ESG+ Newsletter – 01 June 2023

Calls for developed nations to pay their fair share in the fight against biodiversity loss

In a comment article published in Nature Ecology & Evolution, researchers argue that, given their culpability for the crisis, more developed countries should pay for a greater share of the biodiversity losses faced by countries in the Southern Hemisphere. According to the researchers, biodiversity loss has been disproportionately driven by the consumption of people in rich nations, while poorer countries bear the consequences, suffering significant environmental, social, and economic losses and consequences. The researchers state that activities such as the expansion of destructive mining, agriculture, and deforestation by wealthy nations have led to people in poorer nations having fewer natural resources to feed themselves, fewer opportunities for employment, and a loss of cultural values.

Countries across the Southern Hemisphere have long called upon rich countries to accept responsibility for their outsized role in emitting greenhouse gases into the atmosphere. At COP27, world leaders agreed upon a loss and damage fund that funnels funding from rich nations to poor nations facing the consequences of climate change in a “polluter pays” approach. At the end of 2022, the COP15 Convention on Biological Diversity took place and there were similar conversations regarding who should pay for measures reducing biodiversity loss, which resulted in the establishment of a Global Biodiversity Framework Fund. However, the fund does not include a financial provision for the effects of biodiversity loss.

Flexible working policies and ESG credentials key to attracting and retaining talent

It’s a tricky time for employers as they navigate return-to-office mandates and employees’ push for sustainability commitments. Hybrid, or flexible, working has become firmly embedded at workplaces, but some employers are now seeking to reverse that change. An Op-Ed in The Times puts forward the arguments for a broader return to office. These include improved productivity as a result of face-to-face interactions and easier onboarding of new employees and development of a workplace culture. While the implementation of return to office policies appears to be gathering pace across the financial services sector, some of the largest asset managers are facing criticism for what’s seen as a “step backwards”. An article in Ignites lays out the downsides of blanket policies on office attendance – which mainly impact women, particularly those with school-going children. A less flexible approach to working could result in more women leaving the workplace, ultimately reducing the number of women in senior positions, and perpetuating the already large gender pay gap at asset managers.

In addition to flexible working policies, younger workers also want to work for companies whose values align with their own. According to HRD, companies who are ranked high on ethical issues find it easier to attract talent, while companies whose ESG policies don’t stand up to scrutiny will face challenges in recruiting. In a tight labour market job seekers can afford to be discerning and those companies who rank high on ESG factors will find themselves attracting the best talent.

Tumultuous time for carbon offset market continues

The increased scrutinity on carbon offsets continues with governance and costs coming into focus this week. An article by the FT looked at calls for greater rigour to be brought to voluntary carbon markets, with an emphasis being placed on introducing enhanced governance and regulation to reduce potential greenwashing. The article also details concerns about the use of offsets to compensate for fossil fuel emissions, due to the mismatch in carbon cycle timeframes. On the cost front, a recent research report published by PwC, detailed that the price for carbon offsets could more than double by the end of the decade for companies. Increased regulation of carbon markets, and costs associated with them, comes at a point when there has been a clear regulatory push to clamp down on companies who claim their products or services are ‘carbon neutral’. The EU is proposing a regulation that will aim to ban environmental claims that are based solely on carbon offsetting schemes, while the UK will ban adverts that claim products, which use carbon offsets, are ‘carbon neutral’ unless companies can prove that the carbon offsets really work. The regulatory focus on offsets follows on from an investigation which alleged that 90% of rainforest carbon credits certified by Verra, which operates the world’s leading carbon standard, did not represent genuine carbon reductions. While Verra disputes these claims, they announced last week that their founding CEO, David Antonioli, will step down, likely reflecting the clear reputational damage that the investigation had on both the company, and the wider carbon offset market.

With the carbon credit market worth $2 billion in 2021 – and potentially reaching anywhere between $10-40 billion by 2030 – the debate around the validity of carbon credits, and whether they should be part of the solution to the climate crisis, will only continue. However, there is a need for greater oversight of the market from independent regulators, and increased transparency over the science and application of carbon offsets.

Ambitious EU climate pledges come at a cost

The EU has been at the forefront of the drive towards decarbonisation, with EU leaders pushing for the region to be a leader in the transition to a low carbon economy. However, the drive has coincided with emergency legislation to mitigate the effects of the energy crisis and the increasing competition from both the US and China. This has resulted in huge pressure on governments and companies which has led to leaders calling for a slower pace, with both France and Germany already pushing back against certain parts of the Green Deal. It appears the EU’s ambitious plans are now starting to sink in for these leaders who realise the scope of the challenge ahead and the number of sectors which will be impacted. For example, the climate policies are now impacting family sectors such as housing, mobility, and food and, as a result, the debate around these policies is becoming more politically charged. These challenges may continue to drive heightened tensions as we progress along Europe’s net zero transition pathway. They will need to be ironed out sooner rather than later to ensure the EU strikes a balance between transitioning and ensuring economic stability and growth.

Executive pay levels and performance criteria continue to gather attention

While pay levels remain under close scrutiny in the context of the cost of living crisis, ESGClarity reports that the CEO of the London Stock Exchange, Julia Hogget,  is calling for increases in the remuneration of UK-based executives. This story highlights the complex trade-off between fairness and competitiveness that some boards may face in setting executive pay. Another complex issue on boards’ agenda is whether to tie CEO pay to ESG metrics and, if so, how to do so. While this may encourage executives to reach ESG targets, an article from Barron’s stresses that the vague and easy-to-hit criteria may inflate remuneration packages without much by way of benefits for companies’ stakeholders. A recent Quartz article reviewed a study from the University of Chicago which found that the lack of meaningful progress across a company’s ESG initiatives following the announcement implementation of ESG programs and policies could be explained by the low weighting, or linking, that ESG progress has in executive remuneration packages.

Updates to the UK Corporate Governance Code have commenced

The Financial Reporting Council (FRC) has launched a public consultation on its proposed revisions to the UK Corporate Governance Code (the Code), the first to take place since 2018. The revision follows the legislative and governance reforms proposed by the UK Government, that were set out in the Restoring Trust in Audit and Corporate Governance consultation initiated in May 2022. The proposed changes to the Code are focused on internal control, assurance, and resilience, which support the FRC’s transition into the Audit, Reporting and Governance Authority (ARGA). The updates to the Code will be part of a wider framework of measures set to “improve accountability, build trust and support investment and stewardship decisions in the UK”, as noted by the FRC’s Director of Corporate Governance and Stewardship, David Styles, in the consultation.

The structure of the Code will remain the same, with the five sections remaining as they were. A significant proportion of the changes are centered on the section 4 of the UK Code – covering Audit, Risk and Internal Control – where the wider responsibilities of the board and audit committee for expanded ESG reporting is included. The FRC has also proposed changes to improve the transparency of malus and clawback provisions in the context of executive remuneration; introduced a new principle in section 1 with a view of improving the comply-or-explain approach of the Code; and improve reporting on diversity, with the introduction of changes to section 3 of the Code. The consultation is set to end on September 13, 2023, with the revised Code expected to become effective for reporting commencing on January 1, 2025.

Insurer developments highlight growing contention over ESG

Recent ESG developments in the insurance sector have highlighted the geographic disparity in climate change sentiment, particularly the role of big business. As reported by the Financial Times, the past week has seen simultaneous insurance-related pro-ESG and anti-ESG protests in London and New York. Both groups were very specific on the issue they were looking to highlight – the role of the Net-Zero Insurance Alliance (NZIA). While many European insurers have so far been resolute, several of the largest insurers outside of the bloc have withdrawn their support for the group, which has been a catalyst in drawing the ire of the US protestors. The developments have shone a light on, not only the geographic difference in views, but also the complicated relationship between different sectors, the NZIA and ESG. Pricing climate risk has long been a topic of significant debate, and the exclusion of fossil fuel projects has been a point of contention across the whole economic spectrum – particularly amid energy security concerns and the role of Oil & Gas industry in the transition to a low-carbon economy. These global alliances aimed at supporting the climate transition now seem to be at a crossroads, particularly given how vital the insurance sector to the global reduction of carbon emissions.

ICYMI

• Sustainable funds grow despite regional outflows: Global sustainable fund assets hit $2.74 trillion by the end of March of which $29 billion was net inflows in the first three months of the year, according to Morningstar data. Europe continued to be the biggest market for sustainable funds, while Asian markets witnessed some volatility and Japan experienced a net outflow in its third consecutive quarter.
• Don’t Pitch Jets Against Pets. Patrick Hansen, CEO of private-aircraft operator Luxaviation Group, has received backlash for comparing the private aviation industry’s carbon footprint to that of pet ownership. Speaking at the FT’s Business of Luxury summit in Monaco, Hansen pointed out that one customer flying privately produces roughly the same emission as three years of dog ownership.
• The European Union has announced plans to double its aerial firefighting fleet for the summer of 2023. This decision comes as the EU faces a surge in climate-related challenges such as forest fires and floods. With disasters occurring more frequently and with greater intensity, the EU’s RescEU program will consist of 24 planes and four helicopters from 10 member states, along with nearly 450 firefighters from 11 member states.
• In China, the excitement around solar and EVs reach fever pitch at SNEC PV Power Expo this week. The projected growth in these sectors suggest that China is nearing an inflection point in its energy transition more than half-decade before a 2030 target to peak emissions. Importantly, these sectors no longer require heavy government subsidies to push people away from fossil fuels.

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