ESG+ Newsletter – 28 September

Your weekly updates on ESG and more

As ESG+ readers will know, ESG and sustainability issues are interlinked, and that’s where we start – analysing the impact on workers of the net zero transition. We also look at the continued back and forth on the issues in the US, efforts to increase diversity in financial services, updated SLB bond guidance and whether mandatory vote reporting from asset managers would serve to increase understanding of proxy voting in the market.  

Net zero and the outlook for workers 

During a cost of living crisis, it is not surprising to see debates around who pays the cost of net zero, with the UK government recently using the fact that they did not want costs to be passed on to consumers as the reason for its recent U-turn on net zero policies. In an opinion piece for the FT, Sarah O’Connor discusses the impact of the transition on workers, arguing that despite the consistent rhetoric from politicians that “the road to net zero is paved with jobs”, achieving this will involve difficult decisions and trade-offs, which will present political challenges. According to the IMF, the green transition will involve the reallocation of 1% of employment in advanced economies over the next decade and 2.5% in emerging markets. While these numbers seem low, O’Connor argues that “reallocation” of jobs is not a simple exercise, with significant geographical complexities and investment in retraining required. Additionally, green jobs can be less labour intensive leading to short term reductions in staff which can be hard to stomach for those in communities reliant on high polluting industries, something that may be contributing to standoffs in the auto industry in the US. While there will be trade-offs for workers in the transition to a net zero economy, it may be necessary to avoid the worst impacts of climate change, from which workers are not immune. Perhaps companies and governments should begin including workers in the conversation, opening opportunities for training, and implementing creative solutions to bring workers along on the journey to net zero.  

U.S. judge denies states’ bid to block Biden rule on ESG

Last Thursday, Judge Matthew J. Kacsmaryk of U.S. District Court in Amarillo, Texas decided not to block a Biden Administration rule that allows employee retirement plans to consider ESG issues in investment decisions. The initial lawsuit was filed in January by Republican-led states claiming that the rule violated federal law governing retirement plans. The New York Times reports that Judge Kacsmaryk wrote, “While the court is not unsympathetic to plaintiffs’ concerns over E.S.G. investing trends, it need not condone E.S.G. investing generally or ultimately agree with the rule to reach this conclusion.”  

Over the last few years, ESG investing has become increasingly popular, while pushbacks on its impact have grown. However, corporations continue to come under scrutiny from stakeholders to address their impact on the worsening climate crisis and social issues. At this point, many investment funds have made ESG considerations a prerequisite for including a company in their portfolio – a practice that is likely to continue especially after Judge Kacsmaryk’s decision.  

Towards a mandatory vote reporting template for UK asset managers   

Market participants are calling for the UK Financial Conduct Authority (FCA) to make its vote reporting template for asset managers mandatory, ESG Investor reports. This follows a three-month consultation aimed at finding a consensus on a template that would offer “more consistent, up-to-date and comparable” data to asset owners. The UK Sustainable Investment and Finance Association (UKSIF) suggested that the template would enable more effective investor scrutiny of investee companies and improve interactions between asset owners and asset managers. A number of asset owners and investment consultants argue that the template should be made mandatory to maximise its benefits, including enabling asset owners to compare the voting practices of companies managing assets on their behalf. Georgia Stewart, CEO and Co-founder of shareholder voting fintech Tumelo, added that asset managers should also be required to disclose whether they offer pass-through voting to their clients. While the debate on ESG continues to amplify, there is less pushback on the merits of proxy voting as a means of representing shareholder (and asset owners) interests and spurring accountability among companies and Boards. 

ESG becoming an asset bubble, hedge fund claims

In an interview with Bloomberg, the Chief Investment Officer and founder of Blue Orca Capital, Soren Aandahl, has outlined his hedge fund’s view on the state of play of ESG stocks and investing. He cited the current gap between the abundance of capital dedicated to sustainable investing, and the lack of actual good ideas. The result, he says, is businesses trading at far higher valuations than is warranted –therefore providing shorting opportunities.

To be branded a ‘greenwasher’ has become an almost universal fear amongst corporates. Combatting the overstating of green credentials has become a focus of regulators globally, through both company level and investor focused guidance and frameworks. While success has been mixed, there has certainly been progress. One notable impact is that valuations of ESG focused businesses have stabilised. Investors increasingly understand what it means to be well run, and materially exposed to ESG megatrends. However, as outlined by Bloomberg, Joe Biden’s Inflation Reduction Act has intensified the flow of investor capital into providers of sustainable technology – to the effect of inflated stocks once more. That clean energy stocks, as a sector, have slumped in the Ukraine crisis and energy security era is an exacerbator, to the extent Blue Orca is regarding the current environment as a bubble. An interesting piece of a further context comes via recent research looking at the rise of anti-ESG funds. According to Morningstar, while these are yet to hit the mainstream, assets in the funds have multiplied over seven times over the past year to now total €2.1 billion. 

ICMA updates SLB guidance for M&A activity   

Earlier this week, the International Capital Markets Association (ICMA) issued an update regarding their Sustainability-linked Bond (SLB) Principles, expanding the standards for disclosure on M&A activity by SLB issuers. ICMA, which curates the widely used Sustainability-linked Bond Principles, has expanded the guidance following concerns from investors that SLB issuers would sell off heavy carbon emitting assets to meet their SLB targets, which may contribute little to any decarbonisation efforts. Moving forward, the principles now include guidance on the specific use of M&A to achieve targets and penalties when multiple KPIs are attached to a bond. Additionally, ICMA has also recommended that SLB issuers disclose the potential impact of M&A on KPI calculations and restatement before issuing, and the impact of M&A on the KPI post-issuance. 

Since its inaugural issuance in 2019, the SLB market has grown to over a $200 billion in terms of volume with over 90% issued from 2021 onwards. As SLB’s appeal continues to grow – both from the capital markets and investors – so too does the regulatory oversight of the market, which will ensure that stated objective of the financing is having the desired environmental impact. 

The Role of Diversity Policies 

The UK’s Financial Conduct Authority (FCA) has published a consultation paper on the introduction of measures to improve diversity and inclusion in the financial services sector. In parallel, the UK’s Prudential Regulation Authority (PRA), responsible for regulating banks and insurers, also launched a similar consultation paper. Both papers propose a set of measures aimed at boosting “ diversity and inclusion to support healthy work cultures, reduce groupthink and unlock talent”, with the FCA setting the requirement for companies to recognise “a lack of D&I as a non-financial risk”, alongside other measures to improve reporting and strategy. As the focus on diversity sharpens across firms in the UK, with the FCA highlighting its importance in “unlocking talent from those with underrepresented characteristics”, and as a tool to improve the attractiveness of the UK market, the opposite view seems to be gaining traction across the pond. A number of lawsuits have been filed by the anti-affirmative action activist, Edward Blum, to challenge the benefits of diversity-focused initiatives as noted in the recent Reuters article, including civil war era legislation.   

ICYMI 

• 190 investors sign up to collaborative engagement on nature. Following the launch of Nature Action 100 (NA100) in New York, 190 investors with $23.6 trillion in assets under management have sent a letter to 100 companies urging them to protect and restore nature and ecosystems. The 100 companies have been selected based on their market capitalisation within key sectors and their high impact or reliance on nature. The move comes after the recently launched TNFD, to increase pressure for companies to disclose and improve their impacts on nature.  
• China’s World Bank plans to triple climate change lending by 2030. The Asian Infrastructure Investment Bank (AIIB) is set to unveil a “climate action plan” to spur financing and triple annual lending by 2030 for projects to fight climate change, while establishing itself as part of the international financial architecture. The China-led multilateral development bank aims to have $7 billion to $8 billion in climate financing annually, with a multi-faceted strategy that includes co-financing with other multilateral lenders, lending to private sector projects, and investing in emerging market equity funds, in order to support climate adaptation efforts and nature-based solutions. 
• Net Zero by 2050 Still Remains Possible With Rapid Renewables Expansion, Says IEA.  The International Energy Agency (IEA) recently declared optimism over the possibility of remaining within the 1.5°C limit on global warming, given the rapid expansion of solar power and EV’s. Clean energy investments have seen a 40% increase – however, to achieve net zero by 2050, green investments must increase to $4.5 trillion a year, and renewable energy capacity needs to triple by 2030. This is reflected in the IEA’s new report, Net Zero Roadmap, which calls on advanced economies to bring their targets forward by several years as the world experiences a major climate crisis.