ESG+ Newsletter – 13th January 2022

EU’s green rules face widespread criticism

The EU Taxonomy (Taxonomy) is a classification system which identifies ‘environmentally sustainable’ economic activities and came into effect on 1st January 2022. The EU intends for the Taxonomy to increase transparency and provide clear guidance on the activities and investments that can be labelled sustainable. Often heralded as a ‘game changer’ the Taxonomy has received widespread criticism in the past month, from claims of greenwashing to views that this legislation is too heavy handed and that the capital markets should lead the transition towards a more sustainable economy. The inclusion of nuclear energy and natural gas in the Taxonomy has caused controversy among some politicians and NGOs. The Economist argues that these inclusions, and the technical criteria outlined in the Taxonomy, are in fact sensible but argues that the Taxonomy in its current form will not have the desired effect of “unleashing the power of finance to combat climate change.” 

There are clear limitations to the Taxonomy – not all economic activities are covered, infighting on the inclusion of nuclear energy and natural gas persists, and the Taxonomy has yet to provide motivation for investors to finance activities that will support the transition to a low carbon economy. However, the impact of the Taxonomy should not be underestimated, with global standards on sustainability reporting set to be one of the key ESG trends of 2022. The Taxonomy is a first step in a suite of upcoming EU rules and paves the way for global sustainability regulation. All companies have been put on notice that – either now or over the near term – their businesses and activities will be labelled sustainable or not by the regulator of the world’s second largest economy.

Environmental concerns at the centre of pessimistic WEF Global Risk Report 2022

Environmental risks appear as the top concerns in both the short and long-term outlooks of The World Economic Forum (WEF) Global Risk Report 2022. The report, which was released this week, tracks risk perceptions among experts and global leaders in business, government, and civil society. This year, it identifies the top three risks over the next decade, which are: failure to act on climate change, extreme weather, and loss of biodiversity. It adds that a divergent economic recovery from the crisis created by the pandemic risks deepening global divisions. Overall, the report is striking in its pessimism – with a full 84% of respondents expressing broadly negative feelings about the future – and for its emphasis on the need to build “resilience ecosystems” to prepare for future crises. Separate reports recently published have also emphasised the scale of the environmental challenges by looking at the level of investment needed to tackle it. A study by a consortium of Chinese government, academic and private-sector organisations calculates a need for $75 trillion of investment over the next 30 years for China to reach carbon neutrality, dwarfing existing estimates.

The Bank of Japan follows through on green commitment with $18 billion of climate loans

Last year, The Bank of Japan signalled its commitment to tackling climate change and helping transition to a Net Zero economy with the creation of a new climate loan facility. Under the scheme, financial institutions could apply for zero-interest loans when lending to projects or companies that are tackling climate change. The Governor of The Bank of Japan, Haruhiko Kuroda, revealed during a speech at councillors of Nippon Keidanren (Japanese Business Federation) that The Bank of Japan had begun providing $18 billion in climate loans under the scheme. Additionally, it was highlighted that 43 financial institutions had qualified to tap the scheme, which is scheduled to last through to 2030, underlining the demand and opportunity for green financing in the market. These financial institutions will be required to disclose targets and actual results on green investment and loans from the scheme to ensure transparency and effective use of the capital.

As has been highlighted in previous editions of the ESG+ newsletter, banks have been coming under increasing pressure from investors to address their role in tackling climate change. The Bank of Japan’s zero-interest climate loans is a proactive fiscal policy that aims to deploy financing designed to combat climate change, reduce emissions and transition to clean energy.

JUST Capital rankings released – FTI included

The JUST Capital rankings were released this week, recognising companies for their efforts on 20 priorities for ‘just’ corporate behaviour that impacts workers, customers, communities, the environment, shareholders and governance. To produce the annual rankings JUST Capital conducts qualitative focus groups and quantitative surveys of a representative sample of the American public to understand what issues represent just corporate behaviour. The organisation also collects data on how companies in the Russell 1000 Index perform across these issues and develops a ranking model utilizing input from the survey results and the evaluations of corporate performance.

FTI Consulting is delighted to be recognised as part of the top 20% of the Russell 1000 companies in the United States and in the top 15 of all companies in the Commercial Support Services category.

Cybersecurity threats rise further

More than half of UK firms believe they are more exposed to cyber-attacks because of remote working, according to research published by the British Chambers of Commerce and Cisco. The survey, which had participation from close to 1,000 UK firms, revealed that one in 10 had experienced an attack in the past year. The move to hybrid working has increased the cyber-attack threat, meaning that organisations have needed to adapt their cybersecurity strategies to protect not only the corporate network, but also the kitchen table.

This research comes in the same week as cybersecurity was added as an emerging risk to the global economy in the WEF Global Risk Report 2022 (detailed above). The report described cyber attacks as becoming more aggressive and widespread and, similar to the research produced by British Chambers of Commerce and Cisco, pointed to remote working and the associated dependence on technology as a contributor to increased cybersecurity risk. While the report cites cyber threats as a short to medium-term risk, the report’s authors expressed concern that the issue wasn’t ranked higher and described it as a “blind spot” for companies and governments. Given the increased pervasiveness of cyber-attacks, companies need to ensure cybersecurity is ranked appropriately on their risk register and afforded board-level oversight

The role of investors’ stewardship programmes as the focus on the ‘S’ increases

Looking at 2022 through the ‘S’ lens, ESG Investor has outlined that topics such as worsening gender discrimination, lower pay for informal workers, and the broadening pay gap between the highest and lowest paid workers, have been exposed and exacerbated by the pandemic. However, changes in mandatory disclosures around social issues are improving access to data and increasing scrutiny of these topics. As investors increasingly turn to engagement as the most valuable tool to tackle different ESG issues, stewardship programmes are becoming pivotal in addressing social concerns at investee companies. The PRI announced in December 2021 the launch of a new collaborative initiative , that seeks to support investors in prioritising the “most salient human rights risks within their stewardship activities.” Investors have also expressed their concerns with the European Commission after it paused the legislation around sustainable corporate governance and due diligence on supply chain matters. While legislative advancements and shareholder collaboration play an important role in setting standards, the article reminds us that, even when passed, these legislative initiatives can be slow to drive behavioural change. There is, therefore, a prominent role for investors to set clear milestones for their engagement programmes as they set their ‘S’ priorities, towards driving meaningful change.

SEC hears that fund labels are often useless, comes under pressure itself

The global discourse on greenwashing continued this week with the Securities and Exchange Commission (SEC) receiving a new study from shareholder advocacy group As You Sow which claims that fund labelling is “often useless”. The study, spearheaded by the group and conducted by graduate researchers from the University of California, found that 60 of 94 ESG funds “failed to adhere closely to the principles” of ESG investing and that “one can’t tell the difference between a prospectus for true ESG offerings vs greenwashing mutual funds and ETFs”. Central to As You Sow’s position is the ask that all prospectuses be produced in a machine-readable format to allow for easy comparison – by automated means. CEO of the group, Andrew Behar, commented that As You Sow may be forced to file a petition if the SEC does not come through.

Bloomberg noted that the study emphasises the need for standardisation and uniformity in fund terms – seeking classifications to enable transparency and eliminate confusion. The article also cited a research note published by Morningstar’s head of sustainability in the US which stated that a significant proportion of greenwashing claims stem from the gap between investor expectations and a fund’s specific sustainable investing approach. The note places responsibility for this on the funds – noting that managers ought to do a better job of informing investors about their sustainable investing stance and strategy.

While committing to tackle issues in the market, the SEC Chair came under fire himself, Bloomberg Law reports, for his “aggressive” approach to pay talks with workers. In further evidence of the re-emergence of unions in the US, for a change, the securities regulator itself – as opposed to companies it regulates – is being put under pressure to demonstrate strong workforce practice.

Five biodiversity developments to watch in 2022

2021 saw increased recognition for biodiversity and natural capital through the emergence of new resources and frameworks such as the Taskforce on Nature-related Financial Disclosures (TNFD).  The focus on biodiversity is set to continue in 2022 and below are five guidelines to watch:

1. GRI and the European Financial Reporting Advisory Group: GRI and the European Financial Reporting Advisory Group are in collaboration to release an update to GRI’s biodiversity standard. They are aiming to release this by the end of 2022.
2. The Taskforce on Nature-related Financial Disclosures: TNFD announced its intention to create a biodiversity framework that it hopes will help companies move investments away from nature-negative activities. It will develop and deliver a nature-related risk management and disclosure framework for organisations to report and act on.
3. One Planet: Business for Biodiversity:Launched in December 2020, it focuses on a regenerative agriculture framework which will help companies report on outcomes and articulate specific objectives and benchmarks around regenerative agriculture in their supply chains.
4. CDP:CDP aims to update its questionnaire on biodiversity, developing its guidelines alongside both the new GRI standard and TNFD’s framework.
5. Convention on Biological Diversity: The treaty for the conservation of biodiversity signed by 198 countries is resuming after pausing due to the COVID-19 pandemic. It will meet in person in March 2022 to continue the Post-2020 Global Biodiversity framework.

In Case You Missed It

• Climate change is at the top of the ESG agenda, surpassing corporate governance and social issues, MSCI has revealed in their 2022 ESG trends report. The analysis also shows that ESG is now a prevailing part of investing, with both investors and regulators demanding harmonised standards, likely shaping the ESG debate in the year ahead.
• The lack of standards around ESG reporting poses a challenge to the global development of sustainable investment, China’s chief investment officer has warned. At the recent Asian Financial Forum, Weimin Ju, President and Vice Chairman at the China Investment Corporation, said that both investors and regulators have a responsibility to develop a uniform ESG evaluation and rating methodology.
• The UK Government has launched a public consultation on the requirement for developers to deliver at least 10% biodiversity net gain (BNG) from November 2023. The consultation aims to set out proposals of how BNG will work in practice, with the responses shaping the legislation, its processes, and guidance on the set target.

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