ESG & Sustainability

ESG+ Newsletter – 5th August 2021

Your weekly updates on ESG and more

This week’s edition looks at how the SEC is beginning to focus on companies’ disclosure around the ‘S’ and how EU pension funds look for further clarity on ESG investing, just as the impact of the EU’s SFDR begins to impact ‘greenwashing’. We also look at how the four-day work week is back in the news and highlight that the UK’s FCA continues to focus on diversity and pay. Lastly, we cover the growing push for cryptocurrency regulation and the challenges that both investors and companies are facing when it comes to their Net Zero ambitions.

EU pension funds seek clarity on ESG investing as SFDR impacts ‘greenwashing’

As the EU Commission continues its push towards greater ESG regulation, concern is growing in the European pension sector regarding the lack of clarity on how the industry should balance financial returns and ESG investing. For pension funds, the question of how much emphasis should be placed on client returns versus responsible investing needs to be clarified. Matti Leppala, Secretary-General of Brussels-based Pensions Europe told Bloomberg that, even though ESG considerations are important, the core fiduciary duty of a pension fund remains to be to “to pay for pensions.” The impact is that less money, roughly $5 trillion of pension money, is currently not being directed towards ESG funds. Despite this, the EU Commission’s Sustainable Finance Disclosure Regulation (SFDR) – which provides for: stricter regulatory framework for ESG products; enhanced sustainability disclosures by asset managers; and discourages greenwashing – already appears to be having a significant impact on ESG labelled products. Bloomberg this week reported that some European fund managers have had to concede that their claims regarding some of their sustainability products were exaggerated and that, between 2018 and 2020, $2 trillion in ESG labelled assets were removed from the market as the tougher disclosure regulations gradually came into effect. This is positive news with ‘greenwashing’ long being viewed as the biggest impediment to investors achieving their sustainability targets and goals across their portfolios.

Knowing the C-Suite key to ESG out-performance

The woman responsible for this year’s best performing ESG funds has stated that getting to know a company’s management is the key to her success. Caroline Forsberg, Portfolio Manager at SEB Investment, has delivered a 30% return on two funds, which, according to Bloomberg, is more than double the industry average and better than all other ESG funds that they track. Forsberg states that she carries out a lot of “leg work” which includes meeting with management and physically inspecting production facilities. When meeting with management she wants to see if they can get into the details on matters such as sustainability and if they have a deep understanding of their supply chains and sourcing – being aware of any potential ESG risk factors within them. A company’s purpose is also an important factor when Forsberg is considering investing, particularly if a company’s business or operations are benefiting the wider society. If companies want to really impress fund managers then, according to Forsberg, they need to demonstrate a long-term view through science-based ESG targets that are tied to long-term incentives in executive remuneration.

SEC starts to focus on ‘S’ disclosures

In late May, SEC Chairman Gary Gensler told the US House Subcommittee on Financial Services and General Government that they were looking at introducing diversity reporting requirements as part of a corporate workforce disclosure proposal. This proposal has the potential to include new disclosures about the diversity of a company’s senior management, pay levels and staff turnover. Paul Dickinson, Founder of CDP and Chair of the Trustees of ShareAction, and Meredith Sumpter, CEO of Inclusive Capitalism, argue in an Op-Ed for Bloomberg Opinion that this is an important step towards the “accountability that we need from executives to ensure workers are included in the pandemic economic recovery”. However, both authors argue that “regulators should act with urgency” and that workers, and wider society, can’t wait 20 years like they have for environmental disclosures to become an important part of a company reporting obligation.

What is becoming increasingly clear is that, while the regulators may be playing catch-up, investors have become more aware of the ‘S’ in ESG; with, what is often viewed as the forgotten child of ESG gaining increasing importance relating to decisions on capital deployment. Recently, we have seen leading institutional investors opt-out of participating in high profile IPOs due to investment risk associated with a company’s poor disclosure around workers’ rights and employment practices. It will likely take increased focus and disclosure requirements from regulators, coupled with greater scrutiny and pressure from investors – both in terms of investment decision making and AGM voting – to drive companies into greater levels of disclosure and transparency.

Are companies ready for a four-day week?

COVID-19 continues to exert an influence over how, where and when we work and, while remote working has brought many benefits, it has also blurred the lines around the start and end of the workday, often resulting in longer hours worked and associations with employee burnout. A four-day week is touted as a solution, but the Wall Street Journal is reporting that, while the concept of a shorter workweek is gaining some traction in the US and in some instances being used as a recruitment incentive, it still faces challenges. For hourly workers, it will likely result in lower pay while, for larger companies, the shorter workweek often goes against the “always-on” work culture. However, the article points to a greater willingness to adopt a shorter work week outside of the US. Spain is planning to pay companies to test a four-day week while Unilever is currently piloting a four-day week in its New Zealand offices. As previously reported, a study in Iceland showed improved productivity and well-being as a direct result of reduced working hours. While the evidence is clear that a shorter workweek does not reduce productivity, it would still appear that many organisations aren’t yet ready for the cultural shift that surrounds it.

FCA calls on financial services firms to take action on diversity and pay

The UK Financial Conduct Authority (FCA) continues its focus on diversity with the news that it has written to financial services firm asking them to review and address any disparities in pay amongst protected categories of employees. According to the Financial Times, the letter was issued on 3 August to the Chairs of remuneration committees at financial services firms urging them to review their remuneration policies in light of the pandemic and to ensure that those policies align with ESG issues – stressing the importance of the ‘S’ in ESG. Firms will need to submit a remuneration policy statement, outlining any changes made to policies over the last year and explaining how those policies support the firm’s purpose, strategy, and values, when taking the context of the pandemic into account. This week’s letter comes during a period of increased action from the FCA on diversity matters. Just last week this newsletter reported on the proposed new listing rules which would require companies to publicly disclose progress towards achieving targets for gender and ethnic representation on their Boards and across their executive management. Given this growing scrutiny, there is an increased impetus on organisations to act and ensure that there is appropriate level of representation of diversity and gender at senior levels in their organisations.

The intersection of Cryptocurrency and environmental reporting

SEC Chairman Gary Gensler has indicated that he wants a robust oversight structure for the cryptocurrency space. He noted that, while technology has brought about economic progress throughout history, that progress has always come with regulation. Gensler has asked Congress to pass a law that would give the SEC the legal authority to monitor crypto exchanges. It is unclear what exact policy changes will be made; however, there are currently at least seven initiatives being looked at that would address various crypto issues. One that the SEC is contemplating is whether companies involved with Bitcoin and other digital assets, should disclose their greenhouse gas emissions from cryptocurrency mining. Gensler stated that cryptocurrencies and corporate reporting on risks from climate change create an “interesting intersection.” With that in mind, Pantero Capital’s  CEO stated that Ethereum platform’s potential lower environmental footprint is one of the reasons the token could continue to outperform Bitcoin. How this plays out remains to be seen but what is clear is that scrutiny on the environmental impact of digital assets is on the agenda of regulators.

The shortcomings of carbon targets; and burning trees

The financial markets effectively have a zero-tolerance approach to corporate reporting errors; however, when it comes to emissions reporting, there is currently little consequence or impact for erroneous information. Carbon accounting is not nearly as rigorous as financial reporting and whether it’s accurate or not, the company in question is often praised for trying. Scope 1 emissions are generally accurate but when moving to Scope 3, which are emissions from the supply chain or use of products, there are usually a huge number of assumptions. The lack of consistency on carbon emissions data is making it difficult for investors to understand the true extent of a company’s net-zero emissions ambition. The solace is that data and analytics around climate change are rapidly evolving, although the expectation is companies push to continually improve methodologies and metrics. While companies across sectors globally work to reduce emissions and meet the challenge of net-zero, one of the solutions, at least in the short term, is to invest in forests to generate carbon offsets. There is an unfortunate irony that some of these forests in the US are now on fire. While forest fires and drought are not a new phenomenon, they are certainly being exacerbated by global warming and these fires are now threatening these carbon offset projects themselves. Another Bloomberg story also highlights the ‘darker side’ of commitments to plant trees to combat climate change. Carbon offsets and planting trees will both remain central to working towards a net zero world. Scrutiny on emissions and targets, however, is certainly going to change.

Investor group pushes for steel industry Net Zero commitment

The Institutional Investors Group on Climate Change (IIGCC), an investor group representing $55 trillion of assets, published a new steel sector strategy as part of the Climate Action 100+ initiative. The new strategy mandates that steel firms set short, mid and long-term targets in line with the goals of the Paris agreement and align their capital expenditure plans with net-zero emissions, including ceasing investments in new, unabated production capacity. To reach a net-zero target by 2050, global steel Scope 1 emissions must fall by 29% by 2030 and 91% by 2050. Notably, the strategy also demands that steel firms produce reports by the end of 2022 detailing how carbon capture and hydrogen projects can be successfully leveraged to decarbonize steel production. The announcement is significant because the steel industry alone represents about 9% of total global emissions. So far, only nine firms responsible for about 20% of global steel production, mainly in Europe and Asia, have set net zero targets. Other players in the sector may face increased pressure from investors to establish a net zero pathway and align with those at the forefront of the industry.

In Case You Missed It

  • Reuters has reported that sustainability is in the spotlight at the 2020 Japan Olympic Games, with plastic podiums, recycled medals, cardboard beds, and donated carbon credits from Japanese businesses. As part of their carbon offset programme, the Tokyo organising committee counted on more than 200 Japanese companies to donate an estimated 4.38 tonnes of carbon credits to the Games from July 2018 to September 2020.
  • On the drive to end the UK’s dependence on fossil fuels, Boris Johnson has set a 1GW floating wind farm target out of a total 40GW offshore wind goal by 2030. With other countries including France, Norway, Spain, the US, and Japan also pursuing the technology, the Financial Times has reported that there are concerns that the UK supply chain will lose out to foreign companies when it comes to large scale floating offshore projects. To help the country to achieve its set targets, the UK is already examining an auction for floating wind in the Celtic Sea and south of the Republic of Ireland.
  • Moody’s ESG Solutions announced the launch of its Global Compact Screening tool, which will allow market participants to evaluate companies’ alignment with the United Nations Global Compact (UNGC) principles. The tool currently provides assessments for approximately 5,000 listed companies globally and covers 36 datapoints, 0-100 scores, and controversy screening on the UNGC’s Human Rights, Labour Rights, Environmental and Anti-Corruption principles, as well as Negative screening for activities that contravene the UNGC Exclusionary Principles.
  • Japanese regulators will step up efforts to prevent ‘greenwashing’ in financial products, its financial watchdog said on Wednesday. In an interview with Reuters, Junichi Nakajima, who became the Commissioner of Japan’s Financial Services Agency last month, affirmed that it is a priority to establish a framework to verify the eligibility of products that relate to ESG issues.
  • Directors’ behaviours are often the root cause of corporate board failings, according to the latest research by The Institute of Directors (IoD) in Ireland. Twelve boards participated in the research which found that board members regarded emotional intelligence, empathy, and interpersonal skills as key attributes of directors should have.

 

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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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