ESG & Sustainability

ESG+ Newsletter – 24th June 2021

Your weekly updates on ESG and more

The push for ESG reporting continues in earnest, as this week we bring you the latest on the SEC’s efforts to move the regulatory landscape closer to mandatory disclosures on a range of issues. This ambition is matched in the EU, where there are clear efforts underway to place ESG reporting on an “equal footing” with finance. A threat of post-pandemic labour shortages is also emerging on both sides of the Atlantic Ocean. We bring you perspectives on that and delve into climate discourse as November’s COP26 in Glasgow draws nearer and China makes some strides towards higher corporate governance standards.

ESG a core focus as SEC updates disclosure regimes

The SEC’s chair has confirmed a likely path toward mandatory ESG disclosure on a range of topics, while private equity is the latest area under focus. Earlier this month, the SEC announced that it intends to publish rules on ESG and climate-change disclosures. This follows statements of intent from the SEC who have been pushing for enhanced ESG corporate disclosure – including uniform rules for how public companies report on areas such as greenhouse gas emissions, workforce turnover and diversity. This intent was perhaps signalled most strongly through its initiation of a public consultation regarding what climate change information key stakeholders would want reported. Now it appears that these reporting frameworks will be extended to private equity and investment funds, with Mark Schonfeld, a partner at the US law firm Gibson, Dunn & Crutcher LLP, stating that “private-equity firms need to make sure that their actions on ESG match their policies and what they tell investors.” Specifically, it appears that the SEC will focus on how fund managers calculate the value of fund assets and whether they follow through on their ESG commitments. While it was expected that blank-cheque companies, more commonly known as SPACs, will face increased regulatory scrutiny from the SEC, the suggestion that private equity could be required to disclose more information – particularly around ESG – is an interesting development and further underlines how ESG disclosure, across the capital markets, has become a clear regulatory area of focus since the Biden administration took office.

CSRD strives to put ESG reporting on “equal footing” with finance

This week, Tom Stevenson argued in The Daily Telegraph that investors are continuously left “flailing” when it comes to evaluating company’s sustainability ambitions. While there remains an issue of comparability for market participants, the most common critique of ESG remains the absence of standard reporting, risking inaction due to lack of guidance. In our experience with investors and companies, at least during the early stages of their ESG journey, perfect should not be the enemy of the good. Indeed, there are clear efforts underway at a European level to place ESG reporting on an “equal footing” with finance. In May, the European Commission took a major step forward by publishing proposals for a new Corporate Sustainability Reporting Directive (“CSRD”). The CSRD is expected to come into force in 2023 and contains some notable features which, according to Global Banking & Finance includes: covering a much wider group of companies within the bloc and non-EU entities with subsidiaries in the EU; setting new standards for ESG reporting; requiring digitisation of ESG data; and, notably, requiring ESG to be subject to an external audit.

UN climate chief says “significant amount of work” needed ahead of COP26

A “significant amount of work” needs to be done ahead of November’s COP26 summit in the UK, with developing nations stressing that issues of finance and access to COVID-19 vaccines are significant barriers to a successful outcome. While governments have “engaged effectively”, Patricia Espinosa, executive secretary of the United Nations Framework Convention on Climate Change, has called on countries to overcome their differences and work together in the remaining months before the key COP26 negotiations in Glasgow. The World Economic Forum also reports that rich nations have come in for criticism for not doing enough to assist developing nations as they had promised. G7 leaders were also recently criticised by two leading UK scientific institutions for not offering a clear roadmap on how that pledge would be met at a summit last weekend.

Post-pandemic labour market tightens

While employee recruitment and retention has typically been a concern in a number of sectors, reports from both sides of the Atlantic suggest that there is a growing human capital risk – part of the S in ESG – emerging that all industries need to be wary of. According to WSJ, more American workers are quitting their jobs than at any time in at least two decades. Several factors are attributed to the high job turnover – the pandemic has left a cohort of people spurning a return to ‘business as usual’ and instead are undergoing a fundamental re-evaluation of their work-life balance at a societal level. This is fuelling worker demand for more favourable terms and conditions, despite unemployment levels. In turn, this is prompting employers to raise wages and offer promotions to keep hold of talent. Arwa Mahdawi of The Guardian notes similar issues, asserting that “the pandemic has made it very clear that our current model of work isn’t working”. Further to this, Mahdawi suggests that, while lobby groups may succeed in forcing people back to work by successfully demanding that national governments bring an end to pandemic supports, they will have a harder time changing this new mindset about productivity and work in general.

China enhances corporate governance rules

In response to a consultation paper on the revisitation of disclosure standards for listed companies issued by the Chinese Security Regulatory Commission, Norges Bank Investment Management invited the Chinese regulator to provide more detailed guidance on ESG reporting. The asset management unit of the Norwegian central bank has $5 billion invested in equities and $1.8 billion invested in fixed income in China. While welcoming the proposal to enhance disclosure and shareholder protection, it suggested that explicit reference to internationally recognised standards such as the Taskforce on Climate-related Financial Disclosures (TCFD) and Sustainability Accounting Standards Board (SASB) would provide better information to investors on exposure risks and risk management, as well as on issuers’ performance. In an effort to enhance the corporate governance standards for Chinese issuers, the China Banking and Insurance Regulatory Commission also launched a public consultation on new requirements, and this is intended to prevent major shareholders of banks and insurers from abusing its right to interfere with the independent operations of their investee banks and insurers. With these proposals, China appears to be making positive steps forward in corporate governance. However, the pace of the change, particularly on disclosure and transparency, remains too slow for a host of investors.

FTSE4Good constituents told to up game on climate

Following the strong support received from investors to the consultation on the introduction of more stringent ESG ratings criteria on climate (launched in July 2020), FTSE Russell has reviewed its standards (with effect from 8 June 2021) to set a threshold score for climate performance to assess inclusion in the FTSE4Good index family. The tightening of the climate performance standards is now threatening 208 constituents with removal from the index, reaffirming the fact that even without mandatory reporting requirements, poor disclosure will impact your access to capital. The poor performers, representing 10% of the FTSE4Good All World, have 12 months to raise their climate standards and meet the new requirements. FTSE Russell’s ESG rating scores, determined using over 300 individual indicators across 14 themes, utilises the Transition Pathway Initiative’s (TPI) methodology for assessing performance, which is supported by 105 investors globally who manage a total of $26 trillion of assets.

In Case You Missed It

  • On Tuesday, ABN AMRO launched a new sustainable impact fund, which will focus on companies accelerating the transition in the energy, circular and social impact areas. The fund will have €425m at launch and will make private equity investments between a range of €4m to €30m in companies that have a proven business model and are ready for the next phase of their growth.
  • More than half, or 53% of pension trustee boards, now have ESG ‘high’ on their agenda, up from 29% before the government consultation on ESG in August 2020. That’s according to new research by the Pensions Management Institute (PMI) and BMO, covered this week by Pensions Age. However, almost half of trustees felt the board they sit on was only set up to deal with “some aspects” of ESG and the incoming regulatory changes.
  • A “tsunami of money” is flowing into sustainable assets, according to Piyush Gupta, Group Chief Executive of DBS, Singapore’s largest bank. During the virtual CNBC Evolve Global Summit, Gupta said that even if the fundamental value of the asset doesn’t go up, the supply-demand equation remains. Responding to a question on whether sustainable investing is just a trend, or if it’s a long-term strategy, the CEO suggested that, either way, the investment is likely to reap good returns.

Chart of the Week

 

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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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