ESG & Sustainability

ESG+ Newsletter – 7th October 2021

Your weekly updates on ESG and more

We begin this week by drawing attention to a useful deep dive into the future of flexible work, touch on supply chain issues, and wrap up on flagging the need for health to come to the fore of ESG considerations. This week’s newsletter also brings you perspectives on the status of ESG and in particular the risks around ‘greenwashing’, from the IMF and the OECD, as well as detailing the latest revision to reporting standards and expectations.

Latest developments in sustainability reporting

On Tuesday, the Global Reporting Initiative (GRI) unveiled its revised Universal Standards, which reflect due diligence expectations for companies to manage their sustainability impacts. Around 10,000 companies already use GRI standards for their sustainability reporting. Accounting Today reports that the revisions “are designed to position companies to respond to emerging regulatory requirements”. Notably, for the first time, the GRI has committed to setting out standards on a sector basis, in line with the approach of the Sustainable Accounting Standards Board (SASB).  While the changes will include 40 sector standards to help companies focus their reporting on the issues that matter most within their sectors, GRI’s approach will remain distinct from SASB in using the guiding principle of ‘double materiality’ – that reporting on impacts that go beyond those that are financially material benefits organizations while supporting sustainable development. The double materiality concept was recently codified in the EU’s Corporate Sustainability Reporting Directive (CSRD). The GRI’s new standards come into effect from 2023, with the CSRD applying from one year later.

True flexibility in the ‘new normal’

It’s on the tip of everybody’s tongue as the future of work enters its most uncertain period since the financial crash. As employers and employees contemplate the kind of routine they need and want for their respective business and personal needs, Harvard Business Review has produced an insightful deep-dive into the future of flexibility at work. HBR probes at some important questions for business leaders, such as what “true flexibility” looks like and how can they ascertain whether it is working for their organisation. The word ‘flexibility’ itself is vague and may suffer from multiple interpretations, including ones that perpetuate gender inequality in the workplace by promoting a quid pro quo of sorts, meaning a trade-off between greater ‘flexibility’ and career development. With remote-working thrust onto workforces at the onset of the pandemic, many companies were quick out of the traps to claim how they would support remote working in order to drive productivity. As we come out the other side of COVID-19, multiple perspectives have linked ideas of flexibility to the so-called Great Resignation that we have highlighted in recent weeks. HBR suggests that we essentially have arrived at a point of an oversimplified understanding of what flexibility is and as a result, the task of creating a flexible workforce is being approached superficially. Companies need to push past the idea that flexibility simply means the location of where work is carried out and seek to genuinely safeguard the work life balance of their employees.

New OECD report highlights lack of clarity and transparency across ESG investing

This week, the OECD published a report titled ESG Investing and Climate Transition which identifies “considerable challenges” in steering cashflows into sustainable investment opportunities. According to the report, the identified challenges may be compromising market integrity, eroding investor confidence, and masking the extent of the environmental and climate-related impacts of investment decisions.

The research identifies the quality of ESG data as one of the most pressing problems, with ESG ratings often lacking transparency in their calculations. The report points out that ratings sometimes vary considerably and criticises what it sees as inappropriate pricing mechanisms of climate transition risks and opportunities. To adequately tackle those challenges, the report suggests several measures. The OECD calls for the global interoperability, comparability and quality of core ESG metrics in reporting frameworks, ratings, and investment practices to address global fragmentation. To that end, it recommends further alignment with the TCFD disclosure framework, science-based interim targets and verification processes for low-carbon and renewable strategies and plans. Moreover, to facilitate investment decisions, the OECD calls for more transparency and comparability among ESG ratings and indices. This could include regulatory principles to support the consistent disclosure of clear and publicly available information by rating providers on metrics and the extent to which supplementary analysis or direct outreach with issuers is used.

Regulators urged to tackle greenwashing

In addition to the OECD, the IMF has warned that the sustainable investment industry is too small to drive the global transition to a low-carbon economy and that to drive the transition, governments must do more to protect investors from being misled by greenwashing. Even though sustainable investment funds have doubled over the past four years to about $3.6tn, nearly $20tn of new investments will be needed by 2050 to achieve global net zero. Around 70% of this funding is expected to come from the private sector. To achieve this, investors need to understand how the money is used and will need regulators to ensure greenwashing is stamped out. According to the Financial Times, the IMF said sustainable funds could be accelerated if regulators harmonised climate standards and disclosures and developed green frameworks to direct investment towards net zero infrastructure. The British Government is hoping to accelerate green investment by inviting the bosses of BlackRock, Blackstone, Goldman Sachs and JPMorgan to a summit ahead of the UN COP26 climate conference later this month. Whether this represents a positive step or abdication of regulatory responsibility remains to be seen.

Pandora Papers & ESG

This week saw the publication of the Pandora Papers, a collection of nearly 12 million documents by the International Consortium of Investigative Journalists (ICIJ) which reveals hidden wealth, tax avoidance and, in some cases, money laundering by some of the world’s most rich and powerful. In particular, coverage in the aftermath of the publication of the documents has focused on the use of various offshore tax havens by global political figures and heads of state to conceal assets and the reputational damage caused by the release of these documents. In an article for Tellimer, Hasnain Malik, Strategy & Head of Equity Research at Tellimer Research, highlights that the publication of the Pandora Papers should give ESG investors who are deploying capital in emerging markets pause for concern. While offshore trusts and overseas assets are not illegal, they may be used to conceal wealth which could be a sign of corrupt activity, with Hasnain stating that “ESG funds cannot do justice to the Governance part of their mandate without considering corruption in the countries in which they are invested.”  

UK economic model risks public support for Net Zero

It seems like only a few months ago that the British Government was congratulating itself for the speed at which it was emerging from the pandemic. Now though, the country finds itself in a crisis. This is the view of The Guardian’s Larry Elliot who ponders whether the latest fuel crisis and supply shortages could deal enough damage to the British economy and social cohesion to undermine public support for the UK’s net zero ambitions. Elliot suggests that there should be no bemusement and while some international media has been quick to blame the UK’s exit from the European Union as the sole source of the issues at hand, the reality is that a dependence on a ‘just-in-time’ approach to supply chains and LEAN management is only really suitable during the good times.

According to Elliot, one potential upside of the state-of-play in the UK could be to act as a warning against “proceeding without a plan”. One could hardly blame the public for focusing on their material needs but as the stakes have never been higher for humanity, governments must find a way to avoid framing climate action as a binary choice between the end of the month and the end of the world. Equally, the company ‘licence to operate’ may be moving from considerations of how they responded to the pandemic to how they respond amid the complications that supply chain issues cause for society. Ultimately, society will need to be brought through the decarbonisation in a more equitable manner than currently planned, spurring the need for a focus on just transitions, not just lofty ambitions.

Business Roundtable Remains Against the U.S. Reconciliation Bill and its Climate Provisions

In 2017, the largest U.S. corporations publicly denounced the Trump administration’s announcement to pull the U.S. out of the Paris Agreement. Now, according to The Atlantic, those same organizations, through the collective vehicle of the Business Roundtable, are quietly funding efforts to impede the Democratic reconciliation bill and its climate provisions. Their campaign involves sending C-suite executives to meet with lawmakers and placing expansive opposition advertisements in TV, radio, and more than $150,000 in Facebook ads targeted to users in purple states (a swing state where both Democratic and Republican candidates receive strong support without an overwhelming majority of support for either party). The Business Roundtable claims that it opposes the bill because it would raise taxes on its member companies, but its efforts appear to be against the reconciliation bill in its entirety, as opposed to a piecemeal approach on a specific issue. In particular, the organization’s opposition may serve to undermine a statement made in 2019 about redefining the corporate purpose to benefit all stakeholders – not just shareholders. But perhaps like anything else, corporate rhetoric can only be backed by corporate action. And in this case, those actions may contradict pledges for a more sustainable world.

The ESG health blind spot

A report from ShareAction, a UK responsible investing non-profit, has highlighted how asset managers are not investing in a way that protects human health. This is despite the link between health and economic performance being writ large during the COVID-19 pandemic. The report describes health as an ESG “blind spot” with asset managers not excluding “health-harmful sectors” such as tobacco and alcohol manufacturers, those fuelling the gig economy, or contributing to pollution. It also points out how even so-called ethical funds that have exclusions aren’t prioritising companies that positively impact health. ShareAction is advocating for investors to use health as a measure of sustainability using a framework they devised to measure companies’ health impact, using factors such as workplace conditions, the consumer health impact of a company’s products, and also impact on air quality or anti-microbial resistance. With poor public health associated with a loss of around £300 billion in annual economic output in the UK, health may present the next frontier for ESG.

Nomination and Governance Committee Chairs set out priorities

An annual survey of S&P500 nom/gov committee chairs carried out by Spencer Stuart highlights some board trends and priorities for the next 3 years and how these have evolved relative to previous years. Based on the data collected, the following 5 priorities have been identified: i) Expanding/enhancing ESG oversight; ii) enhancing racial/ ethnic diversity; iii) developing a boardroom succession strategy; iv) enhancing board effectiveness and v) overseeing diversity and inclusion firmwide. Interestingly, gender diversity did not make it to the top 5 priorities, a fact illuminated by the fact that the percentage of new Directors appointed to S&P 500 boards fell marginally from 47% in 2020 to 47% in 2021. Instead, the issue of diversity primarily came through the DE& lens this year. The 2021 proxy season reflected the increasing importance given to these E&S topics by investors, where according to research from Morningstar, hot topics and priorities remained unchanged but shareholder support increased greatly. On the DE&I front, shareholder proposals were tailored by filers to have specific relevance for the companies, ranging from racial equity audits to demands from the New York City Comptroller’s for the disclosure of EEO1 data, with majority support registered at a number of companies.

In Case You Missed It

  • European banks are beginning to drop clients that pose a climate risk, according to Bloomberg Green. Pressure is growing for banks as investors are shifting to low-carbon sectors, with climate risk likely to have a major influence on banks loan quality and on the policy response to it.
  • In a historic agreement supported across party lines, lawmakers in Denmark set binding carbon emission targets for the country’s agricultural industry, with Danish farmers being required to halve their greenhouse gas emissions by 2030. – Reuters
  • As scrutiny around fast-fashion’s environmental impact grows, the market for next-gen materials is gaining momentum, according to Material Innovations Initiative (MII)’s latest research.

 

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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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