ESG+ Newsletter – 20th January 2022

Larry Fink outlines BlackRock’s investment principles in annual letter

Two years after BlackRock’s Larry Fink warned that climate risk was an investment risk, the head of the world’s largest asset manager has defended his stakeholder focused approach to capitalism. The letter, published on Tuesday, hit back at his critics by rejecting the accusations leveled against him of wokeness, while also laying out an array of his investment principles. Included among these was the notion that “a company must create value for and be valued by its full range of stakeholders in order to deliver long-term value for its shareholders” – explaining that in order for efficient capital allocation, durable profitability, and long-term value creation, the new world partially created by the COVID-19 pandemic requires evolved considerations which can be addressed by stakeholder capitalism.

Fink also wrote on the relationship between sustainability and capitalism, framing it through the lens of being effective fiduciaries and commenting that the decarbonisation of the global economy is “going to create the greatest investment opportunity of our lifetime.” In doing so, he combined the ideas of eliminating climate risk for shareholders and capitalising on the opportunities which accompany the energy transition. While one of the key messages from the letter was that business needs substantial climate action from governments too, in the run up to proxy season (further details below), the letter closed by calling on every investor, even individual ones, to have their say on ESG issues. For the first time, Blackrock will allow underlying investors and asset owners to vote independently of the asset manager.

Reuters Breakingviews wrote that the clarification of BlackRock’s position to not divest from oil & gas companies has left Larry Fink in a middle ground that is an obstacle to being seen as a climate leader. Although “awkward”, the positioning has proved lucrative, as demonstrated at BlackRock’s Q4 results last week, where Fink disclosed to analysts that BlackRock now manages $509 billion in sustainable assets and one-fortieth of the world’s financial assets.

AGM Season Key Issue Preview

The last year has been characterised by the COVID-19 pandemic and the lockdowns brought about by it, but also by a dynamic 2021 proxy season, as investors used their votes to express views on various ESG proposals, executive remuneration plans, board effectiveness and the management of stakeholder experiences, against an unprecedented backdrop. While uncertainties around the macroeconomic environment remain, there is clearly an increased focus and expectation from shareholders regarding topics such as: board diversity, both from a gender and ethnic background perspective, climate change, board oversight, more meaningful reporting on environmental issues,  and considerations on the wider workforce when defining remuneration practices.

As we start 2022 and the world’s largest asset managers have disclosed expectations for their investee companies for this year, there is “unprecedented consensus” on key priorities, reflecting the urgency for a more holistic integration of environmental and social considerations in companies’ practices. Each of Vanguard, Blackrock and State Street have updated their proxy voting guidelines, with diversity and climate to the fore, in line with guidelines of proxy advisors Glass Lewis and ISS. In the next week, we will be publishing our AGM season preview which will address all of these major changes and more. Do get in touch in advance if you want a copy directly to your inbox.

With debate continuing on ESG evaluations, Americans point to workers as the most important issue

As efforts to determine how different criteria should be weighted in evaluating strong (or poor) ESG practices grow, JUST Capital’s approach of polling the general public might shine some light on emerging pressures. As has been covered extensively here before, while the ‘S’ in ESG may be the hardest for some market participants to conceptualise, it could also represent the biggest opportunity for companies – a stance seemingly echoed by the American Public. As reported by CNBC, JUST Capital’s polling, conducted as part of their ranking of US companies, found that a fair, living wage was the number 1 issue overall.

On the subject of ratings and methodologies, the Wall Street Journal is the latest to point to discrepancies in ratings as being a flaw in the ESG ecosystem. While there is probably a need for increasing sophistication across ESG data and evaluations, attempting to drive convergence in ratings – in line with credit counterparts – may fail to account for the inadequacies of others. In the event of business failings, one might reasonably question why some expect more from ESG rating agencies than of internal/external audits, credit rating agencies or analyst recommendations.

Regulation vs market-based approaches – addressing the banking sector’s role in climate change

As banks continue to grapple with their role in climate financing, two diverging approaches have emerged. The EU is allowing the regulator, the European Central Bank (ECB), to take the lead and force EU banks to implement necessary changes across its business model. Bloomberg recently reported that, in advance of this year’s climate stress tests, the ECB has warned EU banks to be prepared for a harsher and more accelerated fallout from global warming than previously forecasted. It is anticipated that these tests will push EU banks to forecast the potential losses from climate catastrophes, or government policies that would force heavy polluting companies or sectors out of business.

So far in North America, a market-based approach has come to the fore, allowing businesses to come up with solutions to address climate-related risks relating to their industry. This has resulted in a large group of 19 banks, along with the Risk Management Association, forming a consortium with the intention of developing consistent frameworks and standards for climate risk management.

Despite their differing approaches, the focus on climate change – and the banking sector’s role in it – by both the ECB and the US banking sector is a further acknowledgement that they must do more to address their role in climate change. Moreover, while the ECB is taking a firmer stance, all indications are that the SEC will be playing the role of catch up quickly in the coming year.

UK watchdog targets fashion brands over greenwashing

The UK Competition and Markets Authority (CMA) is cracking down on the fashion industry over misleading claims about their environmental credentials. The watchdog will be prioritising the sector for further investigation both due to the size of the market and because consumers are increasingly choosing fashion brands based on their environmental credentials. If any claims are found to be spurious then brands may be forced to change their advertising, or even face court action.

Concern over the environmental impact of the fashion industry has been growing, amidst indications that the sector is responsible for between 2% and 8% of global carbon emissions – potentially more than the aeronautical and shipping industries combined. Should this trend continue then it could account for a quarter of the world’s carbon budget by 2050. Emissions aren’t the only concern. A report issued last year by campaign group Changing Markets Foundation found that 60% of claims by leading UK and European fashion companies were “unsubstantiated and misleading shoppers”. The report highlighted the lack of circular solutions and recyclable clothing as a particular concern and called out brands for using polyester from recycled plastics bottles describing it as a “false solution”.

The CMA had pre-warned companies in 2020 that they had until the end of 2021 to address any misleading claims. Those companies may now face repercussions for a failure to act.

Tension is growing between commitment and action in the Decade of Delivery

Stephanie Maier, Global Head of Sustainable and Impact Investment at GAM Investment shared her views this week that we all need to focus on the delivery of pledges, not just the commitment, stating ‘we need to gauge how we’re moving along a path rather than a review of commitments at five-year intervals.’ Maier’s interview highlights the need to narrow the gap between commitment and action to achieve decarbonisation goals and lessen the systemic risks presented by the climate crisis.

Maier asks how asset managers might appropriately measure and communicate the real-world impact of their investments. In order to support the decarbonisation of their portfolios, Stephanie suggests that asset managers should encourage investment companies to set interim goals, develop capex plans, and maintain a strong focus on metrics and reporting. To move from commitment to action, progress should be monitored on an ongoing basis, looking at the outcomes of decarbonisation strategies rather than focusing on input-output measures or the scale of commitments. Climate action undertaken in the decade to 2030 is critical in maintaining the possibility of a 1.5°C warming scenario. Two years into the Decade of Delivery all actors must step up to translate commitments into outcomes.

Sustainability ratings growing among business schools

As the world shifts to embrace sustainability, business schools are following suit by offering a range of sustainability courses and, in some cases, making sustainability commitments. As these institutions offer sustainability courses and other initiatives, progress in assessing their efforts lags behind due to the availability and quality of data. The effort to track progress is nonetheless underway and give some indication of the most sustainable schools. A large part of the current focus and rankings looks at ESG integration into teaching and not on schools’ actual commitments. Although business schools are not high emitting CO2 producers, less efficient buildings remain while evaluations may review research produced. Notwithstanding the issues with quality of data, there are a number of benchmarks and ratings of schools and despite the differing methodologies, the uptrend provides prospective students and employers a rich range of benchmarks and business schools with plenty of room for improvement.

A Review of Stewardship Landscape in 2021

The Investor Forum recently released its annual stewardship landscape review that detailed the most significant stewardship trends of 2021. The group, which has published its reports since 2015, is designed to facilitate dialogue between shareholders and companies. The developments are noteworthy: the report summarises that the shift in priorities catalysed in 2021 is nothing short of remarkable. In particular, the report indicates that climate-focused engagement is being prioritised and social issues are increasingly competing for attention. Further, the report recognised that the rise of the ‘Dear Chairman’ letter is generally not conducive to meaningful engagement on material issues. That is viewed in tandem with an accelerating focus on ESG data, and the somewhat subjective nature of rating agencies who are in dire need of regulation. Most interesting is the word cloud of 40 stewardship reports that conclude the overview; words like ‘diversity,’ ‘remuneration,’ and ‘climate change’ all dominate the focus of future stewardship priorities. We expect that 2022 will be another pivotal year for stewardship and the engagement between companies and their shareholders.

In Case You Missed It

• COVID-19 is set to remain the driving influence for sustainable business in 2022, with the recent emergence of the Omicron variant reminding the ESG industry of the virus’ dynamism and unpredictability. In Sustainability’s 2022 sustainable business trends report, COVID-19 continues to shape the workplace, supply chain impacts and human rights. In turn, the corporate world is set to place its focus on sustainable development challenges while the world works towards a better future where the virus is under control.
• With the aim of supporting clients as they advance their ESG priorities, improve the resilience of their supply chains and manage their working capital needs, Citi has launched its first MENA sustainability-linked Supply Chain Finance programme in Algeria. The programme aligns with the bank’s ESG commitments to help accelerate the transition to a global low-carbon economy, which includes its $500bn environmental finance goal, $1tr in sustainable finance by 2030 and a $500bn social finance goal.

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