ESG+ Newsletter – 12 December 2024

In our second last newsletter of 2024, we review research on ESG news and links to retail investor trading, look at growing convergence in reporting frameworks globally, challenges in analysing human rights and traceability risks supply chains and, finally, the impact climate changes risks are having on insurance costs and premia. 

Retail investors trade on ESG news 

“Retail investors and ESG news” is the title of a new academic study just published in a top tier journal and summarised in Yale Insights. The authors investigated how retail investors have traded around 54,000 distinct ESG-related news events for nearly 3,300 publicly traded US firms between 2015 and 2022. The research looked to understand whether retail investors made investment decisions based on ESG factors and, if so, whether these decisions reflected non-financial motives, such as being socially responsible, or if these decisions were financially motivated. Their findings aligned with the second hypothesis, with retail trading increasing by 6% on ESG news days, compared to their determined “no news” days. The researchers also found that retail investors purchased more shares when the implications of the news were positive for the stock’s price performance and sold more shares following news that was bad for the stock’s price. In addition, the study reports that news related to leadership and governance affected retail investing the most. Overall, the study provides additional evidence that disclosure around ESG factors continues to have an impact of trading, and not just confined to more sophisticated investors with established views on the merits – or not – of ESG factors when evaluating companies.

Global momentum builds for standardised climate reporting 

As global efforts to standardise climate reporting accelerate, regions and nations are taking significant steps to align with emerging disclosure frameworks. The APAC region is rapidly advancing in adopting climate-related financial disclosure regulations aligned with the International Sustainability Standards Board (ISSB). According to a recent report by the London Stock Exchange Group (LSEG), 13 APAC jurisdictions have already adopted or drafted ISSB-aligned regulations, set to be rolled out by 2025. APAC companies are the second most ISSB-ready globally, making strides in foundational climate disclosures, such as greenhouse gas emissions and basic risk assessments. However, advanced metrics—like transition plans and climate-related financial exposure—remain areas for improvement.  On that note, Switzerland is strengthening its sustainability reporting framework with new proposals requiring companies to align disclosures with ISSB or EU’s ESRS standards. A key addition includes mandatory net-zero roadmaps to support Switzerland’s 2050 climate target, featuring interim science-based goals and financial sector obligations to align capital flows with net-zero commitments. The proposals would amend the current Ordinance on Climate Disclosures, with initial reporting by large companies beginning in 2025.  

As ISSB-aligned standards take effect globally in 2024, APAC’s readiness and proactive efforts such as those seen in Switzerland, signal a global shift toward standardised reporting. The combined focus on foundational disclosures, advanced metrics, and net-zero planning will drive transparency, helping organisations manage climate risks and align with international sustainability goals. 

Murky waters for seafood supply chains, finds FAIRR report 

Seafood companies must stop floundering when it comes to supply chain transparency, Future Portfolio Advisor reports. After speaking with seven global seafood companies, FAIRR has found in its engagement report, Tracing Risk and Opportunity: The Critical Need for Traceability in Today’s Seafood Supply Chains, that only two businesses have made traceability commitments covering all operations and none have shared their progress towards these pledges. Without supply chain tracking, the links between seafood products and environmental and social issues, including human rights violations, habitat destruction, and overfishing become blurred. These unclear links also leave potential for illegal, unreported and unregulated (IUU) fishing, which is how 20% of seafood is caught globally. Therefore, consumers cannot be sure that the seafood products they buy are sustainably sourced. The issue of traceability has resulted in the Food Safety Modernisation Act (FSMA) in the U.S. and Fishery Products Distribution Act in Japan, meaning that businesses must demonstrate that their products are sustainably sourced. Sofía Condés, director of investor outreach at FAIRR, noted that transparency is increasingly becoming an investor issue, calling the lack of traceability “an escalating financial and reputational risk”. FAIRR, and the 35 investors representing £5.1trn in combined assets who supported the engagement report, are now entering ‘Phase 2’ of engagement. The goal is that their efforts will encourage seafood companies to stop letting transparency slip through the net, and instead act proactively to achieve better traceability and disclosures. 

EU and US rules push companies to address modern slavery in supply chains 

This week the Financial Times explores modern slavery and supply chain due diligence as the issues come under increased scrutiny from investors and companies. A key driver of change is the EU’s Corporate Sustainability Due Diligence Directive (CSDDD), adopted in July 2024. The regulation requires European companies, and foreign firms with significant turnover in the EU, to identify and address potential human rights abuses across supply chains, including product manufacturing and raw materials. France, Germany, and the Netherlands already have similar laws in place, and though the CSDDD won’t be fully implemented until 2027, large multinationals are already warning investors of its impact and risks in regulatory filings. Similarly, in the US, the 2021 Uyghur Forced Labor Prevention Act targets forced labour in China’s Xinjiang region and is also having an impact. By June 2024, US Customs and Border Protection had stopped over 4,000 shipments worth more than $3.6 billion for enforcement review. In May, a Senate report alleged that cars and components from BMW and Jaguar Land Rover included parts linked to Uyghur forced labour, highlighting the growing challenges for businesses and investors. For investors, modern slavery has become a significant legal risk requiring action and companies should be prepared for questions on the topic. For companies, early preparation for the CSDDD – supplemented by local law requirements – could offer a competitive edge. Aligning this work with preparations for the Corporate Sustainability Reporting Directive (CSRD) could streamline compliance, as companies analyse material issues, assign internal ownership and collect data with both directives in mind. 

Research shows significant cost of climate change to global insurers 

Insurance industry research has found that top companies within the sector suffered $10.6bn of losses last year which were directly attributable to climate change. The report, by NGO backed campaigner Insure Our Future, is based on a review of 28 of the largest insurers and further concluded that that the total cost of climate change across the past two decades is estimated at $600bn, over a third of total global insured weather losses.   

For context, the reviewed group that experienced $10.6bn of losses also saw combined direct premiums of $11.3bn from underwriting for commercial fossil fuel clients in 2023. For more than half of the companies, losses exceeded the incoming premiums – which account for under 2% of the total. A key question raised by Insure the Future, therefore, is why the sector is not using its influence to protect the other 98% against climate risks. This was emphasised by industry leading figures that supported the publication, who called for insurers to recognise the true risk of climate change, not only to society but their own business models and clients. The report included four core recommendations, following the findings, including of transition and scenario planning, regulatory oversight of management of risks, and policy implementation supporting protection of communities.   

ICYMI 

• Wind Europe reports that, Denmark’s latest 3 GW offshore wind auction round ended without any bids. The report goes on to argue that the industry needs healthier pricing and fairer risk allocation.
• Know ESG notes that SAF Production has increased but continues to fall short of the level needed to achieve net zero emissions for the aviation industry.
• Sustainability Mag reviews the sustainability of premier league clubs, with Brentford, the club with the second smallest ground in the league, have topped the sustainability table. In December, the club published its first-ever sustainability report, revealing a bold strategy to address climate change and foster sustainability within professional football.