ESG+ Newsletter – 23 November

Your weekly updates on ESG and more

From plastic treaties to carbon capture to AI and back again, this week’s newsletter touches on a range of ESG issues facing companies, regulators and investors. We also ask what the impact of the latest developments on labour in the US might be for companies, while again touching on the debate of how companies will have to report in the post-ISSB, GRI world.

CDP cites progress on global reporting on plastics

United Nations led talks on global plastic reporting are increasingly encouraging, according to the sustainability-focused NGO CDP. Citing the third round of negotiations for a Global Plastics Treaty, the draft text of which has been developed by the UN’s International Negotiating Committee, a CDP spokesperson specialising in ocean health noted that it is rare that an environmental organisation is pleased with the early iteration of a framework. A referenced highlight related to the suggested mechanism for progress monitoring and therefore reporting, in addition to the treaty being mandatory for businesses. The need for comparability and repeatability have been a consistent area of discussion across all aspects of ESG reporting, particularly over the past two years, which may bode well for the adoption of the Global Plastic Treaty.

CDP, in its commentary, was keen to be explicit on the far-reaching impact of plastic pollution and the subsequent need for disclosures to reflect “leakage and damage caused at every stage of the [plastic life cycle] process”. It is an area of reporting which is growing quickly already from a scale perspective – CDP announced that more than 3,000 companies have begun disclosing plastic-related data for the first time, this year, in response to investor pressure and impact on oceans and society generally. Plastic reporting is mandatory in 17 major economies currently, albeit inconsistent and of varying detail, with steps on a global treaty set to raise the bar and drive consistency across jurisdictions.

Proxy voting guidelines updates are underway 

As we approach the end of the year, proxy advisors and institutional investors have started publishing guidance for the 2024 AGM and reporting season. Glass Lewis, one of two major proxy advisors, recently published its proxy voting guidelines for 2024. This year’s updates include some interesting additions setting out expectations regarding the oversight of cyber risk and sustainability, reflecting growing materiality to successful business outcomes. In instances where a company operating in the US, Canada, Continental Europe and the UK has been materially impacted by a cyber-attack, Glass Lewis may recommend shareholders vote against directors where it finds that “the board’s oversight, response or disclosures concerning cybersecurity related issues to be insufficient, or not provided to shareholders”. Moreover, Glass Lewis has expanded the scope of its policy on board accountability for climate related issues to include most large-cap companies, and not just those where GHG emissions represent a material financial risk. The review of Glass Lewis’ proxy voting guidelines also includes updates related to executive remuneration structures, as well as changes to board diversity expectations, namely in Canada and in South Korea, among other updates. It seems that we have officially entered the merry season for corporate governance and investor expectations on reporting, with the other major proxy advisor, ISS, announcing the launch of its “open comment period” on proposed changes to its benchmark voting policies, set to run until the end of this month.  

Unions seek to grow momentum in the US

The latest efforts in the US to unionise have come in financial services which, if successful, would mark the first unionisation of workers at a major US bank in decades. The workers are being assisted by the Communications Workers of America (CWA) union and have notified the National Labour Relations Board of their intention to hold elections. While less than 2% of finance sector employees belong to a union, a number of high profile stories across the US have raised the possibility of greater unionisation across sectors. As the focus on ESG and sustainability grows from a range of stakeholders, the impact of collective bargaining among employees could become a key consideration for Boards and management as they continue to develop people and human capital strategies. Indeed, as discussed by our own governance and activism team, 2023 was a prolific year for labour-themed shareholder proposals. With labour and challenges to company practice under the spotlight as much as ever, 2024 may see those trends rise further.

COP28 – the path to net-zero, reducing carbon emissions and CCS 

With all eyes turning to COP28 in Dubai, the usual jostling for media headlines to lecture the world on how to limit global warming and avert the well signposted climate crisis is well underway. One consensus emerging however, to avoid a climate crisis, is societies’ need to rapidly reduce the world’s carbon emissions. In an Op-Ed in the FT, Lord Adair Turner, Chair of the Energy Transitions Commission, believes that central to achieving this is finding a balance between quickly scaling down global economies reliance on fossil fuels and offsetting their use through carbon capture and storage (CCS). Lord Turner believes that the technological progress being made will reduce the use of fossil fuels far faster than people believe, but – even despite that – there will still be a limited need for CCS technologies all the way through to 2050. However, the CCS costs have not come down significantly over the past decade — and the pace of CCS development falls short of what is needed, potentially undermining that aspect of the energy transition.  

As a previous edition of the newsletter outlined, CCS technologies have their critics who believe that the technology only serves to prolong the life of fossil fuels and delays addressing the reliance on it as an energy source. However, as Lord Turner outlined in his article, they represent only a small part of the solution to reducing emissions and that a clear commitment to rapidly phase down the use of all fossil fuels is needed, avoiding CCS as a panacea to prolong the lifespan of fossil-fuel reliance.  

Easy Right? The double materiality debate is boring… just report both GRI and ISSB

Insights from the CEO of GRI and the chair of the ISSB included in Environmental Finance address the double materiality debate that differentiates the two sustainability standards. While ISSB broadly considers material issues to be those that could affect a company’s value (single materiality), GRI’s definition of materiality covers an organisation’s significant economic, environmental, and social impacts as well (impact materiality). The CEO of GRI advises companies that they don’t have to choose between the two, that there are far more commonalities than differentials, and to report both to ensure companies address the concerns of different stakeholders. Furthermore, GRI has published draft revised standards on climate change and energy ahead of COP28 climate talks starting next week, as explained in this ESG Clarity article. These revised standards dive deeper into the concept of double materiality, requiring company disclosure on climate change transition and adaptation plans, the social impact of climate change, just transition metrics, biodiversity impacts, and expanded value chain Scope 3 emissions metrics. 

ESG funds naturally exposed to artificial intelligence 

Perhaps without knowing it, ESG fund investors are also betting on artificial intelligence (AI), Barron’s reports. The reason is fairly simple – most ESG funds track standard indices to some extent. These indices, particularly in the US, often include tech stocks among their top holdings. In addition, as explained by Professor Ken Pucker from Tufts University, “they [the ESG funds] may tilt toward things like tech and healthcare and away from energy or utilities.” This is why you will often see Nvidia, Apple, Microsoft, and Facebook among the top holdings of ESG funds. 

While ESG funds have had a greater focus on technology stocks compared to their benchmarks for a long time, this has increased further since the middle of the year, says Dimple Gosai, head of US ESG research at BofA Securities. While some of these strategies have resulted in greater returns, part of the explanation may come from the progress made by some of these tech companies in the field of generative AI and the new set of opportunities that the technology creates. However, while the benefits of generative AI cannot be denied, the technology is also associated with potential significant social and environmental risks (e.g. displacing jobs and increasing CO2 emissions due to computing requirements). As AI unintentionally permeates investment strategies, so too will the need for greater management of associated risks, likely resulting in greater engagement from investors on how companies are reacting to the latest developments in AI, and what mitigating actions are being taken to alleviate the negative threats brought about by the latest technological advancements.

ICYMI

• Climate vulnerable nations could get insured for $10 mln a year each -research. A breakthrough study by the University of Cambridge’s Institute for Sustainability Leadership reveals that wealthy nations could offer $25 billion annually in climate disaster protection to 100 vulnerable countries for as little as $10 million per nation. The findings challenge the misconception that these nations are uninsurable until 2050 and propose a risk-sharing system using donor contributions to fund climate damage protection premiums. With a modest $10 million donation per recipient country, this scheme could provide $200-300 million in annual protection, mitigating potential losses of 50-300% of GDP for Small Island Developing States facing extreme climate events.

• Over 75% of Companies Have Cut Emissions Intensity Since Paris Agreement: Accenture. A study by Accenture reveals that over three-quarters of large companies globally have reduced their operational emissions intensity since the Paris Agreement, yet less than a fifth are on track for net zero emissions by 2050. While 37% of companies now have net zero commitments, growth has slowed. European firms lead with 61% committed, while North American companies lag at 28%. The report highlights that only 18% are on track for 2050 net zero, with the utilities sector showing the most emissions reduction. 

• North American companies at greatest risk of violating UN environmental standards, new research finds. ESG Book’s new research reveals that companies in the United States and Canada are three times more likely to risk violating United Nations environmental standards than companies in other regions globally. In a study of over 10,000 corporations, North American companies, particularly in the US, are identified as the most susceptible to UN Global Compact’s environmental principles violations. ESG Book’s Risk Score is based on the UN Global Compact, providing transparent, data-driven insights and aiming to address market challenges in risk analytics.