ESG+ Newsletter – 2nd March 2023

The need for a cultural shift on DEI

According to a report published by the government-backed FTSE Women Leaders Review this week, female representation across the FTSE 100 now stands at 39.1% and at 36.8% across the FTSE 250. Progress at the Board level has been impressive, particularly when compared to the 9.5% female representation on FTSE 350 boards in 2011; however, this year’s report highlighted that leadership opportunities for women below board level has not grown at the same rate, with only 33.5% of women represented. Furthermore, only seven women currently lead FTSE 100 companies, and as per the report “almost two out of every three roles that became available in FTSE 100 Leadership during the year were still going to men”. 

The lack of progress, evidenced by the fact that there are still 72 FTSE 350 companies with less than 33% female representation, may reflect the need for a cultural shift around the importance of Diversity Equity and Inclusion (‘DEI’). There are significant identified advantages to business performance from the diversity of thought and experience that derives from DEI. While current levels of diversity across the leadership at private equity firms lag practice across US corporations, PE firms have increased their percentage of ethnically diverse talent and women employees at the junior levels, demonstrating further evidence of the benefits of a more inclusive future from the onset.

ESG ratings – to standardise or not to standardise, that is the question

One of the recurring criticisms of ESG investing has been the inconsistencies across ESG ratings, which has led to calls for a standardisation of ratings across the ESG ratings sector. A recent paper published by The Aggregate Confusion Project at MIT Sloan School of Management argues that the push to standardise ratings, or to disregard ratings altogether, is a mistake. Their view is that ESG – despite its flaws – remains the best available barometer for measuring ethical behaviour of companies and that, in turn, ESG data remains an important source of information for investors. However, some countries are already making attempts to refine their regulatory approach with the introduction of standardisation. According to Responsible Investor, the Securities and Exchange Board of India is considering regulations that would require mandatory assurance by companies for several ESG metrics, including gender pay gaps, GHG emissions, water consumption, incidence of sexual harassment and others.

Regular readers of the newsletter will be aware of increasing focus from regulators and investors to tackle ongoing concerns with ESG ratings, and standardisation has often been cited as a solution – although there is less universal agreement on what should be measured and how. The argument against standardisation is that it could be manipulated by companies, while others have made the case that there is a benefit in having a diversity of approaches to how investors assess a company’s ESG credentials.

Arab countries sign $2 billion industrial deals for sustainable economic development

Businesses from UAE, Egypt, Jordan, and Bahrain have signed industrial agreements, with an investment value worth $2 billion at the third Higher Committee meeting of the Industrial Partnership for Sustainable Economic Development. According to Gulf Business, twelve agreements were signed for nine projects across five sectors: agriculture, food and fertilisers, pharmaceuticals, textiles, and minerals and petrochemicals. The ambition is that the agreements will foster industrial partnerships among private-sector companies to boost GDP and create job opportunities in the partnering countries. The signed partnerships include the creation of three electric vehicle factories with a production capacity of 40,000 vehicles in the first three years and supply of aluminium sheets for manufacturing, emphasising the importance to develop cross-border practical solutions to the challenges of climate change.

Kentucky the stage for an ESG showdown between bankers and lawyers

An article in the New York Times has examined the latest developments in the anti-ESG movement in Kentucky, following a bill targeting the ESG investment community. The bill, which was passed late last year, ordered the State treasurer to compile a list of financial firms that have supposedly “boycotted” energy companies. The State attorney then escalated matters and issued subpoenas to several financial institutions, ordering them to hand over any documents mentioning “climate” or “environmental”. These documents would then be used to assess the companies’ involvement in the UN Net-Zero Banking Alliance, as this could indicate “financial discrimination” against companies not aligned with Net Zero. The Kentucky Bankers Association has sued the Attorney General in response, accusing them of overreach and violation of free speech. In analysing the Kentucky situation, the New York Times makes the point that, while greenwashing is undoubtedly a problem with ESG, adopting ESG principles is simply good risk management and that the impact of climate change or lack of diversity, for an example, should be considered when selecting stocks. Other red states seem to be coming around to this way of thinking with Indiana and Dakota objecting to similar anti-ESG bills. It’s unclear how the Kentucky bankers will fare, with some legal commentators stating that courts generally dislike blocking investigations. The outcome will no doubt be of great interest to those on both sides of the ESG debate.

Mistakes to avoid in gaining support against shareholder proposals

As we enter proxy season, investors have changed their priorities in 2023 and understanding these against an ever-evolving ESG landscape will be crucial to securing shareholder support. Against this backdrop, FTI Consulting’s M&A and Activism team has detailed five common shareholder proposal mistakes to avoid. In a unique year, the team warns about assuming previous results (yours or others) are indicative of future results; waiting for the proxy statement to start your defence; a zero-communication policy with the proponent; a lengthy, unstructured response statement that “boils the ocean”; and viewing a shareholder proposal as strictly a governance issue. You can read the full thought leadership piece here.

ICYMI

• US nominates former Mastercard chief as World Bank president. President Biden has nominated Ajay Banga, former Mastercard chief executive and Wall Street veteran, as the next World Bank president tasked with overseeing the institution’s biggest mission change in a generation. Banga’s nomination comes as the US and other shareholder nations have placed increasing pressure on the bank to expand its development remit to include efforts to address climate change.
• Bank of Ireland and Kerry Dairy launch sustainability-linked farmer loan programme. Kerry Dairy Ireland has announced the launch of a new partnership with Bank of Ireland that will provide funding for sustainable farming improvements for its milk suppliers. The partnership will result in the development of sustainability-linked loans, which will provide additional funding for the implementation of environmentally friendly farming practices aimed at reducing carbon emissions and enhancing animal welfare, as well as improving biodiversity and water quality.
• Cyber security disclosures in company annual reports. The UK Department for Science, Innovation and Technology (DSIT) has commissioned Azets to carry out research into the prevalence and quality of cyber disclosures. This will inform the government’s planned introduction of the Resilience Statement, a statement that will form part of a company’s annual report and will set out how a company is managing risk and maintaining or enhancing cyber resilience.

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