ESG+ Newsletter – 27th January 2023

“Made in America” provisions drive announcement of Europe’s Net-Zero Industry Act

The US Inflation Reduction Act, which allocates $369 billion over ten years in subsidies and tax breaks for clean technologies such as electric vehicles, solar panels and batteries, is continuing to spark international controversy over its “Made in America” provisions. The policy requires entities eligible for subsidies to conduct manufacturing in the US, or in a country with which the US has a free trade agreement. Perhaps in response, on 17 January Commission President, Ursula von der Leyen, announced the EU’s Net-Zero Industry Act in Davos and followed up with a more detailed outline of the initiative at the European Parliament on 18 January. The Net-Zero Act is the EU’s response to the US Inflation Reduction Act (IRA), which could attract investments necessary for the green transition away from Europe; European companies could be enticed to relocate to the US to reap the rewards of the IRA’s subsidies.  The Commission intends to counter this risk through its own package of state aid liberalisation, a sovereignty fund, a skills package and initiatives such as strengthened trade relations and increased use of trade defence instruments.

Matthias Jorgensen, Head of Unit for US and Canada at the Commission’s trade directorate-general, said that the US provisions would “take away investments in the [EU] green transition” and “decrease the possibility of EU goods to compete on the US market, but also… in third-country markets.” However, views are different in the US with Chad Bown, a senior fellow at the Peterson Institute for International Economics, stating that he “doesn’t think the intention is to steal European Industries” but rather “provide Europe with access to a second supply chain, outside of China”. Political stability might also be front of mind for companies though, with attacks on ESG investing from state legislatures and future administrations’ scepticism of green subsidies a live threat.

Pressure on banking sector to decarbonise coming from multiple angles

While the banking sector makes efforts to highlight the role it’s playing in financing the green transition, the industry has faced criticism as it continues to finance fossil fuel industries. This week, Europe’s largest pension fund, ABP, put banks across Europe on notice by stating they will divest from institutions that are not making clear progress in efforts to decarbonise their own business and those that they finance. Importantly, ABP is meeting its words with actions and has created a transparent KPI that financial institutions must meet to retain ABP as an investor. The decision taken by ABP builds upon the growing pressure that the banking sector is facing as investors and regulators increase their focus on the sector. In an effort to provide guidance to companies, this week the European Central Bank published its first set of climate-related statistical indicators aimed at assessing the impact of climate-related risks on the financial sector. The steps are taken privately – by ABP – and by regulators – demonstrate action by power stakeholders, underlining the growing expectation that the banking sector plays a leading role in the transition away from further investment in fossil fuels.

An inflationary backdrop might point to less money but more time off

While workers may find themselves financially worse off in 2023, a growing trend of unlimited holidays could improve their work-life balance. A survey conducted by the Financial Times has revealed how pay increases at FTSE100 companies are falling short of inflation average pay increases of 6% last year, compared to a 9% increase in inflation. In real terms then, most FTSE100 employees experienced a pay cut in 2022; however, some companies made attempts to address the increased cost of living, with 38 of the companies surveyed providing one-off payments, typically around £1,000.

While the survey identified companies that provided increases above 6%, they still fell far below executive pay increases, which reached 23% across the FTSE100 last year thanks mainly to bonus payments. While things may look bad financially, employees may find comfort in longer periods of time off. More and more companies are offering unlimited Paid Time Off (PTO), according to The Guardian, and this move could represent a win-win for employers and their staff. Unlimited time off is a valuable recruiting tool as workers increasingly seek flexible working conditions and a positive work-life balance. For the employer, there are cost-saving benefits thanks to reduced administrative overheads and eliminating the need to pay out for unused PTO when an employee leaves. In a tight labour market, offering an unlimited PTO plan may be a cost-effective way of attracting and retaining talent, particularly when wage increases are unable to keep pace with the cost of living.

Greenwashing debate extends to GSS bonds

The reclassification of ESG investment vehicles is spreading to bonds, continuing the narrative around the effectiveness of the Sustainable Finance Disclosure Regulation (SFDR) and its role in preventing greenwashing at a product level. The movement from dark-green or “impact” Article 9 funds to light-green or “ESG integration” Article 8 funds has been the hot topic in the sector over the past few months, with the general position of asset managers being that the EU’s SFDR had lacked clarity – causing ambiguity and confusion on how products should be categorised. Another view has been that the regulation is now doing exactly what it was designed to do: challenging money managers on how green their products actually are.

With green bonds on the rise; however, it was only a matter of time before regulatory pressure trickled down to debt, perhaps pointing to how the SFDR can make inroads in combatting greenwashing. As pressure rises on the green credentials of bonds, OPEC announced this week that it has raised $1 billion for a new International Development Fund. This represents positive news given the stated focus on themes such as food security and education, wider concerns have been raised as to the extent of checks and balances on the true impact of the bond issues, in a similar vein to the – intentional or not – crackdown from regulators on what truly constitutes an ESG related product.

The role of education in the S of ESG

Reuters reports that the S in ESG has historically “proved something of an enigma”, with challenges around measuring impact leading some companies to prioritise the E and G of ESG. Justin van Fleet, executive director of the Global Business Coalition for Education, believes that education might be the key to unlocking social impact, as it can provide greater rigour and data around the ‘S’. Last year, van Fleet co-authored a report outlining a new approach to investment in education for the private sector, highlighting the role of education as a driver of economic growth and the enabler of creating environmental solutions.  By investing in education, a company can begin to measure its positive social impact while contributing to the development of future talent and economic prosperity. One study of 20 economies, cited by Reuters, found that more than 85 million jobs could go unfilled by 2030 due to skill shortages, potentially presenting a material risk to economies. According to this statistic, investing in education is not only an important facet of an ESG strategy, but also an important risk mitigation approach. As the corporate world looks for measurable and tangible initiatives to demonstrate its positive social impact while avoiding the risk of greenwashing accusations, perhaps investing in education is a win-win solution.

ISSB accused of “straying” from its core purpose

The ISSB has confirmed that their world-first Global Sustainability and Climate Reporting Standards will be released this June. Designed to establish a globally consistent and transparent baseline for sustainability-related reporting, the standards are expected to be endorsed and adopted into law by regulators and pushed onto companies by investors. Yet criticisms are emerging from the investment community over the ISSB’s decision to include the requirement that companies disclose their Scope 3 emissions. Some investors are arguing that this extends beyond the Board’s enterprise value focus and that the ISSB risks straying from its core purpose. “While Scope 3 for many companies is the majority of their ESG impact, is it also the majority of their financially relevant ESG impact?” asks Tim Mohin, global sustainability expert and ESG Advisory Committee Member for the UK Financial Conduct Authority (FCA).

The ISSB has responded to these concerns by highlighting that the Board’s decision was primarily driven by feedback from investors warning that the focus on enterprise value was too narrow. To help businesses get to grips with Scope 3 disclosure, the ISSB will introduce ‘reliefs’, which will allow companies a temporary exemption from Scope 3 reporting requirements for a minimum of one year from the launch of the climate standard. The ISSB has also reassured investors that they are “focused on providing capacity building to support companies and markets as they look to apply our standards for the first time”, and that they “recognise this will be new for lots of companies and time will be needed to develop processes and skills”. What companies must keep in mind is that it is essential that they begin preparing the ground this year, because as IFRS Chair Erkki Liikanen notes, “in 2024, financial reporting and sustainability reporting will go together”. 

ICYMI

• ESG  beats Wall Street. Sustainable investing not only drew more consistent inflows over 2022, but also ended the year in positive flows territory, compared to the general funds market which saw negative overall flows for the year, announces CNN. The key takeaway from this? That despite all the doubts and debates around ESG, it not only survived one of the most challenging investment markets but thrived right through it – an impressively good sign for the future of ESG investment.
• State Bank of India issues ESG bond framework. The country’s largest lender published a new ESG financing framework that will apply to future SBI green bond and loan issuances, Responsible Investor reports. The move comes after many ESG investors ditched SBI’s sustainability-themed bonds over its controversial ties to a coal mine. SBI is now attempting to turn things around, having identified 17 eligible green and social projects for financing, including biodiversity, renewables, and socioeconomic advancement.
• 93% of investors consider ESG and sustainability when investing in real assets. New research carried out by Aviva Investors has revealed that nine out of ten investors take ESG into account when evaluating their real asset investments. As Business Green notes, the findings reveal that 64% of institutional investors plan to increase their allocations to real assets over the next two years, and the use of real assets to create positive ESG impacts has increased from just 17% in 2019 to 28% today.

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