ESG & Sustainability

ESG+ Newsletter – 30th September 2021

Your weekly updates on ESG and more

While there is a relentless focus on the E and, to a lesser extent the S, in ESG, this week’s newsletter aims to remind readers that governance may well remain the enabler of wider practices. We also look at the widening of the focus of investors on environmental action, as well as the continued integration of net zero into industry standards and ESG factors into compensation structures. Finally, a view from Berlin on whether a referendum has thrust S to the fore for institutional real estate.

Companies should not forget the ‘G’ in ESG

As environmental and social considerations remain at the forefront of investor decision making, Chris Bowie, partner and portfolio manager at TwentyFour Asset Management, argues that the ‘G’ may become “forgotten element of ESG among investor and media discourse”. In an informative op-ed article in Investment Week, Chris outlines his belief that the evaluation of a company’s governance remains a crucial part for any investment analysis that an investor makes. This is based on his view that there is a direct correlation between shareholder returns and ESG considerations, viewing companies with sustainable business models as the ones able to deliver dividends, payments of coupons and repay principals. At the heart of each: strong governance.

The article’s points reflect an established truth for many, that companies with strong governance and disciplined business models are more likely to survive economic cycles and crises; and more recently, are better positioned to develop meaningful environmental and social policies. Good governance remains a central tenet of companies’ license to operate, demonstrating its commitment to transparency and accountability to stakeholders. Companies should not lose sight of this. Instead, governance should be viewed as the enabler of strong ‘E’ and ‘S’ practices, not a trade-off, even if the media spotlight and investor pronouncements may not make that clear.

ESG finding friends in the Boardroom

A new report has shone a light on the growing importance of ESG among boardroom leaders. According to law firm Thompson Hine LLP, about half of companies have a strategy for reporting their environmental, social and corporate governance performance to regulators and shareholders, while another third plan to implement ESG reporting strategies in the next one to two years. While this is positive from a public company perspective, the report also highlights that 25% of private companies have no plans whatsoever to adopt an ESG strategy. Notably, the report also points to some sectors, such as financial services, real estate and health care industries, as being “early adopters” and further ahead than sectors like manufacturing and tech. Those latter sectors were far more likely to point to their intentions to pursue strategies over the next two years. While pressure on certain sectors is understandable, any regulation in this space is likely to be industry agnostic, heightening potential regulatory costs at certain companies.

Progress on biodiversity hindered by lack of reporting

Policymakers are being asked to avoid allowing climate change to distract from growing biodiversity challenges. A recent research paper called out how plastic pollution and climate change are intertwined, with plastic manufacturing adding to both greenhouse gas emissions and damaging marine ecosystems.

Meanwhile, asset managers need improved visibility into biodiversity-related performance and are being hindered by a lack of consistency in reporting frameworks and associated data, according to speakers at the recent Natural Capital Virtual Summit. The Taskforce on Nature-related Financial Disclosures (TNFD) may fill the reporting gap according to Elizabeth Marum Mrema of TNFD and the UN Convention on Biological Diversity (CBD), speaking at the same summit. TNFD will be officially launched in 2023 and will mirror the TCFD “four-pillar framework” of governance, strategy, risk management, and metrics and targets. Like TCFD, initial adoption of TNFD will be voluntary but may become the standard for mandatory disclosure across regulatory regimes. Biodiversity continues to climb up the environmental agenda, as many companies will know from ESG tinged engagement with the market over the past 18 months.

Investors could move the needle on dominant economic thinking

Critics of neoclassical economics (and even some proponents) have consistently argued that GDP falls far short of providing a full picture of the health of an economy and society. So why then do mainstream parties, policymakers and the most prominent economists repeatedly fall back on GDP and make it the headline figure? And could a change of focus from the investment community encourage other actors to follow suit? Piya Sachdeva, an economist with Schroders outlines to ESG Clarity how the case for retiring GDP in favour of wellbeing has gained traction alongside the rise in the number of investors considering social factors.

Put simply, “figuring out what makes society happy helps us identify the risks to the global economy from the ‘S’ in ‘ESG’. This shift in investor thinking is apparently underway. Sachdeva highlights how the Organisation for Economic Co-operation and Development (OECD) developed a Better Life Index to track wellbeing and how mental health is especially important to consider in so-called advanced economies. Further strides to discover “what makes society happy” can help to identify the risks to the global economy arising from social factors. In much of the ESG space, investors have been a step ahead of stalled governments. Will Gross Domestic Happiness be another example?

BSI and ISO embed net zero across all industry standards

On September 27, the British Standards Institution (BSI) and the International Organisation for Standardisation (ISO) pledged to align all global business and industry standards with net zero aims. The move has been described as a “game-changing moment for international standards”. The aim is to ensure global standards support the fight against climate change by committing signatories to embed key climate considerations into every new standard that is created. There has been an increasing amount of corporate and government commitments around net zero but a clear lack of understanding and direction in terms of how they are met and, equally importantly, how actors are held to account. Standards can be used by government and industry to deliver actual change and demonstrate impact in the fight against climate change. As part of the declaration, ISO has pledged to work with all its stakeholders to actively embed and consider climate science in the development of new or revised standards.

Value Reporting Foundation publishes its SASB Standards XBRL Taxonomy

This week, the Value Reporting Foundation released its SASB Standards XBRL Taxonomy (Taxonomy), which is the international taxonomy for integrating SASB standards into corporate reporting. The key objectives of the Taxonomy are to simplify the disclosure process for businesses and improve the quality, usefulness and comparability of ESG disclosures to investors. The publication of the Taxonomy follows on from a public consultation earlier this year and its design, and development, is to align reporting in accordance with the 77 SASB industry standards. Currently, there are more than 1,280 businesses disclosing ESG data using SASB standards, including more than half of those in the S&P Global 1200 Index. Madhu Mathew, Director of Technology at the Value Reporting Foundation, said that the “Taxonomy is a major step forward in making ESG disclosures simpler for businesses and data aggregation and analytics more efficient for investors” and that because the “Taxonomy is compatible with base taxonomies for financial reporting standards (like IFRS and US GAAP), businesses can leverage pre-existing processes and structures for use in tagging SASB disclosures.”

Getting the balance right: ESG and Compensation

As the demands on companies to pursue – and achieve – ESG-related goals grow, there has also been a shift in how managers leading those companies are being incentivised. Ultimately, the old adage that what gets measured, gets done, is slowly winning out, with marked increases in the integration of ESG criteria in plans in both the US and UK. But, as CFO.com points out, the prioritisation of ESG measures for incentives does not automatically mean good practice. The risks revolve around Boards incorporating factors that are not material to the business – in misalignment with strategy – or, that business as usual measures are included, simply meaning more pay for the same work. As with much of the ESG and wider governance space, the correct approach is likely grounded in certain key factors: linked to the delivery of strategy, materiality to the business, measurable and understood by participants and stakeholders.

Berlin referendum highlights growing ‘S’ risk for residential companies

Bloomberg, among many other international outlets, covers the story of how Berlin residents have voted in favour of a consultative referendum to expropriate thousands of apartments from large property companies amid public anger over rising rents. While the vote is non-binding, the extent to which large numbers of apartments have become concentrated in the hands of a few companies will be scrutinized and debated to a greater extent than before. Whether such an action would improve access to housing, the victory claimed by housing activists will reverberate across cities facing similar affordability and access issues. While certain Real Estate companies may be overly focused on issues like the energy ratings of the building they own, the renewed focus on their impact on Society – the ‘S’ in ESG – may represent a growing risk to their operations and license to operate.

In Case You Missed It

  • Refinitiv has announced its Diversity & Inclusion (D&I) Top 100 for 2021, showing that EMEA is leading the way with the most culturally diverse boards.
  • Saudi Arabia plans to issue green bonds, as the country seeks to embrace ESG concerns to expand its investor base, Reuters reported. Speaking at a conference this week, Mohammed El-Kuwaiz, the chairman of Saudi Arabia’s Capital Markets Authority, said he expected an increase in green financing instruments in the kingdom, supported by growth in the domestic debt markets and higher participation of foreign investors.
  • Children born in 2020 will endure an average of 30 extreme heatwaves in their lifetime, which is seven times more heatwave than someone born in 1960, according to new research released by The Guardian. Even if countries fulfil their current pledges to cut future carbon emissions, children born today will suffer from more climate disasters over their lifetimes than their grandparents
  • South Korea is also planning to raise its focus on ESG, with the country’s Central Bank announcing that that will “upgrade” its asset management strategy to apply ESG elements to all their foreign currency assets, Reuters reported this week. Bank of Korea (BOK) has invested a total of $7.12 billion of its foreign currency assets in ESG-related stocks and bonds as of the end of June and has outlined its plans to implement a policy that excludes investment in companies or sectors that do not meet the MSCI ESG screened indexes criteria.

Chart of The Week

 

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