ESG+ Newsletter – 6th April 2023

UK Government holds ‘Green Day’

The origins of the UK Government’s ‘Green Day’ can be traced back to last year, when the High Court ruled that the Government’s 2021 Net Zero Strategy was unlawful. The policies within it were found to have failed to meet the Government’s obligations under the Climate Change Act and lacked sufficient detail to meet the UK’s legally binding carbon budgets. The UK Government’s response was to publish its updated strategy earlier this week. The new strategy did not include any significant new funding, with progress instead focusing on delivering some previously announced initiatives. This approach – steady as she goes, sticking to the pre-set course of action – was exemplified by remarks from Chancellor Jeremy Hunt, who described the US’ Inflation Reduction Act (IRA) as “massively distortive” and argued that the UK would not be drawn into a subsidy race. The UK Government has stuck to its guns on this point, with Energy Secretary, Grant Shapps, arguing that the UK does not need to counter the IRA, given that the US was “playing catch-up” on renewable energy. However, this view is hardly in line with the mood music amongst green investors in the UK and further afield, who warn that rather than catching up, other markets may have leapfrogged the UK.

US and EU debate the terms of a green trade agreement

Bloomberg reported that the US and EU are working on a carbon emissions reduction agreement, which aims to reduce trade dependencies on China and Russia. However, divergent priorities are emerging in deal discussions. The EU broadly views the approach by the US as overly protectionist, while the US finds the EU’s rules to be overly stringent and outmoded.

Both the US and the EU have bolstered green subsidies and tax credits in the past year, challenging China’s green technology dominance. However, the IRA raised concerns in the EU about competition between the two parties. Such competition could paradoxically strengthen China’s relative position. As such, the US and EU are working to create a coalition of countries committed to reducing their dependence on China for raw materials, such as lithium, cobalt, nickel, and magnesium, which are important materials for electric batteries. At present, the EU sources approximately 98% of its rare earth supplies from China. If the US and EU can come to an agreement, it could persuade other G7 allies to come together and strengthen their bargaining power for materials required for global decarbonisation.

Boards may struggle to meet imminent cybersecurity standards

New SEC regulations on cybersecurity are expected to come into effect this month that will mandate the disclosure of director cybersecurity expertise and Board oversight of cybersecurity risk management. However, a recent survey of 472 corporate board directors conducted by the Wall Street Journal and National Association of Corporate Directors has identified gaps in Board oversight and expertise with only three in 10 directors highly rating their Board’s ability to oversee a cyber incident. While over three-quarters of respondents stated that they had at least one cyber expert on their Board, less than half of respondents feel that their cyber experts contribute to broader Board discussions. This common disconnect between cybersecurity experts and the ‘business’ is an area that FTI has previously highlighted in a survey of Chief Information Security Officers (CISOs). While Board directors generally have confidence in their management’s ability to manage risk – 16% percent rated as excellent and 43% as very good – many Boards have yet to put this to the test. Only 48% of Board directors surveyed stated that they had participated in a cybersecurity tabletop exercise, with only 34% conducting such an exercise in the past year. With regulators and investors alike increasing their scrutiny of cybersecurity, companies need to act now to ensure their Board composition and oversight is sufficient to stand up to this growing scrutiny.

Companies forced to focus on targets ahead of incentives for Sustainability Linked Loans

A recent update to the Sustainability Linked Loan Principles (SLLP) by the Loan Market Association (LMA) is attempting to shift the focus by borrowers away from the financial incentivisation of Sustainability Linked Loans (SLL) and to focus them on the annual targets associated with the loans. In an interview with Environmental Finance, the Head of Sustainability at the LMA, Gemma Lawrence-Pardew, provided insight into the decision, outlining that the refreshed language in the update reflects concerns that the previous iteration of the SLLPs was “potentially putting the emphasis on the wrong thing”, with the practice of annual targets associated with SLLs being weakened as borrowers highlighted the potential returns. It is hoped that, by focusing on annual targets of an SLL, it will help drive an improvement in sustainability performance of the company, which is the primary focus of these types of products.

The update to the SLLP, which provides guidelines that recommend structuring features, disclosure, and reporting for SLLs, comes at an interesting juncture for green financing. The demand for ESG related financial products has never been higher, with the growth in green financing estimated to reach $1 trillion in 2023. However, there have been broad ranging concerns about ‘greenwashing’ with these financial products, with some questioning whether the proceeds from these products are being used towards ESG initiatives; credibility and transparency of the measures or targets associated with these products; and the overall ESG performance of both these products and companies. Hopefully the updated SLLP will result in a greater emphasis being placed on ESG performance associated with these loans, increasing overall investor confidence in this type of green financing.

World’s largest reinsurer withdraws from climate alliance

Multinational German insurance company, Munich Re, announced last week that it is withdrawing from the Net-Zero Insurance Alliance, an industry-wide alliance of insurers focused on climate change and reducing emissions. Despite being one of the founding members of the alliance, Munich Re has decided to withdraw citing antitrust concerns with Munich Re CEO, Joachim Wenning, stating that it would be “more effective to pursue our climate ambition to reduce global warming individually.” Munich Re’s decision is a further a blow to efforts to organize industries across net-zero objectives and follows on from Vanguard’s decision to withdraw from a similar alliance with reports citing antitrust concerns. The heightened political tensions and backlash regarding ESG investment, most evident in the US, have raised concerns among firms about potential future lawsuits and these decisions could be the start of a trend amongst companies in these types of net-zero industry alliance. If so, this could become a significant  hurdle in the wider efforts to reduce carbon emissions and shared solutions to do so.

Growing focus on ESG compliance amongst emerging giants of the world economy

India and China, two of the world’s fastest growing economies, are focusing their attention on ESG reporting and disclosure to support their respective economies’ carbon transition and attract investment. According to Bloomberg, China is considering introducing an ESG reporting framework  mandanting ESG-related disclosures for public companies. This follows on from China being an active contributor to the development of the International Sustainability Standards Board (ISSB) disclosure guidance, with expectations that it will mandate disclosure following the publication of the final ISSB framework later this year. Similarly in India, the Securities and Exchanges Board of India (SEBI) has issued a consultation paper on a regulatory  framework  of  ESG Disclosures by listed entities. The consultation paper follows demand from investors for sustainable investments in India, with some of India’s largest asset management companies signing up to the UNPRI. The integration of ESG disclosure into company reporting will be an important step in China and India’s increasing focus on ESG and sustainability. The introduction of these reporting frameworks will likely support the attraction, and increase the accessibility, of green capital to these countries, supporting their net zero transitions.

EU challenged over delays to sector specific disclosure rules

According to Reuters, around 20 groups – including WWF, CDP, and Share Action – have written to the President of the EU Commission to voice disappointment that sector specific disclosure standards for oil and gas and mining have been delayed. The sector specific standards form part of the wider Corporate Sustainability Reporting Directive (CSRD) and last week the EU commission asked the European Financial Reporting Advisory Group (EFRAG), who are developing the standards for the CSRD, to prioritise development of the broader sector-agnostic guidelines over the oil and gas and mining standards. This has caused alarm to some sustainability groups, who have claimed that these delays may undermine the EU’s ability to achieve its own net-zero goals. EU financial services commissioner, Mairead McGuinness, claimed that the sector specific standards had been delayed to ease the burden on all stakeholders and ensure successful implementation of the wider standards. While the sector specific standards may be delayed, more than 50,000 companies will still need to make ESG disclosures in their respective annual reports, which are aligned to the broader standards being developed by EFRAG, from 2024 onwards.

ICYMI

• ISS ESG announces launch of US Cyber Risk Index. The sustainable investment arm of Institutional Shareholder Services (ISS) has launched its US Cyber Risk Index, which supports investors by identifying and tracking companies with low or negligible expected relative exposure to cyber breaches. The index focuses on the effectiveness of behaviour rather than on temporary conditions, thereby providing a proactive approach to identifying and managing cyber risks.
• CA100+ targets emissions reduction in Net Zero Company Benchmark 2.0. Climate Action 100+ has launched the third iteration of its Net Zero Company Benchmark assessment tool, Benchmark 2.0. Following criticism that CA100+ had achieved very little real change, the changes to the benchmark will focus on emissions reductions, alignment with 1.5°C pathways, and evaluations of progress towards the goals of the Paris Agreement.

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