ESG+ Newsletter – 31st March 2022

ISSB launches consultation for global baseline of sustainability disclosures

Earlier today, the International Sustainability Standards Board (ISSB) launched a consultation on its first two proposed standards – one which sets out general sustainability-related disclosure requirements and the other specifies climate-related disclosure requirements. The objective of the proposals is to create a comprehensive global baseline of sustainability disclosures – a move that will be welcomed by investors across the capital markets – and the proposals build upon the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD) and incorporate industry-based disclosure requirements derived from SASB Standards. The consultation period will close on 29 July 2022.

With investors’ expectations on companies for transparent and consistent ESG data never being higher, today’s announcement by the ISSB marks an important milestone for ESG investors, as it provides a potential timeline for a global baseline for high-quality sustainability reporting. The creation of a comprehensive and aligned reporting framework – which will include feedback from governments, policymakers, companies, and the capital markets – will make the ESG reporting landscape easier to navigate.

However, despite this progress, their remains diverging and wide-ranging sustainability reporting frameworks in the market and debate around the best universal standard – be it the investor-focused ISSB or the stakeholder-centric model by the Global Reporting Initiative (GRI) – is likely to continue.

Expectations for the 2022 Proxy Season

This year, we enter the 2022 AGM season against a deteriorating global economic backdrop, and threatened supply chains from the return of coronavirus to China, which as described in this FT article “has thrown the usual preparatory work off course”. Along with the increased scrutiny from institutional investors, the influence of activist investors is also growing, who are now part of the shareholder register of at least nine FTSE 100 companies. The energy and food security issues of the Russia/ Ukraine conflict will be a major priority theme that is set to dominate boardroom discussions this year, alongside the deliberations around environmental strategy, remuneration and diversity that have become increasingly featured in shareholder agendas since the last proxy season. While investors have been more vocal around environmental and social issues, according to ShareAction research, only 30 out of 146 ESG resolutions received major support in proxy voting last year. This year, many institutional investors have refreshed their focus on environmental matters such as committing to vote against companies that fail to link executive remuneration to climate targets, as highlighted in our previous newsletter, or vote against board members at companies that have weak biodiversity practices. With the financial sector facing growing calls to reduce their exposure to carbon-intensive sectors in line with their commitments to tackle global warming, critical climate votes for shareholders are expected at the AGMs of large banks across Europe and the US. This becomes particularly thorny, in light of the potential mismatch in the approach to climate between the asset management and the banking and capital market divisions of most large banks. While there has been an increased focus on the E of ESG, we expect scrutiny around remuneration practices and board effectiveness and composition to remain high, particularly through proxy voting, also highlighted in our recently published 2022 Proxy Season Preview.

Inflation further strengthens employees’ position in global workforce

During the pandemic, there has been a clear shift in the balance of power between employers and employees, with the ‘Great Resignation’ and labour shortages providing employees with more leverage and placing pressure on companies to attract and retain talent. Now inflation is impacting the labour market, providing employees with an even stronger bargaining position in terms of pay negotiations – particularly as the cost of living continues to rise. Currently, companies are struggling to hire and retain talent due to labour shortages, forcing companies to offer higher salaries to mitigate this and providing employees with greater leverage to negotiate higher pay.

While companies often cite their greatest asset as their workforce, they have often neglected to reflect that with significant wage increases, instead opting to offer additional benefits such as health and wellbeing support and increased office amenities. Additionally, investors placing a particular focus on social and employee welfare considerations during the pandemic. As outlined in our recently published 2022 AGM Season Preview, these factors will continue to influence how investors engage with companies and how they make decisions around AGM voting. However, investors, along with companies, have often struggled to encapsulate the ‘S’ in ESG. It would appear that – shockingly – employees value being paid appropriately and that this is the best place to start to ensure a satisfied workforce and the retention of talent.

Will supporting a just transition be as important as climate goals?

Supporting a just transition is becoming an increasingly prominent topic in sustainability and ESG. This could mark the beginning of corporate ‘just transition’ pledges either as standalone commitments or integrated within climate targets. The just transition has major implications for many aspects of the corporate world, including supply chains. Examples include the transition towards green transportation, which will be capital intensive and may push smaller operators out of the market. Companies are taking responsibility for the environmental impacts within their supply chains, but in doing so they may be unconsciously contributing to an unjust transition, pushing smaller suppliers who are unable to compete on environmental criteria out of their supply chains. Proponents of integrating a just transition into climate plans argue that by ignoring the topic the benefits and costs of the transition to a green economy will not be fairly distributed. The London School of Economics undertook a study to understand the role of the just transition and human rights arguments on climate related litigation. The authors found that in over 100 cases human rights arguments were used to promote action on climate change, but there is a growing body of just transition cases that are challenging the nature of climate action to ensure that the benefits and burdens of aligning to net zero are evenly distributed. The far-reaching implications of the transition to a Net Zero economy coupled with an ongoing cost of living crisis indicate that the topic of a just transition may well continue to grow in prominence. As the true impacts of transitioning to Net Zero are felt, companies should consider whether existing climate plans support a just transition and consider integrating the topic into their climate targets.

US solar growth could be impacted by tariff investigation

A Wall Street Journal article highlights Atlus Power Inc. and Trammell Crow Co.’s new solar panel installation deal. The deal will cost over $600 million and install 35 million square feet of solar. This news comes in conjunction with an announcement that the Biden Administration is considering taxing the import of solar and key equipment.

There has been a constant push and pull between solar advocates and the focus on American concerns about taxing Chinese products. A South China Morning Post release highlights that the US is concerned that Chinese manufacturers are circumventing tariffs by distributing parts to other South Asian countries prior to their purchase by US companies.

US Solar Capacity has grown ~97.0 gigawatts since 2008 and costs have dropped almost 70% since 2014. The US Department of Energy estimates that we could reach almost 225 gigawatts of solar by 2025, and double that by 2030. Deals like the one with Atlus Power and Trammell Crow Co. are integral in the US ability to meet those estimates, but the possibility of increase price could slow down the solar momentum.

In Case You Missed It

• UK MPs are pressing the Government to ensure that heavy emitters prioritise cutting their emissions footprint before offsetting or investing in negative emission technologies (NETs). The UK’s 2050 net-zero strategy combines emission reductions and emission removal targets which could provide a loophole for big emitters. There is currently no guarantee for the development and deployment of NETs. MPs are questioning how NETs will be scaled, how their impact will be monitored, and what are the alternatives if NETs do not scale.
• The world’s first carbon removal indexes were launched by Nasdaq last week. The three new commodity price reference indexes, tracking the price of removing CO2 from the atmosphere, will increase transparency and standardisation in the carbon removal market. The indexes will encourage well-informed decision-makers to invest in carbon removal projects.
• British Airways has received its first batch of sustainable aviation fuel (SAF), making the airline the first to use this type of fuel produced in the UK on a commercial scale. The use of SAF, whose production-related emissions can be reduced by approximately 80% compared to traditional jet fuel, will help the company move towards its target to reach net zero CO2 emissions by 2050. The airline’s parent company, International Airlines Group (IAG), committed to powering 10% of flights with SAF by 2030.
• Scottish Widows updated its divestment policy and committed to divest from tobacco companies and tightens policies for fossil fuels. The firm will no longer invest in any company deriving 10% or more of their revenues from tobacco and 5% or more from thermal coal mining or tar sands. Scottish Widows is anticipating divestments worth £1.5 billion from its portfolios, bringing its total level of ESG divestment to £3 billion.

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