ESG+ Newsletter – 22nd April 2021

Racial and ethnic inequality under the spotlight

Following a year in which the worldwide focus on social injustice and racial inequalities grew, Tuesday’s verdict on the murder of George Floyd serves as a reminder of the distance to be travelled for many actors, not least public companies. As part of the focus, large companies should be obliged to publish the pay gap between different ethnicities, argue certain UK-based business groups and economists in response to a report accused of downplaying the extent of problems in the labour market. While the Commission on Race and Ethnic Disparities (CRED) report has been widely discussed, it has also been dismissed in some quarters as an attempt to persuade stakeholders that the concern about structural racism is merely a matter of opinion and ‘woke’ politics, rather than a matter of fact. There has been a level of voluntary reporting in this space, however, business groups such as CBI and Business in the Community are urging the Government to introduce a mandatory reporting requirement, modelled on gender pay disclosure. Also in the Financial Times this week, majority action, a non-profit focused on shareholder voting as a means of forcing change, took out a full-page ad marking the cards of asset managers ahead of the peak of proxy season.

New SEC Chairman Sworn in and Gets to Work

In the US, Gary Gensler was officially sworn in on Saturday as the next chairman of the SEC. Gensler is expected to continue acting Chair Allison Herren Lee’s recent focus on ESG issues and has already demonstrated interest to advance the focus. On Monday, Gensler chose Heather Slavkin Corzo to have the top policy role in his office. Corzo previously worked as the director of capital markets policy at the American Federation of Labor and Congress of Industrial Organizations (AFL-CIO) and was head of U.S. policy at the Principles for Responsible Investment. While working at the AFL-CIO, Corzo testified to Congress in favour of requiring companies to put worker representatives on their Board of Directors. This adds to the slew of recent moves by the SEC to put ESG at the forefront of its policies, such as the creation of a Climate and ESG Task Force in the Division of Enforcement, and certainly won’t be the last move in that direction. However, the SEC is still considering if public companies should disclose standard ESG metrics. Recently, SEC Commissioner Hester Pierce noted that a single set of ESG metrics would hinder creative thinking in solving ESG issues. Regardless of the policies introduced, Gensler’s tenure at the SEC will surely mark a historical focus on ESG investing.

PRI chief expects human rights to be included in reporting among signatories

It has been well stated by now that climate change is the issue at the top of investor agendas, but as retailers with a global presence come under increased scrutiny about their supply chains, PRI CEO Fiona Reynolds has said that within the next five years, human rights-related questions will be added — on a voluntary basis at first but later mandatory — to the reporting framework agreed to by PRI’s signatories. This currently stands at nearly 4,000, overseeing more than half of institutionally managed assets globally.

P&I Online reports that name-brand global retailers such as H&M, and Nike have faced a backlash in China’s huge consumer market after eschewing cotton grown in that country’s Xinjiang province over concerns about forced labour involving members of China’s Uyghur population. Tensions between the US and China have not exactly eased with the departure of Donald Trump, with Western sanctions over human rights abuses followed up by China issuing a report of its own, urging the US  to drop what it claims are double standards on human rights. As companies are called upon to engage with human rights frameworks, their task will not be made any easier by a meeting of ESG and geopolitics.

Hedge funds the key to exposing ESG fakes?

Building on last week’s story on the importance of active management in ESG investing, Bloomberg reports that hedge fund managers will play a crucial role in figuring out who’s not living up to their ESG promises, according to an adviser to the industry. Petra Dismorr, chief executive officer of London-based NorthPeak Advisory, spends her time telling hedge funds and private equity firms in the U.S., Asia and London that ESG considerations are key to winning mandates in Europe. She also says hedge funds will ultimately have an edge when it comes to addressing a principle investor concern: policing companies that might not be as clean as they claim. “It is hugely underestimated, the active role that hedge fund managers, in particular, can take,” Dismorr, adding that the “day-to-day interaction” that portfolio managers and analysts working for hedge funds have with the companies in which they invest represents “great potential” when it comes to exposing “frauds”.

Fast fashion: investor demand for a circularity-driven approach

Apparel companies in the fast fashion industry are under growing pressure from investors and regulators to reduce the detrimental impact of their business models on the environment. As the unsustainable take-make-dispose model negatively impacts the environment and, increasingly, consumer value creation, investors are becoming more vocal in demanding a strategic transition to circularity-driven approaches. This shift is required to effectively manage the risks arising from the tightening regulations on environmental impacts and changes in consumer preferences. In their “Fixing Fast Fashion” report, Federated Hermes, one of the most forward-looking asset managers in active and responsible investing, advocates setting ambitious targets in the reduction of science-based greenhouse gas in alignment with the Paris Agreement and reporting on the progress towards targets on annual basis, as the key steps to achieving a tangible change in this direction. Transparency also appears to be one of the main challenges that apparel companies need to overcome to meet investor expectations, particularly on a range of E&S indicators, such as recycled and sustainably sourced materials used. In many instances, Hermes’ stances are a harbinger for the ‘mainstreaming’ of ESG trends; and, it may well be a case that their view is incorporated by larger asset managers over the short-term.

Unintended consequences: How can food companies push towards net zero?

Efforts to reach carbon net-zero is a global phenomenon. Companies’ focus to date has been on production efficiency, offsetting and decarbonised energy and transport to name a few. For the food industry, things are a little more complicated. In a Business Green article, Lesley Mitchell writes that “food companies face a bigger challenge with the vast majority of Scope 3 emissions arising from the supply chain,” meaning that if they are to make a genuine difference, then they will need to adopt a “deep systemic shift”. Unlike some sectors, if the food industry looks at an overall carbon strategy alone, it could cause unintended issues, impacting society as well, in a similar vein to concerns around just transitions in other sectors. For example, banning airfreight may reduce carbon emissions, but that may mean Kenyan bean growers lose their market. In this sector, as with others,  what may be the real game-changer would be to, “align ambitious net-zero climate strategies with delivery on these wider goals, and seeing their purpose, impact, value and resilience through joined-up outcomes.” The food industry shows that for companies to succeed in reaching carbon neutrality, they need to see sustainability as a “core source of long-term value.” This thinking is at the heart of all efforts to “build back better” following Covid-19:  to tackle the climate crisis in a way that also secures a just and sustainable future.

ESG investor pressure ramps up on Banks funding carbon intensive projects

The continued rise in influence of the “E” in ESG has forced companies to respond robustly with more than a fifth of the world’s 2,000 largest public companies committing to a net-zero target. As the focus on the net-zero agenda continues to gather momentum, investors’ attention has turned to how carbon-intensive projects around the world are being financed. A recent report by the Rainforest Action Network highlighted that in the five years since the Paris Agreement, 60 of the world’s largest banks have financed more than $3.8 trillion into the fossil fuel industry, with funding higher in 2020 than in 2016. In response, we have seen pillar banks around the world coming under increasing pressure from their large investors to withdraw from financing carbon-intensive projects and increasing their sustainable lending – a clear indication that the investors are sharpening their focus on the role that banks play in financing emissions intensive projects. The impact of this focus was evident in a recent CNBC interview with Roberto Sallouti, CEO of the largest investment bank in Latin America BTG Pactual, which detailed that ESG considerations have “clearly” impacted the company’s decision-making processes and business decisions. In the interview, Mr Sallouti detailed that for any credit and investment banking transactions it is now mandatory that you have approval from the ESG team to proceed. As outlined in previous newsletters, we believe that there will be increased scrutiny on how projects are being financed and how ‘green’ financing is being used as investors and wider stakeholders hold companies in all sectors to account. Wider markets are playing a role too, with Invesco launching the first “green building” ETF today, targeting the buildings sector which is estimated to account for 38% of global emissions.

Oil and Gas industry getting on the same page

On Tuesday this week, the International Petroleum Industry Environmental Conservation (IPIECA), in collaboration with the World Business Council for Sustainable Development (WBCSD), launched a new roadmap providing guidance for oil and gas companies on how to achieve a low-emissions future while aligning with the 2030 Agenda for Sustainable Development. After a year where the COVID-19 pandemic has threatened to negatively impact the progress of the UN Sustainable Development Goals, the “SDG Roadmap for the oil and gas sector” comes at an opportune time to ensure concerted action and coordinated solutions as the world approaches the 2030 deadline. While the oil and gas industry has the potential to contribute to all 17 SDGs, the roadmap highlights 10 where the industry can have the biggest impact, by driving innovations in its own operations and across the supply chain. WBCSD President and CEO Peter Bakker said: “We hope that this important roadmap can help establish a standard for global best practice with regard to how the oil and gas sector and its value chain can drive the transformations that are urgently needed to realise the ambitions of the SDGs on the road to 2030.”

European Super League a bridge too far for football at-large

As ESG threatens to impact all aspects of business, the owners of football clubs – and their attempt to create a new European Super League – are the latest cohort to belatedly understand how important stakeholder engagement is to effective decision-making and governance. While the concentration of wealth at the top of the sport is not exactly a new feature, decisions this week served as a reminder of  how rushed decisions without consultation can alienate you quickly, with fans, politicians, pundits and wider society lining up to take a shot at proposals and those overseeing them. The owner’s social license to operate has been damaged significantly. Whether that is terminal, time will tell.

In Case You Missed It

• FTI Consulting has put together an interactive timeline of legislative and non-legislative ESG initiatives due to come out this year. The FTI Sustainable Finance 2021 Timeline navigate through the myriad of new cross-cutting policy initiatives and outstanding technical advice on flagship initiatives, including the EU Taxonomy
• Radical new climate change commitments will set the UK on course to cut carbon emissions by 78% by 2035, the UK government has announced. For the first time, climate law will be extended to cover international aviation and shipping.
• Britain’s financial markets regulator has hired one of the UK’s most important corporate governance figures, Legal & General Investment Management’s Sacha Sadan, to lead the development of its sustainable finance policy, Reuters reported. Sadan served as head of investment stewardship with Britain’s biggest asset manager for around a decade and will take up the newly created role of director of the environment, social and governance this summer.
• The European Commission is split over whether to postpone a decision on classifying gas generated from fossil fuels as green energy, Financial Times reported. The commission was forced to revamp its initial proposals earlier this year after the text was criticised by member states which want gas to be recognised as a low-emission technology. Brussels had planned to publish an updated draft of a taxonomy for sustainable finance later this week, but the publication of the draft rules could be postponed again as the commission seeks to resolve the impasse.

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