ESG+ Newsletter – 7th July 2022

2022 has been a ‘quieter’ yet more impactful AGM season

As the 2022 proxy season comes to an end, the variety of issues covered by shareholders has been broad – reflecting investors’ willingness to challenge companies on a diverse range of issues. 2022 was a record year for shareholder proposals and proxy voting, with notable increases in relation to environmental and climate related proposals, although shareholder support for these types of proposals dropped from 37% to 33% year on year.

There has also been a clear focus from shareholders on non-environmental issues this year. From a political perspective, 36 conservative proposals focused on challenging ‘woke capitalism’ – such as corporate diversity, political spending and human capital policies – were tabled at AGMs but only received an average of 6% support. While defeats such as Carl Icahn’s recent campaign at McDonald’s may raise concerns about the ESG path we have been on, there has been a clear push by investors on ‘S’ issues. Additionally, investors have won ground on campaigns for companies to exclude non-disclosure agreements from employees’ contracts, winning majority support at some companies and, in turn, forcing others to adopt similar approaches.

The overlap between important societal issues and recent Boardroom discussions is become clearer, highlighted by activist shareholders at two US companies pressuring companies to outline their plan to support employees’ access to abortions following the Roe v. Wade decision by U.S. Supreme Court – indicating that abortion is likely to be a hot topic during next year’s 2023 AGM season.

Court limits EPA’s ability to regulate high emitters – are other regulators next?

Less than a week after Roe v. Wade was overturned, the US Supreme Court ruled that the Environmental Protection Agency (EPA) doesn’t have the authority to regulate carbon emissions related to climate change. The ruling appears to have stifled the EPA’s ability to regulate carbon emissions coming from the US’s second-highest emitters – power plants – with the majority of the court ruling that the EPA did not have the authority to require companies to shift away from coal to more environmentally friendly types of power generation. The origin of the EPA’s regulation dates back to 2015, when then-President, Barack Obama, launched the Clean Power Plan which set the first limits on carbon pollution from US power plants. While the rule faced pushback from certain states and coal companies who wanted to ensure that they would not have limits imposed on them, many companies viewed the regulation as an opportunity to make changes to transition towards cleaner energy resources.

Although the ruling doesn’t mean immediate change, it could have broader implications for other US regulators, particularly the SEC, who have a number of climate disclosure proposals under review to increase disclosure requirements.

A stark reminder of climate change risk

According to a new report by the Australian Climate Council, climate change is wreaking havoc on the insurability of both private homes and commercial buildings. The study concluded that by 2030, 1 in 25 buildings will become effectively uninsurable due to extreme weather events. Queensland is projected to be the worst affected state, with 6.5% of properties estimated to be impacted by environmental events such as flash flooding and bushfires.

Climate action has reached the top of the political agenda in Australia, with new Prime Minister, Anthony Albanese, promising a big shift in climate policy upon being voted into power. The increase in bushfires in Australia has been headline news across the world – in part due to similar environmental changes in parts of America.

The report serves as a reminder of climate change risk for businesses with physical assets – and by extension the importance of climate change-related disclosures to the market. When considered through the lens of fund greenwashing too, the need for effective regulation is now more important than ever to ensure the security of capital deployment, as real-life environmental risks continue to evolve.

ESG’s new pressure point: litigation

As regulators globally start to clamp down on the veracity of ESG and sustainability claims, Environmental Finance reports on a growing level of risk of litigation. Indeed, as the focus on greenwashing grows from lawmakers, asset owners and shareholders are likely to increasingly view legal channels as another means to hold companies to account. The rigour with which ESG and non-financial claims are tested before being made public will need to become more sophisticated, particularly as US, EU and IFRS disclosure requirements are finalised and stakeholders are provided with more disclosure to sink their teeth into.

Record green financing in Europe not enough as PRI challenges policymakers

According to a report by New Financial, over €300 billion was poured into green finance across the EU last year. This figure is still a long way from the €1 trillion estimated by the EU Commission that Europe will need to spend each year on green financing. Green finance refers to money raised for environmentally friendly activities; however, there are different shades of green. Dark green bonds are used to directly finance projects which will play a significant role in the transition to net zero, however, these only represent 40% of Europe’s green bonds, raising questions as to whether current levels of green finance are being directed into the most impactful and environmentally focused projects.

Separately, on Monday, the European Central Bank (ECB) announced its own plans to decarbonise its corporate bond holdings and focus on issuers. The ECB proposals come as much of Europe faces soaring inflation, leading some to question the role of central banks in the climate transition. While inflation and energy security crises are causing some to reconsider climate transition plans, “policymakers do not need to choose between addressing the present energy crisis and tackling climate change. They can do both” according to the Principles for Responsible Investment (the PRI).  The PRI paper analyses the relationship between the recent increased focus on energy security and net zero commitments. The paper sets out a series of recommendations for policymakers and investors, commending the ambition of the European Commission to fast forward the energy transition.

Sustainable fashion may need a rethink as labelling tool is dropped

The Higg index – a fashion sustainability ratings system – has been dealt a further blow with the news that the fashion brand alliance behind it are suspending use of the tool. As we previously reported, the Higg Materials Sustainability Index has been under scrutiny from sustainability activists and consumer watchdogs amid criticism that its methodology is flawed, resulting in better sustainability ratings for fossil fuel-based synthetic materials than natural fibres. The suspension follows an order from Norway’s Consumer Authority to H&M drop its use of the Higg index, threatening further economic sanctions should it still be in use by the start of September. The Sustainable Apparel Coalition, the alliance behind the Higg index, has stated that it will review its methodology to improve the credibility of its ratings.

With consumers seemingly unable to rely on the sustainability ratings of new clothing, circularity may be one solution to fashion’s sustainability problems. Brands such as North Face and Patagonia are already offering platforms to repair, exchange or resell worn items, while second-hand marketplaces and clothing rental services both increasing in popularity. To support a shift in consumer practice, the Ellen MacArthur Foundation has been pushing for a durability rating for jeans with the aim that they can withstand a minimum of 30 washes. However, even that carries an environmental impact due to the emissions produced from washing and drying.  With no easy answer in sight for fashion’s sustainability issues, there may yet be a place for a new and improved Higg Index.

EU faces pushback on deforestation legislation

The European Commission has made geolocation and traceability requirements a core part of its proposal for legislation banning products linked to deforestation and forest degradation. This regulation would require companies to trace the exact origin of the cocoa beans, soy and palm oil used in products they place on the EU market. However, certain industry players have warned that this would nearly be an impossible task and would require huge investments, pushing price increases onto European consumers. On the other side, NGOs support the proposal, stating that traceability back to the plot of land is essential to prevent abuse of the system. From the outside looking in, pointing to the need to invest heavily seems a weak argument, as recognition grows that a lack of action from industry would be hugely costly for society.

While certain companies complain, others are already making significant progress, with Unilever and Nestlé committing to making their supply chains entirely deforestation-free, with 90% of Nestlé palm oil sourced from deforestation-free resources. According to their CEOs, the sector must embrace regenerative agriculture to develop “nature positive” supply chains, and businesses must fully harness the potential of technology to track, improve and report on progress. They urge governments, multilateral institutions, and development banks, with banks, investors and businesses, to help accelerate forest finance ahead of COP27.

In Case You Missed It

• ‘Total Portfolio Footprinting’, MSCI’s new tool, will help financial institutions calculate the carbon emissions of their investments and loans. The emissions measuring tool will help Institutions understand the environmental impacts of their financial decisions. Banks, insurers and asset managers will be able to align with their net zero commitments and with reporting standards such as TCFD.
• The ECB has announced new measures to further integrate climate change considerations in its corporate bond purchases, collateral framework, disclosure requirements and risk management. This will contribute to the green transition of the economy and increase transparency while reducing climate-related financial risk. These measures will be reviewed and updated regularly to ensure alignment with the Paris Agreement and future regulations, as well as to address additional environmental challenges.
• A new survey commissioned has found that only 18% of British SMEs, and just over 50% of larger British businesses, were aware of the UN Sustainable Development Goals (SDGs). The survey illustrates a knowledge and implementation gap likely due to a lack of business awareness and shows the distance that is still yet to be travelled if the 2030 targets are to be met. With 40% of British businesses devoid of time-bound, numerical sustainability targets, greater cooperation with civil society and key stakeholders is needed to accelerate contribution to SDG ambitions.
• Enhanced regulation is transforming the ESG data market. The most recent annual update to the Environmental Finance’s ESG Data Guide has shown an increase in both providers and products, with Opimas projecting further growth of the ESG market from $1 billion in 2021 to $1.3 billion for this year. This growth is likely due to the emergence of new ESG reporting regulations as well as demands to enhance the integration of ESG risks into investment strategies.

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