ESG+ Newsletter – 30th June 2022

Business leaders grapple with response to Roe v. Wade ruling

Last week, the U.S. Supreme Court issued its anticipated ruling to overturn Roe v. Wade following a leak reported by Politico in May, overturning the constitutional right to abortion. In a 2021 survey, JUST Capital found that 63% of Americans believe that CEOs of large companies have a responsibility to take a stand on important societal issues. McPherson Strategies founder and CEO, Susan McPherson, said American companies that have spent years being outspoken about gender and racial equity through hiring, promotions, and equal pay are “going to be called out if they’re not also addressing this particular issue.” These positions align with recent research from FTI on the expectations of business leaders.

Many companies announced that they will pay for employees to travel to another state if needed to obtain an abortion. Additionally, the past few years have shown a rising trend of businesses moving to lower-tax states, many of which are banning abortion with the overturn of Roe. While CEOs and corporate leaders have largely avoided taking a stance on the issue of abortion as a way to avoid a partisan debate, many are announcing policies that protect their employees’ access to healthcare. As the social element of ESG rises up the corporate agenda, corporate leaders will need to navigate increasingly complex issues while assessing appropriate actions to support and protect their workforce.

Regulators set to tighten rules on ESG rating agencies

On June 27, the European Securities and Markets Authority (ESMA), published a letter to the European Commission presenting its findings from its February Call for Evidence on the market structure for ESG rating providers in the EU. According to the findings, 59 ESG rating providers are currently active in the EU. The findings showed that ESG ratings users are typically contracting for these products on an investor-pays basis from several providers simultaneously, to increase coverage. Identified shortcomings include low levels of transparency, poor coverage and poor responsiveness. The feedback received is indicative of an immature but growing market which has seen the emergence of a small number of large non-EU headquartered providers.

Meanwhile, in the UK, the FCA has stated that it sees a “clear rationale” for regulating ESG data and rating providers, given the potential market benefits of effective, transparent ESG ratings and data. The FCA also looked at the UK’s sustainable debt market, outlining concerns around second-party opinion providers in the currently unregulated market. In particular, the FCA raised concerns regarding a lack of methodological transparency and “potential conflicts of interest inherent to an ‘issuer pays’ model”.

Scrutiny from regulators appears to be intensifying on ESG data, rating agency methodologies and second-party opinion providers. While the lack of transparency may create concerns that misleading or incomplete ESG data and ratings may create a dysfunctional market, the inability of individual investors to assess every company it invests in, particularly on passive mandates, means that despite fundamental changes, ESG rating agencies are likely to remain part of the ecosystem.

G7 accused of reneging on climate pledges in face of energy crisis

G7 leaders meeting in Germany this week faced accusations of reneging on their climate commitments from leading environmental and climate groups following their decision to revert to the use of coal plants and invest in non-renewable energy sources, such as liquefied natural gas. While the environmental industry groups view the decision as a failure to deliver on their climate pledges, the G7 leaders stated that this was an appropriate, albeit temporary, response to the current energy crisis. The accusations follow decisions made by some G7 members in the wake of the war in Ukraine to transition back to the use of fossil fuels to bridge countries’ short-term energy needs. These decisions were made to ensure that these economies could continue to operate, while also reducing their energy dependence on Russia’s oil and gas supply. The German coalition agreed to phase out coal plants in 2030 instead of 2038 when it entered office in November 2021, but it made a decision in March to reactivate old coal power plants to ensure electricity supply security.

What is the net impact of these decisions? A report published by ING highlighted that, while the increased coal use may not jeopardise the emission reduction targets for Europe, the raising of global coal production is not a good sign for global carbon emissions and global warming. Whether the G7’s leadership position in the energy transition is undermined remains to be seen, but it certainly makes it harder for them to hold other countries to account for failing to reach their targets. With the UN’s COP27 climate summit scheduled for November and with the Paris climate goals firmly in the minds of all stakeholders, the scrutiny and concerns around these climate pledges will likely intensify over the coming period.

Climate reporting and an expertise gap

A recent article in Bloomberg Tax highlighted a potential shortage in ESG reporting expertise as companies work toward complying with current and pending regulations relating to ESG such as disclosing Scope 1, 2 and 3 emissions.  Although current ESG disclosures do not require assurance from audit firms, companies still need to make sure that they are consistent and reliable for investors.  To meet the reporting requirements, companies are reaching out to consulting companies, but many are finding that there is a high demand for the right advisers with the relevant expertise and a corresponding lack of supply. With the SEC proposal to enhance and standardize climate-related risk disclosures for, it is likely that demand will continue to grow and significant investment will need to be made to keep up with rapidly increasing reporting requirements globally.

Biodiversity momentum continues

Global mining company BHP on Tuesday published a social value scorecard, which notably included a goal for addressing biodiversity loss. As part of a social value update delivered by BHP’s Chief Legal, Governance and External Affairs Officer, the company stated that it will “create nature-positive outcomes by having at least 30% of the land and water that BHP stewards under conservation, restoration or regenerative practices by 2030.” The scorecard first pledged three years ago as a commitment to build social value into decision making, is a new facet of BHP’s existing ESG strategy, and will be implemented alongside a previously set decarbonisation roadmap. Following the announcement, there was a small bump in BHP’s share price on Tuesday.

Biodiversity has been a central focus of 2022, with EU regulators recently calling for legally binding targets on pesticide use and improving natural ecosystems – as was noted in last week’s newsletter.

The momentum continues this week with the Taskforce on Nature-related Financial Disclosures releasing the latest version of its framework aimed at supporting businesses to outline and disclose risks and impacts – in alignment with the International Sustainability Standards Board. It follows March’s first iteration and accounts for feedback from a 130 strong market and stakeholder group. The guidance is due to be updated twice more, in October and February, ahead of the final release in late 2023.

Upskilling can address the skills gap in the US labour market

US employers are increasingly using upskilling schemes as a means of addressing growing labour and skills shortages. While upskilling has traditionally been used to retrain existing staff, many companies are now relaxing job requirements and instead providing on-the-job training in missing skills, with a recent survey revealing that 67% of companies expect to increase their learning and development budgets in 2022. While monetary benefits continue to play a significant role, in today’s job market, attitudes are evolving and candidates are evaluating prospective employers based on their mentorship and learning and development programmes, among other non-financial factors. Training and upskilling are also important for employee retention, and workers who participate in these programmes stand to increase their annual salary by an average of $8,000. Upskilling won’t fully address issues around social inequality as workers are still expected to hold a certain level of educational qualification, however, it may open up career opportunities for workers who were previously overlooked as a result of a lack of specialist qualifications or experience. And employers who provide an environment where their people can develop and grow will find that their employees are more effective and are more likely to stick around, much like offering them an ownership stake, as covered a couple of weeks ago.

In Case You Missed It

• The Global Reporting Initiative (GRI) has launched a new disclosure standard for the agriculture, aquaculture and fishing sectors to help the industry report on its impact on key sustainability areas. The new standard highlights material topics for the sector, introduces new disclosures on food security, land and resource rights, living wage and income, natural ecosystem conversion, animal welfare, soil health, and pesticide use, and will make it easier for companies to link their impact to the 17 SDGs.
• EU member states have agreed on stricter targets for renewable energy and energy efficiency, under the “Fit for 55” package. The European Council decided to increase the renewable energy target for 2030 from 32% to 40%, to ensure the EU is on track to achieve climate neutrality by 2050. The Council also agreed on a 9% reduction target in energy consumption compared to 2020 levels.
• G7 leaders committed to setting up a “Climate Club” to speed up efforts to tackle climate warming. This initiative, which has a strong focus on industrial decarbonization, will help coordinate international decarbonization efforts and push for ambitious emissions mitigation policies. Climate action and the just energy transition were at the heart of the discussions. However, the Leaders failed to fix an end date for coal generation.

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