ESG+ Newsletter – 18 January

Your weekly updates on ESG and more

In this week’s newsletter, we cover a range of macro and global trends. Starting with the continued push for greater action on biodiversity, we also look at the role of renewables in decarbonization, new reporting requirements in Australia and ask whether details on avoided emissions can support companies’ aims of attracting ESG-conscious capital. Outside of climate action, we ask whether ESG factors are adding to complexity in remuneration frameworks, delve into growing supply chain risks and analyse whether pressure on asset managers to align words and action will continue to grow. Enjoy!

Biodiversity continues rise to top of sustainability agenda

According to Sustainable Fitch, there has been an increase in bond issuances that list biodiversity-related measures among their eligible ‘use of proceeds.’ The research points to biodiversity conservation projects accounting for 16% of the value of ‘use of proceeds bonds’ in 2023, up from 5% in 2020. Arguably, the impacts on biodiversity and conservation of these bonds could be even greater when the bonds incorporate other environmental issues which minimise damage to biodiversity, such as pollution control, or water management. Despite the findings of this research, Sustainable Fitch notes that biodiversity metrics are infrequently featured as key performance indicators within sustainability-linked bonds. 

This research is just the tip of the iceberg in the rise of biodiversity and nature as a key issue for corporates, financial institutions, and governments. The finalisation of a Global Biodiversity Framework in Montreal in December 2022 has focused minds on biodiversity, nature, and how environmental impacts are connected. Reporting frameworks and guidance continue to emerge to support stakeholders, with the Taskforce on Nature-related Financial Disclosures (TNFD) announcing 320 early adopters of its nature-related risk and opportunity disclosure framework this week. As it moves into its second phase of building capacity and driving market adoption, the TNFD also announced the advancement of a publicly accessible facility for nature-related data. But it’s not all about the TNFD, the Global Reporting Initiative (GRI) also plans to launch an updated biodiversity standard at the end of January. This flurry of activity around biodiversity reflects the scale of the impact of biodiversity loss and the urgency to assess, report and mitigate nature-related impacts. 

Issues of forced labour in fashion companies’ supply chains 

A new report from the Business & Human Rights Resource Centre is alleging evidence of forced labour in the supply chains of 46% of fashion companies. In authoring the report, the centre benchmarked 65 of the world’s largest clothing companies and found that the average score for protecting supply chains against forced labour was 21 out of 100, with over 20% of companies only scoring five out of 100 or less. The allegations centre primarily around the use of Uyghur forced labour by these companies within their supply chains, either directly or indirectly. According to KnowTheChain, increased conflict, the climate crisis and economic instability are increasing the risk of forced labour. In response, the entity is calling on these companies to implement stronger measures to prevent human rights violations from occurring in the first place, and to establish more robust disclosure and grievance processes to protect against further transgressions. However, there were some positive findings from the report, with improvements in transparency across some larger companies, and progress overall in the supply chains of Asian companies. In a briefing for investors KnowTheChain called for more engagement by investors on human rights abuses and shared sample questions for investors to use. The findings of this benchmark study should serve as call to action for companies to act on supply chains issues in the near term, particularly with the introduction of the EU’s Corporate Sustainability Due Diligence Directive, and its scope to penalise companies and directors, on the horizon.

Avoided emissions can play a role in attracting capital

Under the European Sustainability Reporting Standards (ESRS) and International Sustainability Standards Board (ISSB), as detailed by Environmental Finance, companies are not required to detail ‘avoided emissions’. Avoided emissions are defined as greenhouse gases that are avoided due to a company’s products or services, as a means of demonstrating impact of a company’s operations. While there are instances of avoided emissions being a useful barometer, such as evidence that shifting from legacy products to innovative technologies results in a lower carbon footprint, there has also been criticisms from some quarters that companies are using such terms to oversell their efforts to reduce carbon emissions.

According to Laurène Chenevat of Natixis, the French Asset manager, as companies conduct materiality assessments under new standards, they may find avoided emissions details are important for investors seeking climate opportunities, shifting from the traditional focus of climate change being seen solely as a risk for companies. While there is a lack of clear and consistent guidance as things stand, the GHG protocol does provide some practical steps to calculating and disclosing avoided emissions. Despite their lack of inclusion in the most prominent reporting frameworks, as companies seek to attract long-term capital from climate-conscious investors, voluntary disclosure – in a rigorous and genuine manner – could be a key tool in the armoury of companies looking to demonstrate their climate impacts.

Australian Government publish draft climate risk disclosure framework   

Last week, the Australian Government announced draft legislation for the introduction of mandatory climate-related reporting requirements. The draft legislation is based on the Australian Accounting Standards Board’s proposed standards for companies to report climate-related information, which is broadly aligned with International Sustainability Standards Board’s sustainability disclosure standards. Under the new requirements, companies are mandated to report on material climate-related risks and opportunities, including metrics and targets incorporating Scopes 1, 2 and 3 emissions. Similar to the EU’s CSRD, the reporting framework will be applicable to companies that meet specific size thresholds across employees, revenue, or AUM, with audited reports required to be provided to Australian Securities and Investments Commission. The introduction of a standardised and internationally aligned reporting framework for climate-related financial disclosures by the Australian Government follows on from trends across the EU and the SEC in the US. These reporting frameworks will have a dual role: providing greater transparency for investors as they determine where to deploy capital, while providing guidance for companies in tackling the challenges of developing governance and reporting frameworks around climate risks and opportunities, building on the work of the TCFD in recent years.

China’s solar boom fuels record growth in global renewables 

The International Energy Agency (IEA) has reported a substantial 50% surge in global renewable power capacity in 2023, primarily propelled by a significant increase in the deployment of cost-effective solar panels, notably in China, as covered by The Economic Times. A key driver of growth in the renewable sector, particularly in China and globally, is the escalating adoption of rooftop solar installations by homeowners and businesses seeking to mitigate energy costs and reduce emissions. Projections by the IEA indicate that, from 2023 to 2028, China is anticipated to establish approximately 30% more renewable capacity compared to rest of the world. Further, the IEA has revised its six-year clean power forecast for China upward by an impressive 64%.  

Despite positive momentum, the challenges faced by the wind power sector, such as supply chain disruptions, inflation, and elevated borrowing costs, particularly in Europe and the US, have resulted in uncertainties at a number of projects. Indeed, downward revisions in offshore wind capacity forecasts highlight potential impediments to meeting critical climate goals in global aims for transition. With a growing focus on the need to increase renewable output as a means of achieving COP28’s triple renewable power goals by the end of the decade, the IEA report highlights the dynamic nature of renewable power production, as well as the interlink to wider sustainability and ESG factors and challenges.

ShareAction research shows widening geographic gap in ESG sentiment  

This week, ShareAction published its 2023 Voting Matters report, with key findings by the responsible investment NGO further illustrating the geographic disparity in attitudes to ESG, and inconsistencies between the public positions of asset manager and voting decisions. The primary distinction from the report is that which exists between US and European asset managers: US asset managers supported, on average, a quarter of ESG-related resolutions, with European asset managers, supporting a record rate of 88% of such proposals. 

The research looked at 257 resolutions. The eight which passed represented only 3% of the total, down from 14% in 2022, and 21% in 2021. Of the eight, four covered social issues, three were seeking improved disclosure on climate related lobbying, and one related to lobbying disclosure more generally. The findings, as noted by ShareAction, drastically contrast with asset managers own positions on the key climate issue – net-zero: “Eight asset managers with public net-zero targets supported fewer than half of all climate resolutions”, potentially identifying discrepancies in words and actions that may be used to pressurise asset managers to take greater action at the ballot box in years ahead. 

Complexity driving misalignment between pay and performance 

A study of executive remuneration practices at large European companies has found that CEOs may from more complex pay structures in the event of poor corporate performance. In a study, led by Xavier Baeten, from Vlerick Business School, and reported on by the Financial Times, “pay complexity” is measured using factors such as the number of elements in a remuneration package, the number of performance criteria used, and the holding periods before share awards are released to their beneficiaries. In addition to its findings regarding pay outcomes, the study also reports a negative correlation between pay complexity and profitability, measured as a company’s return on assets over a three-year period. Part of the explanation stems from the explosion in the use ESG criteria in executive pay in the last three to five years. In certain quarters, the use of ESG measures has been criticised for being insufficiently stretching and showing a lack of alignment with corporate strategy; however, as investors and wider stakeholders continue to pressurise companies to increasingly integrate sustainability considerations into corporate strategy and associated reward frameworks, employing quantifiable and challenging ESG-related performance criteria is likely to remain popular. 

ICYMI

• Azerbaijan appoints no women to 28-member COP29 climate committee. The president of Azerbaijan, Ilham Aliyev, announced that the organising committee for the COP29 global summit in Azerbaijan in December will comprise 28 men, with not a single female. Campaigners have denounced the decision as “regressive”, stating that “climate change affects the whole world, not half of it”.  
• Deforestation surges in Brazil’s sensitive Cerrado region. Deforestation in Brazil’s ecologically sensitive Cerrado biome increased by a staggering 43% last year, with a record of more than 7,800 sq km razed, according to official data that casts a pall over the government’s success in reducing destruction of the Amazon rainforest. 
• US.’s Biggest Renewable Project Is Under Way, Finally. Pattern Energy Group has started construction on its SunZia project, a wind farm in central New Mexico, where more than 900 wind turbines will generate over 3,000 megawatts of clean energy. The problem: the project has been in the works since 2006, and such a sluggish timeline could threaten President Biden’s ambition to reach 100% clean electricity by 2035.
• Oman unveils sustainable finance framework in green push. The new framework is intended to help the Gulf country reduce its reliance on fossil fuels and attract more ESG investors. Under the initiative, the Sultanate plans to issue financial instruments like green, social and sustainability bonds, as well as loans and sukuk – bonds that comply with Islamic law – whose proceeds will be used to fund and re-finance renewable energy projects.