ESG+ Newsletter – 27th January 2022

A challenge to ESG and sustainable investing

The Wall Street Journal’s Streetwise column has recently begun a series on ESG investing publishing three articles – the first on why sustainable investing is flawed, the second on why ESG’s premise of improving the world while making money are at odds with each other, and the third looks at sustainable investing bubbles and how that can ruin your portfolio. The articles do raise some valid concerns about ESG – such as how the selling off of assets and shares by investors does nothing to save the planet if bought by private entities who have no public reporting requirements; and, that taxation and regulation of industries or sectors that have a negative societal impact could be a far more effective approach to combatting issues facing the world, such as climate change.

While we look to discuss both positive and negative commentary around ESG, and to debate its evolution, the idea of ESG as “mostly— not completely—a waste of time” might be somewhat misplaced. ESG and sustainable investing’s growth across capital markets is a relatively recent phenomenon. It is gradually being embedded into investment decision-making and company practice and while its ambition may not be to save the world, it is being recognised as protecting financial returns while providing investors with a useful risk assessment tool that helps incorporate non-financial factors, and their impacts, into decision-making. It would appear that ESG has not been immune to polarisation though, whereby something has to be either everything or nothing – rather than accepting flaws but a positive direction. While ESG is not perfect, the only ones who seem to be stating it claimed to be are its most vocal critics.

Proxy voting updates and the corporate world’s role in society

Following up on letters from the CEO’s of SSGA and Blackrock, Aviva Investors CEO Mark Versey used his annual Letter to Chairs to state that he expects the businesses within his global asset management portfolio to deliver “tangible and transparent” progress on sustainability goals in 2022. Aviva Investors, which has £366 billion in funds under management, added preserving biodiversity and upholding human rights to their existing expectations on climate impact and executive pay. Versey stated that he expects companies to move beyond commitments and “turn pledges into concrete and measurable plans of delivery”. Aviva has created a reputation for voting in line with their ESG requirements, voting against the re-election of directors at 137 companies last year for lack of progress on ethnic diversity, and at 85 others for human rights concerns.

The letter reignited the continuing debate on the extent to which ESG considerations should influence decision making in the corporate world. The CEOs of many large assets and fund managers are increasingly requiring the companies within their portfolios to develop policies and set targets that benefit communities and the environment as well as their shareholders. Blackrock CEO, Larry Fink, used his annual letter to CEOs to clarify that stakeholder capitalism “is not woke. It is capitalism”. While veteran fund manager Terry Smith has gone further by suggesting some firms are going too far in developing sustainability credentials at the cost of business performance. ESG in its current form may be seen as a trend by some – and the WSJ articles above are a clear example of that – but it is also critical in ensuring that companies continue to be profitable over the long-term, against rising external and regulatory threats. Increasingly, investors are committing to use the annual pinch-point of a general meeting to drive Boards and management to respond.

Are cyber rules coming from the SEC?

ComplianceWeek details a speech delivered Monday by Securities Exchange Commission (SEC) Chair, Gary Gensler, which set out potential rule changes focused on existing cybersecurity and incident reporting disclosures for financial sector participants; enhancing disclosures made to clients and customers regarding data breaches; and enhancing existing cyber risk disclosure requirements for public companies. While current regulations mandate that companies detail attacks or the loss of customer information after the fact, the new regime may well focus on more proactive steps, such as “practices with respect to cybersecurity governance, strategy, and risk management,” a regime that would be reminiscent of the recommendations set out the Taskforce for Climate-related Financial Disclosures (TCFD). Ultimately, such an approach would make sense – if it works for the identification of climate related risks, why would it not function effectively against similarly impactful cyber threats?

Tougher ESG reporting rules imposed on European banks

New requirements for the reporting of environmental risks and carbon targets have been unveiled this week by the European Banking Authority (EBA), Europe’s banking watchdog. The initiative is being driven by the EU’s broader climate agenda and is designed to improve transparency and comparability and provide investors with a clearer view of the potential impacts of climate change. The requirements take the form of tables, templates, and instructions, all of which are mandatory, and are the outcome of a review conducted into the previous system which found “shortcomings”. According to the EBA, the reporting measures take the Financial Stability Board’s Task Force on Climate-related Financial Disclosures to the next level by establishing a standardised template that improves the granularity of information provided. As noted by Bloomberg, a key area of focus has been the elimination of “imprecise language” that has characterised reporting to date. The requirements, which are awaiting European Commission approval reflect a broader move towards consistent and clear climate reporting.

Investors to vote against mining company chairs over dam safety

The Church of England Pensions Board has revealed that it plans to vote against the re-election of the company chairs of 183 mining companies unless they sign up to the Global Industry Standard on Tailings Management. The standard on managing mining waste, also known as tailings, was created by a group of 100+ investors representing $20 trillion in assets. The Church, which represents $5billon in assets, is urging the other 100+ investors to also vote against the chairs of companies that fail sign to up to the standards. So far 79 of the world’s biggest miners have already committed to or are assessing the new global standards. This move highlights how investor pressure across a range of ESG topics will continue to emerge and shine a spotlight on companies that do not address ESG risks within their value chain.

How creative recruitment can break the cycle of cronyism

Demoralised employees, internal division, and a culture of suspicion – these are just some of the effects that workplace cronyism can have on an organisation, according to a piece in the Financial Times. While evolution has meant that humans are naturally predisposed to seek allies for advantage, this practice goes against the governance and equality standards of the modern corporate world. If leaders consistently hire younger versions of themselves and are blind to the failings of their allies, workplaces can become a ‘management club’ where leaders close rank and make employees afraid to question poor decisions. Despite the persistence of this culture in some quarters, new research has revealed that progress is being made regarding female representation on boards. In 2021 women achieved a record share of seats in S&P 500 boardrooms, occupying 113 more seats over 2020, an increase of 7%. More creative recruitment practices and a widening of candidate pools is seen as a key driver and is something we’ve highlighted in previous newsletters. Rather than taking the traditional route of hiring former CEOs or existing board members, many companies are also looking at other members of the c-suite, or even lower down in the organisation, to identify specialised expertise. Taking this route not only helps break the cycle of cronyism, but it can also act as an advantage in the war for talent as greater board diversity signals a more positive culture to potential candidates.

The role of diversity in driving corporate action on climate change

Research conducted by non-profit BoardReady and sustainability consultancy A Bird’s Eye View examined data from 159 global companies, identified by Climate Action 100+ as the largest corporate emitters, to understand the relationship between board diversity (gender, race, median age, age span and tenure) and company action on climate change. The study found that companies with greater gender and age diversity on their boards performed better across eight of nine Climate Action net-zero benchmark indicators, and those boards with a median age under 60 performed significantly better in defining their decarbonisation strategy and setting medium and long-term GHG reduction targets. More effective climate governance and climate-linked remuneration, applicable to 21% of companies analysed, leads to better performance in areas such as short and medium-term GHG reduction targets. As scrutiny on companies’ climate commitments increase, board leadership is being put to the test. In line with the recent proxy voting guideline updates from investors, boards are increasingly being held accountable on environmental and social issues. Based on the findings of this research, gender and age diversity can play a critical role in enabling this transition.

Opponents to proposed EU sustainable finance rules threaten legal action

With the so-called Taxonomy rules likely to move forward, the governments of Austria and Luxembourg have threatened legal action to prevent the European Commission from labelling nuclear power a green investment. The Taxonomy Regulation aims to help investors direct capital into sustainable economic activities by listing those that can be considered as ‘green’. However, the European Commission has received strong opposition since it proposed that nuclear technology and some forms of natural gas be included, with environmental activists arguing this would discredit the legislation. The latest escalation from anti-nuclear governments threatening to go to the European Court of Justice comes as opponents to the new rules are unlikely to be able to challenge the text politically. The proposed rules are supported by an alliance of pro-gas and pro-nuclear EU governments including France, and the draft can only be struck down by a supermajority of Member States or by a majority of members of the European parliament, leaving legal challenges as the only route.

In Case You Missed It

• Many venture capital firms don’t have formalised ESG incorporation processes, a UN PRI report has found. The is a result of investors’ hyper-focus on early-stage companies where resources are limited, and the focus is on product, design, and succeeding at all costs. A simple lack of understanding is also with most VC’s maintaining that their portfolio companies do not have ESG risks, but rather provide solutions to problems.
• Airlines will be forced to operate more flights this summer to avoid losing their slots at the UK’s busiest airports, the Cabinet Minister has announced. They will be forced to use their slots at least 70% of the time, which is an increase from the current 50% take-off level. Whilst welcomed by Britain’s largest airports, Chief Executive of IAG, Luis Gallego criticised the decision stating it would “generate unnecessary CO2 emissions”, a view echoed by his predecessor Willie Walsh, who labelled the verdict a “mockery”. 
• Cyber incidents are the biggest concern for companies in 2022 according to the 2022 Allianz Risk Barometer. Business Interruption ranks a close second, with Natural Catastrophes in third. Climate change achieved its highest-ever ranking of sixth, up from ninth. Find the full report, here.

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