ESG+ Newsletter – 2nd December 2021

The need for ESG data, but the right ESG data

In last week’s ESG+ newsletter, we looked at the potential subjectivity of ESG ratings and the calls for more consistent and transparent ESG data. One of the pathways to addressing this issue was the introduction of a global framework for ESG ratings and data. However, in a recent Op-Ed for Responsible Investor, Victor van Hoorn, Executive Director at Eurosif, a pan-European sustainable and responsible investment membership organisation, argues that a global ESG reporting standards “won’t move the market in the right direction fast enough.” Instead, he believes that there is a need for a global set of reporting requirements which focuses on “substance and materiality”. Anything that falls short of that, he argues, will “by default only be at best a consensus driven minimum common denominator.”

This call for complete ESG disclosure and data is echoed by Joel Makower, Chairman & Co-founder of GreenBiz Group, who argues that corporate ESG data “continues to be uneven and incomplete, often lacking consistency.” The effect is that investors are uncertain whether companies are falling short of their reporting requirements by disclosing some types of risks but not others, leaving uncertainty as to whether they are falling short on their ESG commitments. The article also highlights recent examples, where the integration of ESG considerations into investments from large financial institutions has been impeded by lack of consistent ESG data, transparency by companies in reporting, and market regulation and oversight. While the need for a harmonised ESG data framework is evident, there also appears a need for universal agreement on the data points that would be produced by all sectors.

Poor ESG performance linked to talent struggles

While the data is important for investments, according to research conducted by DWF, two in five businesses that are failing to improve sustainability credentials are struggling to attract talent. This latest report highlights the growing importance employees are putting on ESG performance when considering their next move. Head of sustainability at DWF, Kirsty Rogers said “The clear message from our survey is that companies not only understand the need to have a strategy for ESG but that without one there are clear costs.” In addition, DWF found that 61% of businesses are losing out on work as a result of poor ESG credentials, showing the impact on the bottom line and competitiveness.

A new hybrid approach to selling ethical debt

While sustainability-linked financing deals are typically tied to either specific performance targets or ESG ratings, Bloomberg is reporting that an increasing number of deals are combining both approaches. The article provides recent examples such as Balfour Beatty Plc who tied a loan to carbon emissions and social value generation targets but also combined them with a broader ESG rating score from Sustainalytics. The argument for using this approach is that it provides a more rounded (and objective) picture and reduces the likelihood of greenwashing by companies who may select more flattering KPIs. However, a Bloomberg survey also revealed that the preference for borrowers and lenders alike is for deals to be tagged to specific ESG performance targets, rather than broader ratings and that taking a mixed approach is unhelpful as, “too many standards, measures, and ratings confuse the picture”. This reflects the current status quo of the market as Bloomberg’s data shows that 94% of sustainability-linked debt this year was linked to KPIs, with only 6% tied to ESG ratings.

Climate action isn’t reaching the most vulnerable – but it could

The World Resources Institute (WRI) has released a report outlining how the climate crisis and global social crisis should be addressed simultaneously. The report provides detail of how current climate action and policies are not supporting vulnerable communities, despite the vast opportunities to provide improved living conditions for those living in developing nations through access to better health, energy, water, transport, and decent jobs. Bringing equity to the forefront of climate action will be key to ensuring a just transition that provides opportunities for vulnerable communities. The report outlines seven ways that climate action can prevent worsening inequalities in the transition to a net zero economy. Whilst the public and private sectors grapple with how to tackle the climate crisis, all actors should be aware of how their activities and policies will affect those most vulnerable to climate change. The publication of this WRI report highlights the opportunity to leverage climate action to improve living conditions globally through policy and investment.

CDP launches climate disclosure framework for SME

CDP launched a new climate disclosure framework to support SMEs on the journey to Net Zero. The new framework enables SMEs to take climate action through environmental disclosure and science-based target setting. The framework is modular in design, creating flexibility for SMEs to tailor the use of the framework to their needs. SMEs are a major contributor to global economies, accounting for between 50% and 70% of value added in OECD economies. The framework was developed in collaboration with the SME Climate Hub. María Mendiluce, CEO of We Mean Business Coalition, a co-founding partner of the SME Climate Hub, said: “Over 3,000 companies have joined the SME Climate Hub, committing to cut carbon emissions in half by 2030 and reach net zero emissions by 2050 or sooner. With scalable, accessible tools like the CDP reporting framework, these businesses can move from commitment to action, and effectively track progress to meeting our collective ambition.” While most of our readers won’t come from this constituency, it reaffirms the far-reaching demands and expectations for all businesses to start their transition journey, and fast.

Allbirds – the Case for an ESG-branded Stock

Albirds, which began trading in early November and reported its first earnings this Tuesday, differentiates itself from peers in the footwear and apparel space through its emphasis and focus on sustainable practices and products that are environmentally friendly. The demand for sustainable companies has left many analysts bullish on the stock, including Bank of America. One analyst wrote, “Allbirds’ focus on sustainability will be a key differentiator both from a consumer and investor perspective.” However, there are also challenges. For one, many sustainable practices aren’t at scale yet. Additionally, any ESG-related mistakes or wrong moves may affect the company even more than others due to reputation. The stock fell over 16% on Wednesday after reporting earnings that notably included widened losses. However, in the company’s earnings release, Co-Founder and Co-CEO Joey Zwillinger doubled down on Allbird’s mission and stated, “We’re at the forefront of a generational change in consumer values and purchase behaviours, led by our mission to make better things in a better way—which means we’re aligning our purpose of reversing climate change with our product quality and financial outcomes.” Allbirds could provide insight into whether a company can align a purpose of addressing climate change with the delivery of strong financial outcomes, and whether the market is capable of understanding that.

The FRC calls for improved governance reporting to support public confidence in business

The Financial Reporting Council (FRC) has published its annual review of corporate governance, where it selects a random sample of 100 FTSE 350 and Small Cap companies and reviews how they reported on their application of the 2018 UK Corporate Governance Code. One of the biggest concerns highlighted in the last year’s evaluation was related to companies’ failure to disclose non-compliance with the Code, in spite of its flexibility under the ‘comply or explain’ approach. The concern remains following this year’s evaluation, with the FRC reiterating its expectations for companies to improve clarity and disclosure in a way that provides more meaningful insight into a company governance structure, particularly in cases where there are departures from the Code, on the alignment between its diversity and succession planning policies with the overall strategy, as well as on the link between executive remuneration and purpose and strategy. While disclosure on environmental and social issues has improved, the FRC review highlights the continuing need for transparency that goes beyond boilerplate language, that is linked to effective decision-making by the company’s boards and management. During the week, Tim Martin launched a broadside on certain aspects of the investment community and their corporate governance practices. Taking aim at ISS, the IA and PIRC for an inability to evaluate the principles of the Code, the Wetherspoons CEO also attacked Fidelity for not walking the talk on a host of governance issues.

In Case You Missed It

• As companies and countries are increasingly issuing green bonds to help fund solutions to social and environmental problems, debt issuers are pushing the boundaries of a ‘sustainable’ bond really is. Financial Times reported this week that the market’s growth has invited scepticism about the authenticity of sustainable debt, with regulators affirming that they are working on official guidelines that could protect investors from ‘greenwashing’.
• To tackle climate change, China will look into cutting methane emissions in key industries, including coal mining, agriculture and petroleum. Reuters reported that the country will publish a nationwide methane emission control action plan and will encourage companies to cut methane emissions via market trades. A time frame and detailed targets are yet to be revealed.
• European defence forces are facing pressure to cut their carbon footprints and provide transparency over the manufacture of weapons, the Financial Times reported. Executives are concerned t the whole sector could fall foul of blanket exclusions from all ESG funds, with some arguing that the absence of defined ESG investment criteria is holding back the sector.
• The global economy will be 2% bigger by the end of the century if the world can hold global warming below 1.5 degrees Celsius, according to research published in the journal Nature Climate Change. The research points that achieving net zero targets would have long-term economic benefits, with the possibility of global GDP growth of more than 2%.

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