ESG+ Newsletter – 10th February 2022

Boards embrace HR experts for human capital skills

Companies are increasingly recognising the importance of Board members with expertise in human capital, according to new research. With workers quitting jobs at record speed, challenges in figuring out the future of work, and increased expectations around diversity and inclusion, Boards are seeing the need to appoint Directors with experience managing workforces. Share of directorship roles across all companies in the S&P 1500 with specific human-resources skills increased to 19.4% in January from 11.3% two years ago, according to ISS ESG. The reasons for this increase are multi-faceted. Last year, the U.S. Securities and Exchange Commission required that public companies disclose more information on “human capital measures or objectives” in their annual filings. HR and human capital professionals also fit well on Boards, being well-versed in topics such as compensation and succession planning. In-demand Board skills such as digital transformation and cyber security have taken priority in recent years; however, a recent survey found that more than 650 c-suite executives cited the ability to hire and retain talent as both the most important factor and the biggest risk in reaching their organizations’ growth goals in 2022. As the risks and opportunities around human capital manifest, human capital skills at Board level may become essential in supporting companies to deliver their goals.

‘Net water positivity’ – the beginning of new ESG activism litigation?

The World Economic Forum has included water as a driver of global risk for the better part of a decade, with its importance as a natural resource and for the global economy further underlined by the fact that water security is included in the United Nations’ Sustainable Development Goals. As a result, water has risen up the ESG agenda and, outside of climate change and carbon, has become an increasingly important issue for investors. This investor focus has forced companies to address water conservation by providing disclosures on water quality, water withdrawal, and water impact. However, some companies have opted to go one step further, making commitments to become ‘net water positive’ – effectively committing to replenish more water than is being used. Wilson Elser partners, Jonathan Meer and Carl Pernicone, argue that these commitments could potentially lead to a wave of lawsuits, with company executives facing the possibility of litigation if they do not meet their ESG pledges.

As companies continue to make environmental commitments through publicly disclosed targets, the potential for investor scrutiny – particularly in the current climate of ESG activism – grows significantly. Indeed, company executives facing litigation for corporate responsibility failures is not without precedent, with the #MeToo movement and cybersecurity incidents being the most recent examples noted in the same Bloomberg Law article. However, only time will tell whether companies’ failure to meet their environmental commitments – like a commitment to being ‘net water positive’ – will be addressed through proxy fights or in the courts by investors.

Environmental lawsuits offer an attractive prospect for ESG funds

In a similar vein to the threats detailed above, the litigation financing sector has been growing, spurred on by a combination of low interest rates and increased demand for ESG investing, with FTI Consulting estimating that the sector was worth about $13 billion in 2021. While litigation funding can cover any type of lawsuit, the most attractive from both an ESG and returns perspective is the funding of class actions suits for marginalised communities who have been impacted by environmental disasters. The same article shares the example of North Wall Capital who have provided law firm PGMBM with a loan secured against the revenues for winning or settling such cases. A recent case is a class action suit on behalf of an indigenous Brazilian community whose heartland was destroyed as a result of a mining dam collapse. PGMBM see themselves as providing communities with the “muscle to fight against large corporations”, with claimants standing to get pay-outs of tens of thousands of dollars – significant figures for those in areas where monthly household income is less than $250. For investors, cases with big pay-outs that also have a social impact are an attractive prospect. However, this type of litigation can be complicated and lengthy, from trying to identify class action participants to even getting the case to trial. But with funders and lawyers potentially getting the times their investment back or, even better, 30% of the winnings, it’s often worth the wait.

DEI, culture and business performance

A new report from the UN PRI has revealed diversity, equity and inclusion (DEI) is not only correlated with better business performance, but also has a basis in human rights. There has been vastly improved performance on gender diversity in many jurisdictions recently; however, the report revealed investors need to expand their focus beyond gender and diversity to address areas such as inclusion and equity as part of the wider DEI puzzle, to show real progress and reap the true benefits of a diverse and inclusive workplace. The benefits include improved decision making, employee engagement, brand, and market value. The benefits can only truly be reaped when DEI becomes a part of an organisations culture.  There are an increasing number of regulatory drivers of DEI emerging which investors can drive adoption of. By doing so, investors can drive positive, sustainable outcomes for people in line with the Sustainable Development Goals (SDGs) and the Universal Declaration of Human Rights.

EU securities watchdog weighs actions to regulate ESG ratings sector

The European Securities and Markets Authority (ESMA) – the bloc’s securities watchdog – said last week that there is a need to match the growth in demand for ESG ratings with “appropriate regulatory requirements”. There are currently few rules regulating the ESG ratings sector, a fact that may become problematic as new rules mandating ESG disclosures from companies are implemented globally. As a first step, ESMA is looking to gather information from the customers of ESG rating providers and from the entities covered. A newly launched call for evidence “seeks to develop a picture of the size, structure, resourcing, revenues and product offerings of the different ESG rating providers operating in the EU”, the regulator said. This information will then be followed by a public consultation and an impact assessment on the costs and options of a possible EU intervention. This effort comes after global regulators last autumn defined the first global principles to police ESG investment ratings to help combat ‘greenwashing.’

Voluntary carbon offsets market under the microscope

The carbon offsets market has been a hot topic this week, with both the UK and the EU publicly noting their respective intentions to improve on the current mechanisms. More specifically, an independent body set up to advise the UK government, The Climate Change Committee, launched a call for evidence which will help inform the role of voluntary offsetting in decarbonising the UK. The resultant report, due for release later in 2022, will consider strategy up until 2050.

The EU’s climate chief Frans Timmermans commented on the state of the current offsetting standards and called for action “We need to do something urgently, the accounting has to be credible”. Cited in an article by Bloomberg on Monday which spoke to the complexities of carbon stores and the overall “overwhelming” nature of the carbon removal challenge, his words demonstrate the significance of the growing concern around offsetting. As noted explicitly in Financial Times, the market is viewed by many “as a cheap escape for polluters who are able to make use of low-quality offset certificates to make false net-zero claims”.

As with all things ESG, it is widely acknowledged that for a carbon offsets market to be successful and effective, standardisation of frameworks and mechanisms on a global scale is key. This is very much a work in progress, but the formation in September of global governance body the Integrity Council for the Voluntary Carbon Market (ICVCM) could pay dividends in the long run. The body’s primary focus is the establishment of the Core Carbon Principles which aims to set a benchmark for quality carbon credits – whether this proves to be fruitful remains to be seen. The ICVCM’s CCP could well just be the latest addition to the ESG alphabet soup.

Is the Disagreement Between U.S. SEC Commissioners Leading to Delayed Climate Disclosure Requirements?

While U.S. SEC Chair Gary Gensler initially stated that the agency would propose a rule that would force publicly traded companies to disclose climate-related information by the end of 2021, no such regulation has been disclosed. Bloomberg reported that according to sources familiar with the matter, SEC commissioners have so far failed to come to an agreement on how extensive the disclosure requirements should be. With one Republican commissioner opposed, the three Democratic commissioners must support the proposal for it to move forward.

Commissioner Gary Gensler has expressed the importance of adhering to a legally defensible definition of materiality to avoid a potential lawsuit from lobbyists and Republican lawmakers challenging the scope of the SEC’s jurisdiction. In the meantime, Commissioners Allison Herren Lee and Caroline Crenshaw support a less narrow definition of materiality, as they perceive an urgent need for extensive regulation to combat climate change risks. Other issues at the helm of the debate include audits over company disclosures and the inclusion of Scope 3 emissions.

In Case You Missed It

• Venture Capitalists prioritise ESG in their investments – Start-ups failing to disclose how their business is compatible with a net-zero economy could see themselves lose board members, with venture capitalists choosing start-ups that build around those pillars. The Greenbiz article explores how a next-gen company incorporates ESG in its business strategy, by incorporating ESG at the core of the company’s mission and corporate values, by considering the long-term impact of its business and one that addresses specific market needs.
• Ceres guidance for engaging on climate risk governance and voting on directors was published last week, provides specific guidance to investors and proxy advisors on their company engagements and decisions to support the election of directors, responsible for climate change risk oversight. The guidance is based on the TCFD frameworks and the Climate Action 100 + Benchmark indicators.
• S&P Global Ratings expects global sustainable bond issuance to surpass $1.5trn in 2022, as reported in the Investment Week article. The growth in sustainable bonds is being partly driven by booming sustainability linked and green bond markets as issuers in both public and private sectors focus on tackling their climate commitments.

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