ESG+ Newsletter – 16th March 2023

This year’s “Letter” has been published

Larry Fink published his annual letter which has, for the past number of years, set something of a tone for the capital markets. For 2023, Fink is “writing a single letter to investors” but sharing it with all of BlackRock’s stakeholders, as they are “facing so many of the same issues”. The letter has, according to the Financial Times, become “required reading for corporate executives”. While the letter has for a number of years touched on issues such as climate risk and wider ESG concerns (and in 2022 included a specific section on ESG voting), there was no specific use of the term ESG in this year’s letter – and, the word, sustainability appearing only once; an issue noted by Responsible Investor. The toning down of ESG may be driven by criticism from the Republican party, which has claimed that BlackRock’s focus on ESG has impacted its ability to fulfil its fiduciary duty of maximising returns for shareholders. In response, Fink emphasises that, in spite of different views on how they should manage clients’ money, BlackRock’s responsibility is ultimately to its clients.

The issue of climate is not completely absent, however, and the letter does address the importance of disclosures on transition plans as Fink defends the push for firm-level climate disclosures. He highlights that clients expect to see data to assess the alignment of their portfolios with non-financial investment goals.

Fink also touches on the importance of – and current challenges to – corporate culture. He speaks to the risks associated with isolation and uneven reopening – specifically highlighting that they risk “eroding corporate culture and making it harder for employees who are new to the team to learn and grow.” He points to research by BlackRock which “shows a strong correlation between companies with better culture and values ratings compared to industry peers and their stock returns.”

How do sustainability leaders bridge the gap between claims and actions?

New research has revealed that, while senior leaders are continuing to build sustainability into their strategy and planning, there is still a gap between company sustainability claims and the actions they’re taking. The survey, conducted by FTSE 100 Smurfit Kappa in partnership with the Financial Times, gathered insights from 440 senior and executive business leaders across 11 major economies and revealed that while half of businesses have ambitious plans to achieve net zero, just 11% of those surveyed believe they have a robust and actionable sustainability strategy in place, classifying them as “sustainability leaders”. 

The findings also showed that transparency is the central differentiator which separates sustainability leaders from the rest. Clear alignment between actions and ambitions, measurement of progress towards net zero, and independent assurance of sustainability performance were noted as three key areas that are rewarded with greater trust from key stakeholders. The research also highlighted that almost a third of businesses (29%) may be leaving themselves open to accusations of greenwashing due to a lack of alignment between their actions and the stated sustainability ambitions. However, the growing impact of sustainability on company strategy is evident. More than half of those surveyed (61%) now state that sustainability is changing how financial performance is measured, while many also are building sustainability targets into leaders’ performance assessments and incentives.

Differing areas of focus for the 2023 AGM season

As we prepare for the 2023 proxy season, there are different areas of focus on each side of the Atlantic. While in the UK and Ireland, the focus remains on executive remuneration and board composition & effectiveness; in the US, shareholder proposals dominate. The number of shareholder proposals at this year’s proxy season in the US is expected to match or exceed the record levels of 2022.

At the same time, and as the far-right seeks to politicise sustainability strategies, the number of anti-ESG resolutions is also expected to grow. According to the Sustainable Investments Institute, shareholder proposals will likely fall into “three major buckets: climate change, corporate political influence and social policy that includes diversity and human rights”. In the UK, only five shareholder proposals made it to the ballot in 2022 (up from three in 2021). Moreover, 2022 proxy voting data shows that remuneration-related proposals continued to receive the highest proportion of dissent, and is set to remain a topic of significant scrutiny given its ability to show the important link between pay and performance. Our recent Governance Snapshot highlights the priority areas for the 2023 AGM season – and with an expectation for a significant focus on remuneration against the backdrop of a cost of living crisis. We will provide ongoing updates on votes and challenges as the 2023 AGM season progresses.

Key developments further shape ESG battleground narratives

The ESG geographic divide is becoming more pronounced. A recent pensions announcement by the Swedish government demonstrates the differing view Europe continues to hold versus the US where, despite the emerging realisation that ESG principles are additive to value, market and political hostility remains.

Sweden’s updated state pension approach, details of which were released by the Office of the Swedish Fund Selection Agency, now requires any participating asset manager for the $90bn pot to integrate ESG factors into strategies. The new system, which therefore enshrines ESG into state pension law, will, according to Bloomberg , see 150 funds picked for the capital pool – all of which will have to be classified as Article 8 or Article 9 under the EU’s Sustainable Finance Disclosure Regulation. The news comes amid new Bloomberg research which has noted that not only are US ESG fund flows waning, but the ownership of ESG exchange traded funds in the US has become concentrated to the point that  11 institutions owning 29% of ESG assets under management.

Fortunately, however, the truth is beginning to shine through. Research by the Kansas ‘Division of the Budget’ outlined last week that pension returns for the state could fall by $3.6B or almost 1% over the next decade if ESG considerations are removed from investment decisions in the state.

Women representation in Asia’s boardroom still far behind peers

According to research by Bank of America, women make up only 20% of boardrooms in Asia – just a 7% improvement over a 12-year period. The findings, covered by CNBC in conjunction with MSCI’s Women on Boards report, specifically points to the Asia-Pacific region as a laggard. The index provider’s 2022 progress report does recognise that transparency and disclosure quality has improved in Asia. This is a view shared by BofA, although the bank does cite that key areas such as wage gaps and employment are still broadly missing.

In speaking with CNBC, MSCI’s head of Asia-Pacific ESG & Climate noted that the region was later in adopting key diversity principles and may therefore take another 15 years for gender equity in boardrooms. For the 30% level which has become the baseline standard in the UK, due to the Hampton Alexander Review, MSCI is forecasting 2026. There has been progress to date, however,  with Japan and South Korea recording a sharp decline in percentage of companies with all-male boards after mandatory diversity quotas were set, while there is a very noticeable boom in women in leadership positions, too. The key here, as we have seen in other geographies, is coupling company level policy with generating investor pressure to fulfil diversity targets.

Global sustainability regulations to impact the US Supply Chain

Global regulatory bodies are continuing to build proposals and set standards for sustainability. These standards have varied levels of immediacy and requirements across different jurisdictions. For example, the US’s proposal set forth by the SEC on emissions reporting is still being debated, but implications of the EU’s Corporate Sustainability Reporting Directive are much more immediate.

Forbes highlights that the CSRD and the German Supply Chain act is going to result in EU companies needing to require their supply chains to help with the reporting of Scope 3 emissions. Warnings from Forbes and other organisations highlight how important it is for companies to prepare for CSRD and other ESG disclosure regulations by setting up methodologies and data management systems.

ICYMI

• EU draft law sets out moves to secure critical energy transition materials. The European Union is planning to introduce the Critical Raw Materials Act, which aims to set standards and promote policy designed to ensure Europe has the metals and minerals it deems necessary for its energy transition and defence. A core proposal will be the setting up of an EU-wide purchasing body to buy materials on behalf of companies and member states. The Act comes as an attempt to counteract President Biden’s Inflation Reduction Act and break the bloc’s reliance on Russia and China for energy transition minerals.
• £20bn over 20 years: UK Government confirms unprecedented carbon capture investment. The UK Treasury confirmed a commitment of public funding to man-made carbon capture technologies. The UK Chancellor will lay out plans for a two-decade investment plan in the carbon capture space, from which the UK can expect to capture 20-30million tonnes of CO₂ per year by 2030.
• Britain’s top private companies told to improve board diversity. For the first time, the UK’s largest 50 private companies have been asked to improve diversity on their boards by ensuring they have at least one ethnic minority director on the main board by December 2027. The review also announced that each FTSE 350 company should set a percentage target for senior management positions to be occupied by ethnic minority executives by December 2027.
• Bank of England to explore whether climate capital requirements are needed. In a report into its latest thinking into climate risk and regulatory capital frameworks, the Bank of England admitted there is “uncertainty over whether banks and insurers are sufficiently capitalised for future climate-related losses”, and that it would continue to “explore whether changes to the macroprudential framework might be appropriate” to help protect against climate risks.

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