ESG+ Newsletter – 20th April 2023

SFDR downgrades may reverse under new guidance

Only a few months after the start of what has since been termed “the great reclassification”, new guidance from the European Commission seems certain to reverse a significant proportion of that change. The realignment of the sector saw the total assets under management of Article 9 funds drop by €175 billion in 2022, with passive funds making up the vast majority of those. While active strategies use an index as the benchmark, tracker funds follow its characteristics, making it more difficult to guarantee that the equities held under the strategy are all sustainable. This is true even for those indexes which have a stated ESG goal. Notably, Morningstar reported that almost half of recategorised equity strategies tracked Paris-aligned and climate transition indexes.

The new guidance is set to correct this, with the EU Commission clarifying that it will not impose minimum thresholds for what constitutes a sustainable investment. Instead, it will be left to market participants to demonstrate that claims are fair, albeit the Commission did say that the disclosure framework requires “increased responsibility” on their part. The update comes as Amundi launches two new net-zero equity funds, demonstrating the maintained investor interest in sustainable products and the role the market is playing in the transition. Both currently are classified as Article 8s under the EU’s SFDR, for now. The broader ESG investing landscape, and its wrinkles, was discussed this week by Refinitiv’s head of EMEA research Detlef Glow. He discussed the fund downgrades amongst other things, before offering a sage perspective that the industry is still in the childhood phase and that “regulators, index providers, and fund promoters” are still learning. He commented that while it is not perfect, patience is crucial; which could be said for any regulation.

Workforce Disclosure Initiative shines light on companies’ social impact

ShareAction’s Workforce Disclosure Initiative (WDI) released its 2022 results earlier this month. The results demonstrate that companies are engaging on human rights, but are notably lacking a supply chain focus. 96% of the 167 companies that responded to the survey had publicly available human rights related policies and undertake regular due diligence. While this is an impressive statistic, according to ESG Clarity many of these companies failed to monitor instances of human rights abuses in their supply chains, where most occur. Ranging from Scope 3 emissions to responsible sourcing to labour practices, as regulatory pressure ramps up on companies to expand their ESG oversight to include their entire value chain – not just their own operations – how all aspects of the supply chain are managed are increasingly important.

Poll of business executives raises greenwashing flags

A recent Harris Poll/Google Cloud survey of nearly 1,500 executives across 17 countries and seven industries revealed notable findings on the prevalence of ‘greenwashing’. It found that nearly three-quarters of the respondents believed that the majority of organizations in their industries would be caught greenwashing if they were investigated thoroughly. While there is evidence of customers increasingly focusing on companies’ sustainability performance when making purchasing and employment decisions, most global executives evidently believe that greenwashing is widespread in their industry. According to IBM, 70% of businesses view ESG as a revenue enabler, but unfortunately, many of those businesses may be cutting corners. Greenwashing is subjective and can be unintentional or even unplanned, with most often saying it is a response to pressure to set sustainability targets, without a concrete plan to reach them.

Overstating environmental action now comes with an increasing set of risks, as regulatory requirements are being passed or are in the pipeline (Europe’s anti-greenwashing laws and proposed rules from the SEC. To the extent global anti-greenwashing laws advance in maturity, it is likely that incentives to greenwash will diminish and litigation examples will rise.

New bond certification scheme aimed at tackling ‘greenwashing’

While some point to the existence of greenwashing, others take steps to try and address it. Over the last number of week’s we have covered both the growing demand for ESG financing and concerns regarding the risk of ‘greenwashing’ this type of financing. Some believe that a recalibration of the focus of issuers, from the financial aspect of this financing to the annual targets associated with the loans, is the path forward to alleviate some of the concerns. Climate Bonds Initiative, the international organisation working to mobilise global capital for climate action, may have taken a significant step towards providing investors with more confidence regarding the performance of ESG financing with their recently announced expansion of their Climate Bonds Standard and Certification Scheme. The new scheme will offer company-level certification, providing investors with enhanced confidence that the corporate is a green entity and on the Paris-aligned pathway of 1.5-degrees. The certification focuses on key aspects needed to demonstrate a credible transition for ESG financing, such as Sustainability Linked Bonds, and attempts to provide a greater level of assurances on the climate credentials of a company or product by going beyond the company-level assessment. Importantly, the new scheme will help provide an assessment of the 1.5-degree aligned pathways of credible transition plans, which should help sectors which often can’t participate in ESG financing due to the heavy emitting nature of their sectors.

Defining what ESG financing is, and measuring the efficacy of that product, has been a challenge for the capital markets. This new scheme by the Climate Bonds Initiative will hopefully increase investor confidence in the effectiveness of ESG financing, help support companies on their climate transitions, and identifying companies that are ‘greenwashing’.

The rise of second hand as an alternative to fast fashion

As awareness of the environmental impact of fast fashion has become more widely acknowledged, shoppers have been turning to second- hand clothing as a more sustainable means of getting their fashion fix. This has fuelled a rise in the reselling of clothing, which has entered the mainstream thanks to popular apps such as Vinted and Depop. However, while this trend may slow down fast fashion, it’s posing a threat to bricks and mortar charity shops who are losing out to their online rivals and seeing a reduction in their fundraising amounts. This has forced charity shops to rethink how they position themselves. Charity Super.Mkt is a new initiative which has been hosting large-scale pop-up charity stores, which offer more of an experience and, in addition to selling pre-loved garments, are raising funds for a number of charity partners including Marie Curie, Shelter and Barnado’s.

While second- hand shopping becoming mainstream has many positives, such as keeping clothing out of landfill, some are still skeptical about its overall sustainability impact. Firstly, there’s the environmental cost of shipping items purchased online. Thrift “hauling” has also become a source of online content which, despite the items being second hand, is still promoting overconsumption. For fashion consumers to be truly sustainable they need to reduce their overall consumption of clothing and look at alternatives such as renting clothes, and repairing or repurposing existing items.

ICYMI

• Schroders: Companies who miss SLB targets may not be investable. Companies that are missing targets in their sustainability-linked bonds (SLBs) may be shunned by sustainable investors, an executive at Schroders has warned. Companies hitting objectives would, on the other hand, attract interest from more “dedicated, impact-specific investors”. The payments that investors receive from the coupons of SLBs can vary depending on whether the issuer hits the sustainability performance targets in their KPIs. Crucially, a company at risk of missing a KPI should be transparent with investors.
• Tel Aviv Stock Exchange Aims To Increase Exposure With ESG Questionnaire For Listed Companies. The Tel Aviv Stock Exchange has published its first ESG questionnaire for companies listed on TASE in order to increase involvement in ESG; provide more information to investors; and increase exposure to international ratings agencies. The questionnaire was developed alongside ESG advisory company Good Vision, and it is hoped that this will increase alignment with international standards which will be particularly relevant for potential foreign investors. Only 70 companies listed on TASE currently publish full ESG reports and companies completing this questionnaire will be able to publish it on their website while a specific page on the TASE website will contain the questionnaires submitted by companies.
• No More Cheap Flights Is the New Reality for Air Travel. Summer flights between the UK and Europe are currently one-third more expensive than last year. These higher prices are likely to be the new reality for flying as airlines face a decarbonisation challenge and tightening climate-compliance laws. Recent changes laid out to the European Union’s Emissions Trading System (EU ETS) and the rising unit price of carbon emissions are two contributing factors to the expected rising carbon costs to airlines over the next few years.

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