ESG+ Newsletter – 9th September 2021

FRC reveals compliance levels with the UK Stewardship Code

On Monday, the Financial Reporting Council (FRC) published its list of 125 successful signatories to the UK Stewardship Code. The successful applicants represent £20trn of AUM and, according to the FRC, “better demonstrated their commitment to stewardship” while also noting that it was “pleased to see investors better integrating stewardship, and ESG factors into their investment decision-making”. However, the publication of the list also revealed that one-third of the 189 asset managers and asset owners who applied to be signatories of its revised UK Stewardship Code failed to pass the review process, with the FRC asserting that they failed to address all of the Code’s principles or provided insufficient evidence, relying “too heavily on policy statements”. 

This year marks the second time that the names of signatories have been made public since the UK Stewardship Code was updated last year. The objective of last year’s update was to impose stricter requirements on signatories – including asking them to provide evidence of their stewardship activities and show how they were integrating ESG factors into their investment decisions – and the publication of the successful signatories would appear to reflect that ambition. Indeed, the FRC appears to have raised the bar significantly in terms of accepting signatories, with that number falling from 300 to 125. The next application deadline is 31 October 2021.

IASB to focus on sustainability reporting

The International Accounting Standards Board (IASB), the organisation which sets international financial reporting standards (IFRS) for over 140 jurisdictions around the world, is seeking public comments on what its agenda should look like over the next five years. While the plan will not be published until a later date, a clear focus for IASB would appear to be looking at the integration of financial and sustainability disclosure in some capacity. In an interview with The Wall Street Journal the new Chairman of the IASB, Andreas Barckow, outlined that the tone of his priorities for his tenure includes looking at sustainability disclosure. While acknowledging that “that this is not a core issue for a financial reporting standard-setter”, Mr Backrow did detail that many of the jurisdictions where IFRS is the financial reporting standard are providing feedback that you can’t separate financial and ESG reporting and rather “they go hand in hand”. Previously, the IASB began a process of setting up the International Sustainability Standards Board (ISSB), which would focus on setting standards for sustainability-related financial disclosures in an attempt to meet the growing demand for ESG reporting. However, it would now appear that Mr Barckow is intent on integrating the approach, noting that they could tackle “standards together from an ISSB and an IASB perspective.”

Dedicated committees produce higher ESG scores

While methods of sustainability oversight will differ from company to company, new research from Glass Lewis and NN Investment Partners (NN IP) provides some food for thought on how to most effectively manage ESG risks and opportunities and enhance ESG scores.The report, covered this week by Environmental Finance, examines the relationship between companies’ ESG performance, and the characteristics of each company’s ESG supervisory structures. It identifies that companies with stand-alone ESG committees tend to outperform on sustainability those companies without such Committees. Separate Committees are most common in the US and Europe. While it remains to be seen if the report’s assertion that a multi-Committee or combined approach may not wield the force of a stand-alone committee in terms of ESG supervision, the final claim that companies who do not disclose details of their supervision of ESG risks and opportunities had the lowest ESG scores should not come as a surprise, as evaluations and scoring are based primarily on reporting.

Directors see their role differently to others

With shareholders at the fore of pressurising companies to enhance their approach to ESG, a core tenet of ensuring the interests of investors are represented at the Board level is the oversight of management by non-executives. Research published in the Strategic Management Journal, and covered by Bloomberg this week, may thus give pause for thought. In it, the authors point to Directors’ belief that close collaboration and support of the CEO are the primary roles of Directors. This contradicts established governance thinking which views Directors’ primary role as oversight of managers.

The new data argues that those established theories “may have failed to keep up with the realities of today’s Boards”. While Directors have maintained recognition of their fiduciary role, they also see this as being achieved not by challenging the CEO but by helping them formulate strategic decisions and providing support for value creation. As the UK’s FRC has said before, the Boardroom should not necessarily be a “comfortable” place. For those adhering to this view, revolving around the expectation of robust oversight, this latest research may be cause for concern.

FRC review of Streamlined Energy and Carbon Reporting

This week the FRC published the findings from its review of reporting by companies and limited liability partnerships on their emissions and energy consumption required under the 2019 Streamlined Energy and Carbon Reporting rules. All reports were found to meet the minimum disclosure requirements, while some companies included additional information such as Scope 3 emissions, use of renewable energy, and details on emissions targets. The FRC was also encouraged that many followed the format recommended by the Taskforce on Climate-related Financial Disclosures.

However, they flagged several areas for improvement and called for greater clarity and transparency in the reporting, particularly around the methodologies used for emissions calculations and specifics on independent third-party assurance. They also called for an improved “narrative” in the reporting such as including metrics alongside targets and how they align with an entity’s broader climate strategy. Finally, they state that preparers should get the basics right and ensure that information is provided in a format that is clear, understandable, and easy to navigate.

Shareholder dissent on the rise again in Europe

Investors continue to express their unhappiness about executive pay, director elections and share issuances in Europe, with the latest Georgeson report detailing a year-on-year rise in shareholder opposition to various resolutions at AGMs across the UK, the Netherlands, Germany, Spain, France, Switzerland and Italy. Key findings include a 37% increase in contested director elections across the seven markets compared to the previous year and an 18% year-on-year increase in shareholder dissent on remuneration-related resolutions. Speaking to Board Agenda, the High Pay Centre’s Luke Hildyard said that “it’s important not to overstate the trends. The overwhelming majority of pay awards are still approved without radical reductions in pay occurring.” There is some merit to this and those watching events unfold during AGM season should perhaps reflect on portraying as a ‘revolt’.

The report also mapped the growing pressure around climate and sustainability issues in the last twelve months, highlighting that at least 15 companies in the seven European countries covered by the report put forward 17 board sponsored ‘Say on Climate’ resolutions that resulted in voluntary climate disclosures. Previously, we looked at this growing trend in the context of the IPCC’s recent Sixth Assessment Report and have discussed how this may drive more ‘Say on Climate’ proposals at AGMs.

The ESG standardisation debate continues

While the market is clamouring for standardisation for ESG data and disclosures, MSCI chief executive, Henry Fernandez, has labelled standardisation as “misplaced” in an interview with Financial Times. He suggests it can be helpful to have differing views and although some may argue for a one size fits all approach, it would be akin to all wearing the same clothes. This view is reflected in his response to a question in the interview on Boohoo’s high rating with MSCI despite the scandal over working conditions at one of its suppliers: Mr Fernandez argues that MSCI provides one perspective, while other ratings methodologies will produce different outcomes due to their own weighting of material issues, and that “it’s OK to have diversity of views”.

This perspective must itself be weighed against the many calls for standardisation of ESG frameworks and rankings. Many companies feel there are too many ESG frameworks to navigate, and standardisation is seen as a route to better reporting. We have seen moves to standardise with the merger between the International Integrated Reporting Council (IIRC) and the Sustainability Accounting Standards Board (SASB) to create the Value Reporting Foundation (VRF), while as outlined above, the IFRS Board continues to explore a single set of reporting guidance.

Oman looking to develop an ESG framework for increased investment

In an effort to try and capitalise on the growth in ESG investment and sustainability financing around the world, Oman is developing an ESG framework to make itself more attractive to investors. Historically, the region has been a large oil producer, which is viewed as high ESG risk, but Oman is looking to move towards an ESG framework to broaden its investment case. It is already working with the International Monetary Fund (IMF) to develop a debt strategy after its economy was impacted by low oil prices due to COVID-19. Sources close to the report say the ESG framework is at very early stages, but it appears Oman is looking for measures to promote itself, with an ESG framework being top of the agenda. Earlier this year, the United Arab Emirates announced sustainable finance guidelines and it is receiving assistance from banks to develop an ESG framework to help it attract investment. The growing awareness among international investors around ESG risks is encouraging the gulf region to investigate low carbon and sustainable investments to attract capital and investment to the region.

Are “orange collar” workers masking the labour shortage problem?

With labour shortages continuing to hamper employers as part of what is being termed The Great Resignation, some meat processors are turning to prisons to shore up their labour gaps, as noted in the FT. This is being positioned as a win-win, with companies getting to fill their open positions, while prisoners gain experience and a small wage. Evidence shows that prisoners who work while in prison are more likely to find employment on the outside once they are released. However, much of the work provided to prisoners is of the low-skilled variety, with one prisoner likening it to “kid’s work”.

This practice may be allowing some businesses to avoid addressing underlying issues that are contributing to their labour woes. If a business needs to use prisoners to fill positions, poor pay and working conditions may be the real driver. With human capital in the spotlight, and the risks around employee retention impacting a number of sectors, businesses need to consider what changes they can make to attract workers over the long-term, rather than relying on prisoners as their solution.

In Case You Missed It

• Index-tracking and exchange-traded funds are struggling to adapt to the EU’s new Sustainable Finance Disclosure Regulation (SFDR) rules and are at risk of missing out on the growing demand for such funds altogether. – Financial Times
• The Guardian reports that Gen Z is pursuing more climate-focused career paths than older generations. The United States Bureau of Labour Statistics also projects that employment opportunities for environmental scientists and “related specialists” will grow 8% over the next 10 years, a rate much faster than growth in other industries.
• Australian CEOs are struggling to keep up with diversity demands, according to the Financial Review. 66% of Australian CEOs said expectations on diversity, equity and inclusion were rising so fast it was hard to keep up, while 42% globally said articulating a “compelling ESG story” was a tough ask. Somewhat aligned with the story above, attracting and retaining millennial workers is also a concern for Australian CEOs, with 86% saying it was crucial to their “employee value proposition”.
• Green groups say that the COP26 climate conference should be postponed. BBC covers how campaigners argue that vaccine inequity and unaffordable accommodation will lockout “huge numbers” of developing country delegates.  The president of the conference has insisted that the event scheduled for November in Glasgow “must go ahead in person”. Meanwhile, the UK’s hosting of the event has been landed in fresh turmoil after a leaked email obtained by Greenpeace revealed that the British Government has secretly dropped pledges to bind Australia to climate targets in its efforts to strike a trade deal.

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