argued: “We’re at a very early stage of understanding the risks to regulated financial institutions from climate change. It is a risk that we think the public has every right to expect that we will assure that the banks do manage over time.”

China Securities Regulatory Commission focuses on ESG disclosure – but is it enough?

China Securities Regulatory Commission (CSRC) issued a draft consultation regarding the disclosure of climate change, environmental, and social-related information by publicly listed companies. The proposal includes amendments to the existing environmental and social disclosure requirements, which were:

  • Creation of a new consolidated “Environmental and Social Responsibility” section for companies to report under;
  • Companies to be required to disclose any administrative penalties relating to environmental issues received during the reporting period; and,
  • Encouraging companies to voluntarily disclose the measures they have taken to “reduce carbon emissions and their effect, as well as their work on alleviating poverty and revitalizing rural areas.”

While a positive step, the disclosure requirements are both voluntary and limited to mitigation measures taken by companies and their subsequent outcomes. There are no targets or environmental measurements attached to the disclosure requirements, making it difficult to address companies’ specific climate impacts.

Barriers to net zero: How firms can make or break the green transition

As regular readers of this newsletter will note, in line with commitments under the Paris Agreement, many countries are aiming to reach net-zero emissions by 2050. This green transition will require massive corporate investments in cleaner technologies to reduce firms’ carbon footprint. Unfortunately, as the PRI points out this week in a new blog, not all companies, especially smaller ones, are able or willing to invest in cleaner technologies, creating a barrier to achieving the green transition. Written by members of the EBRD Office of the Chief Economist and Imperial College London, their research combines granular data on more than 11,000 firms across 22 emerging markets and shows that firms differ widely in their ability to access external funding and in the quality of their green management practices. While their analysis lends support to policy measures that ease access to bank credit specifically for green investments, it also suggests that this might just be one element of a broader policy mix to stimulate such investments.

Natural capital as a new asset

Natural capital has been gaining investors’ attention based on its potential impact on portfolio value creation. In addition to the financial risks implicated in destroying natural habitats, investing in protecting nature and ecosystems represents an innovative way to streamline earnings and complement the more “traditional” approach of buying green bonds or funding renewable energy investments. The interest in these unconventional opportunities, which may include buying and improving degraded land or investing in companies that reduce plastic pollution, follows the heightened focus on biodiversity at the One Plan Summit held earlier this year. In January 2021, a group of investors announced the funding of the Natural Capital Investment Alliance initiative, established by His Royal Highness The Prince of Wales. This initiative “aims to accelerate the development of Natural Capital as an investment theme and to engage the USD 120 trillion investment management industry and mobilise this private capital efficiently and effectively for Natural Capital opportunities”. While challenges remain on how to evaluate natural resources accurately, these investments are expected to grow more rapidly in coming years, particularly if specific policies directing finance towards natural capital are introduced.

In Case You Missed It

  • The Financial Times reports that nearly 89% of shareholders at Shell’s annual investor meeting on Tuesday voted in favour of a strategy to achieve net-zero emissions by 2050. Against the backdrop of this support, however, the company continues to be “confronted by growing support for activists’ demands to set more ambitious targets”.
  • Green assets are “on a tear” according to The Economist, which highlights that flows into ESG funds topped $180bn in the first quarter of this year, up from $46bn in the same quarter last year.
  • Ahead of the January 2022 deadline for companies to meet requirements under the Sustainable Finance Disclosure Regulation (SFDR), ESG Clarity reports that the European Fund and Asset Management Association (EFAMA) has called for consistency across the EU’s sustainable finance regime, with a particular focus on disclosures, while also urging policymakers to implement a transition period.
  • According to ESG Today, Deutsche Bank is set to launch a new ESG Centre of Excellence in Singapore, focused on ESG transactions, new product development and advisory services in the growing Asian ESG market.

Upcoming events

26th May – Diligent Webinar, Mind the Gap: How the 2021 proxy season highlighted the difference between companies and shareholders on pay and ESG.  

8th June – BMO Responsible Investment Conference 2021

 

Gain insights and stay informed on ESG, sustainability, building back better or on any industry or topic that interests you here. To be added to the distribution list for our ESG+ Newsletter, please email [email protected].

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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