ESG+ Newsletter – 8th December 2022

Global governments negotiating global goals for biodiversity at COP15

The UN Secretary-General, António Guterres, used his opening remarks at the UN biodiversity conference, COP15, to urge governments to end the “orgy of destruction” of nature. COP15 is well underway in Montreal with negotiating parties attempting to reach an agreement for the post-2020 Global Biodiversity Framework, which would set goals to conserve 30% of the world’s surface by 2030 and be nature positive by 2050. The framework is yet to be agreed, and there is significant work to be done before a ‘Paris Agreement for nature can be achieved. In particular, the issues of benefit sharing and finance are likely to be sticking points.

For the private sector, the draft agreement of the biodiversity framework includes a target to mandate corporate disclosure of dependencies and impacts on biodiversity, progressively ending negative impacts and increasing positive impacts. The need for mandated disclosure in the private sector was highlighted by Guterres in his opening address. Over the two weeks of COP15, we are likely to see a host of announcements related to biodiversity. As the conference kicked off, GRI took a step in a similar direction, announcing its new biodiversity standard which outlines a framework for companies to assess impacts on biodiversity and report on impacts throughout the value chain.

The role of ESG from the man who invented it

As we near the end of a turbulent year, comments from the man who is said to have coined the term ESG in 2004 are noteworthy. In an interview with Bloomberg, Paul Clements-Hunt, a former journalist and now sustainability advisor, indicates that “the more the debate plays out, the more obvious it will be that ‘extractive capitalism’ can’t compete with ‘regenerative capitalism’, which pegs economic success to growth that can be sustained”. While clearly a supporter of a more sustainable economic model, Clements-Hunt seems happy to watch the active debate on ESG trundle on. What’s clear from the interview is that Clements-Hunt is an ESG pragmatist and views ESG as a risk management exercise – but one that is crucial for the next stage in the evolution of capitalism. He says we need to “price in the risks that ESG issues represent”.

It is an interesting debate, and his position is likely to draw criticism and support in equal measure. Clements-Hunt says that ESG isn’t about “saving the world” and he highlights that it is also the “antithesis” of divesting from industries such as fossil fuels and that these very companies are the ones who “understand how to deliver global energy at scale and have the balance sheets capable of enabling the transition to clean energy”. As the ESG regulatory environment continues to evolve, and against the backdrop of an energy crisis, a recession, and a sustained debate around the role of ESG, we will be watching closely in 2023 to see how major asset managers, companies and regulators react in the year ahead.

As EU regulatory focus tightens, asset managers downgrade article 9 funds

Since the implementation of the EU’s SFDR, there has been consistent reports of withdrawals from Article 9 funds. In September, Morningstar estimated that Article 9 funds accounted for roughly $470 billion of assets under management; however, it was reported this week that Article 9 funds worth at least $100 billion have now been downgraded. According to Jefferies, asset managers will face limited options to deploy capital to this asset class, which is the EU’s highest ESG-ranked fund, predicting that the issuance of Article 9 funds will be close to zero in the new year. The downgrade of Article 9 funds is further compounded by analysis from Ignites Europe which found that these funds have high exposure to companies accused of having a poor record on human rights. The research casts doubt on whether these types of funds are having a positive societal impact or meeting the right investment criteria for investors’ who are focused on ‘S’ factors in their decision-making.

Perhaps the aims of SFDR were laudable but ahead of their time, with certain stakeholders now recognising that no investment products or classes were truly 100% sustainable. Nonetheless, as a consequence of this increased regulatory scrutiny, any Article 9 funds that remain may become an increasingly coveted ESG investment asset.

Restraint on pay expected ahead of the 2023 AGM season

It will likely come as no surprise that remuneration-related proposals are expected to be at the fore of investors, and proxy advisors’ minds in the upcoming 2023 proxy season. Despite the backdrop of a turbulent macroeconomic environment and the cost-of-living crisis, in particular, bonuses have reached record levels and have been “boosted by easy-to-hit targets set during the pandemic”. A recent International Labour Organisation report found that global wages fell in real terms for the first time this century, raising investors’ concerns over the potential insulation of executives from the financial difficulties that are being felt by other stakeholders. The call for restraint regarding the remuneration of executives has been reflected in the Investment Association’s Principles of Remuneration for 2023, with ISS also updating the language in its voting policy guidelines to clarify these expectations, meaning UK companies can expect greater scrutiny than ever on any changes to fixed or variable remuneration.

Investors pen joint statement on cost-of-living crisis

In addition to the IA and ISS, but through a slightly different lens, asset manager CCLA has also focused on current rates of inflation and the wider cost of living crisis. In a statement, which has also received backing from 16 other institutions (bringing the combined total assets under management of the group of 17 to £3.2 trillion), they draw attention to the “disproportionate impact” of the current situation “on low-income households” and called on the UK listed businesses to adapt accordingly.

It sets out five central areas that signatories would like action to be taken on: 1) Prioritisation of the lowest paid employees when providing support; 2) Work constructively with workers and unions; 3) Proactive engagement with third-party contractors to ensure support is provided; 4) Cognisance of pricing of key goods and services on which people are reliant; and 5) Publicly stating how exactly support to workers and consumers will be provided, with an update given at least once every six months. The statement also requested that the remuneration approach at the executive level considers the crisis and companies show “restraint when determining executive pay”. 

The position is a public crystallisation of a discussion which has been ongoing in the market since inflation started to rise significantly, with the world’s largest asset managers and proxy advisors highlighting at FTI’s recent event that it would potentially be the single biggest proxy voting issue for 2023.

Avoiding the pitfalls of ESG-based marketing

Brands are walking the fine line between demonstrating their ESG credentials, while also leaving themselves exposed to legal and regulatory scrutiny; and claims of greenwashing. Companies have historically relied on generic catch-all claims of being ‘green’ as a way of marketing themselves as sustainable to their consumers while, at the same time, avoiding specific claims that may not stand up to scrutiny. However, with regulators increasingly deeming these broad ESG claims as misleading, lawyers are now advising that companies quantify their claims against an accepted standard or benchmark. Identifying an acceptable standard is easier said than done though.

Many fashion brands had been relying on the much-maligned HIGG Index, but that guidance now seems somewhat redundant. With a lack of a suitable independent standards, many companies have resorted to developing their own legally approved guidelines for how to appropriately market their ESG credentials. Nonetheless, with the risk of legal action on greenwashing claims, some companies have simply opted for a strategy of silence, which has led to the rise of ‘green-hushing’. However, it’s a strategy that’s unlikely to succeed in the long term, particularly as regulators in the US and Europe push for ever-greater company disclosures and customers ask for more sustainable products. While it may seem like a case of ‘damned if you do and damned if you don’t’ for companies, those who make clear ESG claims and can appropriately back them up will find themselves best placed for success.

Analysis reveals gender pay gap is the largest for women in their 50s and 60s

In the latest analysis of UK Office for National Statistics data by Rest Less, a digital news site, it was revealed the gender pay gap remains the largest for women in their 50s and 60s. On average there is a 24-26% difference between the median gross annual pay of men and women in that age bracket. Interestingly, the research also compared figures across all employment ages from this year with the previous 10 years and found the national pay gap is narrowing – decreasing from 24% in 2012 to 19% in 2022. The pay gap is the smallest between the age bracket 22-29 with a gap of 9%. According to Rest Less Chief Executive, Stuart Lewis, the figures highlight how women who have greater care responsibilities can sometimes fall behind their male counterparts in job progression and, consequently, salary. However, it is also important to note that there are many factors that could influence this and, while it is promising to see the progress made over the last decade, there is clearly more work needed to bring this gap down further.

Federal reserve proposes climate rules for large banks

The Federal Reserve has released a proposal for banks that provides a framework for the management of climate-related financial risks. This proposal is specifically for the world’s largest banking organizations and is currently open for public comment. The newly proposed principles are reminiscent of TCFD (Taskforce on Climate-related Financial Disclosure) Recommendations. It highlights the importance of proper management of climate-related financial risk, and how these risks can affect the stability of the overall financial system. The Federal Reserve, Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation are aligned in the principles they are proposing.

The principles are focused on physical and transition risks, financial institution weakness in measuring those risks, and providing a framework for sound management and exposures to the risks. They are being proposed as a supplement to current risk management practices.

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