ESG+ Newsletter – 8th September 2022

Biodiversity is following in carbon’s slipstream

As this newsletter has covered previously, biodiversity has become a pressing issue for both investors and regulators. We’re noticing that, while previous environmental issues took longer to reach the investor and regulators’ consciousness and become adopted by companies, biodiversity is quickly gaining momentum and gathering the attention of regulators. Recently, the UK pensions regulator stated that it was “keeping close tabs on” on the biodiversity reporting framework being drafted by TNFD.

One potential growth area for biodiversity is biodiversity credits, with Robert Guest, Investment Director at Foresight Sustainable Forestry Fund, suggesting this week that biodiversity credits could outgrow voluntary carbon markets. Biodiversity credits would work in the same way as carbon credits, allowing a company or individual to purchase part of the benefits of a project to protect or restore biodiversity. The predicted potential demand for these credits is driven by the UK’s biodiversity net gain legislation which will require new building developments to achieve a 10% gain in biodiversity. Existing carbon verification bodies, such as Verra and Gold Standard, are scrambling to develop standards for these credits. As momentum grows for biodiversity credits, it remains to be seen whether this market can overcome the transparency concerns that plague voluntary carbon markets and the unique difficulties in measuring the impact that biodiversity credits face.

Leading organisations call for more alignment in sustainability standard setting

A group of prominent investors, companies, and professional accounting firms from across the globe have signed a statement calling for standardisation of reporting and alignment of disclosure setting drafts. The concern is the current draft standards are not comparable in terms of concepts, terminologies, and metrics. The statement seeks a coordinated and collaborative approach to standard setting. Consistency of data ensures the needs of the investors are met through allocating capital correctly, companies can deliver more sustainable outcomes and accountants can easily assure the validity of the data. Standardisation of ESG reporting is a topic which continues to come under focus from all stakeholders and it is something we have covered extensively in ESG+. Looking ahead, it remains a key problem to solve for ESG proponents if it is to evolve further and enhance its credibility with its detractors.

BlackRock intensifies scrutiny of ‘overboarded’ directors

The impact of the Covid-19 pandemic, along with increased efforts on shareholder engagement and broadened expectations of directors’ role of oversight, have increased the time commitment required to serve as a director on a public company board. Against this backdrop, proxy advisors and institutional investors have sharpened their focus on what they deem to be an excessive number of directors on boards. In its most recent stewardship report, BlackRock noted that it voted against directors based on overboarding concerns at 182 companies in the Americas, and 390 in the EMEA region. A recent Financial Times article highlighted the renewed efforts by BlackRock to vote against overboarded directors on the board of leading tech companies, with many of them introducing changes to their Board structure following this feedback. These votes are reflective of BlackRock’s efforts to improve corporate governance, as it incorporates further ESG considerations in its investment process. While there is growing convergence on the threshold for overboarding, institutional investors continue to take different approaches on this topic, recognising the growing expectations being placed on public company directors.

ShareAction’s key learnings from the 2022 proxy season

AGMs are key opportunities for investors to hold companies to account, as noted by the responsible investment NGO, ShareAction, in its recent paper. The group believes that for the “financial system to work for people and planet, investors must influence companies by voting on resolutions at AGMs” and regularly reviews actions taken by institutional investors that look to achieve this outcome. In its review of the 2022 proxy season, there is a detail that continues to be space for investors to play a more active role in tackling environmental and social issues at the companies they invest in, which can be further supported by proxy advisors’ recommendations. While there is debate around their influence, ShareAction’s analysis shows that on environmental and social considerations, proxy advisors seem to reflect investor attitudes. Climate seems to be perceived by investors to present the bigger financial, reputational, and regulatory risks; however, more efforts should be placed on bridging the gap on more disparate social issues, such as employee health and safety, and workers’ rights. While these proposals have the potential to set momentum at next year’s meetings, Share Action takes the approach of pressuring investors, which in turn raises the temperature for companies.

SEC approved new pay vs performance disclosure rule

Companies will be forced to improve pay versus performance disclosures under final rules adopted by the SEC. Companies will need to comply with the new disclosure requirements in proxy and information statements for fiscal years ending on or after 16 December 2022; and will need to cover a period of up to five years. Smaller companies only need to provide information for the last three years. Companies will need to provide compensation information in the form of table and include total compensation for the principal executive officer (PEO) – typically the CEO – and average compensation for other named executive officers (NEOs). The company will need to use the information in the table to describe how each of the financial performance measures included relates to the executive compensation actually paid to a company PEO and other NEOs. The new rule also requires companies to provide a list of three to seven of the “most important” financial performance measures used to link executive compensation actually paid to the named executives during the most recent fiscal year. Against the backdrop of spiralling inflation, pay – and any perception of excess – is likely to be a major issue for investors in 2023. Whether the increased disclosure will increase restraint, remains to be seen.

Sustainability-linked loans – in practice and impediments

Since their inception in 2017, ESG linked loans have become the fastest growing segment of sustainable financing instruments, with banks now even offering discounts to borrowers if sustainability, and similar, targets are met. Loans can also be tied to a single ESG metric or KPI, to an overall rating from a third-party ESG assessor, and more. For example, Telefonica in January 2022 amended its core facility to commit to lower carbon emissions and more women in executive roles. Penalties and interest rate hikes can in turn be incurred through failing to hit agreed upon targets, demonstrating accountability in the form of a bottom-line hit. As noted by Bloomberg , regulation is a current tailwind for lenders, with policymakers encouraging banks to pursue this form of financing. As with ESG investing, Europe is comfortably the leading region for SLLs, but the same key challenges facing various aspects of the ESG sector remain – borrower transparency on ESG strategy, strong target setting, and inclusion of third-party assessors in the process.

Meanwhile, the aviation sector’s challenges with the calculating and reporting of accurate carbon emissions have been the subject of a new report by IMPACT – the Initiative to Measure and Promote Aviation’s Carbon-free Transition. The white paper argues that the core issues facing the industry are inconsistent data points and KPIs used across the sector, which impacts effective monitoring. In terms of the provision of financing, and accountability as a consequence, it has had a notable impact on the ability to draw up the sustainability linked loans which are booming elsewhere.

FRC publishes report to improve companies’ ESG decision-making and reporting

Companies are facing increased demand from investors for more transparent ESG disclosure, as the latter attempts to obtain higher-quality ESG data to help with their investment decision-making. In response to this demand, the Financial Reporting Council (FRC) last week published a report which provides insights into how companies can improve the production and use of ESG data. The report, which is based on interviews and roundtables with a diverse range of public and private companies across sectors and sizes, identifies three elements of ESG data production for companies to focus on – Motivation, Method and Meaning. The FRC believes that, by focusing on these, companies better understand how to respond to the risks and opportunities associated with environmental and social issues; and what ESG data they should be disclosing.

In Case You Missed It

• Blockchain technologies are increasingly used in an attempt to fight climate change. Supporters of the technology argue that blockchain will provide more transparency and liquidity to the carbon market. However, opponents fear this will only add complexity and financial speculation to two markets that are currently unregulated.
• A new research report found that 54% of FTSE100 companies have established a dedicated ESG Committee at board level. While 100% of oil and gas companies have set up an ESG committee, only 13% of non-bank financial services companies took this step. A separate research report carried out in 2020-2021, showed that large US firms are lagging behind, with 13% of S&P 500 companies having an ESG committee.
• To reduce food waste, Aldi will remove ‘best before’ dates on 60 fruit and vegetable lines by the end of the year. Aldi committed to cutting food waste by 20% by 2025 and 50% by 2030. This announcement follows similar claims made earlier this year by other supermarkets, including Sainsbury’s, Waitrose, M&S and Morrisons, while Tesco scrapped around 100 fresh food products in 2018.
• Companies listed on India’s stock markets will have to provide detailed data on more than 120 metrics under the new ESG rules. From April 2023, companies will be required to collect and report on historical data from the prior 2 years. The new rules aim to tackle greenwashing and will help India move towards its target of net zero emissions by 2070.

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