ESG+ Newsletter – 4th November 2021

Successful ESG shareholder activism on the rise

A report released by Diligent Institute finds that 13% of ESG campaigns were successful in the first eight months of the year (vs 11% in the previous year). The report points to the lack of modern governance practices, namely boards’ unpreparedness on technology, compliance and sustainability topics, as the catalyst for activist action. The research looked at data collected for 726 companies that engaged with investors, solely on investor activism campaigns. The increase in the success of ESG-related campaigns is a reflection of the prioritisation of ESG by investors this year and seems to indicate that the pressure for companies to improve the disclosure of their practices will continue to increase, particularly on climate change targets and diversity & inclusion. As institutional investors are looking to reduce risks across their portfolios, they are becoming increasingly vocal about their support for topics and proposals on ESG. In the first half of 2021, there were 169 ESG shareholder proposals in the US, which received 34% support by fund managers. In comparison, only 171 resolutions were filed in the whole of 2020, with support averaging less than 29%. While the wins in “Big Oil” made headlines during the last proxy season, on the “S” side, shareholder proposals targeting the largest US banks requesting racial equity audits also received a lot of attention. Even though some of these resolutions failed to pass, support levels were very high. One example is Citigroup, where the proposal received 38.6% shareholder support, and at the beginning of this month, the bank announced that it will be conducting a deep dive into its business to assess its contribution to racial discrimination and become the first Wall Street Bank to agree to this audit.

Launch of the ISSB points to uniformity in ESG reporting

We’ve previously reported on efforts to consolidate ESG reporting methodologies and bodies, which faced criticism from detractors that the range of standards and frameworks represented an ‘alphabet soup’. A major step forward in consolidating those frameworks occurred at COP26, when the IFRS Foundation, responsible for international accounting standards, announced on Wednesday the launch of the International Sustainability Standards Board (ISSB) to create a single set of standards “to meet investors’ information needs”. The new body will integrate the Climate Disclosure Standards Board (CDSB) which oversees CDP, and the Value Reporting Foundation (VRF), set up following the merger of SASB and the integrated reporting framework. It also published two prototype disclosure requirements, including a climate-focused standard based on the Taskforce for Climate-related Financial Disclosure’s framework which may be formally adopted in late 2022. The approach may serve to ensure information is comparable across sectors and financial markets, smoothing out the financial system’s “essential plumbing” that Mark Carney had previously referenced. While a potentially monumental step forward in providing consistent and comparable information to capital markets, certain questions remain, such as how the standards will be adopted at the national level; their role set against existing IFRS standards; and, how they will interplay with the EU’s impending Corporate Sustainability Reporting Directive.

Investor focus turn to pathway to net zero

With COP26 well underway, the world’s focus is firmly placed on how it can lower its greenhouse emissions and transition towards a carbon neutral economy in line with the goals of the Paris Agreement and the UN Framework Convention on Climate Change. One core element of this transition has been companies’ commitment to achieving “net zero” and slashing their carbon emissions by 2050. However, pressure continues to grow on companies to identify their pathways to net zero and to take immediate action to accelerate the transition towards achieving it. This is the focus of a recent Financial Times article, which details investors growing expectations around achieving net zero and what the impact of not achieving it will mean. This is best summarised by BlackRock’s CEO, Larry Fink, who predicts that “companies that are not quickly preparing themselves will see their businesses and valuations suffer.” The article outlines key areas that companies should focus on to meet these expectations: “expertise, incentives and setting the tone from the top; investors narrow their focus to engage the biggest emitters; making tomorrow’s goals matter to today’s leaders; and disclosure is the key to counting to zero.” As outlined in a recent edition of the newsletter, critics of the net zero commitments, such as UN Secretary-General António Guterres, believe that they have little value without a plan of how to achieve them. Investor scrutiny on companies can be part of the solution to ensure that public objectives translate into concrete action, particularly now that the innovative and effective Science-Based Targets Initiative has set out an inaugural net zero standard.

Firms that control 40% of global assets to align with 1.5 degree pathway

Building on this issue of scrutiny and net zero commitments, on Wednesday, the Mark Carney-led group of financial institutions, GFANZ, committed to a net zero emissions target by 2050. According to the FT, this equates to around $130 trillion of private capital which is now aligned to a 1.5 degree pathway. During the COP26 negotiations, there has, as outlined, been widespread criticism of targets without robust underlying strategies. Campaign group Bank on our Future highlighted that the commitments were hollow if they did not address the group’s investment in fossil fuel expansion, stating “It is not green finance, nor is it all dedicated in the slightest to tackling climate change as long as financiers have large interests in fossil fuel expansion”. Only last month the FT revealed that members of GFANZ had pushed back on a roadmap to halt the financing of new oil, gas and coal projects. Ultimately, we are seeing a greater push across the market for evidence based targets – rather than simply high-level net zero commitments. This will continue to drive companies and investors to validate science-based targets and ensure there is a level of rigour around the delivery of net zero objectives.

Climate accounting in the crosshairs of investors and regulators

An uptick in climate-related disclosures looks likely with significant moves made this week by both regulators and investors. An investor group managing around $4.5 trillion has threatened action against Big Four auditors if they do not include climate risk in financial statements. In a letter to Deloitte, PwC, KPMG and EY, the group cited research that showed more than 70% of the largest carbon emitters did not disclose climate risk in their 2020 accounts and warned that investors could vote against their reappointment should they not meet expectations. This letter comes just days after the UK announced that it will implement legislation making it mandatory for firms to disclose climate-related financial information from April 2022. The new legislation will affect more than 1,300 of the UK’s largest companies and will make the UK the first G20 country to enshrine TCFD recommendations into law.

EU climate targets in reach due to developments in the green corporate bond market

Last week the ECB released an assessment of the EU taxonomy and what this means for climate finance. The EU Taxonomy regulation requires organisations to identify and disclose environmentally sustainable activities which will contribute to the EU’s goal to be climate neutral by 2050. The ECB’s assessment found that while there are currently very few taxonomy aligned activities, the regulation “expands the green investable universe far beyond renewable energy”. The share of investments currently financing taxonomy-aligned activities is estimated at 1.3%, corresponding to around €290 billion. An additional €400 billion of green financing will be required each year to achieve climate objectives alone, while the share of financing directed towards activities that will need to be progressively abandoned in the transition to a net zero economy is currently 5.5%. The ECB concludes the assessment positively, stating that there is “enormous growth potential for green finance” and the financial investment required is feasible based on recent developments in the green corporate bond market. This assessment is yet another example of how the taxonomy will be increasingly used to ensure the EU is on track to achieve its climate goals.

In Case You Missed It

• Airline tickets are cheaper than rail because airlines face lower costs for their carbon emissions than train companies, Eurostar CEO Jacques Damas said in an interview with The Independent. Damas defended higher costs for airline tickets as a way to encourage travellers to take the train instead of flying, which would significantly reduce carbon emissions.
• Hong Kong backs ESG focused companies, with its stock market seeking to be at the forefront of sustainable investments. Forbes reported Hong Kong regulators are stepping up their efforts in pushing forward the ESG agenda, and the green bond market is set to play a critical role in ensuring that China reaches its target to become carbon neutral by 2060.
• Blackrock raised $673 million for climate-focused infrastructure, Reuters reported. With backing from the French, German and Japanese governments to invest in projects such as renewable energy, Blackrock hopes the fund will mobilise private capital in developing countries to tackle climate change.
• Surging oil and natural gas prices have investors issuing $49.5 billion of bonds, challenging previous data from Blackstone on how climate-minded investors might be making it harder for energy companies to raise money. The Wall Street Journal reported that investors are recognising that oil-and-gas production will likely be curbed over time by carbon emissions regulations, which will integrate them into ESG’s standards in the future.

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