ESG+ Newsletter – 10th November 2022

Climate damage and ESG disclosures on the agenda at COP27’s first week

COP27 was in full swing this week, with over 40,000 delegates gathering in Egypt to negotiate, collaborate, discuss, and plan the world’s transition to Net Zero. One of the recurring themes across the conference was loss and damage, with a particular emphasis on allocating financial resources to help support countries that have been impacted by climate change. Several nations committed to providing funding for disaster relief, including Germany ($150m), Austria ($50m), and New Zealand ($20m), as well as debt payment deferrals by the UK for countries hit by climate disasters.

Several other commitments have also been unveiled throughout the week, from the US’s Energy Transition Accelerator to the progress on the harmonization of ESG and sustainability related disclosures, with the CDP announcing that it will incorporate the IFRS S2 Climate-related Disclosure’s requirements in its 2024 cycle (more below). As commitments and demands ramp up, we’ll have people on the ground to keep tabs.

Climate progress initiatives give reasons to be bullish and concerned

Only shortly after unveiling its fund targeted Sustainability Disclosure Requirements, the FCA, in conjunction with the UK’s Transition Plan Taskforce (TPT), has this week published a new disclosure framework for listed companies and financial institutions to align when publishing their Taskforce on Climate-Related Financial Disclosures (TCFD) transition plans. As reported by Environmental Finance, the disclosure framework recommends that climate transition plans should be based on three key principles: ambition, action and accountability, and aims to be a gold standard framework that other jurisdictions may build on.

The publication of the new disclosure framework coincides with the publication of a new net-zero-focused report by the UN which called for a renewed impetus on emissions pledges – and more stringent enforcement within that. While only formed in the first part of the year, the group’s raison d’etre is the combatting of greenwashing.

Sustainable bonds increase their share of the bond market

Despite a drop in the issuance of sustainable bonds, they now account for 16% of the overall bond market. A report from Moody’s Investor Service has shown that, while green, social, sustainability and sustainability-linked (GSSS) bonds volumes are down 17% in the year to date, each are outperforming the broader market which has dropped by 27%. Green bonds continue to make up the largest share of the sustainable bonds market, accounting for over half of total volumes in Q3. With the current macroeconomic and geopolitical landscape continuing to put pressure on debt issuance, Moody’s report highlights that the regulatory changes and improved guidance for sustainable investment issuances may positively impact the GSSS market. These include recent reports on how the EU taxonomy can be integrated into sustainable bond frameworks, proposals on sustainable investment labels by the Financial Conduct Authority (FCA) and the publication of the China Green Bond Principles.

Corporate governance reporting improving, but not quickly enough

The Financial Reporting Council (‘FRC’) has published its 2022 Review of Corporate Governance Reporting, containing the findings of its assessment of 100 FTSE 350 and small cap companies’ reporting against the UK Code. While there have been improvements in the overall quality of reporting, and the number of companies providing additional context in their reporting of deviations from the UK Code, many continue to use boilerplate and vague language in their explanations. Workforce engagement issues continue to be high on the agenda of most boards, albeit with a focus on flexible working matters. Furthermore, wider stakeholder and shareholder engagement outcomes could benefit from more detailed reporting, particularly on the “outcomes and impacts of their initiatives/actions” and explaining how their views were taken into consideration.

While this represents a cornerstone of corporate governance, a recent report on the state of stewardship highlighted the disconnect between institutional investors (and proxy advisors) and company leadership, who criticised shareholders for the lack of constructive dialogue based on the context of the company. In response in the FT this week, an opinion piece questioned boards’ consideration of investors as an inconvenience. After all, it is the latter that elects the former.

Guidelines for UK Pay Updated

Yesterday, the Investment Association (IA) published guidelines for expectations around remuneration for 2023. The Principles of Remuneration have a significant impact on the voting practices of institutions in the UK and – albeit to a slightly lesser extent – Ireland. Perhaps unsurprisingly, the Principles focus on the backdrop against which pay decisions are being made: cost of living, inflation and the stakeholder experience. Likewise, the guidance points to concerns about potential windfall gains – pay-outs under three-year plans granted during Covid-depressed share prices – while asking for proof of how ESG measures are integrated into strategy in a quantifiable manner, guarding against pay-outs for narrative-based performance. While the guidelines strictly apply to the UK, they tend to reflect the evolution of investor views globally and are worth reviewing for businesses in other markets.

BlackRock CEO forecasts new era of shareholder democracy

Larry Fink has written to clients and CEOs about his plans to allow retail investors to vote their shares on proposals made at BlackRock’s portfolio companies. Currently, BlackRock’s sizable stewardship team holds near monopoly responsibility for voting the shares that it is a custodian of on behalf of investors – both big and small. In his letter, Fink outlines that he hoped that every investor would have access to voting choice and that this “revolution in shareholder democracy will take years to be fully realised, but it is one that, if executed correctly, can strengthen the very foundations of capitalism.” The move appears designed to differentiate BlackRock’s offering in an age of burgeoning digital activism on social and environmental issues. The move may also relieve BlackRock of some of the pressure it has received on the back of its voting power in recent months from political and activist stakeholders; however, it will likely be met with a range of views, with BlackRock’s voting policies being too conservative for some critics but too progressive for others.

CDP incorporates ISSB standards into evaluations

Earlier this week, CDP and the IFRS Foundation announced that CDP will incorporate the ISSB S2 Climate-related Disclosures Standard (IFRS S2) into its global environmental disclosure platform, with the standard set to be incorporated into CDP’s existing questionnaires. Earlier this year, the ISSB announced the launch of a consultation on sustainability disclosures following calls to introduce a standardized approach to global climate-related disclosures.

This announcement comes in response to growing demands for a unified sustainability disclosure regime, which investors believe will allow for greater evaluations of investments, and companies hope will reduce the annual ESG reporting burden. It is also the latest example of the growing significance of ISSB’s efforts to become the gold standard in sustainability reporting, given the wide-reaching impact of CDP’s evaluations.

In Case You Missed It

• Alternative asset managers and industry bodies in the private and syndicated credit markets launched the ESG Integrated Disclosure Project template to offer a baseline for leading lenders to develop their ESG capacity, identify ESG risks, and enhance transparency and consistency by providing a standard format for ESG-related disclosures..
• In an effort to reduce the carbon footprint of heavily polluting industries, Canada is examining a framework that would allow the issuance of additional types of ESG bonds, such as transition and social bonds. Keeping this in focus, C$5 billion ($3.6 billion) was raised in its inaugural green bond transaction priced in March.
• The megadrought plaguing the West is worsening and Lake Powell in Colorado could sink below a critical level heading into its third La Niña winter in a row with a below-average snowfall projected. To save time and water, federal officials are considering whether to release less water from the country’s two largest reservoirs downstream to Arizona, California and Nevada.

Gain insights and stay informed on ESG, sustainability, building back better or on any industry or topic that interests you here. To be added to the distribution list for our ESG+ Newsletter, please click here to input your details or email [email protected].