ESG+ Newsletter – 22 February 2024

This week’s newsletter looks at the focus on worker and human rights for the upcoming 2024 AGM season, with a number of shareholder resolutions on the ‘S’ of ESG garnering attention. We also assess the growing recognition of the role of the financial sector in incorporating climate transition risk to reduce lending volatility; look at the continued rise in bond issuances which target sustainability and social issues; taking a trip to the US to check in on progress on the SEC’s climate rule; and finish by taking a look at the significant commitment from Singapore’s aviation sector to achieve net zero emissions by 2050.  

ESG Regulatory Update

As ESG regulations rapidly develop, FTI Consulting provides a quick summary of the need-to-know updates from around the globe. This month we cover China’s top stock markets’ new sustainability reporting guidelines, provisional agreements on ESG ratings in the EU, and a delay in voting on EU legislation to implement company liability for human rights issues in their value chains. Read more on our ESG regulations page.

Workers and human rights in focus for the 2024 AGM season

The Interfaith Center on Corporate Responsibility (ICCR), a leading shareholder proponent in the US, recently published its Proxy Resolutions and Voting Guide for 2024, detailing member-sponsored resolutions filed for 2024 AGMs. From the 344 resolutions filed this year, 75 are related to human and worker rights. Topics related to the ‘S’ of ESG have been gaining significant attention from investors in recent years, shifting from an initial focus on diversity, equity, and expanding to include considerations around worker and human rights. Examples include proposals filed last year calling for a third-party audit on worker health and safety, which received 67% support. Worker rights issues targeted by the ICCR have generally related to living wages, workplace safety, and respect for freedom of association, as summarised in a Responsible Investor article this week. In a similar vein, human rights proposals have called for enhanced due diligence in conflict zones and human rights impact assessments.

As investors sharpen their focus on social issues, they are looking for additional guidance from the Securities and Exchange Commission (“SEC”), which is set to publish a proposal on human capital disclosure by April 2024. This proposal will likely cover standardised disclosure expectations and provide investors and stakeholders with relevant information about how a company invests in and supports its workforce. With more information being provided than before, there is the potential for a widening range of issues to be raised through shareholder proposals, which can be effective mechanisms for pressuring companies to change, even if market support for such proposals appears to have begun to wane.

ECB says climate transition risk should be included in capital requirements

As reported in Environmental Finance, the ECB published a paper on the role of prudential regulation in mitigating the impacts of climate transition risk on the banking sector. According to the paper, applying higher capital charges to banks with greater exposure to high-emitting sectors would be beneficial for future financial stability. The research also found that such charges would benefit companies with comparatively low-carbon intensities who would benefit from lower lending rates than peers with higher funded emissions. The findings are based on the theory that when goods with different degrees of carbon intensity are compared, those with a lower carbon intensity have a lower climate transition risk, and therefore a lower risk of default than peers that produce goods with a higher carbon intensity. While the ECB does not recommend one specific measure for regulators, it suggests utilising “some risk weighted policy instrument [such as] an add-on or a supporting factor, or the obligation to publish the transition risk implied by each exposures” to decrease climate-related transition risks and associated lending volatility. Ultimately, this research points to the role of the financial sector in supporting the climate transition. Justifying the pursuit of leadership in decarbonisation within a sector can be challenging for an individual company; however, these findings can act as motivating factors in reaping the financial rewards of efforts to decarbonise ahead of peers. 

S&P forecasts volume and variety growth in sustainability bonds

As reported in ESG Today, S&P Global is anticipating a rise in the issuance of sustainability-linked bonds in 2024,  both in terms of volume and thematic variety. In research published last week, the market intelligence, credit and ESG ratings provider forecasted volumes of around $1 trillion in what it terms GSSSBs – green, social, sustainability, and sustainability-linked bonds. Within this bucket, S&P expects relative growth in bonds focused on the energy transition and the blue economy. Key indicators S&P cites are the recent unveiling of a transition taxonomy by the Monetary Authority of Singapore, and the February launch by the Japanese government of a $11 billion climate transition bond – the first of a $130 billion issuance of transition bonds. 

While growth to $1 trillion may not represent a tipping point in comparison to the boom in recent years, S&P’s view is that this will be a year of “broadening regional reach and instrument type” presenting a platform for a future of sustainable progress across the next decade. The analysis on broadening varieties of GSSSB correlates with the World Bank’s commitment to outcome-based products, as covered in last week’s newsletter.

SEC prepared for lawsuits over proposed climate rules

The SEC’s climate rules have been long awaited since they were first proposed almost two years ago. According to the Wall Street Journal, the SEC is preparing for the possibility of lawsuits challenging the climate rules, before the final version is even released. SEC head, Gary Gensler, said that any challenges to the climate disclosure rules would be “ part of our democracy”, but that the SEC is preparing a rule which he believes will hold up to a legal challenge. The SEC’s proposed climate rule seeks to provide greater consistency in corporate climate reporting. The consultation on the proposed climate rule received thousands of responses with businesses, trade groups and industry bodies waiting eagerly to understand the full scope of the SEC’s final climate disclosure rule. Any judicial review may focus on whether the SEC has the power to create such a rule, but the SEC maintains that the rules are intended to provide investors with the information they need to make investment decisions, with Gensler affirming “we are not a climate regulator. We are not a climate risk regulator. We are a securities regulator”. 

Singapore releases blueprint to achieve net zero aviation emissions by 2050 

The Singapore Sustainable Air Hub Blueprint represents a proactive step towards balancing aviation growth with environmental sustainability. By targeting net zero emissions by 2050 and implementing specific strategies across airport operations, airline practices, and air traffic management, Singapore is seeking to set a comprehensive approach to tackling the climate impact of aviation, as reported in ESG News. 

Key initiatives, such as increasing the use of renewable energy at airports and mandating Sustainable Aviation Fuel (SAF) for departing flights, underscore Singapore’s commitment to driving sustainable practices in the industry. The introduction of a SAF levy to support adoption signals a willingness to invest in greener alternatives, though its effectiveness may hinge on factors like global SAF availability and market dynamics. Singapore seeks to position itself as a leader in sustainable aviation through the Blueprint and by focusing on innovation and scaling best practices. Aviation receives a lot of public attention for its contribution to climate change, but is a challenging to abate sector with no proven technology to achieve net zero emissions. While investments in SAF dominate near-term decarbonisation plans in many regions, there are concerns around the ability to scale SAF without creating other environmental externalities. Much of the industry’s ability to decarbonise hinges on as yet undiscovered technologies, challenging the credibility of any net zero plan for the industry.

ICYMI 

• Malaysia launches consultation on adoption of IFRS sustainability reporting standards. The new consultation launched by Malaysia’s Securities Commission seeks feedback on key issues around the implementation of IFRS S1 and S2, including the scope and timing of implementation, transition reliefs, and assurance-related issues. 
• Financing Indonesia’s energy transition: Will the next president finally spark change? Prabowo Subianto has claimed victory in the Indonesian presidential elections and is now looking to create five million green jobs – but has stopped short of pledging to phase out fossil fuels subsidies. Can Subianto successfully lead Indonesia towards meeting its ambitious targets and deliver on the country’s green transition?
• Five ways to prioritise supply chain sustainability in 2024. Kimberly Rodriguez, Supply Chain Manager at BSI, outlines the five factors organisations should consider to ensure sustainable supply chains in the year ahead: building a clear understanding of sustainability-related regulations and reporting transparently; managing sustainability data; focusing on stakeholder engagement; internal and external collaboration; and ensuring ethical supply chains.
• Australian government to invest a $70 Million in new hydrogen hub. The new Pilbara Hydrogen Hub will be a major centre for clean hydrogen production and export, with the potential to become an international gateway to Australian-made green steel and iron. The planned pipeline will enable enough production capacity to power 26,000 heavy vehicles for an entire year and create over 1,000 new jobs in construction and operation.