ESG+ Newsletter – 9th June 2022

EU sets its first-ever gender diversity quota for corporate boards

The Council of the European Union and the European Parliament have provisionally agreed on the first EU law promoting more gender-balanced representation on the boards of public companies. The proposed law sets the expectation for at least 40% female representation on non-executive boards, or a combined 33% female representation at the executive and non-executive levels by 2026.

Gender representation targets vary broadly by country, ranging from a 9% target in Estonia, to 33% in Ireland, and 40% in France which has already surpassed this target with French company boards achieving an average of 45% female representation. The European Institute for Gender Equality, noted in May last year, that binding quotas have proven to be effective, with countries that have gender diversity quotas in place – such as France, Germany and Italy –  achieving an average share of women on boards of 37.6% compared to 24.3% in countries with no quotas. While progress is happening at the board level, the share of female leaders remains very low, with fewer than one in ten board chair or CEO roles being held by women. The recently published guidance by the FCA in the UK has sought to address these concerns by setting the expectation of at least one senior board position to be held by a woman. Finally, while an EU-level quota would allow for a stronger and more uniform approach across the block, the proposed legislation allows for countries who think they have “put in place equally effective legislation” to suspend the directive’s requirements. The proposed directive will now be submitted to Coreper for approval before going through the formal adoption procedure.

Diversity Leadership Needs Empowerment

While the EU focuses on boards, an article in Time Magazine this week looks at the management side, and the role of the ‘Chief Diversity Officer’. The article states that between 2015 and 2020, the number of people with the titles including Head of Diversity, Director of Diversity and Chief Diversity Officer have increased dramatically based on LinkedIn data. But despite evolving regulation and acknowledgement from companies of the importance of diversity and inclusion, Time says that diversity leaders still “have their work cut out for them”. In speaking to a range of diversity leads, the author highlights that for the role of a diversity lead to have real impact, it needs to be distinct from a function within HR, and needs to be a direct report to the CEO. In addition, a commitment to a diverse and inclusive workforce must also “be embedded into a company’s values, mission statement, handbooks… everything” with, according to the article, training ‘pervading’ the highest levels of a company.

In building more diverse and inclusive workplaces, people charged with addressing inequity in the workplace need to be empowered and there needs to be a genuine firmwide commitment to understanding the challenges of embracing change for the better.

Is ‘ESG’ the right term?

ESG rationale and efforts have regularly been questioned since the first mention of ESG in 2004 but current criticisms increasingly focus on whether considering E, S and G as part of the same discussion is effective. A recent Financial Times article highlights concerns from an activist that ESG has taken the pressure off governments to impose regulations. This is based on the idea that governments can rely on investors and company efforts to make the change and avoid increased regulation, despite markets being ineffective in spurring change on many of the issues within ESG at a rapid pace. This provides an interesting context for new SEC regulations and the IFRS consolidated standards. The article also asserts that E may work better separate from S & G and highlights that any push away from ESG does not mean the end of ESG, but a shift in terms and conceptions. In a separate article, critiques of ESG are identified as being bolstered by recent high-profile greenwashing allegations, divestment in countries, and the lack of a framework on ESG investing. Although both articles highlight problems with ESG, they also make it clear that the issues raised through ESG discussions are here to stay and will only become more integrated in the world of business, regardless of the terms used to identify them.

Bloomberg and Macron create Climate Data Steering Committee

On 3 June, French President Emmanuel Macron and U.N. Special Climate Envoy Michael Bloomberg announced the creation of the new Climate Data Steering Committee, as part of efforts to enhance transparency and more effectively monitor business climate actions. The proposed Committee will bring together international organisations, including the United Nations, the OECD, the Financial Stability Board and the International Monetary Fund, regulators, policymakers and data service providers, to design an open-data public platform that will collect and standardise net-zero transition data in the private sector.

According to Bloomberg, the platform will make it “much harder for companies to ‘greenwash’ or make empty promises that do not actually cut emissions”, as the creation of an open-data platform will bring transparency and accountability to their commitments. Better information, accessible by everyone, will then help facilitate and scale the transition toward a net-zero global economy.

Food’s nutritional value thrown into the ESG mix

Governments and investors are pressing food companies to make their products more nutritious as part of an increasing focus on ESG, according to the Financial Times. Maria Larsson Ortino, global ESG manager at LGIM, underscored this trend, stating that “nutrition and in particular obesity have become systemic risks for companies we hold across multiple sectors”. Food companies are facing dual headwinds of increasing regulation and limitations on the marketing of unhealthy foods. A worsening obesity crisis has led investors to look beyond the conventional facets of ESG and encouraged calls for tobacco-style warning labels for highly processed foods that are high in salt, sugar or saturated fats. Investors groups are also taking direct action on the topic, with several multinational food and drink manufacturers receiving shareholder resolutions on nutrition. Some investors are taking an active engagement approach, working with portfolio companies to improve existing nutritional credentials or launching new, more nutritious products.  As the scope of ESG concerns increases, it remains to be seen whether nutrition will remain high on the investor agenda at a time of worsening global food poverty.

Code of Practice for companies on carbon credits

The Voluntary Carbon Markets Integrity Initiative (VCMI) has launched a provisional Claims Code of Practice for more transparency and clarity around the use of carbon credits. Generally, there are growing concerns about the credibility of carbon offset projects, with many failing to cut emissions and instead allowing for emission-intensive practices to continue unabated. The standard intends to assess carbon offset claims and award companies with a Gold, Silver or Bronze accreditation. Businesses such as Google and Unilever will test the draft Code and provide feedback while a public consultation is set to be launched alongside the publication of the Code and an updated version is expected by early 2023. While carbon offsetting projects are viewed as essential to mitigate climate change, with the IPCC’s sixth assessment report outlining the necessity of carbon removals, without regulation or oversight, the system may remain open to abuse. The Code aims to increase credibility, and in turn increase stakeholder confidence in carbon offset claims. Ensuring consistency with the code where possible allows a company using carbon claims to ensure they are robust, consistent with best practice, and defendable in accordance with the principles of the Code.

Firms with ‘ambitious’ transition plans are ‘more resilient’

According to Marsham Investment Management, companies committed to a low-carbon transition are weathering the recent storm of inflation much better than those that simply score well in ESG ratings. Marsham has analysed their own portfolios to identify whether funds that focus on companies with strong transition plans have been more resilient to recent stock market drops than tracker funds. The findings showed that funds containing firms with commitments to a low-carbon transition had, on average, dropped by less than the market. The findings of this analysis point to companies with stronger commitments to a low-carbon transition being more resilient to recent bearish markets, driven by rampant inflation, the withdrawal of covid relief packages, and war in Ukraine. These findings, and the approach of Marsham, highlight how some firms can appear green despite lacking ambition that aligns with global goals, while also pointing to resiliency as an overarching outcome of strong ESG practice.

UK becomes latest country to trial four-day week

The world’s biggest trial of a four-day week began in the UK this week with more than 3,300 workers across 70 UK businesses embarking on the six-month pilot. The program is based on the 100:80:100 model proposed by non-profit 4 Day Week Global where workers receive 100% pay for 80% of their time while maintaining 100% productivity. It follows similar trials in Iceland and the US, while in February this year workers in Belgium received the right by law to opt for a four-day week, along with the right to switch off. Evidence from the Iceland trial showed how workers experienced reduced stress and improved health following their move to a shorter work week, while employers also reaped some benefits with productivity remaining the same or improving in the majority of workplaces. Looking beyond improved employee morale and productivity, four-day weeks also provide the environmental benefit of reduced carbon emissions and ease pressure for childcare. With Spain and Scotland planning similar trials later this year, the four-day week movement is clearly gathering momentum.

In Case You Missed It

• The new “Financing Nature Recovery UK” report highlights the necessity of private finance for nature-based investments. The UK will not be able to deliver on its nature conservation and restoration commitment if it doesn’t close the current funding gap. Over the past years, the UK has seen a decline in British species and the natural environment. A three-pronged policy is recommended in order to appeal to investors, who are still concerned about not seeing a full return on their investment.
• A new OECD report highlights the need for higher taxes on plastic use and improved recyclability of plastics. Two policy scenarios to 2060 and their environmental impacts were outlined in the report. The Regional Action policy scenario would reduce plastics use by a fifth compared to the business-as-usual path to 2060, while the Global Ambition policy scenario would cut global plastic use by a quarter. If policies are not implemented, plastic waste could triple by 2060 compared to 2019 levels, destroying habitats and natural resources.
• French and Dutch financial regulators have proposed a regulatory framework for ESG data and ratings providers operating in the European Union. There is a growing need for reliable ESG data and ratings as investors progressively integrate ESG in their investment decisions. However, ESG service providers are currently unregulated. This proposed regulation would require more transparency on methodologies used by providers and would reduce the risk of misallocation of investments and greenwashing.

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