ESG+ Newsletter – 27th April 2023

FTI Research Deep Dives into Environmental Litigation

FTI’s Strategic Communication’s Research team, with support from our litigation and digital focused colleagues published a spotlight report this week, analysing the growth in environmental legal action across Europe. The research follows an initial publication from 2019 which ultimately found that business leaders were anticipating an increase in sustainability related lawsuits in the years ahead, a prediction that, four years later, has held true. The latest analysis dials in on three specific areas of litigation that have boomed in the years since at the corporate level: shareholder litigation for misleading ESG disclosure, consumer and competition regulator action regarding product claims, and third-party driven action. The findings of this research outline the continued tension between sustainability performance and financial performance that constitute some of the driving factors behind the risk of environmental litigation. From the 600 large businesses that were surveyed, one quarter believe that their company does not financially benefit from being more sustainability focused, and another 28% of respondents returned the view that they struggled to implement real improvements on sustainability. Furthermore, from those polled, one in five leaders believe that the majority of their company’s communications on the environment can be attributed as greenwashing.

The results are certainly interesting – not least because the context of the findings show that litigation, and its consequences, is an ESG risk in itself and should therefore be managed and governed as such. While the financial trade off is a concern for some, the regulatory direction of travel plus market level rulings such as the EU SFDR, show both the risks and opportunities related to ESG do not mean that financial health will be sacrificed as the sector develops. In fact, it is the opposite.

Irony abounds with EU’s efforts to reduce carbon emissions

Earlier this week, the European Council announced that it has adopted five new laws which will support the EU in achieving its climate targets within the main sectors of the economy, as set out in its ‘Fit for 55’ roadmap. Included in the new laws is a revision to the EU Emissions Trading System (EU ETS) with the establishment of the new EU Carbon Border Adjustment Mechanism which will work to equalize the price of carbon paid for EU products operating under the EU ETS. The revised EU ETS will cover shipping emissions from the maritime sector and phase out free allowances to the aviation sector. The revision increases the overall ambition of emissions reductions in the sectors covered by the EU ETS to 62% by 2030, relative to 2005 levels.

In spite of the EU’s efforts to tighten its emissions system, the EU Commission has recently been brought to court by four environmental NGOs to stop the EU from labelling fossil gas – primarily gas and nuclear energy – as ‘sustainable’ under the EU Taxonomy. In an ESG Clarity article, the NGO ShareAction has argued that, if the taxonomy is to be credibly linked to reducing emissions, then it must exclude any forms of fossil fuels. Whether the EU will have to walk back from the inclusion of fossil gas to avoid the taxonomy being labelled ‘greenwashing’ remains to be seen, but undoubtedly the irony inherent here damages both the reputation and credibility of the EU’s efforts.

The EU adopts ban on deforestation linked products

The EU parliament has voted through a law to tackle deforestation by requiring companies to perform due diligence for certain products which are at high risk of coming from a deforested area. According to Reuters, the law will require companies that sell goods into the EU to produce verifiable information to prove that the goods were not grown on land deforested after 2020. The rules will initially only apply to cattle, cocoa, coffee, palm-oil, soya, and wood with verifiable information taking the form of geolocation coordinates. The rules aim to tackle deforestation caused by goods consumed in the EU. The UN FAO estimates that EU consumption was responsible for around 10% of global deforestation between 1990 and 2020, representing around 42 million hectares of lost forest. While the EU insists that the rules do not target or single out any country some have not reacted well to the news. In response to the law, Malaysia has said it may stop exporting palm oil to the EU as the requirements to prove where goods are produced using geolocation data is deemed to be too challenging.

While some of the law’s requirements may be perceived as challenging, traceability is a fundamental element in ensuring global supply chains can become more sustainable. This rule applies to products consumed in the EU, but since the goods could be produced anywhere in the world it is easy to see how these due diligence requirements may have wider impacts on product traceability worldwide. The EU Parliament’s negotiator on the law, Christophe Hansen, said that “European consumers can now rest assured that they will no longer be unwittingly complicit in deforestation“. Perhaps as the impacts of this law are felt, the impact of this law will extend far beyond its European jurisdiction.

Can the UK be a leader in the ESG reporting space?

A group of MP’s have called on the UK Government to create a comprehensive ESG reporting strategy which would enable the private sector to integrate and adopt standards, frameworks and disclosures to improve ESG reporting in the country. The MP’s are concerned the EU is moving ahead when it comes to ESG disclosures. The EU has made a lot of moves in the last few years, including introducing a new Corporate Sustainability Reporting Directive (‘CSRD’) which mandates unified ESG disclosures from all listed companies. In addition, it finalised the EU Taxonomy that defines which investments are ‘green’ and which are not. The UK is planning to release its own version of the Taxonomy (the ‘UK Green Taxonomy’), which has now been delayed a number of times. Although the UK may be behind in certain areas, it has been a leader in setting other policies. It was, for instance, one of the first countries to mandate TCFD reporting for listed companies. In spite of some positive moves, the consensus has been that the UK is lagging behind other markets, with concerns around the current ruling party’s potential lack of knowledge and passion when it comes to ESG matters.

A call to action has been put forward for the UK to embrace a single ESG strategy which will galvanize the ESG reporting sector and push the country into a leading position in a topic that is of huge global significance. This supports the widespread view, that ESG reporting requires standardization and any unified reporting strategy constitutes a step in the right direction.

The impact of the anti-ESG backlash on company disclosures

During the last year, ESG seems to have become caught up in a political war, as the lines between business and politics get increasingly blurred, as covered in previous editions of this newsletter. According to the Proxy Preview report, the number of shareholder proposals “seems to be on track to match (or exceed) last year’s unprecedented 627 ESG-related resolutions”, including an increased number of anti-ESG this year. This year, 68 anti-ESG proposals have been filed (vs 45 in 2022), according to a recent Axios article. About one third of these proposals have been focused on diversity, with proponents requesting companies to report on the risks of their anti-discrimination policies to the business. Although these proposals have typically received low levels of support from shareholders, they have drawn significant levels of attention. The anti-ESG movement has had a significant impact on companies’ operations, with BlackRock, for instance, seeing more than $4 billion in pension and investment funds being “pulled” by Republican State officials in late 2022. The potential material impact on operations, has led many asset manager and other large financial firms to identify the impacts of the anti-ESG movement as a material risk to the business, as highlighted in a recent FT article.

Overall, while the narrative and the explicit focus on certain topics may have changed as a result of the anti-ESG backlash, it seems that the underlying strategy and approach remain. This may create a complex situation with companies increasingly incorporating ESG into their operating structures while also taking fewer opportunities to promote their efforts. This may cause a shift in narrative, with ESG treated as another key component of companies’ strategies, rather than a communications opportunity.

COP28 President-delegate rounds up Emirati Chinese partnership discussions in the run up to COP28

Dr. Sultan recently concluded a two-day visit to China where he held a series of bilateral meetings and discussions with important ministry dignitaries linked with the energy and environment sector. These conversations were focused on new and existing partnerships and the development of practical solutions to achieve transformational climate progress in the run up to COP28. As reported in the Arab News, Dr. Sultan emphasized China’s role in contributing to the world’s renewable energy mix and commitment to continue diversifying their energy mix. He also continued to advocate for investment in industrial decarbonization such as steel and aluminum given its continued importance across all sectors and the inability to eradicate its use completely. Pointing to the UAE-China partnership as a model of cooperation towards sustainable, low carbon growth and prosperity, he noted in the same article that “Partnerships will be key to making COP28 a COP of action and a COP of solidarity, unity and impact”.

The need to globally reduce emissions by 43% by 2030 to meet the Paris Agreement targets, requires a range of technology solutions to meet these decarbonization goals, which can only be achieved with the participation of all countries and parties, as stated by the COP28 President-Designate.

Sustainability-linked bonds penalize sovereign issuers for failing to meet climate targets

Countries are issuing debt that offers additional payout to investors if the issuer fails to meet its climate targets. As detailed in the recent Financial Times article, the national debt issuances play an important role in easing fears that countries will backtrack on promises to reach their ambitious climate targets. Countries such as Chile, Uruguay, issued $2bn and $1.5bn in sustainability-linked bonds (‘SLB’), a world first. A number of countries, according to the same article, appear ready to follow, despite a decrease in a global issuance of green labeled bonds. The use of SLB’s may allow countries with poor track records on sustainability to have access to wider pool of capital. Additionally, these countries are able to prove they are serious about their commitments, given the requirement for higher payouts if targets aren’t met, whether it be to reach expectations set by the Paris Agreement or decrease deforestation.

Implications of anti-strike laws for HR organisations

The UK’s proposed Strikes (Minimum Services) Bill seeks to address the impact of ongoing strikes by key frontline workers by allowing employers to dictate who should continue to work in the event of a strike and removing protection against unfair dismissal for those who refuse to cross picket lines. While the bill focuses on those working in key public sector roles, there are concerns regarding the implications of the bill for those in the private sector. Some feel that the Bill could see a breakdown in engagement between employers, workers and unions and could lead to a more disaffected workforce at a time when the UK is attempting to bounce back from recession. There is also limited evidence of the likely effectiveness of the Bill. Supporters of the Bill have pointed to the use of minimum service requirements in other major European economies. However, these aren’t as far reaching as the UK’s proposals and have also failed to quell industrial action, with France as the most notable example of this. Rather than using laws to address industrial relations issues, experts point to dialog and mediation as the tried and trusted methods for dispute resolution. However, for these to be successful HR teams must closely examine their dispute resolution processes to ensure they are person-centred and values based. Additionally, HR teams may require mediation to equip them with the appropriate skills – dialogue, compassion, and empathy. Ultimately, rather than relying on the threat of termination, organisations can mitigate industrial relations issues by positioning their people function as a “strategic driver of productivity”.

ICYMI

• China’s $1.4 Trillion Wealth Fund Backs ESG as US Divisions Grow. While ESG has become a divisive political issue in the US, in China it has become a national rallying cry; ESG is, according to Chinese state media, a way of “using the power of corporations to achieve a more beautiful society.” Accordingly, many government-controlled enterprises are increasing their voluntary ESG disclosures and asset managers are introducing new products to appeal to the investing public. Further, China’s $1.35 trillion sovereign wealth fund declared at a forum last month that sustainable investing “will prevail.” Beijing hopes this embrace of ESG will encourage investors at home and abroad – enthusiasm which stands in marked contrast to the political attacks the investing strategy has faced in the US.
• Biden pledges $1bn to UN climate fund and implores world leaders to act. US President Joe Biden has pledged $1bn in new US funding to the UN-led Green Climate Fund, which is designed to help developing countries cope with climate change. Separately, Biden has also promised $500mn over five years for a fund to tackle deforestation in the Amazon rainforest. Alongside offering the funding, the US President has called on multilateral development banks to scale up their lending to tackle climate change. This comes as the World Bank is under criticism for failing to adequately address the scale of the global climate crisis.
• MAS Launches Finance for Net Zero Action Plan. At the opening of the Sustainable and Green Finance Institute of the National University of Singapore, the Monetary Authority of Singapore (MAS) announced the launch of its Finance for Net Zero (FiNZ) Action Plan. The action plan sets out MAS’ strategies to mobilise financing to support Asia’s net zero transition and decarbonisation activities in Singapore and the wider region. Specifically, the plan aims to achieve the following four strategic outcomes: data, definitions & disclosures; climate resilient financial sector; credible transition plans; green & transition solutions & markets.

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