ESG+ Newsletter – 10th March 2022

How sustainability can elevate women into leadership positions

Each year International Women’s Day provides an opportunity to assess progress in the representation of women in senior leadership and board positions. ‘Break the Bias’ was this year’s theme, and it seems a solution may exist within sustainability. Over half (54%) of chief sustainability officer (CSO) positions are now held by women and the profile of the CSO has been steadily increasing thanks to the attention that sustainability now receives at board level. The role has grown from being a fringe position within a company to one that influences strategy and often reports directly into the CEO. As a relatively new position within companies, it doesn’t have an established leadership path or defined set of skills, which leaves it open to a more diverse set of candidates. The role can be challenging as well, as it frequently touches on all aspects of a business and requires the CSO to build relationships that will affect change across the organisation and will protect the future of the company. They’re also open to external scrutiny from customers and investors. The traits required, combined with the increased exposure now available to the CSO, means that those in the role are honing the skills necessary to make the leap into CEO positions.  We may be seeing the start of a breakthrough for women at the top table and ‘breaking the bias’ that often exists in the route to the top position.

How do companies report on their workforce?

There has been an increasing focus and acknowledgement from investors and companies alike on the importance of engaging and addressing workforce issues. While reporting requirements on workforce related matters have existed for a long time, updates – such as the 2018 UK Corporate Governance Code – brought about a renewed focus. A report published by the High Pay Centre, notes that while there has been an increase in reporting “the quantity and quality of disclosures still varies significantly and remains very poor in places”. In its assessment on the quality of reporting across the FTSE 100 companies, it found that while topics around workforce cost, skills and development, reward structures, employee wellbeing, are part of the narrative for most companies, it is not accompanied by meaningful data, which has also been part of the criticism from the FRC in its Corporate Governance Reporting review for 2021. The report calls for a baseline workforce reporting framework, based on robust employee voice mechanisms and diverse boards that are focused on employee practices, which has been highlighted in a previous edition of the newsletter. In the meantime, investors are being called upon to address this issue through their stewardship efforts and challenge investee companies about their workforce initiatives and engagement.

ESG and the Real World

In an article for The Times this week, Oliver Shah argues that the ESG movement has failed “to grapple with the real world” and that compliance with ESG metrics has been proven to be “counterproductive”. Oliver points to the German Government’s recent decisions to increase military spending and to reactivate old coal power plants to ensure electricity supply security as examples of ESG’s failures. However, despite any short-term retreat to the use of coal, meaningful investment in, and requirement for, renewable energy remains the long-term solution to facilitate the transition towards a net-zero carbon economy.

As we highlighted in a previous edition, commentators seem to believe that ESG investment has to be a panacea for all the problems in the world and, when it isn’t, then that is proof that ESG as an investment philosophy does not work. However, the reality is far more nuanced and the belief that something has to be either everything or nothing is a deeply flawed argument and fails to appreciate the value that ESG can add to investment decision-making. While we readily accept that ESG is by no means perfect, we are not so sure that current events are the “reckoning” for ESG as many commentators are predicting and, once again, we would argue that it would appear that the only ones who seem to be claiming that it is, are its most vocal critics. At the start of COVID, similar views were raised as to the inadequacy of ESG; however, scrutiny on the long-term impact of business and its role in is unlikely to dissipate.

Nickel prices and net zero ambitions

Record high commodity prices are set to have an impact on an array of sectors, including electric vehicles. Russia is the world’s third-largest producer of metal globally, behind the Philippines and Indonesia, and has the leading market share of the high-grade variety – a key component in the manufacture of car batteries. Nickel is ultimately responsible for the distanced achieved by an EV battery, with the more present equating to a car travelling further off of one charge. As noted by Ian King for Sky News, carmakers are already suffering from higher raw material and energy costs, and the nickel crisis will likely have a compounding effect on manufacturers’ troubles, who are also still struggling with semiconductor shortages.

Although initially seeming like a fairly specific issue, the nickel crisis is poised to have a far-reaching impact beyond the automotive industry. Countries individual net-zero targets, for instance, are suddenly in jeopardy and there is a view among industry analysts that they will remain high in the near to medium term. This is a critical space to watch, particularly when viewing the crisis in the context of last week’s IPCC report, which concluded that the global community is still falling short of tempering global warming.

ESG Investing – “necessary but not sufficient”?

Over the past few months, we have covered the intense debate on ESG investing, with some arguing that ESG focused investments necessitate reduced returns and others arguing that ESG provides an essential long-term view that is critical in investment decisions. We covered an article from the Wall Street Journal which articulated its view on why ESG is flawed. While it is clear that there are flaws in ESG-related investing, the article argues that sustainability considerations don’t matter in investment decisions, only returns and shareholder profits. This week an article directly responds to this criticism of ESG investing directly, highlighting that while ESG investing is not perfect, it provides a valuable risk mitigation tool and is essential in improving the environmental and social performance of investee companies.

The plethora of articles on this topic from both sides makes it clear that we remain a long way from a consensus on sustainable investing. It is also clear that critics will point to a lack of information and transparency around ESG ratings to suggest that ESG investing is not yet mature enough to be taken seriously. There is consensus that environmental and social issues should be addressed; however, arguments on the role of regulation versus markets continue to stall progress. As the disagreements continue, Hazel Henderson from Ethical Markets sums up the conundrum well, stating “ESG is necessary. But it’s not sufficient.”

SEC Expected to Propose Climate Risk Rule by End of March

According to Reuters, the SEC is committed to proposing its climate risk rule by the end of March 2022, and as early as 16 March. The long-awaited measure would require publicly traded companies in the US to disclose detailed information to investors regarding the impact of climate change on their business. Previous reports of debates at the SEC over the specifics of the rule, such as the inclusion of Scope 3 emissions and concern over lawsuits, have likely led to multiple rounds of delays, with SEC Chair Gary Gensler initially promising the proposal would be published by October 2021. This move aligns with what we have seen in the UK with TCFD reporting becoming mandatory for certain listed companies.

GRESB: minimal changes in 2022 and five-year Roadmap

The Global Real Estate Sustainability Benchmark (GRESB), a recognised global standard for ESG reporting in the Real Estate sector, released its 2022 Real Estate and Infrastructure Assessments Reference Guides in early March. The Reference Guides may still be subject to change and the final version will be available on 1 April. While changes to the 2022 assessments are limited in scope and address mainly clarifications and improved guidance, more substantial changes can be expected in the coming years, starting in 2023, as GRESB is currently focusing on developing its five-year Roadmap.

Future assessments will introduce new indicators to focus on the most material issues faced by the Real Estate industry including topics such as climate change and net-zero targets, embodied carbon, DE&I, health and well-being, human rights, biodiversity and cybersecurity. Over the coming years, GRESB will align with industry frameworks and standards, consider sector and regional differences, recognise both efforts and outcomes, assess ESG performance through the asset life cycle, evaluate and benchmark at organisational, portfolio and asset level, provide more guidance and improve accessibility, and review its standards regularly.

In Case You Missed It

• The Net Zero Technology Centre has launched a new £10m funding competition for innovative low-carbon technologies to be deployed in the North Sea. The first phase (£7m) starts on 16 March and will focus on seven areas including CCUS, hydrogen and clean fuels, and renewables and energy storage. The second phase (£3m) is scheduled for October and will focus on data, field automation and smart technologies.
• The first ever Sovereign Sustainability Linked Bond was issued by Chile on 2 March. The interest in the bonds is tied to Chile’s performance on the reduction of GHG emissions and the share of energy generated by renewable sources. The country will have to pay a higher coupon if the targets are not met.
• As the ESG investment sector grows, the Johannesburg Stock Exchange amended its listing requirements to allow the sale of bonds with pre-defined ESG objectives. Climate change is a growing concern in South Africa, the JSE will provide climate related bonds to secure funds to fight climate change. Two segments, a Sustainability and a Transition Segment, will be created to track the bonds.

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