ESG+ Newsletter – 5 December 2024

In this week’s edition, we look the rising trend of sick leave across Europe and its wide-ranging implications; how investors are steering private market portfolios toward impact and sustainability mandates; the outcomes – or lack thereof – from the UN plastic talks in Busan;  and why transition bonds are struggling to gain the same traction and credibility as green bonds.

Workplace culture key in fighting absenteeism

This week, Bloomberg took a closer look at the trend of sick leave across Europe and its economic and social implications. Norway’s welfare system faces scrutiny as businesses contend with a 15-year high in sick leave, with workers averaging 27.5 days per year—the highest in Europe. For businesses it can mean higher costs for hiring and replacements and added pressure on remaining staff. The issue extends beyond Norway; countries like Portugal and Spain, with less generous systems, also report high sick leave rates of 23.7 and 22.4 days, respectively. In the UK, economic inactivity among working-age people has risen by 800,000 since 2020, with long-term sickness costing £33 billion annually. However, as noted by Bloomberg, OECD research shows presenteeism—working while ill—harms productivity two to three times more than absenteeism.  

Proposed solutions have sparked controversy; in France, the national auditor suggested cutting compensation for absences under eight days, potentially saving €470 million annually but is facing backlash. Despite the economic strain, businesses are being encouraged to view employee health support as an investment. A workplace culture that prioritises well-being can strengthen employee loyalty and retention, offsetting some of the negative impacts of absenteeism. Ultimately, the challenge lies in finding a balance between supporting workers and maintaining sustainable systems for businesses and national economies. 

UK private market investors to boost allocations to impact and sustainability mandates 

A study by Legal & General – encompassing the views of 150 UK institutional investors – reveals plans to allocate nearly half of their private market portfolios to impact and sustainability mandates within two years, up from over a third currently. While private markets are seen as a means to achieve stronger sustainability outcomes, investors are not compromising on financial returns, citing alignment between commercial returns and societal or environmental outcomes. Clean energy & tech and renewable energy infrastructure were identified as investor top environmental priorities, while economic infrastructure and health & social care were identified as their top social priorities. When surveyed on the strongest return opportunities, almost three fifths of respondents pointed to the climate transition and decarbonisation. As they seek to meet their financial and sustainability objectives, private market investors are expected to increase their allocation to infrastructure, private equity/venture capital, private credit and real estate. The findings of this study align with others suggesting that, despite political tensions focusing on ESG investing, European investors continue to integrate sustainability considerations in their investment strategies. 

UN plastics treaty talks fail to reach agreement 

At the fifth and final round of the UN plastic talks in Busan, South Korea, negotiations on an international plastic treaty have been suspended, Environmental Finance reports. With only a draft treaty approved, countries have failed to come an agreement on key issues, including whether the treaty should be used to manage waste or to decrease the initial production of plastic. Over 100 countries and jurisdictions, including the EU and the UK, sought to set a global target to reduce plastic production to a sustainable level; however, certain of these steps were opposed by oil-producing countries, as well as top plastic producer and consumer, China. Much like efforts to gain consensus on addressing climate change, another issue remains finance. While the draft text proposed a plan to increase private finance and develop a global financing mechanism to supply developing countries with funds, these are only in place in principle. This will be disappointing for over 180 private and public institutions who signed the UNEP Finance Statement, advocating for an ambitious treaty. The draft treaty will now be the starting point of negotiations “at a later date” next year. Spokespeople from the finance sector remain optimistic about this strong foundation for the next round; however, one can’t help wondering if, with stalled negotiations, heated international tensions and inflexible thinking, life in plastic is fantastic after all. 

European Commission releases EU Taxonomy FAQs to support sustainable investment 

The European Commission has announced the publication of a new set of FAQs to aid investors and companies in implementing the EU Taxonomy, aiming to simplify the framework’s application and reduce administrative burdens on businesses. The EU Taxonomy, introduced under the EU Action Plan on Sustainable Finance, categorises economic activities contributing to at least one of the bloc’s six environmental objectives while ensuring they cause no significant harm to the others. These objectives include climate change mitigation and adaptation, sustainable water use, transitioning to a circular economy, pollution control, and biodiversity protection. Effective since 2022, the Taxonomy initially focused on climate change mitigation and adaptation under the Climate Delegated Act. The framework expanded to cover the remaining objectives at the beginning of 2024, guided by the Environmental Delegated Act. The FAQ addresses key areas such as compliance with Taxonomy requirements, interoperability with the CSRD’s European Standards for Sustainability Reporting (ESRS), assurance protocols, and technical screening for activities aligned with environmental goals. A dedicated section clarifies the “Do No Significant Harm” (DNSH) criteria. As debate grows as to whether the burden of EU regulations are placing too significant a burden on companies and stakeholders – something covered by our Newsletter just last week – the EU’s guidance on how to address and implement recommendations may play a key role in safeguarding regulations and empowering businesses to align with environmental goals. 

Transition bonds struggle to gain ground 

Sustainable finance continues its rapid expansion, with the annual issuance of green, social, sustainability, and sustainability-linked bonds projected to reach in excess of $1 trillion in 2024, up from over $980 billion in 2023, according to S&P Global figures published by the World Economic Forum. While green bonds have thrived in this market, transition bonds have received less love. Transition bonds are designed for high-emission industries, such as aviation and shipping, that cannot fully meet the stringent requirements of green bonds. These instruments fund projects aimed at reducing carbon emissions or mitigating environmental impacts. Adoption has been slow since their introduction in 2017; however, there have been some green shoots recently, with the Japanese Government issuing $15.1 billion worth of transition bonds in the first half of 2024. Japanese companies dominated the market, accounting for 91% of its value in 2022. Adoption outside Japan remains limited though. For example, Euronext Dublin, the leading global listing venue for ESG bonds, hosts only a small number of transition bonds. According to Valerie O’Flaherty, head of Irish and UK debt listing at Euronext Dublin, speaking in the Sunday Business Post, the lack of clear narratives and measurable key performance indicators are significant barriers to wider acceptance. Transition bonds, for now, have yet to establish a strong foothold in the sustainable finance market and, to realise their potential, stronger metrics to build investor confidence and meet the growing demand for sustainable finance solutions and decarbonisation are needed.  

ICYMI 

• The French Financial Market Authority issued its 2024 Annual Report on Corporate Governance and Executive Remuneration. The report includes the legal news of the past year in terms of governance, an assessment of the regulator’s supervisory action, and a status of the information published by proxy advisors.
• The Principles for Responsible Investment published another framework, focused on assessing the progress of companies targeted by its Spring engagement initiative. This initiative focuses on engagement with companies on their impacts and dependence on nature through heir business operations and supply chain.