ESG+ Newsletter – 8th July 2021

New OECD Report Puts Governance at Centre of Recovery

A 30 June OECD report highlighted the structural weaknesses in capital markets that emerged as a result of COVID-19 and warned that substantial financial resources and robust corporate governance will be required to support economic recovery and resilience against possible future shocks. The report recommended policymakers adopt a strong corporate governance framework that prioritizes four points, including the management of health and supply chain risks; facilitating access to equity markets for sound businesses; improved management of ESG risks; and supporting insolvency frameworks to support recovery and resilience. In its launch, OECD Secretary-General Mathias Cormann applauded the report and said that, “Good corporate governance and well-functioning capital markets play a crucial role in supporting the recovery of our economies coming out of the COVID-19 crisis. They also help to make the business sector more dynamic, competitive and resilient to possible future shocks, including through more effective management of environmental, social and governance risks.” Indeed, the report is another example of governmental agencies applying the lessons learned from COVID-19 to strengthen capital markets and improve resilience with existing policymaking tools. With perhaps more attention from stakeholders placed on the E and S, the OECD is reminding companies of the oldest of the three letters, G.

ESG share price outperformance set to end – study

A new research paper has raised the possibility that the ESG ‘market’ is reaching maturity and could, as portrayed by the Financial Times, “become a victim of its own success”. A research paper titled, ‘Chasing the ESG Factor’, which was co-authored by Abraham Lioui of the EDHEC Business School and Andrea Tarelli of the University of Milan, suggests that the prevailing narrative that sustainable investing delivers higher returns over the long run may be about to change. Lioui told the FT that “We are going to the zone where the positive impact of the ESG buzz on prices is coming to the end of its cycle.” The FT adds that this “ESG buzz” is partly due to a huge rise in passive investment buoyed by mounting evidence that the corporate focus on material ESG issues leads to improved returns. The gradual trailing off of relative superiority in performance is not surprising. As ESG – and more importantly, the key drivers underpinning it – becomes increasingly embedded in day-to-day business activity, the challenge is now to ensure that buy-in within an organisation is not necessarily grounded in short-term win-wins or profitability, but to push for genuine sustainable business practice.

Banks struggle to put strategy into practice while investor pressure mounts

Banks across Europe are struggling with taking concrete steps for a greener future, despite having the strategies in place to do so, according to a study by European digital transformation consultancy Mobiquity, which surveyed 300 banking executives at large incumbents and smaller challengers across the UK, Netherlands and Germany. The study, covered by Consultancy.eu, suggests that some 80% of respondents are conscious of the sustainability challenges facing the banking sector. Sustainability has become a core part of the banking sector’s business strategy – most notably for over 90% of executives in the Netherlands, followed by nearly 80% in the UK. The problem lies in the implementation of these strategies and banks across all markets have work to do. Ultimately, it will remain impossible for any company to truly integrate sustainability considerations into strategy if there is a failure of oversight from those charged with overseeing and approving strategy: The Board.

Meanwhile, a coalition of investors overseeing a combined $4.2 trillion of assets is asking the world’s biggest banks to take more aggressive action in addressing climate change and biodiversity decline. Bloomberg Green reports that 115 investors wrote to 63 banks to outline that they will have to go beyond the pledges they have already made through voluntary initiatives.

ESG disclosure takes further step in US but progress will take time

US Congress narrowly passed legislation that will require public listed companies to report on ESG metrics, including measures to disclose greenhouse gas emissions. This development marked the first time that Congress has passed legislation requiring corporate reporting specifically on sustainability issues. John Kerry, the US special presidential envoy for climate, stated that ESG disclosure “is here to stay” with the Bill now moving to the Senate where it is expected to pass given the casting vote of Vice President Kamala Harris. The passing of this legislation marks another milestone for the Biden Administration who have made sustainability and ESG issues, facing both the capital markets and wider society a core focus.

Gary Gensler, Chairman of the Securities and Exchange Commission (SEC), doubled down on this approach during a recent speech, where he outlined the role that the SEC will play regulating and assisting investors with ESG. However, despite the volume of coverage that ESG reporting and integration has received in the US, progress may be somewhat slower,  given that the SEC has received over 400 unique comment letters as part of their consultation process on ESG disclosure. While investors’ demand for accurate and substantial ESG disclosure is unlikely to subside, companies may see it differently for now. Nonetheless, even without regulation, investors will continue to press companies to deliver on their commitments and continue to integrate material ESG considerations into their business models.

Firms take a stand on flexible work arrangements

As the post-pandemic return to the office accelerates, a divide has emerged among US financial firms with some requesting staff back into the office full-time while others offer a hybrid arrangement. According to the Wall Street Journal, both JP Morgan and Goldman Sachs are in the process of bringing all staff back to the office, citing better collaboration and productivity as the reason for this move. The firms recognise they may lose employees to rivals, such as Citigroup, who allow for some remote working. Recruiters acknowledge that offering flexible arrangements is now being used as a hiring differentiator and incentive for top talent who are seeking greater flexibility and enhanced work-life balance. The US debate on flexible work arrangements is taking place at the same time as the move towards a four-day working week gains momentum in Europe, with a study of 2500 workers in Iceland finding that productivity improved and that the well-being of employees increased dramatically while working a four-day week. Similar studies have been proposed for the UK and Spain as countries begin to examine the social and environmental benefits of a shorter working week. As with any change, the pushback is likely to be pronounced. However, inertia may well lose out to progress – the word ‘weekend’ is less than 150 years old.

European Commission adopts new rules to bring finance in line with climate objectives

The European Commission has adopted new measures to help increase the flow of money towards financing the transition to a sustainable economy. The three announcements – a new Sustainable Finance Strategy, a European Green Bond Standard and a Delegated Act supplementing the EU’s Taxonomy – represent a further step towards achieving the climate neutrality objective of the European Green Deal by ensuring a comprehensive approach to funding the green transition. As cited by Reuters, the objective is to have a “climate-neutral continent” by 2050.

The new Sustainable Finance Strategy provides a roadmap until 2023 with actions in four areas:

1. Facilitating access to transition finance;
2. Improving the inclusiveness of SMEs and consumers;
3. Enhancing the resilience of the financial system to risks and its contribution to sustainability; and,
4. Developing international sustainable finance initiatives and standards

The strategy is a continuation of the previous Commission’s agenda rather than an overhaul, building on what EU officials see as the significant progress accomplished in recent years. The Green Bond proposal lays the foundation for a common framework of rules regarding the voluntary use of the designation ‘European green bond’ (EuGB). On Taxonomy Regulation, its adoption specifies the content, methodology and presentation of information to be disclosed by large financial and non-financial companies on the share of their business, investments or lending activities that are aligned with the EU Taxonomy.

The Commission has confirmed a one-year phase-in of the new disclosure rules, hence reporting obligations will only start applying fully as of 1 January 2023, for the 2022 reporting period. The momentum from Brussels on these issues is higher than ever, and the ability of companies to not only understand the raft of legislation but to leverage it as an opportunity, has never been as important.

For a deeper dive into the various measures, FTI Brussels has developed a sustainable finance timeline that provides a helpful overview and can be accessed here.

Fashion industry: more actions are needed to minimise ESG risks

It has been well documented that the fast fashion industry has been responsible for significant contributions to greenhouse gas emissions, water and landfill contamination. Now, new data from the European Parliamentary Service and the United Nations details that the production of clothing and footwear accounts for 10% of global greenhouse gas emissions – more than the emissions produced by all international flights and maritime shipping combined. In addition, 0.5 million tonnes of microfibres are released into the ocean every year by washing synthetics textiles, the impact of which has been discussed in a previous newsletter. Efforts to shift the industry to a more sustainable path include sustainable innovations such as natural leather made from pineapple leaf fibres, tree-based natural rubber products and naturally produced pigmentation as a fabric dyer through microbial treatment. The ‘sustainably conscious’ consumer versus the traditional ‘cost conscious’ consumer is a battle that will continue; however, companies can no longer simply try to attract the latter without at least considering the former.

The “E” in ESG is not the only headache for the fashion industry. The business model of apparel brands, centred on the supply chains and the high exposure to forced labour risks, has significantly increased demand for more transparent ethical and sustainable sourcing standards from investors and consumers. Several well-known fast-fashion retailers are currently under the media spotlight as French prosecutors have opened an investigation over suspicions that fashion brands have benefited from human rights crimes committed by using forced labour. As one in five cotton garments sold globally contains cotton or yarn from the Xinjiang region of China, the scrutiny for production links to the region and forced abuses in the supply chain is broadening within the industry (and all others).

ESG Shaping Information Technology Industry

S&P Global Market Intelligence has unveiled a new report that depicts the full impact that ESG considerations will have on the Information Technology (IT) industry. The report finds that ESG will be one of the most significant issues in the IT industry, particularly at larger organisations. Chris Marsh, the lead author, states that the “importance of IT in shaping our increasingly digital future means the industry will have a huge bearing on the evolution of ESG, and in creating a more sustainable and equitable society.” These are summarised as 30 trends that will have an impact on the sector – and range from datacentre efficiency, consumer data privacy and dependence on ‘smart’ technology. The report finds that the majority of service providers expect sustainability to become a key differentiator in three years; and, that nearly half of consumers have reservations about sharing personal data online, while only 8% of businesses have a data privacy team. Overall, ESG is influencing every industry and IT, which is vital to the digital future we are likely to experience, will be a cornerstone of ESG impact in years to come.

In Case You Missed It

• Integrated container logistics company A.P. Moller – Maersk announced an agreement with shipbuilding company Hyundai Mipo Dockyards for the world’s first carbon-neutral methanol fuelled container ship. The agreement is a response to over half of Maersk’s larger customers having set or are in the process of setting zero carbon targets for their supply chain.
• Affiliated Managers Group has agreed to buy ESG Fund Manager Parnassus for $600 million, Barron’s has reported. In recent years, Parnassus, based in San Francisco, has grown swiftly as the vogue for sustainable investing as the firm developed a reputation for reliably good performance.
• Under new proposals to lure leading tech groups, the UK will permit founders to retain more voting rights in companies seeking to list on the top tier of London’s stock market. According to the Financial Times, The Financial Conduct Authority laid out plans to allow more dual-class shareholdings, which give certain shareholders greater voting rights than others, to help London compete with thriving overseas centres such as New York, Hong Kong and Shanghai.
• 68% of global consumers expect companies to solve sustainability issues, according to the seventh edition of the EY Future Consumer Index. Consumers believe that companies can make a bigger impact through market-transformative, sustainable-focused processes and innovation: 28% believe that large multinational corporations should reduce waste generated during production and 25% believe companies should reduce greenhouse gas emissions.

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