ESG+ Newsletter – 27th May 2021

New US Executive Order considers Climate-Related Risk on US Financial System

On May 20, President Biden issued a sweeping Executive Order (EO) that directed a whole-of-government approach to assess climate-related risk. The EO is significant because it is the first to convene a core group of key US regulators, including Treasury Secretary Yellen, Labor Secretary Walsh, National Economic Council Director Deese, and other members of the Financial Stability Oversight Council, to assess the risks of a changing climate on the US financial system. It also instructs these agency leaders to submit a report, within 180 days, identifying the next steps on integrating climate risk into their respective policies and programmes. Of particular interest is the inclusion of new climate-friendly criteria to assess the bid competitiveness of Federal suppliers. Namely, the EO instructs that major Federal suppliers publicly disclose GHG emissions and climate-related financial risk, set science-based reduction targets, and instructs Federal agencies to give preference to proposals from suppliers with lower GHG emissions, where appropriate and feasible. The EO could have taken a stronger approach to direct agencies like the SEC to consider additional rulemaking, but did not. The EO did direct the Department of Labor (DOL) to identify agency actions to protect the life savings and pensions of US workers from the threats of climate-related financial risk. It also requested that the DOL consider rolling back a Trump-era rule designed to limit consideration of environmental and social factors in choosing retirement investments. This particular nudge to the DOL, but deference to the SEC, suggests that the Biden administration will continue to yield to the SEC, and its standard comment period process, on ESG-related matters.

MSCI warns on clean energy stock bubble, some investors remain undeterred

Leading index provider, MSCI, has warned investors that thematic indices are now almost as crowded with clean energy stocks as they were with technology stocks at the height of the 1999 ‘dotcom boom’. According to their research, renewable energy sector stocks accounted for more than 8% of certain indices by weight at the end of March, which was significantly more than the next sector, cyber security, which stood at just under 3%. This follows a rapid increase in investment and capital being allocated to clean energy stocks and funds by investors and, as outlined in previous newsletters, demand has forced indices providers to either create new indices or broaden current ones, to meet this new demand. Despite this warning some investors remain undeterred, with the Canada Pension Plan Investment Board (CPPIB) outlining that it will shift its focus to investments that will facilitate the world’s transition to renewable energy. CPPIB’s net assets rose by 21.4% to C$497.2 billion year-on-year and this growth was supported by strong gains in energy and resources real assets, which were the most profitable assets returning 40.8% and 45.8% respectively – highlighting these sectors attractiveness to investors.

Return of In-person AGMs

As the world felt the impact of COVID-19, in governance circles, the inability to attend AGMs during 2020 and the first half of 2021 was a key issue. At annual meetings, retail investors are provided with their primary opportunity to engage management and the Board, and their institutional counterparts recognise how important that opportunity is to promoting accountability. So, for the governance purists, the latest round of restriction-easing in the UK was a significant one, with Lloyds responding by inviting up to 100 investors to its AGM as reported by the FT. While, given the short notice, only 10 or so made it to the meeting, investors are likely to watch with interest to see if any companies opt to try and stay with online meetings. For those that do, ensuring that investors of all sizes are provided with the same opportunity to raise issues as they are in person will be central to ensuring support of institutions remains high.

Aviation in the crosshairs of the EU’s green agenda

After the EU signed its climate emissions targets into law last month, attention has quickly turned to how it will meet its emission targets and it would appear that the aviation sector is firmly in their sights, with wide-ranging revamp of fossil-fuel levies looking set to be introduced. It is expected that the European Commission will unveil its plans for a significant overhaul of its energy taxation directive in July. This directive, which has been unchanged for nearly two decades, sets the minimum taxation rates for fossil fuels, but has previously exempted the aviation sector. Reports at the weekend indicated that there is broad consensus and support amongst European political leaders to push ahead with the introduction of a Europe-wide tax on aircraft fuel used to help with lower its carbon footprint to meet its carbon reduction targets.

The green agenda push has not just been limited to a supranational level this week, with Spain’s Prime Minister Pedro Sanchez detailing a new proposal that would impose new air travel taxes on frequent travellers and short-haul flights, while also banning plane journeys which can be covered in less than two-and-a-half hours by train. This decision is similar to an initiative introduced in France which banned domestic flights on routes than can be covered by train. The aviation sector is now facing more pressure than ever to look at ways of ‘decarbonising’ flights, with sustainable aviation fuels being one potential short-term solution before a greener form of air travel – either electrical or hydrogen powered aircraft – are developed by the end of the next decade.

Where does social inequality fit into the ESG agenda?

Reporting by the Sunday Times and The Guardian has shone a light on how for some, there is opportunity in crisis. While Governments spoke of national solidarity, there are now more billionaires in the UK than a year ago. The Guardian points to an area that is likely to become a larger part of ESG and investor focus, tax reform, with the Institute for Public Policy Research (IPPR), a progressive thinktank, saying that these findings have highlighted how the UK and global tax systems benefit the wealthy. As companies allude to purpose and stakeholder considerations playing an increasing role in strategy, tax contributions have the potential to undermine any platitudes. Last August, Funds Europe predicted that as the world emerges from the pandemic, the fund management sector looked set to hone in on the topic of income inequality. Both Funds Europe and Responsible Investor agree that growing social inequality poses a “systemic risk”. It remains to be seen whether ESG 2.0, as Emilie Goodall at Responsible Investor calls it, is ready to embrace systemic change in place of the existing preference for incremental stewardship.

The Development Bank of Japan expands ESG focus

The Development Bank of Japan (DBJ) plans to increase lending and investments to ESG projects over the next five years. This commitment will account for 40% of the total 13 trillion yen (US$120 billion) funding activity and boost the development bank’s level of ESG investment and financing from 50% to 80%. The lender’s plan is backing projects based on hydrogen energy, electric vehicles and other emissions-cutting technology through the private sector as well as the business model transformation to address the societal changes triggered by the coronavirus pandemic.

The bank is also involved in promoting the achievement of climate change targets. On 21 May,  DBJ announced that it had become a signatory of the Poseidon Principles, a voluntary initiative to promote the achievement of climate change targets in the maritime industry.

Sweden is at the forefront for ‘green’ steel

A pool of prominent European companies and funds are backing the “green-steel” project promoted by H2 Green Steel, a Swedish start-up that plans to produce 5 million tonnes of emissions-free steel by the end of this decade. The new venture, led by Henrik Henriksson, the former CEO and President of Scania, aims at replacing coke through the use of hydrogen produced by renewable energy and eliminate carbon dioxide emissions from the process. In its first round, the start-up gathered funds for US$105 million from a mix of investors including Agnelli, Wallenberg and Maersk families together with Ikea foundation, Spotify’s CEO, Mercedes-Benz and Scania. H2 Green Steel is the second Swedish project in the steel industry and direct competitor of Hybrit, the fossil-free steel joint initiative backed by SSAB, LKAB and Vattenfall. These two high-profile “green steel” projects place Sweden at the forefront for supporting the green transition of an industry that is responsible for up to 9% of global emissions.

EU Leaders set for spat on distribution of carbon-cut burden

This week, everything was set for a climate showdown at an EU Summit, with Bloomberg Green reporting on Monday that representatives of Eastern European member states were arriving seeking to avoid a surge in costs. This East-West divide is seen in the differences of opinion over how the bloc will toughen its carbon goal to at least a 55% reduction by 2030 from 1990 levels. Countries that lie to the west of the EU such as Denmark, Sweden and Luxembourg are keen for the methodology to take into account cost-effectiveness, something that newer member states fear would disproportionately shift the burden onto poorer member states. As it happened, climate did not dominate the agenda as intended, with Belarus at centre-stage. However, on Tuesday, Polish Prime Minister Mateusz Morawiecki was reported to have led the opposition against proposals to extend the EU’s carbon price, arguing that an indiscriminate approach would impact on poorer countries the most. With the EU seeking to reinforce its position as a global leader in reducing pollution, European Commission President Ursula von der Leyen reiterated a need for the bloc to reach agreement on how to get there.

In Case You Missed It

• Diversity & inclusion, employee benefits, safety, learning and development are the main topics included on S&P 500 workforce disclosures, according to an EY research.  The research analysed 143 S&P 500 companies and showed that most of them employed mostly qualitative disclosure, with a wide range of pages of human capital disclosures, with DE&I being the most discussed theme.
• A record 14 S&P 500 companies had more than 50% of investors reject executive pay packages so far this year, according to an analysis by ISS Corporate Solutions.  Investors are objecting to paying rises and the easing of performance targets in the wake of the COVID-19 pandemic and that number is set to rise as more executive’s face votes in the coming weeks.
• Boohoo Group Plc is to link executive bonuses and a long-term incentive plan to environmental, social and governance targets as it seeks to recover from their labour supply chain scandal, Bloomberg reported. Under the plan, managers would share a 150 million-pound ($213 million) bonus if the stock price hits 600 pence by June 2023. The proposed changes will be voted on by shareholders at next month’s annual meeting.

Gain insights and stay informed on ESG, sustainability, building back better or on any industry or topic that interests you here. To be added to the distribution list for our ESG+ Newsletter, please email [email protected].