ESG+ Newsletter – 20 July

US-China return to negotiating table on climate change

The first climate talks between US and China in almost a year kicked off in Beijing this week with both sides stating they intend to make significant progress, according to Bloomberg. The negotiations between US Climate Envoy John Kerry and his Chinese counterpart Xie Zhenhua aim to tackle a number of issues including global climate targets, methane abatement and the use of coal-fired power. Senior US State dept officials have indicated that some specific areas of focus are likely to be a greater deployment of wind and solar power while addressing shortcomings around such strategies, in particular concerns around availability. However, some experts are being more cautious indicating that just a joint statement on a commitment to further talks would be progress. Kerry was looking forward to taking “big steps”. While the rhetoric may be moving in the right direction, other Chinese commentators have indicated that they won’t be rushed in their transition, stating that they “need to keep control of the pace” with general geopolitical tensions perhaps an inhibitor of progress.

Unite, Act and Deliver – key messaging from COP28

Unity is crucial for success in climate action, and COP28 and the first Global Stock Take (GST) of the Paris Agreement can be a turning point, says COP28 President-Delegate in a letter outlining the key ‘paradigm shifts’. The letter points to fast-tracking the energy transition, transforming climate finance, putting nature, people, lives, and livelihoods at the heart of climate action, and mobilising for the most inclusive COP ever to accelerate the transition towards a new low-carbon, high-growth, sustainable economic model.

Given the global community is aware that the GST will show the world is off track to meet its climate goals, Dr Sultan has laid a three-fold vision to course correct: a comprehensive negotiated outcome, an action agenda, and a call to action. To support the ongoing negotiations process on the GST, the Secretary-General has requested support from South Africa’s H.E. Barbara Creecy and Denmark’s H.E. Dan Jørgensen to conduct consultations on the outcome of the first GST at COP28. These consultations will take place over the coming weeks, reporting back to the incoming Presidency in time for UNGA. The Secretary-General emphasises the importance of the COP28 outcome and the need for all Parties and constituencies to actively engage with these consultations and events. The two-week thematic program for COP28 has been finalised and can be accessed here.

Paying more for stewardship services can improve ESG performance

A new academic study covered by the Financial Times shows that paying passive asset managers extra fees to engage with portfolio companies can improve their ESG performance. The paper builds on a programme launched by Japan’s Government Pension Investment Fund (GPIF), the world’s largest public pension fund, in 2018. While an asset management contract was already in place at the time, GPIF gave its largest asset manager, Japan’s AM One, a separate remunerated mandate to improve the ESG performance of the constituents of the Tokyo Stock Price Index (Topix). AM One centred its engagement activities on “the most valuable companies in the portfolio” and engaged almost all of the Topix 100 large-cap constituents at least once on ESG matters. The study found that “engagement by the asset manager has resulted in improvements in some of the ESG scores for mid and large cap companies.” As reported by the FT, the authors conclude that the programme “successfully addresses one of the main criticisms of active ownership by passive managers”, which is the “absence of remuneration for stewardship services beyond a standard asset management fee”. The findings perhaps chime with the reasoning that aiming to improve ESG performance may incur a cost, but savers and investors may feel that cost is worth it in the long run.

BlackRock offers a vote to retail investors in its biggest ETF

BlackRock investors in the iShares Core S&P 500 ETF ($342bn), the asset manager’s largest, will now be allowed to vote according to different policies at public company meetings. Retail investor voting can deviate from the house view, by electing to follow one of seven differing ESG policies or continue to ask BlackRock to vote their shares. Investors will not be able to cast votes on the company or investment level; instead, they can opt to vote with management or choose to follow other policies, which more closely align with their expectations for public companies. BlackRock follows Charles Schwab, Vanguard, and State Street, each of whom has initiated multiple funds with similar pilot programs in the past few years.

With political pressure growing, large money managers are allowing greater investor input. Recent Gallup Polling indicates that 63% of investors would actively purchase stocks that align with their values, and 68% of investors would avoid stocks that conflict with their values, producing tension with general investor sentiment that demands prioritising shareholder returns above all else. BlackRock’s new voting policies may prove a further testing ground for these sentiments and be a harbinger of what to expect for the future of ESG.

Just Capital reveals public cares most about workers in ESG

According to an article in the Harvard Business Review, which analysed the results of Just Capital’s annual survey of the American public, people are most concerned with how companies treat their workforce. Just Capital undertakes an annual survey, asking representative focus groups across the US to identify the behaviours they would expect from a company to make it “just”. The results of the analysis demonstrate that the American public is far more interested in how a company treats its workforce than how it interacts with communities, customers, the environment, or shareholders. This prioritisation is fairly consistent across demographics, with slight variations according to political party, especially on the issue of the environment. Just Capital uses the survey to rank companies based on public opinion, employing a unique model which disregards the views of experts in favour of the views of the people. While the judgements of experts, as used by many ratings agencies to weigh ESG issues, can be subjective, Just Capital has proved it is possible to measure the corporate behaviours that the public expects. Perhaps, when trying to understand which corporate behaviours are most important to ordinary people, companies should just ask.

Busy week for greenwashing regulation

It’s been a busy period for greenwashing regulation, with this week seeing the Australian Competition and Consumer Commission (ACCC) announce the publication of new guidance regarding companies’ claims on sustainability. In less promising news, however, the week has also seen the UK’s Financial Conduct Authority (FCA) delay the publishing of its Sustainable Disclosure Requirements (SDR) policy until the fourth quarter of 2023, which had initially been scheduled for June of this year. The resulting implementation period is therefore also now expected to slip from the original target period of Q2 2024.

The ACCC’s new guidance was accompanied by a statement confirming that the regulator will investigate companies for suspected greenwashing claims and that it will also work with businesses to provide and conduct education activities. The rules themselves are predicated on eight central principles to ensure accuracy, data, transparency, and digestibility.

The FCA’s now delayed SDR has been designed to be the UK equivalent of the European Union’s Sustainable Finance Disclosure Regulation (SFDR), the world’s leading market level regulation that aims to eliminate greenwashing from investors and their products. The pushback, while not ideal, looks to be a necessary development given the regulators’ reasoning of digesting and integrating the significant number of consultation responses. As learned through the SFDR, to be successful, regulation of this complexity is not easy to master. Time and diligence in the creation of a sustainable solution should take precedence over speed. As we posit at FTI, better to do something correctly than quickly.

Diversity disclosure improves in recent years in the S&P 500

The diversity of boards and disclosures regarding a company’s diversity efforts have improved significantly in recent years. In the S&P 500, women represented 33% of boards in 2022, up from 27% in 2020 and 16% in 2011, according to recent Spencer Stuart data. The number of directors belonging to a racial and ethnic group represents 24% of boards, with the number of companies improving disclosures on this topic increasing from 116 in 2020 to 381 in 2022. A recent WSJ article notes that “on the back of pressure from investors, regulators and other stakeholders, U.S. publicly traded companies are increasing their disclosure with regard to their board composition, including information on directors’ gender as well as racial and ethnic diversity”. Interestingly though, the study also finds that despite the Nasdaq rule on diversity, there do not seem to be any significant differences in overall diversity between companies listed on the Nasdaq and those on the New York Stock Exchange, perhaps pointing to investor pressure as the key difference maker in enhancing diversity on boards. While diversity and associated disclosures have improved, the study also finds that the most common director on the S&P 500 “is a white 63-yeard old man”. Indeed, the average director tenure in the S&P 500 is 9.3 years, suggesting that changes “are bound to take time” as newer directors are appointed.

ICYMI

• ESG the Top Investment Priority for CFOs… and the Most Vulnerable to Near Term Budget Cuts: EY Survey. ESG topped the list of long-term investment priorities for CFOs in a new survey released by EY, yet paradoxically it was also identified as the most likely area to experience near-term budget cuts as firms look to boost short-term results. The need to create long-term value while facing pressure to cut priority investment areas emerged in fact as a key tension area for finance leaders, with two-thirds of respondents reporting disagreements within their leadership teams over the balance between short and long-term priorities.
• SDG funds fail to target countries most in need. New research conducted by Clarity AI found that on average, companies in funds targeting the Sustainable Development Goals (SDGs) sell just 1% of their products and services in countries most in need of sustainable development. Instead, companies in SDG funds receive more than 75% of their revenues from countries in the top quartile of those that have made considerable progress towards achieving the SDG targets. Clarity AI said it hopes its research will emphasize the urgency for investors and asset managers to align their investments with areas requiring the most attention.

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