ESG+ Newsletter – 13th October 2022

Cybersecurity chiefs unprepared for increased board and leadership scrutiny

New research released by FTI today reveals the heightened pressure felt by chief information security officers (“CISOs” ), as company boards and leadership seek to improve oversight of cyber risks in the face of growing regulatory, investor and media scrutiny. As the executive with accountability for cyber risk, CISOs are increasingly having to present to boards on cybersecurity, with 85% of CISOs surveyed stating that the prominence of cybersecurity on the board’s agenda has increased over the last 12 months. Despite this increased prominence, the majority of CISOs (58%) surveyed revealed their struggle to articulate technical information and effectively communicate cyber risk in a manner that the board and senior leadership can understand. This disconnect between the CISO and board and leadership priorities may ultimately negatively impact an organization’s ability to effectively prepare and respond to a cybersecurity incident. The survey highlights that, while many company boards now recognise the importance of cybersecurity, ineffective communication between security leaders and the board may limit effective oversight and management of cyber risk. Establishing a reporting framework that enables consistent and structured engagement between the board and security leaders on cybersecurity can provide a common language for all stakeholders, a subject addressed in our recent paper on Building Effective Cybersecurity Governance.

Carbon markets receive fresh criticism

Carbon markets are ineffective. That is the opinion of Silicon Valley based financier and founder of climate tech investor DCVC, Zachary Bogue, who is also opposed to investing in businesses that make use of carbon offsets, citing that research has shown that they are ineffective. Bogue’s criticism is the latest in a long list, which includes that of Finnish NGO Compensate, whose conclusions included frequent “additionality” concerns. Additionality involves demonstrating that the impact of the carbon project was additional to what would have happened if the project hadn’t been undertaken. Compensate believes that the focus of the carbon market should be generating high quality offsets. This view is shared by the DCVC founder, who believes that there is a need for more transparency and accountability.

London Stock Exchange to be the first to set listing rules for carbon cutters

The London Stock Exchange (LSE) revealed on Tuesday that it has become the first major bourse to set listing rules for companies that finance carbon reduction projects. Under the new rules, a fund or company would have to issue a prospectus vetted by the FCA that gives details of the carbon emission-cutting project it wants to finance. While rival exchanges, such as Deutsche Boerse’s European Energy Exchange (EEX), have launched financial products such as futures contracts based on carbon credits, the LSE’s rules aim to encourage investment funds and operating companies to raise billions of pounds through LSE listings to fund climate-friendly projects. As covered previously by this newsletter, scepticism around carbon credits and their governance remain. While doubts persist, the IPCC’s sixth assessment report outlined that carbon removals will be critical in slowing the pace of climate change.

Water risk being integrated into the investment agenda

With increasingly unpredictable weather events, Blackrock views water security as an emerging problem for the developed world. Blackrock has developed a fund that invests in water related stocks, from utilities to companies that improve water efficiency. The fund’s product strategist, Omar Moufti, stated that “Thematic investment is long term, and the rationale behind setting up this fund is that we see it as a long-term structural growth opportunity”. BlackRock expects roughly 60% of properties owned globally by real-estate investment trusts will experience “high water stress” levels by the end of the decade. As the impacts of the climate crisis continue to be seen and felt, we may see similar thematic funds addressing these interconnected issues including water scarcity, biodiversity loss, and air quality.

The role of company leadership in the transformation of work

As this newsletter has previously covered, the growing focus on DE&I and overall employee wellbeing mean that employee matters are no longer an isolated HR topic, but instead an important component of a company’s strategy meriting a full seat on the Board. The pandemic has indeed transformed and shaken up the way people work, while also raising additional questions about why and how people work, at a time when workers are empowered with options rarely seen before. Talent retention has become a key focus for many companies, with many business leaders expecting a shortage of skilled labour by 2030. As companies adjust to the new form of work it is difficult to “envision a time when the CHRO role has been more important to an organization’s continued success than the present”.

This raises some considerations for companies as they navigate this period of change, where Boards should play the critical role of oversight and guiding the CHRO on some important topics including employee experience in a hybrid environment, with a focus on talent retention that ensures the short and medium-term needs of the business. Human capital management and culture are also important themes which should be considered at the board level, addressing generational imperatives, diversity needs and expectations and developing a culture that enhances strategy.

ESG score divergence: An Inconvenience or an opportunity?

Ratings that score companies based on ESG factors have been subject to significant controversy since they often diverge or disagree from one provider to the next. Critics have cited this divergence as part of their argument that ESG investing should be completely discarded. However, a recent Fidelity International article argues that there is a case to be made for a diversity of approaches to how investors assess a company’s sustainability. They point out that since separate ratings providers weigh multiple factors differently and assess different metrics, it is logical that different providers reach different conclusions. In fact, papers published by groups including the International Organization of Securities Commissions (IOSCO), Financial Markets Standards Board (FMSB), and International Regulatory Strategy Group (IRSG) broadly agree that a diversity of views, independent methodologies, subjective judgement, innovation, and competition can be beneficial to markets and investors. While standardisation and comparability have benefits and may be in the pipeline, market participants today need to do their due diligence to understand the process that underpins each ESG rating. In the meantime, investors should appreciate that divergence in ESG ratings also signals a diversity of views.

Aviation’s environmental impact under the spotlight yet again

Analysis from environmental non-profit, Carbon Market Watch, has claimed that leading European airlines are misleading passengers regarding carbon offsets. Many airlines have been providing environmentally conscious travellers with the option of purchasing offsets to cover the impact of their flight. However, according to this new study, almost all airlines are relying on cheap forestry projects in developing countries whose longevity is uncertain and are therefore unlikely to deliver sufficient offsets over the longer term.

Airlines have been facing pressure regarding their levels of carbon emissions, which have been rising steadily over the past twenty years, with aviation accounting for 2% of total global emissions in 2021. However, emissions are not the only aviation-related environmental concern. Contrails – the white vapour that trails behind airplanes – have also been found to be contributing to climate change by trapping heat from the Earth’s surface in the atmosphere. This week Delta Airlines and MIT announced a partnership to research ways to reduce and eventually eliminate contrails. Using a combination of data from Delta and an MIT algorithm, the group will examine how altitudes and flight paths can be adjusted to avoid the formation of contrails. This appears to be a low cost and effective means of reducing the environmental impact of aviation. However, according to Carbon Watch, the only way to truly reduce the impact of air travel is to take fewer flights – a measure that airlines are unlikely to promote any time soon.

Australian competition commission targets companies making misleading environmental claims

The Australian Competition and Consumer Commission (ACCC) has begun a crackdown on “greenwashing” by Australian companies after a global investigation found that as many as 40% may be fraudulent. The ACCC’s views the sustainability credentials of a product as a driver for purchasing decisions and claims that such false claims are a sign of uncompetitive markets. The ACCC plans to outline guidelines for companies so that any claims are clear, defined and always supported by strong evidence. The relative lack of sustainability reporting in Australia has led some to estimate that the percentage of false environmental claims in the country is much higher than the 40% global average. This intensification of scrutiny in Australia follows a similar global trend, with one of the most high-profile cases resulting in legal action against fashion retailers in the Netherlands.

In Case You Missed It

•  Leading proxy advisor, ISS, this week published the findings of its 2022 Global Benchmark Policy Survey; a survey which helps inform their policy review and development. ISS received 417 responses this year including 205 responses from the investor side and 212 from “non-investor respondents”. Feedback covers a wide range of issues from climate and D&I to remuneration. A more detailed analysis will be included in next week’s ESG+.
• A new study suggests that demand for sustainable investments is outstripping supply. According to the study, 81% of institutional investors in the US plan to increase their allocations to ESG products over the next two years — almost on par with Europe, where 84% said they planned to do so. This contrasts with reports of a growing backlash against ESG investing.

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