ESG+ Newsletter – 17th February 2022

Companies failing to support suppliers in improving ESG performance

Expectations for companies to mitigate ESG risks within their supply chains continues to increase, with new research from CDP highlighting that companies are failing to engage with suppliers on setting emissions targets. The research finds that less than 3% of suppliers to large corporates have approved Science-Based emissions targets in place, with more than half having no climate targets at all. This is despite almost 1,000 companies pledging to reduce supply chain emissions by setting scope 3 Science-Based Targets. When it comes to emissions, action in the value chain – or scope 3 – is critical since they can be more than 11 times greater than emissions resulting from operations.

But it is not just concerns regarding the ‘E’ in ESG for supply chains, with growing scrutiny of companies’ ability to effectively tackle concerns around the ‘S’ too – particularly tackling human rights issues. In December, President Biden signed the Uyghur Forced Labor Prevention Act into law, banning imports from Xinjiang and imposing sanctions on individuals responsible for forced labour in the region. An article from Bloomberg suggests that companies sourcing goods from China should immediately undertake a comprehensive review of their supply chains to ensure they comply with the new law. However, Human Rights should not be solely viewed as being far from home and, as forced stoppages becoming increasingly common in the US, companies should also be looking at controlled operations to ensure equity in labour practices.

Sustainability disclosure alignment in the balance for the EU and UK

With both European and UK regulators currently developing their respective disclosure rulebooks, the investment industry has warned of potential complications for investors if two different courses are charted. Financial institutions who manage money in both markets argue that differentiated approaches around interpretation and implementation can result in added complexity, confusion and cost for investors. It remains too early to tell the full extent of any future differences, although one significant point of divergence is the Financial Conduct Authority’s (FCA) use of five labels – in comparison to the three categories used in the EU’s Sustainable Finance Disclosure Regulation. As reported by the Financial Times , this is in spite of the FCA’s acknowledgement that many British firms have “already invested in systems and processes to classify their products”. Perhaps Britain can success where the EU has struggled to date, more effectively labelling funds and products for consumers, paving the way for a more seamless integration of clearer standards while finding a balance on rigidity of labelling.

The promise of a universal approach to ESG reporting

As expectations on companies to report on their ESG progress continues to grow from investors, Harvard Business Review has described this new reporting landscape as being more difficult to navigate for companies due to the diverging and wide ranging sustainability reporting frameworks that are in the market. However, the need for a uniform set of standards for measurement and reporting that addresses financial and sustainability topics is expected to be addressed by the International Sustainability Standards Board (ISSB), which was created in November at the COP26 summit by the IFRS Foundation. Its promise of a “global baseline for high-quality sustainability reporting” will further support the progress being made by the SEC in the US and in Europe with the Corporate Sustainability Reporting Directive. While alignment has become the keyword in terms of sustainable reporting, the debate around the best universal standard, be it the investor-focused ISSB or the stakeholder-centric model by the Global Reporting Initiative (GRI), is likely to continue. With the EU set to publish its own standards, being crafted in conjunction with the GRI, those who see immediate continuity of reporting on the horizon may be set up for disappointment.

Private equity – an ESG force for good?

The role of private equity in ESG has been a hotly debated subject. Some view its role as a facilitator for heavy polluting businesses to transition into the financial shadows – effectively offering these companies a carte blanche to continue operated without facing shareholder or public scrutiny. However, in a recent blog post, Vindi Banga, a Partner at private equity firm Clayton, Dubilier & Rice,  argues that private equity could help accelerate the incorporation of ESG into business models and practices. Vindi sees growth, across both financial and other non-financial metrics, delivering a higher valuation or returns – which should be music to private equity’s ears. While Vindi does articulate a positive vision for private equities role, he does concede that it has a “perception problem” of a ‘corporate raider’ that is solely focusing on improving operations and business models to enhance its financial returns for the short-term. However, as recognition grows that ESG considerations are linked to enhanced operational performance – and the resilience of business models – perhaps private equity and ESG proponents will increasingly become bedfellows.

Property sector under the EU spotlight

As EU climate legislation looks to be taking aim at tackling the environmental impact by the real estate sector, our Brussels office recently published a paper which looks at whether the industry is prepared. The report offers insights on the upcoming policy initiatives and standards, including the requirements on poor environmentally performing buildings to become more sustainable.

EU securities watchdog turns its attention to tackling greenwashing

In its newly released Sustainable Finance Roadmap covering 2002-2024, the European Securities and Markets Authority (ESMA) – the bloc’s securities watchdog – has identified tackling greenwashing and promoting transparency as one of three priorities. The other priorities are building regulatory capacity in the sustainable finance field and monitoring and assessing and analysing ESG markets and risks. ESMA said this would entail actions across several sectors, including investment management, investment services, issuers’ disclosure and governance, benchmarks, credit and ESG ratings, trading and post-trading, and financial innovation. With regards to greenwashing specifically, the Roadmap details that it would ideally tackle the issue “based on a complete and fully applicable legislative regime setting the boundaries of the type of market behaviour and practices that are and are not permissible” but that there was “a real need to address greenwashing without delay, even if all the legislative steppingstones are not fully in place yet”.

Retail investors demonstrate increasing commitment to ESG, despite lack of clarity

And the movement to tackle Greenwashing on a regulatory level may be timeless, as new research from Oxford Risk has revealed how wealth managers may risk losing clients because of a perceived lack of focus on ESG. 20% of retail investors surveyed said they already have, or intend to, move their investments because of this lack of focus. ESG funds stand to gain from this increased commitment with 40% of investors already moving some of their investments, including pensions, into such funds; while 61% of clients now ensure that at least some of their investments are in ESG-friendly products. Research from the Irish arm of Amundi has uncovered similar findings regarding the importance of ESG for retail investors, with half of respondents stating that they were willing to sacrifice a 10% return to make an impact on climate change. However, the research also reveals a lack of clarity around what responsible investing means, finding that only 11% of those surveyed knew what the term ESG stands for. While the appetite for sustainable investing amongst retail investors clearly exists, the investment industry may need to rethink their messaging to ensure they’re capitalising on this interest.

California is regaining leadership position in the US in decreasing emissions

California is regaining the influence it once had over one of the largest sources of US greenhouse gases, tailpipe pollution. An article from the New York Times reports California expects to end the sale of new gasoline-powered cars by 2035. This is particularly important as California is the largest auto market in the US.  The move is a continuation of the state’s efforts to re-establish its climate leadership position in the US, after they lost control in 2019 when the Trump administration took away California’s ability to set CO2 emissions rules that exceed federal standards. In January, California passed the Climate Corporate Accountability Act that requires companies with over $1 billion in revenue to disclose scope 1, 2 and 3 emissions. This update follows other changes made by the Environmental Protection Agency (EPA) to decrease mercury and address additional climate challenges. Looking forward, the EPA expects to decrease nitrogen dioxide emissions from cars, and continue to tackle hydrofluorocarbons.

In Case You Missed It

• Netflix Surpasses 50% Employee Representation for Women, Diverse Race & Ethnicity, ESG Today reports. The leading entertainment services company revealed new details of the composition of its global workforce, announcing that women now represent more than half of their employee base, with 51.1% of them holding director and above positions compared to 47.8% the previous year.
• Despite their ubiquity, ESG scores continue to cause confusion amongst investors – so what are investors still getting wrong? An article by MarketWatch aims at tackling five ‘misconceptions’ associated with ESG ratings.
• The Hong Kong government is selling up to $770 million in green debt directly to retail investors for the first time ever, Bloomberg reports. Retail investors will be able to purchase green bonds for as little as $1,281 as the city sets its sights on expanding its role as a sustainable finance hub.

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