ESG+ Newsletter – 21st October 2021

Widening the meaning of diversity to avoid ‘groupthink’

Scottish Widows, one of the UK’s biggest pension providers and a significant investor in companies around the world, has this week called for companies to better understand cognitive diversity. In the latest example of the broadening of the meaning of diversity, its report, ‘Great Minds Don’t Think Alike’, the pension provider outlines that too many executives and board members are from similar backgrounds with similar viewpoints, leading to “groupthink”. The report goes on to argue that cognitive diversity – which is the inclusion of people who have different styles of problem-solving and can offer unique perspectives because they think differently – is “critical” to the long-term success of companies. The report’s key findings found that cognitively balanced teams take less time to solve problems, with various studies supporting the belief that diversity increases financial performance.

How companies would disclose and detail this diversity will present challenges; however, Scottish Widows said it intends to use the report as the basis to engage with companies in the years ahead. For our UK readers, the expectation contained the 2018 UK Code – the promotion of “diversity of gender, social and ethnic backgrounds, cognitive and personal strengths” – may have set the scene for the growing focus on digging deeper into diversity in leadership and throughout organisations.

Scepticism and scrutiny of ESG are signs of a maturing market

The growth in ESG has led to greater scrutiny on, and allegations of, greenwashing within sustainable finance. In the rush to jump on the ESG bandwagon some asset managers are perceived as having taken shortcuts when developing ESG products. However, regulators are cracking down on this as a means of protecting investors and ensuring sustainable finance is flowing to genuinely sustainable investments. The EU’s Sustainable Finance Disclosure Regulation (SFDR) set standards for marketing funds as sustainable, while the SEC issued a risk alert earlier this year to highlight a lack of policies, procedures, and controls across ESG products.

This increased scrutiny may not be a bad thing, according to the Financial Times, as debate and focus may be signs of a maturing market. Patience may also be necessary as the true impact of ESG funds will only emerge over the longer term, particularly for carbon reduction as significant investments in this space is relatively new. Certain of the criticism of ESG may also be somewhat opportunistic, with naysayers pointing to the failure of ESG investing to solve societal crises – instead of being portrayed as the panacea, sustainable investing should be seen as playing a partial role, in conjunction with pressure from regulators and civil society.

While mainstream investors’ adoption of ESG may have initially prioritised financial return, experts believe that asset managers who can clearly demonstrate the year-on-year improvement in the impact of their funds may come out on top.

ESG Threats and Opportunities – A look at the insurance industry

As debate rages as to the true impact of ESG – both individually and collectively – our colleagues in the Risk and Actuarial team have taken a deeper look at the threats and opportunities facing the insurance industry. Much like any sector, the evidence for opportunities in the insurance industry are clear, including covering renewable energy companies who are investing in sustainable infrastructure projects. On the other hand, as regulators clamp down on the financial industry, insurers face similar pressures and threats. Our research points to a quarter of insurers expecting their sustainability credentials to be investigated in the coming 12 months. To be in a strong position to respond, or simply to retain their licence to operate, the team sets out five starting steps for insurers to follow, which will have relevance for all readers.

Evaluating the ESG credentials of crypto and blockchain

Cryptocurrencies such as bitcoin have developed a bad ESG reputation, primarily because of the use of fossil fuels in digitally ‘mining’ them, but also because of their role in facilitating illicit activity, notably cybercrime such as ransomware. However, researchers say it’s important to distinguish between cryptocurrencies and the technology that underpins them – blockchain. Blockchain offers a digital, non-centralised means of verifying and approving transactions. Research from University College London has shown how this distributed ledger technology has evolved to become more efficient, to the point that it could in fact reduce the energy requirements of traditional central payment systems. A recent paper from UBS Wealth Management also recommended that “investors focus on companies exposed to the evolution of distributed ledger technology, rather than engaging directly in cryptos”, and highlighted its role in digital transformation. Despite cryptocurrencies’ poor sustainable credentials, investors should be wary of throwing the baby out with the bath water and be open to the opportunities provided by blockchain.

Mounting pressure on the shipping industry to go green

In the run up to COP26, critics say that shipping firms are not acting fast enough to meet the Paris Agreement goals. To compound pressure, nine consumer goods companies signed a pact to achieve zero carbon shipping by 2040. This pressure is reflected by banks, who are placing much stricter environmental criteria on shipping companies, according to Reuters. Key financiers of the shipping industry are requesting increased disclosure on emissions reductions when lending on new assets.

It is estimated that the shipping industry will require an investment of over $2 trillion to achieve net zero emissions. In response, investors are embracing green investments to clean up the maritime industry. According to the Wall Street Journal, shipping company Seaspan has sold nearly $1 billion of ‘blue bonds’ to finance the transition to lower emissions vessels. The new so-called blue bonds are the latest iteration of green bonds which aim to funnel sustainable investment into the world’s oceans.

In Canada and the UK, scrutiny on net Zero Plans is growing

Canada’s six largest banks have joined the Net Zero Banking alliance, which brings together 81 banks worldwide, who together represent over a third of global banking assets, and have committed to aligning their lending and investment portfolios with net-zero emissions by 2050 and setting intermediate targets by 2030, using science-based guidelines. The NZBA is a subset of the GFANZ, which also includes insurers and asset managers, and was created in April under Mark Carney’s leadership. Whilst most Canadian banks have already set individual targets towards 2050, only one had joined the GFANZ in April when it was launched.

Similarly, in the UK, many companies have committed to net zero emissions by 2050, in line with the government’s goal, but few have mapped out in detail their plans to reach it. This week and as the UK prepares to host COP26 climate negotiations, it announced the Greening Finance plan, which is backed by the Treasury, Business Department and the Bank of England. The plan mandates that UK companies provide details on how they will reach their net-zero targets. The plan aims to require some of the bigger listed companies to publish their transition plans towards net zero by 2050, and provide an explanation if they have not yet done so, as well as to incorporate the UK Green Taxonomy and ISSB standards in their annual reports. Investors, who are also under pressure to reach targets to green their portfolios, have welcomed the requirements set out by the government and highlighted the need for these disclosures to become a mandatory requirement.

Disclosure and action needed to avoid the worst impacts of climate change

According to the latest climate report from the UN PRI, government policy changes to fight global warming could result in zero-emissions vehicles compromising 30% of all vehicles on the road by 2030. It predicts wind and solar will provide 30% of global power which is three times more than current levels. Under the forecasted policy scenario, which is understood to be the most likely as opposed to what is needed, the report revealed “dramatic and sweeping” changes in policy between now and 2025 across a range of sectors. The policy changes would keep warming below 2 degrees Celsius but not limit the warming to no more than 1.5 degrees as set out by the Paris Agreement. Despite the concerns around the 1.5 trajectory, the TCFD status report revealed 83 of the world’s largest companies are now supporting or disclosing in line with the TCFD framework. It also revealed a 99% increase in the number of companies disclosing globally bringing the total to around 2,600. However, as we have highlighted before, simply disclosing against the TCFD is one thing – wholly incorporating its spirit may be another.

Developed vs. Developing Countries in the Fight Against Climate Change

The upcoming COP26 conference in Glasgow may prove definitive for harbouring collective action on climate change. According to scientists, countries must align to prevent average global temperatures from rising more than 1.5 degrees Celsius compared to levels before the industrial revolution. But it is unclear if participants will arrive at solutions to the problem that developed and developing countries have faced for a long time. In short, developed nations argue that their developing peers should initiate emissions targets and play a role in global emissions reduction. Meanwhile, developing nations argue that their developed peers have had historical opportunities to use low cost, high utility emissions like coal to build their economies to their current strength. Support, therefore, should be provided economically to curb emissions– harking to notions of a just transition, the only feasible way of truly changing direction.

So far, large emitters like Australia, China, India and Russia have yet to disclose new pledges to cut pollution levels. And only a few wealthy countries have allocated money to help poorer nations cope with the catastrophic impacts of climate change. Even in the US, the passage of the historic reconciliation bill remains uncertain at this time. As the conference looms and despite more focus on climate than ever, will politicians take leadership positions? Unfortunately, expectations are not high.

In Case You Missed It

• The release of the quarterly MSCI Net-Zero Tracker reveals publicly listed companies will burn through their 1.5°C emissions budget within five years of COP26. The study, which examines the progress of more than 9,000 of the world’s most investable companies towards reducing carbon emissions, also found a majority (57 per cent) of those companies did not align with any globally agreed temperature target, with fewer than 10 per cent aligned with the Paris Agreement signed in 2015.
• With a record 34 per cent increase of the average level of shareholder support for all environmental and social petitions, board members are bracing themselves for more pressure in the months ahead. The Financial Times reported that even companies that have historically been reluctant to adapt to ESG proposals have felt pressure themselves to prioritise ESG concerns.
• CDP is set to expand the scope of its disclosure framework beyond climate, deforestation, and water to also cover natural capital such as oceans, land use, biodiversity, food production and waste as part of their new 2021-25 strategy ‘Accelerating the rate of change’. In a press release, CPD revealed that it aims to “support greater transparency and accountability from businesses, cities and governments” and “formalize a reporting system which is good enough to legislate”. 

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