ESG+ Newsletter – 1 August 2024

Our final ESG+ before our annual August break begins with the Paris Olympics, as we look at the game’s environmental efforts. SBTi is also back in focus this week, as we review its proposed use of carbon credits for companies’ emissions plans. We also examine the impact of climate change on US home insurers; how the pandemic’s impact on work habits has changed employee monitoring; and how ESG ratings agencies give companies headaches due to their differing methodologies for identifying and assessing potential controversies. 

The newsletter will return in September!

Climate change impacting sport both on and off the field

With the 33rd Olympics well underway in Paris, discussion of sustainability in sport has risen to the fore once again. Paris’ ambition was to host an Olympics that limited its impact on climate change, aiming to reduce the total carbon emissions to half the level of previous Olympics. However, with Paris currently undergoing a heatwave, and poor water quality in the River Seine delaying the beginning of the triathlon event, the stark reality of global warming is evident for all to see at the world’s largest sporting competition. Some of the organiser’s environmental efforts have created an un-level playing field. The Olympic Village for example, was built with an emphasis on reducing carbon emissions both in its construction and when operating – through use of construction materials, renewable energy to power the village, and use of geothermal cooling systems instead of traditional air conditioning. However, these environmental efforts have caused dissension amongst competing nations. The Olympics Committee has only installed air conditioning for those that paid for it, causing tension amongst countries athletes that do, such as the French and Great Britain teams, and those who don’t.

While the gesture by the Paris organisers is clearly well intended, it has created a gap whereby wealthier countries are going the extra mile for their athletes. This is similar to environmental efforts globally, where wealthier countries often contribute the most emissions while also have greater financial firepower to acquire climate change technology or make societal changes with limited economic impact than emerging nations.

SBTi details possible uses of carbon credits despite effectiveness concerns

The Science Based Targets initiative (SBTi) released a series of research publications aimed at informing its new standard for corporate climate target-setting. One of the standout items was the potential inclusion of carbon credits in corporate emissions reduction plans. While the SBTi emphasised the need for further research due to concerns over their effectiveness, it did include potential use cases for carbon credits for companies, such as demonstrating emissions reductions in supply chains, offsetting residual emissions, and mitigating emissions outside supply chains. However, it hasn’t committed to integrating these scenarios into its policy update, expected to be effective in 2025. The announcement follows on from controversy back in April, when SBTi’s board suggested including carbon credits. This resulted in backlash from SBTi employees and from 80 global charities and companies, who feared it would undermine climate pledges. Despite theoretical benefits of carbon credits, studies have questioned their efficacy and revealed instances of fraud. SBTi recently indicated that best evidence suggested that many carbon credits fail to achieve intended mitigation outcomes, although it called for further research. An independent review echoed this, finding insufficient evidence for a definitive conclusion.

Against the backdrop of SBTi’s consideration of carbon credits, Verra – one of the world’s leading carbon credits verifiers – announced a new ABACUS label for reforestation credits, which they believe signifies “exceptional quality,” for carbon credits. While SBTi and Verra’s efforts highlights the ongoing attempts to enhance the credibility of the carbon credits, we only have to look to recent history to have skepticism regarding their efficacy.

US home insurers face historic losses worsened by climate change

Last year, US home insurers experienced their worst underwriting loss of this century, resulting from the expensive combination of natural disasters, inflation, and population growth in at-risk areas. According to the Financial Times, insurers providing homeowner policies suffered a $15.2 billion net loss, the worst since at least 2000 and more than double the previous year’s losses. The economic loss for insurers worsened a trend where US insurers pullback from disaster-prone areas, choosing to either exit the market or drive-up prices. This has created an affordability crisis for many homeowners, as insurance companies try to balance high homeowner insurance policy prices to prevent insurers from exiting the market and consumer affordability. Rising populations in regions most vulnerable to natural disasters also contributed to the catastrophic loss; census figures show that six states prone to severe weather, including California and Texas, accounted for half of the country’s population growth in the 2010s. Meanwhile, thousands of firefighters have been tackling over 100 wildfires across the Pacific Northwest and Canada according to the Wall Street Journal. These have included some of the largest wildfires in California’s history which are creating air pollution and haze that is affecting both northern California and Oregon. The impact may spread to the northern US Plains and Midwest as well. Increasing natural disasters yielding higher costs for home insurers and unaffordable prices for homeowners is a precursor to how climate change is challenging the sustainability and affordability of vital markets across the U.S.

With the right culture, employee monitoring software is unnecessary

In a recent edition of the ESG+ Newsletter, we looked at the lasting behavioural impact that the pandemic has had on work habits. With hybrid working a mainstay, companies are turning to remote employee monitoring software to ensure workers are genuinely productive. The trend emerged alongside the rise of remote working, which sparked concerns that employees might use mouse-moving and keyboard-clicking software to simulate activity. While various forms of employee monitoring, such as timesheets and performance reviews, have long been in place, the prospect of software tracking every mouse movement and keystroke feels markedly different. It raises the question of whether such monitoring actually boosts productivity or merely diminishes morale. Companies should instead address the root causes of such behaviour and focus on establishing appropriate performance metrics for employees rather than monitoring their movements. This involves setting the right goals, which are not always quantitative or easily tracked with data. However, these goals can be distilled into numeric, trackable metrics that balance quantity with quality. By starting with well-defined goals, managers can avoid relying on “trackable but meaningless metrics” and the accompanying need for intrusive tracking software.

ESG rating agencies give headaches to corporates with their differing assessment of controversies 

This week Environmental Finance highlighted the challenges encountered by companies in managing the controversies flagged by ESG rating agencies. Major ESG rating agencies all include a controversy-based element in their ratings – such as operational impact on surrounding environments, unethical supply chain provider, or employee corruption. These are usually elements that can be hard for a company to control and ESG rating agency assessment of the potential for these controversies to occur at a company may negatively impact the appeal of certain investments. A challenge for companies is that ESG rating agencies don’t always have the same methodologies to identify and assess controversies, and these are sometimes included in ratings for many years. Several market participants have argued that ESG controversy scoring and reporting should be regulated. However, the final proposed EU ESG Regulation explicitly excluded data related to controversies noting the rules could be broaden in the future to cover this topic.

ICYMI 

• Major sports initiatives, world leaders and financial institutions have come together to announce a $10 billion in investment for the creation of sustainable sports infrastructure. Guided by the UN Sustainable Development Goal, contributors include FIFA, the NBA, and the French Development Agency.
• European companies focused on clean energy are abandoning expansion plans due to fears over what a potential election victory for Donald Trump could mean for their sector, Reuters
• Colombian subsidiary of Spanish banking group BBVA announced that it was issuing the financial sector’s “first biodiversity bond”, according to the FT.
• Reuters reports that Air New Zealand have abandoned a 2030 emissions reduction target, citing delivery delays of fuel-efficient aircraft and higher SAF prices.