ESG & Sustainability

ESG+ Newsletter – 28th October 2021

Your weekly updates on ESG and more

This week, COP26 kicks off, and make sure to look out for our special edition Friday updates that will arrive in your inbox from tomorrow onwards, bringing you all the major developments from the conference. Not to be missed!

While most eyes are trained on Glasgow for the month though, we discuss another aspect of ESG, that of the impact of outsourced and mistreated labour. Similarly, we ponder whether a rebrand, to GSE, is in the offing. We also look at further calls for data consistency and whether they’re impacting capital allocation, and a host of looks at whether the banking and finance industries hold the keys to stemming emissions.

Focus on the S central to ensuring ESG works

Poor treatment of workers is undermining efforts on ESG across the globe, as companies increasingly outsource labour or rely on questionable business practices. In a paper titled ‘Making ESG Work: How investors can help improve low-wage labour and ease income inequality’ Casey O’Connor-Willis from NYU Stern’s centre for business and Human Rights points to a yawning gap in ESG-related evaluations of business practices. Specifically, the author criticises fund managers and ESG data providers for their ineffective assessments of social impact and suggests that assessments should focus on how companies’ earnings depend on “illegal labour practices, inadequate and inconsistent pay, chronic over time, and unsafe working conditions.” Instead, as things stand, most “S” metrics assess internal company processes and policies, rather than their core business’ impact on society, an issue raised by FTI previously. In a novel approach, the paper goes on to suggest a host of interesting measures that might more effectively capture ‘S’ risk and opportunity at companies and in portfolios.

Banks’ fossil fuel support is still too high while some funds move to divest

With COP26 around the corner, it has been revealed big banks are continuing to provide as much capital towards fossil fuels as they are for green projects. In 2021, banks organised $459 billion of bonds and loans for the oil, gas and coal sectors. During this period, they arranged $463 billion of green bonds and loans. Since the 2015 Paris Agreement, banks have generated more than $17 billion in fees from facilitating $4 trillion of fossil fuel financing.

Going in a different direction, the EU’s biggest pension fund, ABP, has blacklisted fossil fuels with a divestment plan worth $15 billion. The plan will see fossil-fuels investments cut by early 2023. The plan will support ABP in a more aggressive and ambitious CO2 reduction goal next year. The announcement follows a growing trend of 1500 asset managers overseeing a combined $39.2 trillion now committed to offloading these holding to combat climate change and keep the world from reaching a tipping point. Likewise, Fidelity this week announced its plans to halve CO2 emissions in its portfolio by 2030. While there are various views on the decision between engaging and divesting, Fidelity International plans to give portfolio companies time to adapt to its tougher CO2 requirements, with its head of stewardship and sustainable investing noting that “Immediately exiting our exposure to more carbon-intensive companies will diminish the impact we can make through active engagement”. However, Fidelity has also established that if companies fail to deliver results in cutting emissions within three years, after a period of engagement, then it will divest as a last resort.

Starting ESG with the G

In ESG Clarity, Professor Kevin Haines suggests that we should be framing our conversations around ‘GSE’ instead of the current ESG framework. The debate about ESG priorities has been somewhat cyclical, with governance dominating in the post financial crisis world, and environmental and social issues now at the top of the agenda of regulators, politicians, business and society. As we face the imminent global climate crisis, the E has naturally taken priority, and Professor Haines argues that to match the scope and level of impact required to meet global ESG challenges, a broader understanding of governance is vital. High standards of corporate governance provide some confidence that decision-making is always ethical, legally compliant and considers long-term implications. Considering a restricted model of governance, focused on the financial sector and the regulation of investments, the unrestricted model calls for greater regulation as well as the need for governments to step up and promote pro-ESG behaviour. In thinking about changing behaviours needed to meet current ESG objectives, we must remember the importance of the S – it is people that drive decision making and change. As the global approach has proved somewhat ineffective at avoiding global catastrophe, the shift from ESG to GSE may provide the basis needed to have the necessary impact towards securing a positive future. On the other hand, if the world is in a place where a shift in an acronym is what is needed to save the future, maybe we are all doomed!

Data disclosure and the property sector

As investors continue to focus on deploying capital across the ESG landscape, the New York Times this week published an article which highlighted how investors are seeking to invest in ‘greener’ buildings. With demand growing for this asset class, so too is the need for greater disclosure and data to mitigate any potential greenwashing. This has forced investors to focus on sustainability and the environmental data points of buildings, including environmental and sustainability standards for the sector. However, the article outlines that these standards can be confusing, demoting them as a “alphabet soup of standards” and citing that the lack of “common guidelines and technology” as an issue. This raises the question as to whether more disclosure – a cornerstone of capital markets – through mechanisms like the SEC’s environmental disclosures for public companies or BlackRock’s call for common global disclosure framework for corporate environmental risk will be a more effective means of policing heavy emitting sectors.  Whatever the outcome, the demand from investors for greater quality ESG data has never been higher – something that we have continually highlighted as a pressing problem for ESG.

World on track for climate catastrophe despite climate pledges

According to the FT, the UN secretary-general, AntĂłnio Guterres, has warned that countries are still “utterly failing” to keep the goals of the Paris agreement in reach. Guterres warned that long term Net Zero commitments have little value without a plan of how to achieve them. Guterres’ comments come as a UN analysis of national goals warned that existing climate commitments put the world on track for 2.7C of warming by the year 2100 and an increase in greenhouse gas emissions of nearly a fifth by 2030, far beyond the targets of the Paris agreement.

The stark warnings of the report were compounded by an admission of wealthy nations that they will fail to deliver the previously promised $100bn of annual climate finance to help developing nations deal with and limit climate change. How wealthy nations will provide climate finance to developing nations is becoming an increasing focus of the upcoming COP26 talks, with a study undertaken by the Jubilee Debt Campaign revealing that the world’s poorest nations are spending five times more on debt than climate change.

Climate Action 100+ calls on electric utilities sector to accelerate net zero transition

Climate Action 100+, the world’s largest investor engagement initiative on climate change, published a report detailing actions and strategies that the electric utilities sector needs to take to achieve their targeted IEA Net Zero by 2050.  The report titled, ‘Global Sector Strategies: Investor interventions to accelerate net zero electric utilities’, argues that the sector is running out of time and that urgent action is needed by setting more ambitious targets. The report advocates that the sector needs to bring forward existing net zero targets by 10-15 years, aiming for more than 50% of decarbonisation achieved by 2030.

The electric utility sectors represent 40% of annual emissions and, with electricity demand projected to grow by over 166% globally by 2050, it would appear that the call to action is warranted, especially considering that many other sectors are dependent on the decarbonisation of electricity for their own net zero plans. It is therefore hoped that the actions outlined in the report by Climate Action 100+, who itself represents more than 615 investors who are responsible for over $60 trillion in AUM, “will help inform investor engagement with companies, clearly and definitively outlining what business alignment with net zero transition goals looks like.”

Greater scrutiny of ESG funds raises questions about greenwashing

As regulators across jurisdictions increase their attention on ESG funds and their claims, a number of asset managers have started to worry about potential reputational risks. With more than 500 new ESG funds launched in 2020 and surging investor interest across the board, asset managers have tried to stand out by boosting their marketing claims. Many now worry they might have opened themselves to accusations of greenwashing. These fears have recently been reinforced by accusations by a former employee that German asset manager DWS misrepresented its ESG credentials in its 2020 annual report. With US and German watchdogs now probing the issue, many asset managers and their marketing teams are nervous they could suffer a similar fate. Over and above new EU rules such as the Sustainable Finance Disclosure Regulation, these worries are already having an effect: there is now a trend across the sector towards greater caution in the way funds and their ESG credentials are marketed. Despite these recent changes, many are nonetheless expecting to be on the receiving end of some tough questions.

In Case You Missed It

  • In wake of social unrest and the global pandemic, the 2021 Federated Hermes ESG Investing Survey reveals an increased importance on social and governance issues amongst investors. From the 102 institutional asset owners respondents, 88% cited corporate governance as the most important issue, with 74% noting a perceived increase in the importance of diversity, equity and inclusion in the past year.
  • A lack of consistency in ESG scores from ratings firms is ‘a stumbling block’ when incorporating research data into the investment decision-making process, according to more than a quarter of respondents in Capital’s Group ESG 2021 global survey. 27% of respondent also ranked ‘difficulties accessing the information I need’ as the leading challenge they face.
  • Blackrock announced the creation of the largest range of climate-aligned exchange-traded equity funds, with six funds currently managing more than $9 billion. The range will follow the European Union’s Climate Transition Benchmark and will exclude any company making 5% or more of its revenues from oil sands, shale gas, shale oil, coal-seam gas, coal-bed methane and Arctic onshore/offshore reserves.

 

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 click here to input your details or 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

 

Related Articles

Predictions for Cybersecurity in 2024: Communications and Reputational Perspectives

March 7, 2024—What will the cybersecurity space look like in 2024? And what do companies need to do to ensure they are prepared from a...

Cybersecurity in Latin America: Cyber Threats Evolve in a Landscape of Incipient Resilience

January 25, 2024—Organizations in Latin America should not wait for regulators to impose cybersecurity readiness requirements, as prepara...

A Year of Elections in Latin America: Navigating Political Cycles, Seizing Long-term Opportunity

January 23, 2024—Around 4.2 billion people will go to the polls in 2024, in what many are calling the biggest electoral year in history.[...

ESG+ Newsletter – 28 March 2024

March 28, 2024—This week’s newsletter covers a number of EU-related developments, with back and forth on the merits of defence fundin...

FTI Consulting News Bytes – 28 March 2024

March 28, 2024—FTI Consulting News Bytes This week, we start by looking at Microsoft’s ongoing effort to set itself up for success as...

How communications strategies can minimise data breach penalties

March 28, 2024—Calculating the true cost of a data breach incident can be complicated, particularly as reputational damage to key stake...