ESG+ Newsletter – 23rd March 2023

ESG and Silicon Valley Banks’ failure

While there continues to be questions over the strength of certain parts of the financial sector, there are already opposing views on the drivers of Silicon Valley Bank’s (SVB) demise. According to the Wall Street Journal, a contributory factor to SVB’s failure may have been the 2021 Infrastructure Bill, which funnelled investment into clean technology. SVB had been supplying lines of credit to a number of start-ups in the clean tech sector, which the Wall Street Journal argues “weren’t filling some vital market needs” and was instead just an attempt by the federal government to “micromanage” the market. While this argument may provide fuel for anti-ESG factions, further evidence indicates that poor governance and oversight were more likely to blame. According to the Financial Times, Bank of England warned US regulators over the risks building in SVB and weak controls within the bank. Nonetheless, SVB’s decision to shift to ‘safer’, longer term bonds left it exposed to rising interest rates, and they were unable to provide investors with real time or even weekly updates about what was happening to its securities portfolio; however, no action was taken to address this, and early warning signs were likely overlooked. While some may argue that too much focus on E and S matters led to SVB’s downfall, including the now custom “woke” accusations during any crisis, a greater focus on traditional governance may have resulted in a different outcome. Or, maybe it wouldn’t, but it seems a stretch to say that exposure to US treasuries in a high interest rate environment is an ESG-related failure.

Two sides of the legal coin for investors

Earlier this week, Robeco published its annual Climate Survey, which provides insights into how investors (with $27 trillion in assets under management), are approaching the opportunities and risks associated with climate change. One of the growing concerns highlighted in the report is the potential for legal consequences for investors invested across ESG assets. Almost half of the respondents in North America stated that they are concerned they will face legal consequences if they consider ESG factors, particularly on foot of the increasing US political scrutiny of ESG investment in certain states.  While 30% of respondents in Europe cited legal proceedings as a concern, this is more likely relating to potential litigation regarding ‘greenwashing’ of investments, as regulators look to hold companies and investors to account for sustainability related claims.

While investors may be concerned that they may face legal repercussions from either political or regulatory stakeholders, others believe that legal recourse will become an important component for ESG investors. In a recent Op-Ed in ESG Clarity John Naughton, COO of Institutional Protection, argues that investors should turn to litigation themselves more frequently when dealing with companies who they believe have either committed negligent or illegal behaviour, or who have failed to meet shareholders expectations on public commitments. As we have highlighted previously, investors have become more willing to use ESG styled activism to bring about wider changes at companies, and whether investors turn to using legal action for this activism as a way to ensure that companies are meeting their ESG commitments and – in turn – influencing change across a company’s strategy and business operations, remains to be seen.

UK budget falls short of planned US and EU green subsidies

Last week, the UK’s Chancellor of the Exchequer, Jeremy Hunt, announced his Spring Budget. Despite the current global economic headwinds, there was expectation that Hunt’s ‘Budget for Growth’ would represent a stepping-stone towards the UK Government’s vision for a prosperous and green economy.  Confirmation of long-awaited plans to invest in small-scale nuclear reactors and carbon capture facilities will be viewed as a boost to the UK’s low-carbon energy frameworks, as will the decision to reclassify nuclear energy as “environmentally sustainable”, in line with the EU Taxonomy. However, like it’s EU counterpart, the inclusion of nuclear energy is likely to be met with opposition in some quarters, on grounds of risk and hazardous waste.

The budget also included plans to give more power to local authorities and set up investment zones focused on strengthening green industries. Despite these boosts to green investment, there was almost no weight given to expanding the UK’s clean energy technologies, including wind, solar and measures to combat energy efficiency.  The UK’s plan falls short of the new green subsidy programmes planned in the US and EU. However, with a ‘Green Growth Day’ expected for the end of March that will include an update to the UK Net Zero Strategy; a Government response to the Skidmore Review; and a response to the US Inflation Reduction Act, there is hope that significant announcements in support of the green economy are in the pipeline, as the UK looks set to join the green subsidies arms race.

U.S. President Joe Biden defends ESG investing

This week, U.S. President Biden vetoed a Republican attempt to overturn a Department of Labor rule allowing retirement plan fund managers to incorporate ESG considerations into investments. This action was the first veto of his presidency and marked a stance against the Republican onslaught against ESG’s role in investment. The President said, “there is extensive evidence showing that environmental, social, and governance factors can have a material impact on markets, industries, and businesses.” As ESG becomes increasingly political in the U.S., and with the SEC’s disclosure ruling upcoming, investors will be forced to navigate contentious waters while making investment decisions.

FCA cracks down on benchmark ESG disclosure quality

The Financial Conduct Authority this week sent a letter to benchmark administrators, outlining a range of areas where ESG-related disclosures have been deemed poor by the regulator. It follows an initial letter, also to administrators, which emphasized the need for good quality disclosure and the risk of poor information – these inadequacies were impacting the trust in the market for ESG labelled funds, and the effectiveness and enablement of the transition to a net-zero economy.

The letter noted central areas of inadequate detail around ESG factors, including opaqueness regarding underlying methodologies of data providers and ratings products, a failure to fully implement the required level of disclosure as per the Low Carbon Benchmarks Regulation, and incorrect roll out of benchmark strategies – including in relation to usage of outdated ratings agencies. It goes on to state that ESG matters remain high on the FCA’s agenda and it will consider enforcement action where firms fail to consider their feedback. With the UK’s equivalent of the European Union’s Sustainable Finance Development Regulation, the Sustainable Disclosure Requirements, due to be unveiled this summer, ESG benchmarks are highly likely to remain in the FCA’s crosshairs. The next step is a consultation, with current indications that an announcement may follow shortly, even possibly aligned to the Net Zero Strategy Update, due out next week.

European Commission publishes a proposal on green claims

On 22 March, the European Commission published a proposal for a Directive on Green Claims, together with a proposal for a Directive on Common Rules Promoting the Repair of Goods, as part of the overall Consumers Package.  This directive stems from the findings of an impact assessment carried out by the European Commission which concluded that, despite consumers’ willingness to contribute to a more circular economy, their active and effective role is hampered by barriers that prevent them from making environmentally sustainable consumption choices, including a lack of confidence in the credibility of environmental claims and the proliferation of misleading marketing practices related to the environmental sustainability of products. The aim of this Directive is to protect consumers and provide them with accurate and reliable information, as well as to improve legal certainty and a level playing field in the internal market.

In terms of scope, the proposal focuses on the substantiation and communication of voluntary environmental claims and labels and will apply to all businesses that place products on the EU market, both in the physical and digital environment, in business-to-consumer commercial practices. The proposal will now enter the legislative process, with the aim of adoption by the end of 2023. However, although the European Commission is working to speed up the process, there could be delays due to some controversial aspects of the legislation, including the lack of a mandatory and common methodology and the reporting requirements for GHG offsets.

Voluntary carbon markets under scrutiny yet again

Speaking of offsets, this week Bloomberg reported that many carbon offset projects have overstated their impacts. The reported study was undertaken by the University of Berkeley’s Goldman School of Public Policy and assessed a specific type of forestry project which generates carbon credits by implementing more sustainable practices. The study looked at almost 300 carbon offset projects and found that many of these had inaccurately calculated their impact in terms of avoided emissions. Most commonly this was due to comparison of the project’s impact with unrealistic alternative scenarios, leading to the creation of what the report’s authors describe as “bogus credits”. These credits were verified by four of the largest and most well renowned carbon credit registries, all of whom have challenged the output of the study and defended their approaches which they claim have“‘undergone scientific reviews and incorporated feedback from experts and the public.” 

The important question here is whether the voluntary carbon market can rebuild its credibility after a string of accusations of poor carbon credit quality which have undermined the credibility of the entire voluntary market. Last year, Bloomberg found that 40% of offsets purchased in 2021 came from renewable energy projects that didn’t actually avoid emissions; in January, the Guardian published an analysis claiming 90% of rainforest credits were worthless; and, last week, Scottish Widows pension fund called for regulation of carbon offsets. Some may view this as the final nail in the coffin for voluntary carbon markets; however, the IPCC is firm in the assertation that they play a role in avoiding the worst impacts of climate change. With the issues facing voluntary carbon markets consistently focus on a lack of transparency, perhaps more effective governance and oversight is the answer.

Pay transparency across US companies’ hiring processes

A recent Bloomberg article notes that “the number of U.S. job postings that include salary information more than doubled between February 2020 and February 2023, from 18.4% to 43.7%”, following regulation recently introduced in New York, and states such as California, Colorado, and Washington, to mandate such disclosure. It appears the impact of those laws has been to start voluntary disclosure, with 17% of companies that disclose pay range information not being required to do so, according to a WTW survey. The tight labour market, alongside the significant increase in remote work are further drivers of these disclosure expectations. The Bloomberg article also notes that increased transparency across the pay spectrum, including in hiring, may play a central role in closing gender and racial based pay gaps.

Increased disclosure around pay ranges for potential candidates will require similar conversations to current employees, around what salaries are being offered to potential candidates and will have implications for the development of human capital and reward strategies. Across the spectrum, as greater transparency requirements are put on companies, there will be a higher bar of justification of pay practices, no longer will pressure be limited to executive remuneration, but practices throughout the organization.

ICYMI

• Employer climate credentials a top priority for one-in-five jobseekers under 30. According to the European Investment Bank’s latest Climate Survey, 61% of UK jobseekers under 30 regard it as important that prospective employers prioritise tackling their climate impact, with 15 per cent citing it as a top priority.
• LFC celebrates sustainability with the launch of The Red Way Report. This week, Liverpool FC released its first The Red Way Report, spotlighting the global football club’s ongoing commitment to each of the three key pillars of LFC’s sustainability programme: people, planet and communities.
• US and EU ‘reach common ground’ on clean EC President Von der Leyen announced that the two sides had come to agreement on discussions around critical raw materials for the batteries used in electric vehicles, stating that this would “secure strong supply chains for batteries in Europe and ensure access to the US market”.
• Mars chief hits out at ‘nonsense’ attacks on corporate ESG. Businesses that push aside their environmental and social commitments in the face of “nonsense” political attacks will fail to attract younger generations of talent, warns Mars’ new chief executive Poul Weihrauch, arguing that purpose and profit should be seen as friends, not foes.

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