ESG+ Newsletter – 25th May 2023

Widespread recognition of the impact of CSRD as the EU Commissions seeks amendments

With the implementation of the Corporate Sustainable Reporting Directive (CSRD) drawing closer, many companies are putting plans in place to comply with new EU standards. According to a survey conducted by Workiva of 500 publicly-listed companies across Europe, 94% plan to become CSRD-compliant by 2024. More significantly, 59% of companies not covered by the directive, such as those in the UK, also plan to comply with it. However, many companies have some work ahead to become compliant, with a separate survey by Censuswide revealing how 60% of UK companies don’t believe that they’ll meet the Scope 3 emissions reporting deadline of January 2024.

EFRAG’s European Sustainability Reporting Standards (ESRS) are the reporting pillar of the CSRD, providing the indicators for reporting. While these are yet to be finalized, a EU Commission consultation on ESRS concluded on 17 May with Environmental Finance revealing that some “adjustments” had been made. The most significant change is in relation to the materiality assessment, with the EU Commission scaling back its mandatory disclosure requirements. The EU Commission is now proposing that companies conduct their own materiality assessment to determine what needs to be disclosed, a change which many lobbyists had been pushing for. The EU Commission’s amendments are expected be put forward in delegated acts in June, which will then be open to a one-month consultation period.

Biodiversity funds explored in seminal week for action

There has been a renewed focus on biodiversity since COP15 established the Global Biodiversity Framework late last year, underpinned by the increasing number of biodiversity focused investment funds. Last week, the FT published an opinion piece detailing the rise in such funds, citing Morningstar data counting a total of 19 biodiversity-related funds, raising the question of how exactly they can contribute to improved outcomes for biodiversity, which is notoriously difficult to measure. Each fund provider seems to be taking a different approach, with some favoring large-cap companies committed to improving performance, others only selecting companies which have a minimal impact due to the very nature of the business, and a third group taking a more long-term view by selecting stocks in companies where a significant proportion of revenue results from a product or service that specifically contributes to biodiversity. These approaches have garnered widely different returns, with ‘safer’ strategies being more resilient to current market conditions, while those focused on biodiversity solutions seeming riskier in the short term.

As the biodiversity landscape continues to evolve, in a seminal week, the TNFD and Science Based Targets Network (SBTN) both made important announcements this week. The TNFD announced that it plans to release its final framework on 18 September and is exploring setting up a Global Nature Data Utility to provide data which would support companies in assessing their impacts, dependencies, risks and opportunities associated with nature. Yesterday, SBTN launched criteria for setting freshwater and land use science-based targets. This is an important step in science-based target setting as it allows companies to set best-in-class targets for water and land use. With over 1,000 SBTs already set for carbon emissions, the adoption of these wider environmental goals could be swift while simultaneously starting to address concerns regarding the ability to measure nature-related impacts.

Asset managers accused of going silent due to political tensions on ESG

Anti-ESG efforts have been to the fore in the US, as various political figures seek to discredit and minimise its impact. Their stance is that ESG investing is anti-capitalist and that deploying capital – particularly pension money – in socially conscious investment as opposed an investment that delivers the greatest returns, is against asset managers fiduciary duties. Since drawing the ire of many US State legislatures and congress representatives, asset managers have been accused in a recent article by Bloomberg of going from loudly extoling the benefits of ESG to losing their voice and retreating. Their ardent stances on carbon emission reductions, net-zero plans, workforce diversification and other respective related ESG efforts, have given way to the downplaying of the prominence of ESG across their investing principles, and the revision or removal of ESG language from marketing materials. The article includes views from several responsible investors and, while the ESG acronym has become too politicized for some, these asset managers doubled down, arguing that companies and investors that aren’t thinking about issues such as climate change are hurting their own bottom lines.

The growth in ESG, and its mainstream profile, has drawn increased scrutiny from various stakeholders. There have been some notable impacts to its reputation, particularly its politicization and inclusion in ‘culture wars’ in the US which has led to public confusion about what ESG is; and the hijacking of ESG by marketers using it to promote ‘green’ products or events which has contributed to the perception of ‘greenwashing’. However, despite this, ESG seems likely to evolve rather than disappear. Its role in investment decision-making and incorporation into financial risk assessment has been embedded – on some form or another – across many parts of the investment community. ESG’s image and reputation though, may be impacted by all the external noise, and only time will tell if walking back from it publicly will help quieten this down.

Supply chain scrutiny has unintended consequences

As the world continues to grapple with the climate crisis, Reuters has reported on the potential tension between renewable energy sources and material sourcing. Western countries have been rushing to get their hands on solar as an attempt to reduce their dependency on fossil fuels. However, the challenge is the potential for transgressions in the supply chain. At the heart of the solar manufacturing is the province of Xinjiang, which is a major producer of silicon metal, the quartz-based feedstock for ultra-pure silicon – known as polysilicon – which is the key raw material in solar panels. Xinjiang controls 35% of global polysilicon output and there are potential concerns around human rights issues in the region, with several countries starting to tighten up on human rights issues within supply chains. The United States has already banned the import of Xinjiang polysilicon and, in Europe, Germany has introduced new legislation requesting companies to police their supply chains, while the EU is proposing a value chain due diligence plan to eradicate forced labour from all products entering the 27-nation bloc. This has caused a huge bottleneck on solar panels in the US and could result in the problem worsening in the EU, which could have a major impact on countries ambitions to transition to a low carbon economy. These are issues which need fast and well thought out solutions. As is the case in many ESG issues, there are often unintended consequences in trying to achieve targets and one needs to consider all possible scenarios.

Middle East to drive sustainable change through ‘Transition Investment’ Strategy

According to a recent annual report published by NYU Abu Dhabi, UAE institutional investors should focus on transition investment as a new philosophy to further the United Nations Social Development Goals, capitalizing on their unique access to emerging markets. During an event to launch the report, attendees concluded that transition investment, an investment philosophy aimed at achieving socio-economic impact along with financial returns, can make a significant difference for the global economy and the region. As reported by Zawya, according to the report, this form of investment is vital to overcoming the current global “polycrisis” – a simultaneous occurrence of multiple, interconnected challenges that worsen each other, making them harder to address and resolve. The Transition Investment Workshop discussed potential ways to unlock large-scale capital deployment and found that the Middle East is particularly well-placed to play a leading role.

Amongst others, Transition Investment Lab’s primary vision is to assess how can companies, investors, and policymakers effectively address the sustainability challenges of the 21st century? Specifically, how can research contribute to the shift towards a paradigm where environmental sustainability, social inclusion, and shared prosperity are prioritized, looking toward academic research to restore credibility, effectiveness, and predictability in sustainable investment, and encourage large-scale capital deployment to close the SDG investment gap.

E-Commerce making space for electric vehicles

The Wall Street Journal reports that renewable energy companies are beginning to expand their share of US industrial real estate. The report highlights a CBRE release that companies involved with EVs (Electric Vehicles) have doubled their leasing in Q1 of this year. Typical renewable energy, such as solar, wind and others, have held significant space for a long time in industrial real estate, but more recently the batteries and energy transition technology have accelerated their leased space. The space has expanded to build out these companies’ supply chains, and is filling in some, but not all, of the space left vacant by e-commerce. This reaction and increase in leasing are connected to a variety of pushes, all connected to the demand for EVs, and subsidies offered by the Inflation Reduction Act. As the required space for the supply chains for EVs and other renewable focused companies grow, questions remain about whether or not these companies will be able to meet the demand for their products, as well as whether sourcing of the materials needed can be carried out in a sustainable fashion.

ESG investing and link to returns debated among UK investors

Financial services firm, Charles Schwab, has found that investor sentiment in the UK towards prioritising ESG issues versus financial returns has fallen year-on-year. Of the 1,000 UK investors surveyed, the percentage of those making sustainability centric decisions ahead of maximising returns has fallen by 8% to 47%. Commenting on the survey, Managing Director, Richard Flynn, noted the impact of the cost-of-living crisis, and the report more broadly noted that investors are less convinced that companies with strong ESG credentials make for superior investments.  The debate is an interesting one. While ESG returns have dropped off relatively compared to the wider market, the levelling out of the ESG investing sector was inevitable – especially in an increasingly recessionary environment. The last year has seen Oil & Gas returns boom, in no small part due to the war in Ukraine, while widely held tech stocks have struggled comparatively. The premise of ESG investment is long-term sustainable growth through the thorough evaluation of material risks and opportunities, and governance structures. These opportunities most often relate to the regulatory backdrop and market investment trends, which demonstrate fundamental and non-flash in the pan characteristics of them. The idea, therefore, that there must is a tradeoff between investing for ESG and for financial returns, is a complex one. You can certainly make more money by riding short to medium term trends but for institutions that manage pension capital, for instance, it may be against fiduciary duties not to integrate material ESG factors into investment decisions.

The pressure to improve on the corporate front isn’t limited to investors either, as TechCrunch outlines in a recent article which discussed the gap between executive narrative on ESG and the data behind that. The article highlights that consumers are one particular stakeholder group that are holding businesses accountable. Demographic-wise, millennials and Gen-Z’ers will particularly base consumption choices on sustainability footprint, demonstrating the bottom-up pressure in addition to the investor-led top-down.

ICYMI

• ‘ESG’ in US finance job titles comes with 20% pay premium. According to research seen by Reuters, money managers and bankers whose job titles mention ESG or sustainability have a 20% higher base salary on average in the US compared to colleagues of the same seniority whose job titles do not include those terms. As more than $30 trillion in capital has been committed to ESG-related investments, there has been an increase in the need for bankers and asset managers to work with these investments.
• Swiss Re decides to leave Net-Zero Insurance Alliance. Reinsurer Swiss Re has become the latest company to leave a global climate alliance as it announced in a statement that it would be leaving the Net-Zero Insurance Alliance without explaining its reasons. This follows similar moves earlier in the year from companies including Munich Re and Zurich Insurance. The company stated that its commitment to its sustainability strategy remains unchanged.
• India eyes nationwide use of 1% sustainable aviation fuel by 2025. In an attempt to reduce emissions from the aviation industry, India is planning to require the use of 1% of sustainable aviation fuel (SAF) for domestic airlines by 2025. This follows a similar move by the European Commission whose SAF mandate of 2% is also expected to begin in 2025. As more fuels become available, the amount of SAF mandated could increase according to the country’s oil minister.

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