ESG+ Newsletter – 25 July 2024

This week, our newsletter starts in the US, with Kamala Harris’ climate agenda gaining endorsements following her nomination for the presidential race. We explore the decline in DEI targets in executive compensation plans among S&P 500 companies; discuss the importance of cost-effective green technologies; and look at the FRC’s updates to the UK Stewardship Code. Lastly, we examine how greenwashing fears are leading companies to under promote their sustainability progress to avoid accusations of greenwashing.

Harris agenda endorsed by environmental groups  

Following President Joe Biden’s departure from the 2024 presidential race, Kamala Harris has garnered enough support to become the Democratic nominee. According to Bloomberg Green, Harris has a track record of ambitious climate policies and has been a key supporter of Biden’s climate agenda during his presidency. As Vice President, Harris has been a spokesperson for the Biden administration’s climate legislation, promoting the Inflation Reduction Act and representing the U.S. at the COP28 climate summit. In her 2020 presidential campaign, Harris’ platform included a carbon tax, a ban on fracking and proposed $10 trillion in public- and private-sector climate spending. Environmental groups such as the Sierra Club, and the Natural Resources Defense Council endorsed Harris’ campaign within 48 hours of Biden’s announcement, according to the Washington Post.  

Harris has yet to announce her running mate, but potential choices will likely exhibit a strong commitment to climate policy. Bloomberg lists potential running mates as Michigan Governor, Gretchen Whitmer, Pennsylvania Governor, Josh Shapiro, and US Secretary of Transportation, Pete Buttigieg. Since Monday, there has been additional speculation that potential running mates now include Arizona Senator, Mark Kelly, Kentucky Governor, Andy Beshear, and North Carolina Governor, Roy Cooper, among others. The potential running mates have a varied history of climate action, which includes executive orders, legal action and proposed investments. Regardless of who is selected, Kamala Harris’ running mate will likely be an advocate of an agenda that includes investments in climate change solutions and support for climate laws and regulations in the U.S. in the future. 

Fall in DEI targets in US executive pay 

This week, the Financial Times highlighted that pressure in the US has resulted in a reduction of Diversity, Equity and Inclusion (DEI) targets in executives’ bonus schemes. 12 companies were reported to have dropped such metrics after having faced pressure from Strive, an anti-ESG asset manager. According to an analysis by ESGAUGE and The Conference Board, the proportion of S&P 500 companies that included DEI metrics in executive pay decreased from 75% in 2023 to 66% in 2024. It might be pessimistic to attribute this decline in full to the political backlash against ESG initiatives. A number of asset managers have raised concerns against “poorly constructed ESG metrics” that could result in “inflated pay relative to performance.” Indeed, investors are increasingly raising their expectations around ESG targets, asking that they be closely tied to the business strategy, quantifiable, and challenging to meet. While these investors may, in some instances, be supportive of a recalibration of executives’ incentives, this may not be directly linked to a lower interest in DEI initiatives but a potential maturing of the focus on ESG from effort to demonstrable outcomes.

Reducing the cost of the green transition

The cost of the green transition – both for companies and consumers – has been a much-debated topic, and there has been one relatively universal conclusion – it will be expensive. While consumers may be willing to pay more for ‘green’ products for smaller items – like food and clothes – for larger and more expensive items, they will likely opt for the most cost effective. The same logic applies for companies. A recent Bloomberg Opinion article argues that, for the adoption of new climate technology with lower emissions to work, it needs to replace existing products at the same price point or else consumers or companies will default to the cheaper alternative with higher emissions. An example of emerging companies fulfilling this requirement from the article is Fortera Corp, which has developed an alternative type of cement. The company grew from a failed start-up, where the sector wasn’t willing to pay a “greenium” for the product. Having gone back to the drawing board, the resulting product is as strong as cement, quicker to set and produces 70% lower emissions. With concrete representing 8% of total emissions globally and, given the link between the construction sector activity and economic growth, a lower emissions and cost-effective alternative to concrete is a key example of how the world may effectively transition and decarbonise. 

Green Impact Exchange (GIX) Files for SEC Approval as First US Green Economy Stock Market 

The Green Impact Exchange (GIX) has filed an application with the SEC to establish the first U.S. exchange dedicated to the emerging global green economy, targeting a 2025 launch if approved. Founded by former NYSE executives, Daniel Labovitz and Charles Dolan, GIX’s mission is to list companies committed to sustainability, offering enhanced transparency and accountability to investors, and combating greenwashing through rigorous listing standards. GIX will enable companies to maintain their primary listings while being recognized for their environmental efforts on GIX. 

According to GIX, the new exchange will simplify the investment landscape for sustainability-focused investors, while helping companies access a growing pool of capital directed towards sustainable investment. According to the SEC filing, GIX will require all listed companies to comply with its Green Governance Standards, mandating an internal governance structure that provides transparency and accountability for the companies’ sustainability commitments. These standards also include public commitments to long-term sustainability, engagement strategies involving key stakeholders, and alignment of business strategies with sustainable principles, with actionable plans across multiple timeframes to implement these strategies effectively. GIX will also implement the Return to Green program, which commits a portion of GIX’s revenue to support organisations on the front lines of sustainability efforts. By addressing the need for verified sustainability practices and offering a dedicated marketplace, GIX aims to attract significant investments into the $50+ trillion global green economy, driving progress toward environmental goals.

Financial Reporting Council provides update on review for Stewardship Code 

Following engagement with stakeholders, the Financial Reporting Council (FRC) has announced five distinct priority themes that will be key to the update of the UK Stewardship Code. These are “Purpose”, whereby the FRC will base the premise of effective stewardship based on the perspectives of the entire stakeholder spectrum, and subsequently what this translates to in engagement and practice. “Principles” is second – this will establish which reporting is exactly necessary, while “Proxy Advisors”, which is focused on ensuring greater transparency. “Process” and “Positioning” are the final two, the former will address the reporting burden of signatories, and the latter recognises the necessary relationships with other authorities, such as the Financial Conduct Authority, required for successful implementation.  

Reducing the reporting requirements for signatories has long been a topic of discussion, with investors providing feedback to the regulator that there is little room left for impactful engagement due to the burden. The FRC is now obliging by emphasising impact and outcome rather than detailed activity and context. As guidance, the FRC has clarified the expectation for what constitutes an outcome – explaining that this can be demonstrated by positive, constructive and ongoing engagement, alongside informing investment decisions. It has referred to Principles 10 and 11 of the Code – collaborative engagement and escalation – as tools. The ultimate aim, therefore, is to allow stewardship professionals the capacity to work primarily towards effective engagement, rather than templated reports. The FRC will continue to receive feedback ahead of launching a public consultation later in 2024. 

How greenwashing fears shape corporate communications and investing  

The fears of greenwashing and how it is impacting communications and will impact investing decisions is very real. A review of the UK’s FTSE 100 and 100 large US firms’ communications shows that they avoid making consumer-facing ESG marketing claims not backed up by data. It highlights the concerns around greenwashing, which can have severe consequences. With the UK Competition Markets Authority reviewing claims and EU regulations effective in 2026 banning misleading, vague, or overstated green claims in all communications. The result is ‘greenhushing’, where companies report robust data on their sustainability progress but do not include this information in public-facing communications. “63% of the environmental progress points reported by the FTSE 100 were not promoted”, which was even higher in the US at 67%. 

For asset managers, greenwashing is now having financial impacts. ESG funds in Europe may need to offload $30-$40 billion in stocks and bonds to retain their labels under the EU’s stricter fund naming rules. Approximately three out of four equity and fixed income funds hold at least one stock that breaches the new rules. Passive funds are more likely to change their names since selling securities would require changes to their underlying benchmarks, making it more challenging. Both companies and investors are under pressure to avoid greenwashing, which is increasingly negatively perceived by the public. Careful communications will be crucial to ensure they are not missing out on opportunities to gain favour with consumers and investors for sustainability efforts. 

ICYMI 

• Green bonds sales in the first half of the year top $356 billion, making it the busiest half year observed since the market’s inception, according to data compiled by Bloomberg. 
• S&P Global will no longer offer ESG ratings to Indian investors following the introduction of regulations on ESG ratings products by the Securities and Exchange Board of India, Responsible Investor reports.