ESG+ Newsletter – 17th June 2021

Child labour increases to 160m worldwide

With the world recognising World Day Against Child Labour on Monday, leading NGOs have warned that progress to end child labour has stalled for the first time in 20 years.  A recently published report by the International Labour Organization (ILO) and UNICEF, highlighted that the number of children in child labour has risen to 160 million worldwide – an increase of 8.4 million children in the last four years and a reversal of the downward trend that saw child labour fall by 94 million between 2000 and 2016. The report highlighted that the economic implications caused by the COVID-19 pandemic has resulted in more children being forced into the worst forms of child labour due to job and income losses among vulnerable families. Speaking about the report, NICEF Executive, Director Henrietta Fore, stated that “global lockdowns, school closures, economic disruptions, and shrinking national budgets” have forced families into making “heart-breaking choices.” As highlighted by the report, child labour remains a serious problem across the world. While there are certainly higher risk sectors and industries, the globalised nature of supply chains means modern slavery and child labour are significant risks for all businesses. Supply chain due diligence has risen up the agenda in recent years, and this report is likely to increase investor and stakeholder scrutiny further.

Focus on treatment of employees to the fore

As the UK economy and society reopen, a range of issues around labour standards and precarious working conditions are coming to the fore. People Management reports that speaking virtually at a conference of the GMB Union, Labour Party Leader Sir Keir Starmer said that so-called ‘fire and rehire’ tactics should be outlawed, calling the practice a “truly shocking” way to treat employees who have worked through the coronavirus crisis. The practice is used in contract renegotiations where the employer terminates the employee’s contract and immediately re-engages them on new and often less favourable terms. A recent report by Acas found that although these techniques existed before the pandemic, COVID-19 has seen them become more commonplace as companies have been forced to radically rethink their business models. Experts told People Management that firms need this “last resort” option but that both employers and employees must be flexible in contract negotiations. Starmer’s intervention follows a number of high-profile uses of the practice which have been met with anger by trade unions. Meanwhile, a joint report released by the Trade Union Congress (TUC) and Race on the Agenda (Rota), suggests that women of colour are almost twice as likely to be on zero-hour contracts as white men. The TUC general secretary, Frances O’Grady, told The Guardian: “This is what structural racism at work looks like – BAME workers getting trapped in jobs with the worst pay and the worst conditions, struggling to pay the bills and feed their families.” As the focus on social justice and D&I reverberate across the globe, company actions on the treatment of employees will continue to face increased scrutiny.

Fuel tax on the EU agenda for aviation and automotive sectors – but will it change behaviour?

As the EU embarks on designing and implementing policies that will help reduce its carbon emissions to reach its climate targets, some nations are lobbying for stricter decarbonisation of heavy emitting industries such as aviation and automotive sectors. Bloomberg reported that the German government submitted a position paper to the European Commission which advocated for increasing pressure on manufacturers to introduce more climate-friendly battery-electric or hydrogen cell vehicles, viewing this as a “decisive lever” in lowering carbon emissions and achieving a target of greenhouse-gas neutrality. The paper also advocated for the removal of airlines’ free CO2 allowances as part of European emissions trading, which some airlines avail of free of charge. However, there appear to be diverging views amongst European countries and citizens with a recent referendum in Switzerland rejecting a proposed “carbon dioxide law,” which would have increased fees and taxes on internal combustion engine-powered vehicles and on airline tickets, both of which produce greenhouse gases. Absent the rapid development and production of electrical and carbon neutral vehicles across the automotive and aviation sectors, it appears that the EU favours introducing new laws and strengthening existing ones that focus on increasing the costs associated with intensive emitting sectors. However, whether these taxes lower emissions by materially reshaping consumer behaviour or are just absorbed as an additional cost, remains to be seen.

Natural capital has its first reporting framework

Another day, another framework. The British Standards Institute (BSI), the UK National Standard Body, has published the first framework for natural capital accounting. This standard, named “BS 8632: Natural Capital Accounting for Organisations – Specification” has been developed by experts involved in environmental economics, forestry, natural and social capitals and environmental science, with the purpose of supporting organisations in understanding how their operations materially impact and depend on nature. Investors, companies and advisors can benefit from the comprehensive guidance on reporting which outlines specifications, terminology, principles, steps and outputs of natural capital accounting. The BSI additionally claims that this framework provides a systematic and verifiable approach for users to prevent greenwashing.  BSI’s Head of Environment, Social and Governance Standards, David Fatscher, commenting on the release stated: “By combining financial, environmental and socioeconomic information, natural capital accounting can reveal the value of nature to organizations and society, and importantly, the value of organizations’ impacts on nature. The purpose is to enable better integration of natural capital considerations into financial and other business analysis”.

Stock performance and ESG ratings

The link between how companies are rated on their ESG efforts and share performance is not straightforward, at least not over the short term. The Wall Street Journal’s analysis on share performance for 500 US companies between 2020 and 2021 and ESG ratings assigned by global providers found that there is no consistency in how stocks are scored on ESG by the rating agencies. The research explains that the disparity lies in the different data sets utilised and methodologies implemented by providers, which are additionally tied to their clients’ bespoke ESG products. A connection between market performance and ESG ratings is also unclear. For example, the share price over the first half of 2021 for top-ranked companies at Sustainalytics rose by 26%, while stocks classified as average ESG performers by MSCI spiked also. Rating agencies point to longer timeframes rewarding companies that have plans to address environmental and social issues, such as decarbonisation and human capital, based on long-term strategy. These companies are also more likely to have better performance in the “bear market”. Bloomberg Green this week also attempted to dig deeper into the ratings and ESG reporting of large companies, with a study from Chicago Booth attempting to identify the most commonly used measures as a means of bringing a level of consistency to ESG analysis.

FTI’s Spotlight on Sustainability Series: Betterment CEO Sarah Levy

As the world clamours for better investment strategies that align with investor values, in this week’s Spotlight on Sustainability Series FTI Consulting spoke to Sarah Levy, Chief Executive Officer of Betterment, a leading innovative financial services company that’s introducing investors to ESG portfolios. In the interview, Sarah discusses Betterment’s ESG strategies and how it has evolved its thinking in the space, its customer demand for sustainable portfolios, how the company’s Climate Impact portfolio is meeting the needs of climate-conscious investors in the near and long term, and how Betterment plans to continue its momentum in the ESG space. You can read the full interview here.

Enhanced E&S requirements will align disclosure for Japanese companies to Europe and US

A revised version of Japan’s Corporate Governance Code (Code), including enhanced requirements on climate and diversity, came into effect on 11 June. The updated Code, published by the Tokyo Stock Exchange, recommends that companies listed on the Prime Market segment provide disclosure on their diversity policy, set measurable targets and report on their progress in improving female representation.  Environmental and climate risks are also a focus. Prime Market-listed companies are now required to discuss climate risks and opportunities in their operations in line with the Task Force on Climate-related Financial Disclosures (TCFD) recommendations or equivalent frameworks; the latest example of the growth in prominence of TCFD. Recommendations on developing a basic sustainability policy and disclosing initiatives in this area are also set out by the updates. With recent difficulties at some of Japan’s most prominent businesses, this revisitation jointly made by the Financial Services Agency and Tokyo Stock Exchange will look to bring the corporate governance standards at the largest Japanese companies in line with US and European frameworks on female representation and environmental disclosure.

In Case You Missed It

• Only 6% are completely confident in their current abilities to foresee and respond to future disruption, a new report from Accenture shows. The study also found that 88% of companies have a clear picture of the challenges they face today, with more than half (58%) saying their business model will change over the next year.
• Progress on increasing racial diversity on boards stagnated in the two preceding years, according to a new study by the Alliance of Board Diversity in conjunction with Deloitte. While Asian, Hispanic, and Black women directors made the biggest percentage increases since 2018, the research shows that of 974 board seats, 81% were filled by White directors.
• Australia is in no rush to join the global stampede to green bonds, Bloomberg reported. During a speech, Rob Nicholl, chief executive officer at the Australian Office of Financial Management, said that “Green bonds are just a tiny part of the total pool of global assets right now”. The debt management office has come under criticism for Nicholl declarations, but Australia is not the only country its reticence toward green sovereign bonds, was the U.S haven’t added green bonds into the Treasury’s list of products to explore yet.

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