ESG+ Newsletter – 11th November 2021

FCA announces new ESG strategy and a discussion on new standards

The Financial Conduct Authority (FCA), the UK’s financial regulator, has launched a new ESG strategy with the objective of driving “positive change”, including the transition to net-zero. The strategy, announced to align with COP26, sets out the FCA’s approach to supporting the transition to a more sustainable economy, working with listed companies, governments and international partners, as it believes that “Institutions large and small can use their business decisions, their innovation and creativity, and their voice and their influence, to encourage positive change.” The strategy, which has five core themes, Transparency, Trust, Tools, Transition & Team, seeks to not only address climate change issues and the transition to net zero, but to go beyond the environment and also incorporate social and governance issues.

As part of its strategy, the FCA has also launched a discussion paper to help investors put ESG matters at the forefront of their investment decisions, with the objective to develop clear and understandable criteria to classify and label investment products based on high-quality information and clear standards. The move by the FCA reflects the direction of travel in financial markets globally. Regulators across the world are working to bring greater certainty with respect to financial products (to limit ‘greenwashing’), and also bring clarity and cohesion around global reporting standards for issuers. In the short-term, there remains something of an ‘information overload’ on standards and where they are going but, ultimately, we will see alignment and common ground emerge on what is expected of both issuers and investors.

SBTi launches guidance for private equity firms to align portfolios with global climate goals

The Science Based Targets initiative (SBTi) has released new guidance aimed at supporting private equity firms align their portfolios with global climate goals. Alongside the launch of the new guidance, six private equity firms representing €130bn in assets under management, announced that they have set SBTi-approved targets aligned with 1.5°C. An additional five private equity firms have committed to having SBTs approved within two years. The announcement comes just two weeks after the SBTi launched the world’s first framework for corporate Net Zero commitments, aiming to add credibility to the increasing number of corporate Net Zero targets.

ESG credibility at risk from a failure to address supply chains

According to the Conversation, major rating agencies are not appropriately including evaluations of organisations’ supply chains when measuring ESG risk. Recent research found that most ratings treat supply chains as separate from topics such as carbon emissions, climate change risk, pollutants, and human rights. This means that ratings for these topics exclude impacts and risks within the supply chain. However, for many organisations, the greatest environmental impacts and social risks lie within those supply chains. The Conversation argues that whilst ESG rating agencies should redesign their methodologies to take global supply chain impacts into account, there is also a need for regulation to make disclosure on supply chain impacts mandatory, without which external stakeholders will remain blind to some of the most acute ESG risks.

Taking a data-driven approach to diversity

In an interview with the Financial Times Amanda Rajkumar – Head of HR Adidas – revealed how the company is using personal data as a part of a drive to improve diversity. Adidas was the subject of employee protests in 2020 due to perceived inaction on inequality and discrimination. The company’s then head of HR resigned in the aftermath of the allegations with Rajkumar taking the helm. While Adidas has taken some standard measures such as training employees on diversity and inclusion, Rajkumar has taken the controversial step of gathering employees’ ethnicity, nationality, gender identity and sexual orientation data to track diversity. It’s a bold move, especially for a German company where data privacy is highly protected. However, it allows progress on diversity to be clearly tracked and while the data won’t be used to make decisions, the act of gathering this data will indirectly influence promotions and career paths. For all companies though, it is a delicate balance, as this data falls under GDPR’s special category, meaning it must be carefully handled and can only be shared voluntarily.

Portugal bans contacting staff after hours

Portugal has introduced a new law that could see businesses facing fines for contacting staff outside of agreed work times. The new labour laws introduced by the ruling socialist party are intended to address changing working practices and work-life balances as a result of the pandemic, a core element of the S in ESG considerations. The new regulations will also force businesses to pay for expenses such as internet and electricity bills and will ban employers from tracking productivity outside of the office, something which would have significant ramifications for embedded systems at professional services firms. Parents will also have the right to work from home until their child turns eight. A “right to disconnect”, which already exists in France, was also rejected by MPs. Portugal’s move reflects a general move to regulate what has become the norm for most following the pandemic, with Germany, Italy and Slovakia also implementing rules on working from home.

UK Audit and Corporate Governance Review scaled back

The reform package that is set to mark the largest overhaul of audit and corporate governance regulation in the UK, is expected to be scaled back to ensure a more “business friendly” environment, as noted in the Financial Times. As the UK is working towards a post-Brexit economic recovery, ministers are concerned about the cost impacts of additional regulation in attracting and retaining established businesses in the UK. The consultation on audit reform has been aimed at “restoring public trust in the way businesses are run and scrutinised”, with a heavy focus on the need for stricter internal control frameworks. The requirement on executives to make an annual statement on the effectiveness of their internal control environment and procedures for financial reporting will be introduced but will not have to be signed off by an external auditor, contrary to what is required under the Sarbanes-Oxley Act (SOX) for US corporations, hardly the home of anti-business regulation. Instead, this requirement is expected to fall under the UK Corporate Governance Code, as it would carry less weight and be more difficult to enforce. As part of this review, the new audit regulator Audit, Reporting and Governance Authority (ARGA), will enforce new rules governing company audit committees with fraud and directors also coming under its remit, and is expected to replace the Financial Reporting Council (FRC). This move has raised concerns from accounting firms, as a failure to strengthen the rules around internal controls will undermine the wider package of audit and governance reforms, and ultimately their role in the assurance process. Strong corporate governance is recognised as a cornerstone of the ability to attract capital; and, we wonder if doing everything to attract business may harm those same businesses’ ability to attract investors.

In Case You Missed It

• AXA Investment Managers said that it will apply a “climate lens” to its investment decisions to divest from companies that are slower on the path of a tangible sustainable transition. Environmental Finance reported that AXA IM engage with “climate laggards” from next year, to “define clear objectives and monitor actions taken until 2025”.  The firm has also decided to exit all coal investments in OECD countries by 2030, and throughout the rest of the world by 2040.
• Company boards lack the expertise to address sustainability issues such as climate and diversity, and that boards would benefit from replacing some directors, according to new research by PwC ‘Board effectiveness: A survey of the C-suite’. From 550 senior executives interviewed, only 12% of executives responded “very well” when asked how well boards understand company ESG risks, while a large majority said that their boards do not spend enough time on key sustainability issues such as climate (73%), labour and human rights (67%) and diversity and inclusion (59%).
• UK retail investors have poured over 4.3bn into their responsible green funds in the three months to the end of September, the Financial Times reported. The record amount of quarterly investment on record has sparked the debate around inconsistent labelling in sustainable investment products, with the Financial Conduct Authority launching a process to clean up the labelling and disclosure — warning that more consistency was needed.
• The UK announced its commitments to monitor, review and improve opportunities for women at the top of British business, IR Magazine reported. While new targets are yet to be announced, UK business minister Paul Scully said that “companies shouldn’t take their foot off the gas” when it comes to improving diversity as “evidence shows that more diverse businesses are more successful businesses”.

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