ESG & Sustainability

ESG+ Newsletter – 4th March 2021

Your weekly updates on ESG and more

Welcome to the latest edition of ESG+ where this week we focus on executive pay, electrification, and the connections between cryptocurrency and ESG.

Investors warn companies on executive pay

As we approach publication of Annual Reports across Europe, investors’ views on executive compensation in a COVID-19 economy and voting intention during AGM season are becoming increasingly clear. Last month, Allianz Global Investors outlined that it will vote against companies looking to award “generous pay packages” to executives, especially if these companies had received Government support, reduced dividends or cut jobs during the pandemic – which follows similar voting guidance published by major proxy advisors ISS and Glass Lewis. In a letter to FTSE 350 Chairs earlier this week, Fidelity International followed suit by warning that if any company has availed of or participated in any taxpayer supported employee furlough schemes, they should not pay bonuses to executives, directors, or senior management. Commenting on this Global Head of Stewardship and Sustainable Investing at Fidelity International, Jenn-Hui Tan, stated that given the “continuing uncertainty about the post-COVID economic recovery we are advocating for a restrained approach to executive pay this year” and that he expects “senior management salaries to be frozen or rise only modestly next year and in any event, not beyond the workforce rate of increase.” As has been apparent since the scale of the pandemic unfolded, investors will vote unfavourably at companies that fail to fully reflect and consider both the market backdrop, and the consistency in treating its general workforce, stakeholders and executives.

ESG & cryptocurrencies – when worlds collide

This week the long-term viability of Bitcoin, and the wider cryptocurrency market as an investment product, was questioned in a note by BCA Research. The note, which was reported on by Bloomberg, cited the large quantity of energy required to mine cryptocurrency and the potential for increased Government regulation, as serious impediments to its long-term value and viability. Cryptocurrencies’ energy consumption has come under increasing investor scrutiny in recent months. The Cambridge Centre for Alternative Finance outlines that the energy consumption used to mine Bitcoin increased 20-fold, from 6.6 terawatt-hours at the start of 2017, to 130.9 terawatt-hours by March 2021. Furthermore, estimates by Digiconomist , have put Bitcoin’s annualized carbon dioxide footprint at close to 37 million tonnes which – according to them – is comparable to that of New Zealand’s annual output.

Noting this high energy consumption among other factors, Peter Berezin, BCA Research Chief Global Strategist and author of the BCA report, notes that once “ESG funds start to flee Bitcoin, its price will begin a downward spiral” leaving him to advise investors to “stay away.” This view was echoed by ESG investors with David Sneyd, Vice President, Responsible Investment at BMO Global Asset Management viewing that Bitcoin, and other cryptocurrencies, “to be a net negative from an ESG standpoint.” 

Despite this recent negative scrutiny, Bitcoin is still up more than five times over the past year and, with Tesla recently announcing that it purchased $1.5 billion Bitcoin tokens and will start accepting the cryptocurrency as a payment method for its products, it is becoming more and more mainstream. It would appear that ESG and Bitcoin are on a collision path.

U.S. funds playing climate catch-up

Despite sweeping moves by the Biden administration to address the climate crisis the country’s asset management industry is still playing catch up. Just two US asset managers were recognised for running an environmentally friendly equity funds at the third Carbon Disclosure Project (CDP) Europe Awards, which was hosted by the European Investment Bank earlier this week. A total of 550 funds in the global and European equity categories were judged as five-leaf products but no U.S. or emerging market funds received a five-leaf designation according to Climetrics, a fund-rating service developed by CDP and ISS-ESG, a division of the proxy adviser Institutional Shareholder Services.

ShareAction seeks to bridge data gap between asset managers and owners

Earlier this week, ShareAction, the responsible investment NGO released new research outlining the current state of real-life leading practice by asset managers on core ESG topics. The research which covers responsible investment governance, climate change, human and labour rights, and biodiversity, includes a checklist of current leading practices that asset owners can compare with their managers’ practices, and case studies of specific managers’ implementation of these metrics. ShareAction has made the move after observing a breakdown in how responsible investment advocates and asset managers assess ESG practices, with the former typically pushing for implementation of theoretically ideal standards and the latter arguing that they  are unrealistic. Someasset owners are welcoming the intervention, with Colin Baines of Friends Provident Foundation saying it will “enable asset owners to better hold managers to account by demonstrating that positive changes are not just possible but have already been implemented by their peers.” As we approach AGM season, we’ll be watching developments off the back of this research closely.

The electrification of transport (and SPACs)

Volvo this week became the latest car brand to announce an all-electrification plan – with a target for electric vehicles to be 50% of sales by 2025 and 100% by 2030. It appears that consumer demand has influenced the decision to now make that move by 2030, though the wider market environment and competitor pressure has no doubt also played a significant role. BMW has an increasingly wide range of electric vehicles while, two weeks ago, Ford announced that by mid-2026, all of their passenger vehicles in Europe will be zero-emissions capable with plans to become all electric by 2030. This move builds on Ford’s commitment in mid-2020 to be carbon neutral by 2050. Jaguar Land Rover also announced it was on a path to net zero by 2039 including the “re-imagination” of Jaguar as an all-electric brand by 2025 – with all Jaguar and Land Rover models available in all-electric format by 2030.

The electrification of passenger transport continues to gather pace more generally. Over the past few weeks, two US electric-aircraft or eVTOL (electric vertical take-off and landing) companies, Archer Aviation and JOBY, who will ultimately seek to offer electric air-taxi services, announced they will go public via a Special Purpose Acquisition Company or SPAC for short. It looks like both the roads and skies will be electric highways before long.

Values and value work in synch says Cevian

companies to account where ESG metrics are not included within management plans by 2022 – claiming that companies are making “laudable statements” about long-term ESG intentions but that such intentions “are not supported by tangible shorter-term measures.”

In one of the more public and direct challenges to issuers on tying ESG metrics to executive pay, Cevian calls for “strengthened alignment between the desired outcomes and the companies and individuals we expect to produce them” meaning that “significant, measurable and transparent ESG targets” should form part of compensation plans for all European public companies.

Cevian indicated it is “raising this now, as most companies approach 2021 shareholder meetings, to give companies clear and reasonable notice of our expectations” adding that companies should use the remainder of this year to consult with shareholders on “tangible proposals for incorporating ESG into incentive plans in time for their AGMs in 2022.” In its publicly issued statement, Lars Förberg, Cevian Capital Managing Partner and co-founder commented “There is no conflict between “values” and “value” – in fact in today’s world, they are fully symbiotic.”

Biden Administration poised to align SEC with ESG

To date, the U.S. Securities and Exchange Commission (SEC) has lagged investors’ impetus to move ESG to the foreground, making it an important part of their portfolio choices. An article from Barron’s stated for example that in September, the SEC promoted rules that essentially gave more power to corporate management, to the detriment of their investors. With the appointment of Gary Gensler as the new SEC Chairman, commentators are asking if Biden’s administration may take a different approach. Barron’s article highlights some key areas where the SEC could strengthen ESG, arguing it should “seize the moment to prioritise investor protection and sustainability.” Separately, activist groups are calling on the SEC to make it easier for investors to contest climate related issues at oil companies’ AGMs as highlighted in the Financial Times. This is seen as a plea from shareholders to the Biden government to reverse the impact of the “‘corporate-friendly’ Trump years”.

How COVID-19 is shaping communications: Insights from FTI’s Social Divide

Earlier this week, FTI’s Digital and Insights practice launched the ninth edition of the Social Divide, an annual ranking of FTSE 100 companies based on their results communication on social media. Having examined over 1,000 social media posts across Twitter, LinkedIn, Instagram and YouTube, the team found that COVID-19 has accelerated the trend of corporates communicating ESG initiatives, both at leadership and business levels. The pandemic was used not only to explain financial performance, but also to highlight positive initiatives that companies undertook in response to the COVID-19 crisis. Beyond COVID-19, most of the best performing companies in the ranking “softened” their results content, supplementing financial information with broader messages around purpose, resilience and societal responsibility. Once again, this research further demonstrates how ESG continues to be a growing focus point for investors, while also highlighting companies’ willingness to meet these new demands and treat ESG as a priority.

Chart of the Week

Source: Digiconomist

In Case You Missed It

  • According to PhocusWire, sustainability must be a priority for business travel in 2021 to help reduce the impact on the environment. The travel news service is advocating for companies to develop and implement policies that will enable more sustainable travel choices.
  • Accounting Today reports that the merger between the Sustainability Accounting Standards Board (SASB) and International Integrated Reporting Council (IIRC) is close to being finalised. The two institutions should combine as the Value Reporting Foundation by the middle of this year. Both have been working with three other standard setters since September to harmonize their approach in response to pressure from financial regulators and the growing demand for ESG funds from investors.

Upcoming events

March 9: FTI and Hanson Search Webinar: The ESG trends arising, or accelerating, as a consequence of the COVID-19 pandemic

 

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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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