ESG+ Newsletter – 30 May 2024

Shareholder proposals relating to lobbying and political spending is the first topic in this week’s newsletter, as we assess the potential for these to impact corporate reputation. We then review a number of ESG surveys which reveal the challenges of climate change for companies and investors, look at how nearly half of EU funds may be in breach of ESMA’s new ESG naming rule, and detail new developments on the global interoperability of sustainability reporting. Lastly, we look at a WEF report on the role that cities can play in halting and reversing biodiversity loss and the launch of the public consultation on the first draft of the Australian taxonomy.

Lobbying and political spending shareholder resolutions in the spotlight  

Shareholder proposals relating to lobbying and political spending have been among the most supported socially oriented resolutions during this AGM season. As set out in a recent GreenBiz article, these proposals have called for companies to improve transparency around direct and indirect lobbying activities and expenses; while also asking companies to strengthen policies and governance frameworks guiding these decisions. According to data from Proxy Monitor, lobbying-related proposals “accounted for 8 of the 10 socially oriented resolutions receiving the most shareholder support”. While none has received majority support so far, their inclusion highlights reputational risks facing companies. The congruence between company commitments across a range of ESG issues and their political donations and industry participation have come under significant scrutiny in recent years. Investor groups, NGOs and other advocacy groups have been engaging with companies as part of their push for greater transparency and coherent action. Investor interest is reflected in the levels of support for lobbying and political spending resolutions, despite the overall decrease in levels of support for shareholder proposals generally. 

With proposals meeting the Securities and Exchange Commission’s threshold for resubmission, we expect scrutiny to continue year-on-year, with investors expecting to see comprehensive disclosure on lobbying activities, including detail on how companies have responded to shareholder feedback on this topic.

GRI & IFRS partner to deliver sustainability reporting interoperability

Last week, the IFRS Foundation and the Global Reporting Initiative (GRI) announced that they are deepening their existing partnership and optimise the interoperability of GRI and ISSB Standards. The objective of this partnership is to create a comprehensive sustainability reporting system for companies across the world, helping them meet the disclosure needs of both investors and a stakeholders. The International Sustainability Standards Board (ISSB) and the Global Sustainability Standards Board (GSSB) – who respectively oversee the IFRS Foundation and GRI – will jointly identify and align common disclosures for information germane to their distinct scopes for their standards. This renewed partnership and interoperability will be a welcome step for both investors and companies, as it will ensure compatibility and interconnectivity between leading ESG reporting frameworks.

And the ESG surveys says…

A deluge of ESG surveys were published recently, providing insights into a wide range of topics from investors, asset managers and companies. Investors view climate change as the primary environmental factor driving investment decision-making, with 93% stating that climate issues are most likely to affect the performance of investments according to survey findings published by The Hoover Institution. From the company perspective, sustainability continues to be viewed as a value creation opportunity, becoming a focal point when designing a sustainability strategy according to a report by Morgan Stanley’s Institute for Sustainable Investing. The survey of more than 300 companies, highlighted that sustainability efforts are seen as supporting business objectives, which is reflected in fact that 92% of the companies surveyed expect climate change to impact the business model by 2050. However, while the impact of climate change is at the forefront of both investors’ and companies’ minds, a survey of Fidelity International’s investment analysts revealed their belief that most companies still do not have a credible plan to achieve net zero by 2050. This is underlined by their analysts’ view that only 43% of companies have an achievable 2050 net zero strategy in place, compared to 57% last year. The analysts surveyed viewed the widening gap as a reflection of the reality of net zero setting in for companies, who are struggling to deliver tangible action to meet their ambitious emission targets as deadlines loom closer. 

While the reality of the challenges of climate change and achieving net zero is evident, there is an underlining sense of optimism across all the surveys. Companies are more acutely aware of the climate risks facing them and the benefits of integrating sustainability considerations in its decision-making processes across their business. For investors, their ongoing focus on climate risks and companies’ sustainability performance, alongside ever increasing regulatory obligations, will ensure that pressure remains on companies to achieve net zero.

Research firm reports ESG naming transgressions following ESMA ruling  

Following finalised guidelines published earlier this month by the European Securities and Markets Authority (ESMA), research and analytics firm Clarity AI has found that 44% of funds are in breach of the EU’s new ESG naming rules. Of the overall 3,000 fund sample size, 28% reportedly have exposure to numerous assets which are in breach of the Paris-aligned Benchmarks (PAB), a range of exclusionary criteria which includes controversial weapons and fossil-fuel derived revenue. On the latter, it was found that over 1,000 of the analysed funds were exposed to businesses active in oil fuel production, above the 10% revenue threshold outlined by PAB, while 875 were invested in companies active in gas fuel production above the 50% revenue threshold. 

As concluded by Clarity AI, the EU’s naming rules will require a significant proportion of the EU universe to make divestment choices if managers are to continue to capitalise on ESG-related inflows. The research thus far does not focus on UN Global Compact Principles, a common exclusion criteria within funds’ own investment strategies, or the OECD’s Guidelines for Multinational Enterprises. Clarity AI will be publishing equivalent information relating to these, to which it estimates there will be an increase from the 44% breach. If this is the case, it may well represent a breach of fiduciary duty, given the prevalence of these exclusion criteria which are explicitly stated by investors in their strategies. 

Nature-Positive guidelines for the transition in cities

The World Economic Forum has released a new report outlining the crucial role that cities can play in halting and reversing biodiversity loss. Published in collaboration with Oliver Wyman, ‘Nature Positive: Guidelines for the Transition in Cities’ argues that there is a need for more co-ordinated urban efforts around nature solutions – not only to meet the ambitions of the Global Biodiversity Framework – but also to address the growing number of economic and infrastructure-related challenges arising from nature loss. Urban centres contribute 80% of the world’s GDP, yet an estimated 44% of that is at risk right now due to biodiversity loss. Despite this, just 37% of the 500 most populous cities around the world have developed a dedicated strategy focused on nature preservation. Against this backdrop, the report aims to provide support to local governments and businesses looking to progress their nature-positive transition, recommending that cities commit to benefitting nature and leaving it in a better state than it was before; translating this commitment into formal objectives; and finally, implementing actions to deliver on set targets and report on their impact. By following these principles, cities will be able to advance their restorative actions, and reap the rewards of a sustainable urban environment.  

Feedback sought on first draft of Australian taxonomy 

Environmental Finance reported that the Australian Sustainable Finance Institute (ASFI) has launched a public consultation on its initial draft taxonomy, focusing on energy, the built environment and mining. Stakeholder feedback will shape the development of climate mitigation criteria. Scheduled until 30 June, the consultation aims to refine the taxonomy’s ambitions and criteria. A subsequent consultation in Q4 2024 will delve into the manufacturing, transport and agriculture sectors, also considering a ‘Do No Significant Harm’ framework. Estelle Parker of the Responsible Investment Association Australasia highlighted the potential for Australia to lead in mining, emphasising the need for an internationally aligned taxonomy to drive a sustainable economic future. ASFI’s initiative reflects a crucial step towards integrating environmental considerations into financial decision-making. Aligning financial practices with sustainable development goals can foster resilience and propel Australia’s global leadership in responsible investment.

ICYMI 

• China has experienced its first decline in carbon emissions since the pandemic’s end, suggesting that the country may have reached its peak emissions ahead of its own set deadline. According to Bloomberg, renewables, particularly wind and solar power, have met most of the country’s increased electricity demand. This reduction aligns with China’s commitment to reach net zero emissions by 2060. 
• ESG falling off the agenda at top firms in Europe and US. The Business Post reports that in the US, climate-related terms saw a significant 60% drop in mentions during company presentations. European firms experienced a more modest decline, likely reflecting the increased scrutiny and politicisation of ESG in the US.
• US Transportation Secretary Buttigieg has linked increasing flight turbulence to Climate Change, stating that its effects are already impacting transportation systems. Speaking on CBS’ ‘Face the Nation,’ Buttigieg emphasised that turbulence is likely to continue affecting travellers. According to CNBC, Buttigieg referenced various climate-related events, from extreme heat waves threatening infrastructure to the increasing severity of hurricane seasons.