ESG+ Newsletter – 3rd March 2022

The window of opportunity to combat climate change is closing, warns the IPCC

In its latest report, published on Monday last, the IPCC warned that the window of opportunity to minimise the consequences of climate change is “rapidly closing”. The document, the second part of the IPCC’s Sixth Assessment Report and titled Climate Change 2022: Impacts, Adaptation and Vulnerability, outlines that the people and ecosystems least able to cope are being hardest hit. Infrastructure too was a focus, both from a risk perspective, but also as a solution with the IPCC stating that “cities also provide opportunities for climate actions”, despite the challenges accompanied by growing urbanisation. “Green buildings, reliable supplies of clean water and renewable energy, and sustainable transport systems that connect urban and rural areas” were all signposted in this respect.

Media coverage of the report has been widespread, with the Financial Times leading with the UN’s assessment on the climate change risk to global supply chains, already highly volatile and vulnerable due to the pandemic pressures and the Ukrainian crisis. In respect of tangible effects, the Financial Times highlighted global food price rises and already squeezed semiconductors and car parts.

Many would view the IPCC’s conclusion as one that is not surprising. Global efforts to date have been generally characterised by rhetoric without the requisite level action when comparing the level of urgency needed to the output – COP26 being the most recent case in point. This may change as the costs of essential goods continue to inflate, especially when considering the level of political and media attention on the current ‘cost of living’ crisis.

Finance for Biodiversity launches ‘first of its kind’ climate-nature framework

Biodiversity loss and climate change are inextricably linked, and companies are increasingly expected to recognise the interdependencies between climate and nature in their environmental strategies and transition pathways. This week, the Finance for Biodiversity initiative (F4B) responded by publishing a transition framework to enable financial institutions to integrate their climate and nature approaches. The framework works at an asset-level, looking at the climate and nature related risks and opportunities of each asset and estimating the financial impact on asset value using an integrated climate and nature scenario analysis. Simon Zadek, the chair of F4B said “you can’t look at climate risk without understanding nature risk. And you can’t look at nature risk without understanding climate risk”. By looking at nature and climate in an integrated way, financial institutions are able to ascertain a clearer picture of the dynamic between the two factors, and how the joint crises of climate change and biodiversity collapse could amplify risks. This week, as outlined above, the physical risks of climate change were reiterated through the publication of the second part of the IPCC’s sixth assessment report, which also laid bare the interdependencies between climate and nature.

As we approach the UN’s Convention on Biological Diversity in April, it has become increasingly evident that climate and nature must be viewed in tandem. The F4B framework is likely to be the first of many reporting and measurement methods that seek to account for the links between environmental topics.

Addressing cyber risk across leadership, boards, and ESG reporting

Research from Gartner has laid out how the role of the cybersecurity leader needs to evolve, with a recent survey revealing that 80% of boards now consider cybersecurity a business risk, not just an IT risk. In response, 13% of boards have implemented dedicated cybersecurity committees, overseen by a specific director, and Gartner predicts that at least 50% of C-level executives will have cybersecurity-related performance requirements by 2026. These developments will inevitably shift accountability for cyber risk to business leaders. To be effective, the cybersecurity leader should therefore not only be responsible for directly addressing cyber risk, but will also need to ensure that “business leaders have the capabilities and knowledge required to make informed, high-quality information risk decisions”.

Greater scrutiny from internal and external stakeholders is also providing an impetus for organisations to include cybersecurity in their ESG reporting, with Gartner predicting that 30% of large organisations will have published ESG goals related to cybersecurity by 2026, up from less than 2% in 2021. While cybersecurity is often considered a governance matter, it’s increasingly becoming a social and societal concern that is driven by risks to personal data, safety of systems (including critical infrastructure), and the potential abuse and misuse of an organisation’s products. In a week of heightened cybersecurity concerns, the growing likelihood of an incident occurring, coupled with greater public awareness, will inevitably mean that pressure will mount on organisations for greater transparency in their cybersecurity reporting.

Boards under fire for COVID-19 executive bonuses

Despite shareholder action to decrease CEO pay packages, an As You Sow report has highlighted that CEO remuneration is at an all-time high, most noticeably for companies in top indices. This is in spite of record numbers of CEO pay packages being rejected, with 16 of the S&P 500 opposed by over 50% of shareholders in 2021. As You Sow’s research notes that, although many CEOs promised to cut their own base salaries last year, analysis has since shown that there was only a minimal impact on their total pay due to “larger long-term equity incentives given to CEOs”. A recent Barron’s article highlights that the three managers that control over 20% of shareholder votes, BlackRock, Vanguard and State Street Global Advisors, are “still approving 95% of S&P 500 CEO pay packages”. At the end of January, the SEC re-raised a rule proposed in 2015 that will require public companies to report multiple executive compensation metrics in their proxy statements. The 2022 version includes a requirement to highlight incentive plan metrics and connections to ESG related goals. The extent to which the SEC update truly does clamp down on executive pay deemed ‘excessive’ remains to be seen.

Investors can drive capital into health and nutrition

There have been increasing concerns around climate and biodiversity impacts, and the link between the degradation of the environment and subsequent health risks. Poor worker health costs $575 billion a year, with one in ten people undernourished, one-third of the global population unable to afford a healthy diet and one in four people are overweight. The costs from the global food system amount to $6.6 trillion. As such, the food and agriculture system is coming under increasing scrutiny as the world starts to understand and grapple with the complex issues of health and nutrition. Despite the worrying statistics, the issue is not one prioritised by the investor community and, as a consequence, companies have been allowed to overlook their impact.

The future may present a rosier outlook, with better health outcomes estimated to contribute $12 trillion to global GDP by 2040. This demonstrates the strong incentive for investors to upscale health and nutrition priorities – deploying capital to investments aligned with health focused UN SDGs, most specifically SDG 3 – Good Health and Well-Being.

The circular argument to tackle plastic pollution

In a recent ESG Investor interview, Juliette Goulet, the Project Manager in the Global Commitment team at the Ellen MacArthur Foundation, talks about the urgent need to manage plastic pollution with the same urgency as climate change, given they “exist in an interconnected parallel”. Based on United Nations Environment Program (UNEP) estimates,  at the current rate, the impact of plastic production and incineration would account for 15% of allowed emissions under the Paris Agreement targets by 2050. Furthermore, while not part of deliberations at last year’s COP26 summit, the world leaders gathered at the United Nations Environment Assembly (UNEA) in Nairobi have endorsed a historic resolution to end plastic pollution and forge an international legally binding agreement by 2024. This impetus is reflected by the commitment this week made by 200 countries to start negotiations on an international agreement to take action on the “plastic crisis”. 

As regulators are at work, investors are also being called upon to engage with their investee companies, given the high levels of exposure to plastic pollution in their portfolios, as noted in the Planet Tracker data. The impact of these engagement efforts can be evidenced by the commitments set by Kraft Heinz to reduce its use of plastic packaging by 2023, in response to the shareholder proposal filed last month by the proponent As You Sow, which has now been withdrawn. With regulators in agreement on the need to address plastic pollution through a circular economy model, given the potential 80% reduction of plastic in oceans by 2040, it also has the potential to affect millions of people from a job creation perspective. This has been recognised by the UNEA resolution regarding the role of “waste pickers”, for the first time in an environmental proposal, marking a significant shift in the policy approach to plastic.

Advisor to European Commission recommends expanding Taxonomy to social objectives

The Platform on Sustainable Finance, an advisory body to the European Commission, has published its final report on the Social Taxonomy. Following the model of the Green Taxonomy, the Social Taxonomy would create a classification system to define the economic activities that contribute to a positive social outcome. The document, published this week, is for now only a set of recommendations with no binding effect – the European Commission has not yet decided whether it plans to expand the scope of the taxonomy to social objectives – but its content is nonetheless relevant as it is likely to influence the Commission’s thinking.

The Platform on Sustainable Finance recommends setting up a framework around three objectives: providing decent work and including the value chain, adequate living standards, and the wellbeing of end users. For each, the document includes sub-objectives, such as preventing child labour, providing access to drinking water and others. If adopted, a Social Taxonomy would have a significant impact on redirecting capital flows towards aligned activities and would introduce new or more stringent disclosure obligations. For instance, the report suggests that funds disclose the percentage of compliance with the Social Taxonomy, broken down by objective. As the Social Taxonomy advances, we will continue to provide updates in this newsletter.

In Case You Missed It

• A study of investor preferences in Denmark revealed that women are less sceptical of ESG than men, and more willing to sacrifice returns to uphold ESG goals. Analysis showed that 59% of male respondents were prepared to invest in companies that ignored sustainability, provided they generated high returns – whereas the figure stood at 41% for women.
• The EU securities markets watchdog, ESMA, has identified tackling greenwashing as a primary priority for its sustainable finance work over the next three years, IPE reports. The authority has identified greenwashing as a “complex and multifaceted issue”, of which its causes potentially relate to multiple aspects of the functioning of the investment value chain and, as such, recognise it as crucial to the advancement of the overall sustainability agenda.
• CFO’s should prepare for stronger ESG shareholder pressure, an EY report has found. The study revealed that 7 out of 10 institutional investors say they will prioritise the risks and opportunities from climate change during 2022 shareholder meetings, pre-empting a proxy-season like no other. Against the backdrop of heightened focus on companies’ environmental footprint, executive management teams and boards are facing increased shareholder scrutiny regarding the integration of ESG into their business practices.

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