ESG+ Newsletter – 26 October

Your weekly updates on ESG and more

This week’s newsletter begins by looking at why institutional investors invest in ESG or sustainable funds, before shifting to the EU’s new green bond standard which seeks to prevent greenwashing and tighten requirements about what constitutes ‘green’. Energy is also in focus this week, with an apparent “unstoppable” transition to clean energy and advocacy from companies urging the phase-out of fossil fuels to be agreed at COP28. We also look at how the Inflation Reduction Act is impacting the EU; the end to the UK’s banker bonus cap; and how unions are flexing their muscle in the US. 

Investor’s view ESG as value additive

Amid the ongoing sustainable investing versus financial returns deliberations, most notably emanating from the US as the politicisation of ESG continues, Schroders has published its 2023 Institutional Investor Study. Interestingly but not unsurprisingly, the majority of investors view long-term financial returns as the top driver of investing in sustainable and impact strategies, and that there is an increasing recognition of the opportunities that ESG investing presents. As noted in the study, “the trends of deglobalisation, decarbonisation, and demographics” are firmly on the radar of the investment community with “sustainability themes becoming increasingly important, creating new opportunities for companies and investments”. Thematic investing was highlighted in the research as an area of interest among investors, further underlining this point.

According to the study, US investors were particularly dialed in on the relationship between financial returns and sustainable strategies. While this may initially seem surprising, it correlates with the US investment market before ESG was made a divisive issue, and ESG investors were subsequently forced to remarket to avoid explicit mention of ESG – while attempting to still recognise the opportunities that sustainability provides from a financial returns perspective.  

EU implements green bond standard

This week the Council of the EU, the EU’s decision-making body, announced the adoption of regulation that will create a European green bond standard, which creates uniform requirements for issuers of bonds that wish to use the designation ‘European green bond’ or ‘EUGB’ for their environmentally sustainable bonds. The objective is to prevent greenwashing by forcing issuers to demonstrate that the proceeds from green bonds are being used for green projects and that these projects are meeting the environmental or sustainability conditions associated with the bond. Under the regulation, bond issuers will be required to provide voluntary disclosures for environmentally sustainable bonds and sustainability-linked bonds issued in the EU. To ensure effective and independent oversight of these disclosures, the regulation also establishes a system for the registration and supervision of entities acting as external reviewers for European green bonds. Additionally, all proceeds of European green bonds will need to be invested in economic activities that are aligned with the EU taxonomy framework that defines which economic activities the EU considers environmentally sustainable – effectively ensuring that the financing is being used to support the bloc’s green policies and transition to net zero. The European green bond standard is scheduled to be formally signed and published in the EU’s Official Journal in November 2023, and will come into effect from November 2024. 

Impact of US green subsidies yet to materialise

A European Commission report into the macroeconomic impact of US green subsidies has produced inconclusive findings according to Reuters. The $369 billion-plus green subsidies are part of the US Inflation Reduction Act (IRA) which was enshrined into law just over a year ago. When it was announced, EU governments expressed fears that US subsidies for green goods, such as electric vehicles, would have a damaging effect on manufacturing in Europe as the subsidies would favour US manufacturers and locally produced components. However, the Commission’s report this week found only limited macroeconomic impact on Europe, mainly because any potential investments have not yet occurred. There has also been some uncertainty about calculating the potential impact of the IRA. IRA tax credits aren’t capped, making it difficult to calculate their total value and makes it challenging to differentiating between the impact from the IRA and other economic factors such as higher EU energy costs. The report stated that Europe will likely continue to be attractive for clean tech investment thanks to the continent’s predictable demand, talented workforce, and focus on innovation. However, the Commission outlined its intention to continue to monitor the situation closely and to maintain pressure on Washington to mitigate the impact of the IRA on the EU economies.  

International Energy Agency argues clean energy transition is now “unstoppable”

This week the International Energy Agency (IEA), an authoritative source of data on global energy markets, released its annual World Energy Outlook. Perhaps the most optimistic energy outlook yet, the report highlighted the accelerating pace of investment into renewable technologies with global annual investment in clean energy 40% higher in 2023, than it was in 2020. The report highlighted what the IEA is calling an “unstoppable” transition to clean energy. While these figures are promising, a lot of work remains to achieve the much-needed phase-down and eventual phase-out of fossil fuels. The IEA’s report predicts that by 2050 demand for oil will fall by almost half, and warns that oil and gas investments are no longer “safe or secure” for countries or customers. Despite this demand reduction, the report concludes that, unless additional policy interventions are made, the share of fossil fuels in the global energy supply will be 73% in 2030, far exceeding the reductions required to align with a 1.5°C scenario. It remains to be seen whether negotiating countries at COP28 will adopt the measures needed to accelerate the transition to clean energy and avoid the worst impacts of climate change. 

Companies urge fossil fuel phase-out ahead of potential COP28 deadlock

Sticking with fossil fuels, and in advance of the upcoming UN climate summit COP28, over 130 companies have urged leaders to agree a timeline to phase out fossil fuels. This marks the first time that the businesses, with nearly $1 trillion in annual revenues, have openly argued for the phase out of fossil fuel to tackle climate change. With COP28 looming, businesses with net zero targets have expressed concern about the lack of coherent policies to meet the Paris goals. In the letter, companies said they are phasing out fossil fuel use but need policymakers to work with them to accelerate the transition and provide greater certainty. 

The letter places greater focus on a COP which has already been the subject of great scrutiny. In a recently published letter, COP28’s President-Designate stated his intentions for COP28 to fast-track the energy transition, transform climate finance, put people and nature at the centre, and mobilise inclusive COP participation. He also raised concerns around the Loss and Damage Fund, stating the fund needs to urgently become operational with no delays. This comes as countries appear to be deadlocked on how to design the fund to help nations recover and rebuild from climate change. With only a month until critical UN climate negotiations in Dubai, countries remain at an impasse over designing a fund to help nations impacted by climate change. Disagreement is focused on which entity should manage the fund, who should contribute financially, and which countries would qualify for funding. Finding common ground on how to create and operate the loss and damage fund represents a major challenge that must be overcome to achieve progress at the summit. With negotiating positions still unaligned, bridging the divide may be an uphill battle.

The UK scraps cap on bankers’ bonus

The Bank of England and the Financial Conduct Authority (FCA) announced their decision to scrap the cap on bonus awards for bankers as part of the UK government’s push to boost the competitiveness of the UK market. The cap, a legacy arrangement from the European Union, limits bonus awards to twice base pay for employees of banks, investment firms and building societies, and was introduced in 2014 in the aftermath of the 2008/2009 financial crisis. The new rules are set to take effect from 31 October and apply from this financial year, with regulators expecting the move to make the UK financial services industry globally competitive. The cap on bonus awards led to higher salaries for bankers who, as noted in a recent FT article, “will be contractually entitled to those higher salaries and so will only give those up where they are offered some incentive to do so”. In spite of the rules and market practice expectations around executive remuneration, such as the deferral of a proportion of the bonus award into shares, and other protective measures to curb executive pay in the UK, the move has been subject to severe criticism, particularly in the context of the cost-of-living crisis. 

From Detroit three to healthcare, US labour unions flex muscle  

2023 has been a big year for labour organising in the US. Nearly 310,000 workers have been involved in work stoppages and strikes through August this year, according to preliminary data from the US Bureau of Labour Statistics. This puts 2023 on course to being the busiest year for strikes since 2019. The high number of negotiations for pay hikes and benefits was triggered by a combination of a tight US labour market, the expiry of union contracts, high living costs, and rising inequality, including growing pay gaps between workers and top executives. According to Reuters, the toughest negotiations in 2023 took place across sectors such as media, parcel delivery, manufacturing, healthcare and energy. Given these ongoing labour market tensions, companies are under increased scrutiny regarding their labour practices. Workers aren’t afraid of asking for better pay and protections, and have shown a willingness to take strike action if progress isn’t made.

ICYMI 

• New competency framework to drive higher standards in corporate governance in Ireland. In response to the ever-changing regulatory, governance and macro-economic environment in Ireland, the Institute of Directors has launched a new Continuing Professional Development (CPD) Framework. Designed to foster improved collective board strength and responsibility, the framework is the first of its kind in Ireland and will act as an enabler for individual directors and boards in identifying the necessary skills and expertise needed to direct and control their company.
• Social factors taskforce issues guide for pension trustees. The Taskforce on Social Factors (TSF) has issued its latest recommendations for the UK pensions sector on how to develop a common understanding and assessment of financially material socials risks and opportunities. Among the recommendations, pension trustees are encouraged to ensure their asset managers consider social factors and integrate them into their investment strategy and stewardship. Meanwhile, asset managers should demonstrate that they have influenced social outcomes through transparent reporting on engagement, voting and investment outcomes.
• Measuring growing ESG prioritisation in 2023. Research from Thomson Reuters Market Insights shows that 66% of general counsels and legal decision-makers in the companies surveyed report that a focus on ESG issues is going to be a high priority for their organisation in the coming 12 months.
• Australia releases proposed IFRS-based climate-related reporting standards. The Australian Accounting Standards Board (AASB) announced Tuesday the release of a new exposure draft, outlining its proposed standards for companies to report climate-related information, based on the recently released sustainability disclosure standards by the ISSB, with planned disclosures starting in January 2024.