ESG+ Newsletter – 28th April 2022

Emerging ‘nature markets’ join carbon markets

The Finance for Biodiversity (F4B) Initiative has suggested a three-principle governance approach to support the scaling of voluntary carbon markets. It argues that carbon markets require more innovative approaches to governance than traditional financial markets, with the F4B proposing an approach covering whole-system governance, complete transparency and inclusive participation for all market stakeholders – including traditionally underrepresented groups. Demand for nature-based carbon offsets is set to soar, with prices already doubling from around $4-$5/tonne last April to around $10-$11/tonne this month. Experts, however, warn that to be effective, offsets must be priced at a minimum of $100/tonne.

While carbon markets mature, there are murmurings about the development of wider ‘nature markets’, which could include biodiversity related offsets. This potential expansion from carbon markets to ‘nature markets’ is reflective of the rise of biodiversity on both the corporate and ESG agenda. While awareness of the need to act on biodiversity is rising, corporate understanding of nature risks is not aligned with the best practices of the Taskforce on Nature-related Financial Disclosures (TNFD) according to the UN Environment Programme Finance Initiative (UNEP FI). Through the interview of 19 companies, UNEP FI found that systemic nature-related risks were “not actively monitored” by any company. The need for any environmental or social programme to be underpinned by robust governance structures is clear. From carbon markets to nature-related risk, strong governance is required to provide effective oversight, ensure transparency, and create the necessary credibility to verify impact and provide participants and investors’ confidence.

US shareholders reject proposal to stop banks from financing fossil fuels

Shareholder proposals across industries are asking for more action on climate change. For banks specifically, the proposals are focused on ending fossil fuel financing. An E&E News article highlights those recent proposals were shot down by US Investment Banks. Activist shareholders had filed climate focused resolutions for 6 US Investment banks, all focused on bank financing of the fossil fuel industry. Proponents of the resolutions aren’t discouraged by relatively low levels of support and are likely to refile in 2023. All of the banks have committed to supporting the world reaching net-zero emissions by 2050, and will most likely need to take some action in regard to financing of carbon intensive companies and projects.

These resolutions stood out because they were asking for the banks to set specific policies; in the past only recommendations for disclosure and goals have been set in proposals. Even some of the more popular shareholder advocacy groups, like As You Sow, were not a part of this round of proposals. This does not mean the end of shareholder activism efforts to set funding policies. Many activists see this as a starting point to continue to work to push the banks to stop funding high emitting companies.

EU banks in activist investors crosshairs?

In a recent Op-Ed for the Financial Times, Simon Samuels, founding partner of Veritum Partners, looks at the rising tide of activism at publicly listed companies in Europe over the last year, and pondered whether EU banks could be the focus of the next wave of investor scrutiny. The article outlines that the sectors low profitability, weak returns, undervalued shares, fragmented market backdrop and the tougher regulatory environment governing EU banks capital requirements could make it a “fertile activist terrain”.

While the EU banking sector may be susceptible to the traditional areas of focus for shareholder activism, they could also be exposed to a new phenomenon across the activism landscape, ESG activism – which is becoming more popular with investors. As we highlighted in last week’s ESG+ Newsletter – and as set out above – the banking sector across the globe is facing increased scrutiny for its role, or lack thereof, that it is playing in financing the green transition. Regardless of the form of activism, it is clearly evident that investors are willing to engage companies across a variety of campaigns, including ESG related matters.

AXA IM requires proof of sustainability credentials for investee directors

AXA Investment Managers (AXA IM) will vote against the renewal of investee directors if they are deemed to have no proven track-record in managing ESG risks – specifically those which fall into the categories of environmental and social issues. According to a spokesperson cited by Environmental Finance, the investment management firm requires “robust disclosure on the desired ESG skills, and how nominees contribute to the overall Board’s expertise and effective oversight of sustainability matters material to the company’s business”.

The position is part of a wider voting policy update by AXA IM, which now also states the requirement for ethnic representation on the board at large-cap companies in the US and UK – or else votes will be lodged against the re-election of the nomination committee. Further focus continues to be on remuneration linked to ESG KPIs and short-term milestone and progress updates on net-zero commitments. AXA’s stance demonstrates both the evolving definition in the sector of material information, as investors look to maximise understanding in a difficult economic climate, and how accountability of ESG risks and opportunities dovetail with traditional governance areas like oversight and accountability at board level.

Competition could push private equity firms to “tipping point” in net-zero targets

The Science Based Targets initiative (SBTi) said European private equity firms have reached a critical threshold in the number that have science-based decarbonisation targets. It is believed a ‘tipping point’ has been reached whereby, once a few leaders set targets and have them assessed by the SBTi, others will follow along. Companies are more sensitive to what their competitors are doing than the pressures of stakeholders and regulators. This phenomenon is “one of those fundamental dynamics of the SBTi – the tipping point effect.” The latest private equity company to validate through the SBTi is Montagu and it is expected more private equity firms will receive validation in the coming months.

Companies reluctant to disclose diversity data during pandemic

The most recent Workforce Disclosure Initiative (WDI) survey from governance campaigner ShareAction has revealed how companies were less willing to disclose diversity data in 2020 compared to pre-pandemic times. The 2020 survey covers data from 173 companies, including half of the FTSE100, with the results shared with 66 investment institutions. Participants can choose to have responses made public or shared only with the investment group. In 2020 only 65% of responses were made public, compared with 85% in 2019. The gap is even more noticeable when it comes to data on diversity and inclusion, pay gaps, and supply chain data, indicating yet again that progress on workplace equality stalled during the pandemic. ShareAction also revealed how there has been no improvement in data shared on gender pay gaps, and while 97% provided leadership data broken down by gender, only 39% did so by race and ethnicity. The survey results provide more evidence for how social measurement and metrics lag behind its environmental and governance counterparts, but with this data, or lack thereof, being exposed to large investors, there is an increasing impetus to address this discrepancy.

FCA publishes Diversity and Inclusion Policy

The Financial Conduct Authority (FCA), the UK regulator for financial markets, published its Diversity and Inclusion policy for company boards and executive committees last Tuesday. For all accounting periods after 1 April 2022, the policy establishes targets for companies to hold at least i) 40% of diversity at the board level, ii) one senior position (chair, CEO, senior independent director, or CFO) to be held by a woman and that iii) one member of the board should be from an ethnic minority background. Under these updated listing rules, companies will be required to disclose in their financial reports a standardised numerical table on the diversity of their board and executive management and if unable to comply with the above targets, an explanation must also be provided. The updated FCA targets are aligned with those set out by the government supported FTSE Women Leaders Review, which has taken over setting voluntary recommendations for the FTSE 350 companies from the Hampton Alexander review. The new policy is expected to push smaller groups and FTSE 250 companies that are lagging behind in their efforts to update the diversity of their leadership, particularly as it becomes increasingly more important to investors. While companies may have some technical concerns such as whether to report on the basis of sex or gender, or privacy in the data collection process, the comply or explain approach gives companies sufficient flexibility to describe their approach, which clearly echoes the overall market sentiment and expectation for compliance and progress on diversity reporting in a meaningful manner and away from boilerplate language.

In Case You Missed It

• An IBM survey highlighted the growing consideration of sustainability in employee and consumer choices. Of the 16,000 respondents, more than 65% said they would be more willing to apply for and accept job offers from companies they consider sustainable. The majority of respondents want to improve their responsible consumption, but they would like companies to provide a clearer and more accessible path to sustainable choices.
• Research from McKinsey revealed that global warming is expected to exceed 1.7C by 2050 despite countries meeting their net zero targets. The findings showed that global oil demand could peak in 2025, driven by the transition to electric vehicles (EVs), and the share of renewables could reach 85% of the global power system. However, more ambitious efforts will be needed to stay in line with the 1.5C pathway.
• The UK Treasury has created a Transition Plan Taskforce to guide companies in their climate transition disclosure. From 2023, large companies will be required to publish their climate transition plan and the Taskforce will provide a ‘Gold Standard’ verification scheme to tackle greenwashing and ensure plans are science-based.

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