ESG+ Newsletter – 9 May 2024

Investors are ready to take action on biodiversity this AGM season 

As reported by Environmental Finance, the Finance for Biodiversity initiative, an investor group committed to protecting and restoring biodiversity, has identified the AGM season as a “key opportunity” to take action. The group, that is also developing guidance for voting on biodiversity, predicts that three themes will likely gain prominence this season: “governance and impact assessment, biodiversity loss drivers, and location-specific issues.” The asset managers argue that the AGM season presents an opportunity to employ “escalation tactics” when insufficient progress is achieved through regular engagement. For example, investors can file proposals requesting the disclosure of additional information on biodiversity impacts. Investors can also decide to hold specific directors accountable for a lack of progress in tackling biodiversity issues and vote against their re-election. At this time, the use of escalation tactics is most visible in the US with more than 20 shareholder proposals related to natural capital recorded to date in 2024. Discussions between companies and their investors have generally remained private in Europe. However, considering the emergence of climate-related shareholder proposals in Europe in recent years, we could also progressively see biodiversity proposals making their ways to the AGM agenda of European companies over coming years. Read our top five takeaways following a recent FTI event focused on  biodiversity considerations for companies. 

UK gender pay gap narrows, but remains decades away from parity

According to a recent analysis carried out by the FT, the median pay gap between men and women in the UK has fallen from 9.2% to 9% in 2023-24, down from 9.3% since the introduction mandatory gender pay gap reporting in the UK in 2017. While it represents a positive development, it is estimated that at the current rate of progress, it would take at least 29 years to close the gender pay gap in the UK, and 43 years across OECD countries. Growing scrutiny of companies’ actions towards improving pay parity is evidenced by the use of the gender pay gap as a key metric within sustainability reporting alongside growing DE&I regulation, such as the EU Pay Transparency Directive. Additionally, there has been an increase in the number of shareholder proposals on pay equity filed over the last three years in the US receiving significant levels of support, reflecting growing shareholder scrutiny. In this context, understanding the drivers of any disparity and setting clear policies and procedures that promote greater equality, are key to addressing this issue.

Can the carbon offset market overcome its credibility problem? 

According to Responsible Investor, MSCI research shows that over the past 10 years, only 13% of carbon offset buyers have SBTi-approved net zero targets, indicating that most carbon offset buyers have not made credible net zero pledges. This research comes amid turmoil at the Science-Based Targets initiative (SBTi), following an announcement that carbon offsets could be used to achieve scope 3 emission targets. If the SBTi opens a pathway for companies to use offsets to compensate for scope 3 emissions, carbon offset markets could receive a significant boost, and – according to the FT – the world needs carbon offsets. However, to avoid the controversy that has mired the market to date, these offsets need to be credible, additional and permanent. The Integrity Council for Voluntary Carbon Markets (ICVCM) has been trying to solve the offset credibility problem, starting by releasing standards for carbon credits. Last week, Reuters reported that the ICVCM has extended approval to 98% of the market. ICVCM will now assess the different methodologies of credit issuers to ensure all carbon credits covered by its standards are credible. Those who see carbon credits as part of the solution may be hopeful that the ICVCM can solve carbon offset credibility issues once and for all.   

EU and ISSB come to an agreement on climate disclosures 

In recent years regulators around the world have been attempting to standardise climate-related corporate disclosures, leading to the introduction of several new reporting standards. In 2021, the International Sustainability Standards Board (ISSB) came onto the scene, establishing a global baseline of sustainability disclosures, and in 2023 the European Commission adopted the European Sustainability Reporting Standards (ESRS) in an effort to advance its sustainable finance agenda. Whilst many international companies have welcomed these moves to strengthen the reporting landscape and support the needs of investors, others have criticised the costly overlap of complying with both sets of standards. Luckily, the EU and the ISSB have agreed on joint guidance to ensure they are interoperable with one another, providing much-needed reassurance that compliance with one means little extra work to comply with the other.  

US strengthens greenhouse gas emissions reporting for the oil and gas sector 

Earlier this week, the U.S Environmental Protection Agency (EPA) issued a final rule to strengthen, expand, and update methane emissions reporting requirements for petroleum and natural gas systems under EPA’s Greenhouse Gas Reporting Program. The recent revisions allow for greater transparency and accountability for methane emissions from oil and natural gas facilities, the nation’s largest industrial source of methane. The final rule will dramatically improve the quality of emissions data reported from oil and natural gas operations, with provisions that improve the quantification of methane emissions, incorporate advances in methane emissions measurement technology, and streamline compliance with other EPA regulations. For the first time, the EPA is allowing for the use of advanced technologies, such as satellites, to help quantify emissions. In addition, the EPA is finalising new methodologies that allow for the use of empirical data for quantifying emissions, including options added in response to public comments on the proposed rule. Together these changes support complete and accurate reporting and respond to Congress’s directive for the measurement of methane emissions to rely on empirical data. For more information about the new rule, visit the GHG Reporting Program Rulemaking Resources webpage. 

Coral investment provides returns while addressing intrinsic sustainability issue 

Coral conservation is being increasingly viewed as both an emerging investment opportunity and necessary recipient of funding, with private equity capitalising on the opportunity to invest. As reported by Bloomberg in an interview with Pegasus Capital Advisors, which is to manage a dedicated $500 million vehicle on behalf of the Global Fund for Coral Reefs, returns are estimated to be in-line with standard PE at 20% over a 12-year period.  Reef protection is a key, but currently overlooked, aspect of the wider ‘blue economy’ which itself is attracting more attention, including from bond markets through outcome-based issuance. Blue bonds totaling $4 billion were distributed in 2023 for water focused solutions, but the estimated requisite investment to achieve ocean and marine resources focused Goal 14 of the UN’s Sustainable Development Goal framework is $175 billion. 

While the sub-sector is nascent, there are a growing number of investors that are paying attention to the combination of need and potential returns. However, given its infancy, there is a real requirement to fully understand the lay of the land, part of which is engaging and coordinating with the entire stakeholder spectrum. The scope for investment is demonstrated by the 71% of the Earth’s surface that comprises our oceans, so theoretically, the blue economy will only grow and grow as understanding deepens, and reef conservation is a central aspect of that.  

The global reach of EU’s new import law, sparks concern for Australian meat industry 

The EU’s new law on imports, coming into effect in December, is stirring up concern in Australia, particularly within the meat industry, as reported by The Australian. The requirement to prove that certain products were not produced on deforested land could have significant repercussions for Australia’s beef exports, potentially affecting areas where land management practices are common. The Australian Agriculture Minister, Murray Watt, wrote to the EU Commissioner for the Environment, and called for a delay to the legislation, highlighting the uncertainty facing the beef sector due to vague definitions of deforestation. It emphasises how EU laws that are intended to prevent extreme environmental issues, in this case principally the deforestation of the Amazon, can have wide consequences on a variety of different industries and regions.

The issue for Australian farmers underscores the far-reaching impact of EU legislation and the need for companies worldwide to adapt to evolving environmental standards and evaluate their supply chains. The incoming Corporate Sustainability Due Diligence Directive will have a similar effect as it is likely to place increased oversight on companies supply chains, even if they operate outside the EU.

ICYMI 

• Taiwan’s sustainable investments market offsets decline in Asia ESG fund flows. The FT reports that while sustainable fund flows in Asia (excluding Japan and China) experienced a significant decline in the first quarter of the year, there were still positive developments, particularly in Taiwan. Taiwan stood out with strong inflows, offsetting heavy outflows from Hong Kong and Singapore, with 24% of assets invested in sustainable funds.
• Berkshire Hathaway’s shareholders reject proposals addressing climate and diversity issues. At Berkshire Hathaway’s annual meeting, shareholders rejected six proposals concerning environmental and social policies, in line with opposition from Warren Buffett and the board.
• Survey finds that CEOs are increasingly prioritising sustainability. The CEO Outlook Pulse Survey published by EY revealed a significant shift in the priorities of CEOs, with over half indicating that sustainability has become a more crucial focus compared to a year ago. Amongst 1,200 CEOs from large companies across 21 countries, decarbonisation emerged as the most cited strategic priority.