ESG+ Newsletter – 16th September 2021

Cybersecurity disclosures under SEC scrutiny

On 30 August, the US SEC sanctioned eight investment advisory firms for cybersecurity failures which resulted in the exposure of personal data belonging to thousands of their clients. The firms were found to have breached the “Safeguards Rule” for protecting confidential client data and were each required to pay penalties of up to US$300,000. This action is a sign that the SEC is both increasingly monitoring but also penalizing companies for cybersecurity breaches.

The SEC considers data breaches material, which means that firms must disclose full details of these breaches in public filings. The SEC’s orders against these firms show that they are specifically examining whether firms’ published cybersecurity policies and procedures are consistent with the actual protections that they have in place. They’re also looking closely at public statements, and even internal disclosures, with vague terms such as “unauthorized access” or “exposure of data” seen as particularly problematic when a firm is aware of the full extent of the breach.

This recent action highlights that organisations must treat cybersecurity breaches as seriously as other disclosure obligations or, in certain circumstances, perhaps more so. While the SEC ponders what other factors may constitute material issues for business, the best defence for businesses is to prepare for further attacks, not just to avoid breaches but also regulatory punishment.

IA warns of data gaps with proposed TCFD reporting under the FCA proposals

In June 2021, UK’s FCA released two consultations proposing new rules on climate-related disclosures. In response to this, the Investment Association (IA) welcomed the proposal but also raised concerns around misleading disclosures, mispricing of assets and misallocation of capital. The concerns are related to data gaps and the reliability of data. The proposals require asset managers, life insurers and FCA-regulated pension providers to produce climate-related disclosures aligned with the Task Force on Climate-related Financial Disclosures (TCFD). The IA believes there is a need for “greater coherence” around the approach to TCFD reporting and there is a “mismatch” between the mandatory and granular nature of the proposals on asset managers and owners. Concerns around data reliability, consistency and comparability in the ESG space but with time have not been fully addressed but nothing is static and strides continue to be made to increase understanding, measuring, reporting, consistency and standardisation.

Spotlight on Sustainability: US Bank’s Reba Dominski

As part of FTI’s Sustainability Series, we spoke with Reba Dominski, US Bank’s Chief Social Responsibility Officer and President of the US Bank Foundation. In line with global trends, Dominski points to the increasing focus on ESG in US banking as being driven by stakeholders, in particular investors who want to see that banks are considering the impact of business, but also regulators and legislators.

In terms of efforts and impact, Dominski points to a new racial equity bond that supports housing developers. She also describes a project that supports both environmental and social issues by providing grants for solar installations for tribal communities and by awarding scholarships through the American Indian College Fund for students pursuing studies related to solar energy. US Bank also finances Renewable Energy Tax Credits programmes and provides loans to environmentally-friendly businesses. Promoting financial literacy is also important to US Bank, which they’ve been tackling through several educational programmes for their employees. They’ve also appointed a dedicated financial education specialist who deals with external initiatives and partnered with non-profit Operation Hope on educational programmes for low-to-moderate individuals and families. Climate-related risk management, a growing area of focus for banks that provide funding to projects, has also risen up the agenda, underpinning that banks are potentially returning to their core purpose: helping both individuals and society address burning issues as a core of communities.

The full interview is available here.

Greenhouse gas emissions from ICTs to outpace air travel

A new study has revealed that the Information and Communications Technology (ICT) sector could be responsible for a greater share of greenhouse gas emissions than previously thought. A peer-reviewed study conducted by Lancaster University and the sustainability consultancy Small World Consulting highlighted that ICT’s proportion of global greenhouse gas emissions could be around 2.1% to 3.9% of global emissions, an increase on previous estimates of 1.8% to 2.8%. Previous estimates did not account for the full lifecycle of a tech device, including energy used in creating the device, the carbon footprint of manufacturers’ supply chains, the energy consumed while using the product and the environmental impact of disposing of devices.

The study follows on from the increasing scrutiny that the technology sector has been receiving in relation to its emissions and its growing energy requirements. It is likely that scrutiny will only continue to increase and could become a broader reputational issue for the ICT sector over time. There are already cited concerns about the energy demands of data centres; and, that associated with crypto mining. As a comparison the aviation industry has long been in the crosshairs of regulators new green agenda, becoming a poster child for sustainability reform and has been under significant pressure to reduce its emissions.

Without a global framework, is ESG investing subjective (or even real!)?

The market fallout appears to be continuing from the investigation into DWS by US authorities for allegations of ‘greenwashing’. The market panic set off by these allegations was immediately apparent, with asset managers becoming fearful that “exaggerated claims over sustainability-focused investments could become a mis-selling scandal across the industry.” However, Citi analyst, Nicholas Herman and his colleagues wrote this week in a research note that the allegations were “excessive” and that they “struggle to see how regulators can hold DWS to account, because sustainability requirements are subjective, making it hard to enforce, even if there was wrongdoing.”

The point raised by Herman in relation to the subjectivity of ESG and sustainability investing is something that Institutional Investor discusses in an extensive article on ESG investing and planetary impact. The article highlights that there is currently “no common definition or legal framework for ESG assets” that is recognised globally and that without a clearly defined framework “asset managers can construct portfolios branded as ESG in any way they like.” While there has been a clear regulatory push in the EU to curb greenwashing, many regulators around the globe are still playing catch-up which has allowed “greenwashing in the asset management industry to continue unabated.” As this newsletter has outlined previously, as the focus on both issuers’ and investors’ ESG practices and reporting grows, it is likely that scrutiny of perceived greenwashing is going to increase.

ISSB to set up by COP26 with a focus on climate first

Lee White, Executive Director of the International Finance Reporting Standards (IFRS) Foundation revealed he is hoping to have the new International Sustainability Standards Boards (ISSB) set up by  COP26. He said COP created a timeline and momentum to “get to the point to saying the conditions of success have been met and the new board has been created, on the way to global baseline standards everyone can use”. The FCA has shown support towards this development as have others during the consultation period, highlighting the growing support of global harmonisation. Based on the positive feedback, the IFRS Foundation is moving towards an international board that can create global standards on sustainability to replace voluntary ones. According to White, the priority is on climate, with hopes to have a standard in Q4 of 2022. There will be widespread hopes the ISSB can bring about standardisation across sustainability reporting which has long been a concern across the industry.

Mainstreaming biodiversity requires commitment to transparency – Robeco

A sustainability investing specialist has said that ensuring that the Nature Action 100 (NA100) comes of age like its climate counterpart (CA100) will require transparency of the outcomes of engagement with companies on their biodiversity impact. Peter van der Werf, senior manager of engagement at Robeco, told Environmental Finance that while it is desired that biodiversity impact will eventually be discussed in a mainstream way like climate change, “it is less well understood, less well captured in terms of data and in terms of ability to report”.  In order to address this in advance of the arrival of the Taskforce on Nature-related Financial Disclosures (TNFD) two years from now, awareness needs to be created among companies of their dependencies and impacts on biodiversity to the extent that this is reflected in company reporting, policies and corporate governance frameworks.

Van der Werf, who according to Environmental Finance is a driving force behind the NA100, added that while NA100 will look to CA100 for learnings (such as disclosure of real-world outcomes), that weighing up biodiversity is a somewhat more complex challenge. This, he says, is because the geospatial, local context that is very important, as to where the impact really is made –requires more choices in terms of how specific biomes or specific pieces of that impact chain are outlined. Whether the investors behind NA100 can bring it into the mainstream remains to be seen but given that Robeco developed a stewardship programme on deforestation as recently as last year, there is surely some cause for optimism. Furthermore, companies should not wait for a data panacea before evaluating the touchpoints between their operations and biodiversity.

Record number of environmental activists killed for second consecutive year

A record 227 people classified as activists working to protect the environment and land rights were murdered last year, according to a report by the campaign group Global Witness. Almost a third of the murders are allegedly linked to resource exploitation in sectors such as logging, mining and large-scale agribusiness. Almost 75% of the attacks took place in the Americas – with 7 out of the 10 highest countries located in Latin America. Global Witness also stated that this figure was likely to be an understatement as a result of growing restrictions on journalists. The report calls on the global business community to do everything it can to ensure that “they are not causing, contributing to, or benefiting from these attacks, whatever the costs.” In particular, businesses are asked to:

• Publish and implement robust due diligence systems to identify, assess, prevent and mitigate human rights and environmental harms throughout their supply chains and operations.
• ·Adopt and implement a zero-tolerance stance on reprisals and attacks on land and environmental defenders.
• Provide for and facilitate effective remedy processes when adverse human rights and environmental impacts occur.

As the risk to companies in respect of their human rights due diligence is naturally higher in areas characterized by high levels of social inequality and for various geopolitical reasons, weak government institutions, companies must now also accept that communities in these areas are awake to the fact that they are in the most immediate climate-related danger.

NYSE To Co-Launch New NAC Sustainable Asset Class

On 14 September, the New York Stock Exchange announced a partnership with the Intrinsic Exchange Group to launch a new environmentally sustainable asset class called a Natural Asset Company, or NAC. Through NACs, governments, farmers, and other owners of natural assets will be able to form a specialised corporation that hold the rights to the ecosystem services produced on a certain plot of land, such as carbon sequestration or clean water. In making the services public on NYSE, the NAC will unlock the capital available on US public markets used for regular business uses of capital, such as financing transactions or share buybacks, but re-allocate those dollars towards sustainable conservation efforts through the NAC. In return, investors will gain access to a new form of sustainable investment that is intrinsically valuable and has yet to debut on US public markets, despite global natural assets production of around US$125 trillion annually. With Morningstar reporting that assets of ESG-related funds rose 12% to US$2.3 trillion from the end of March to late July, the NAC is part of a growing trend for ESG investments demanded by both investors and institutions alike.

In Case You Missed It

• This weekend’s English Premier League football match between Tottenham Hotspur and Chelsea has been packaged by the home side and Sky Sports as “the world’s first net-zero carbon football game at an elite level”. In order to make #GameZero happen, emissions from matchday activity, such as energy used to power the game and fan travel to and from the stadium will be minimised.
• Tesco will offer reusable packaging products, from brands such as Coca-Cola and Heinz, to reduce plastic waste, Bloomberg reported. The company partnered with Loop, a reusable packaging platform, and will include 88 name-brand products, as well as Tesco’s own-brand offerings. With the initiative, customers will be able to purchase items from the reusable range, and once finished, they can return the empty packaging to the store at no extra cost.
• The EU has pledged to increase financial support to poorer countries, aiming to help them fight climate change and adapt to its impacts, Reuters reported. In a policy speech at the European Parliament in Strasbourg, EU’s Commission President Ursula von der Leyen proposed an additional 4 billion euros for climate finance until 2027 and said that United States is also expected to step up, affirming that “closing the climate finance gap together, the US and the European Union, would be such a strong signal for global climate leadership”. 

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