“ESG in the News” is a regular series of articles containing recent ESG news headlines that we think are worth sharing.

As the FCA edge closer to regulating ESG data, this edition examines the latest headlines …

Professional Adviser reports: FCA sees ‘clear rationale’ for regulatory oversight of ESG data providers

Portfolio Adviser echoes: ‘Clear rationale’ for regulating ESG ratings, says FCA

ESG Clarity states: FCA closer to regulating ESG data and ratings

ESG data is always a hot topic and a constantly evolving landscape.  Environmental Finance have launched a guide to help ‘shine a light on the rapid evolution’ of the market:  ESG Data Guide 2022

The headlines are also highlighting an increase in ESG litigation…

               FT Adviser declares:  ESG litigation is gaining momentum

               Responsible Investor announces:  Investment firm raises £40m for first ever ESG litigation investment fund

That concludes our roundup of the ESG in the News for this month.  Look out for our next edition coming soon.

Representatives in the European Parliament’s environment committee recently attained an initial consensus on reforming the EU’s carbon market. The legislators are aiming to overhaul the core policy for reducing global carbon emissions for the bloc of 27-countries.  This would be the biggest revamp since its launch in 2005.  The proposals methodically target each nation based on their gross domestic product (GDP).  As a result, stricter and more ambitious targets are set for wealthier member states compared to poorer ones.

Under the current legislation introduced in 2005, power plants and factories are mandated to buy CO₂ permits when they pollute, a policy that has seen emissions fall by 43% since its introduction.  However, under the proposed legislation, lawmakers will cut the supply of carbon permits by 4.2%, to ensure emissions fall faster.  Additionally, the committee agreed to a bonus-malus system which would reward organisations with the best environmental performance by giving them additional permits, taken from firms with the worst environmental performance.  A majority of legislators also backed changes which would allow countries that overachieve on their targets to sell their additional CO₂ cuts, or about 5% of their annual emissions limit, to another member state each year until 2030.

The committee also voted to curtail plans to launch a second emissions trading system (ETS) to impose CO₂ costs on suppliers of fuels used in buildings and transport.  The reform of the ETS, is aimed at aligning the cap-and-trade system with a new climate goal of cutting emissions by at least 55% by 2030.  Instead, the committee agreed to apply the scheme to commercial institutions from 2025, and only expand it to private consumers in 2029 if certain conditions are met.  However, the package was rejected by the Members of European Parliament (MEPs).  According to Politico the cause of tension amongst MEPs is the level of “ambition”, regarding the amount of greenhouse gas emissions the reforms would reduce.

In the UK the government published its plan to reduce carbon emissions in its Industrial Decarbonisation Strategy report.   A major aspect of the new strategy is centred on transforming industrial processes.  A number of measures are proposed in this respect, from supporting innovation and the widespread deployment of low carbon technologies, as well as a stronger emphasis on more sustainable practices like remanufacturing to reduce the need for new raw materials.  In addition to this, greater adoption of digital technologies by industry is expected, with artificial intelligence, 3D printing and ‘digital twin’ technologies, all identified as having a role to play in reducing emissions. Furthermore, one of the levers the government has said it will pull to achieve industrial decarbonisation is its international trade policy. The government said it would work through forums such as the G7, G20, Office for Economic Cooperation and Development (OECD) and United Nations Environment Programme (UNEP), to “create a coalition of countries committed to shared approaches to developing the market for low carbon products”.

Further information on carbon disclosure for UK firms can be found within the Regulation summaries:  Carbon Disclosure Project (CDP), Taskforce on Climate-related Financial Disclosures (TCFD), EU Sustainable Finance Disclosure Regulation (SFDR)

In the world of responsible investing, one key trend that has persisted is the debate over the effectiveness of divestment vs. engagement – essentially, whether investors should sell assets or hang onto them and wield influence as shareholders.

The recent Russian-Ukraine conflict has exacerbated the debate on the best strategies investors can use to influence an organisation’s behaviour.  In this article, we will investigate the divestment vs. engagement argument and explore how investors can engage with companies to support better corporate ESG performance.

As shareholders and stewards of corporations, investors are in a unique and highly influential position to shape corporate behaviour.  By providing capital to corporations, investors have the opportunity to engage with companies, raise issues of concern, and have a say on outcomes.  In turn, corporations are fiduciaries of the capital entrusted to them by investors and have the responsibility to create corporate value over the short and long term.  Advocates of engagement policies maintain that breaking ties with organisations through divestment and exclusion does not encourage change and could ultimately result in the sale of those securities to investors who are less attentive to ESG issues.  They also argue that divestment fails to address the systemic, long-term impacts of climate change and so prefer to use their investments to influence long-term structural change by engaging directly with companies or voting on shareholder resolutions.

Advocates of divestment believe that organisations will only change behaviour when they are forced to through legislative change. They argue that legislative change is not possible until the necessary groundwork has been laid by changing public discourse and generating voter pressure on politicians and that divestment plays a critical role in this regard. The question is not so much whether divestment has a direct financial effect on companies, but rather whether, by helping to shift societal norms and expectations, it creates more favourable conditions for legislative change.

Supporters of divestment argue that through divestment strategies, investors can influence a company’s climate-related activities by reducing its share price and increasing its cost of capital. Research by Jonathan Berk at Stanford Business School found that divestment announcements typically decrease the share price of fossil fuel companies and that ‘divestors’ can influence the share price of their target companies. As a result, organisations with poor ESG practices will lead to financial losses that have not yet been properly priced in by the markets. Therefore, supporters of divestment policies argue divestment ultimately shapes corporate behaviour as organisations and senior management have an incentive to maximise share prices.

Ultimately, there is broad agreement amongst investors that both divestment and engagement policies can shape corporate behaviour. There is also broad consensus amongst advocates of divestment and engagement that using one approach in confinement will not be enough to achieve ambitious climate objectives. Therefore, the discourse around divestment and engagement is perhaps futile and should not be perceived as an either/or matter, given that there is room for both approaches. 

“ESG in the News” is a regular series of articles containing recent ESG news headlines that we think are worth sharing.

After recent controversy surrounding Tesla’s emission from the S&P 500 Index, this edition examines headlines regarding ESG metrics and the accuracy of ESG ratings in measuring an organisations sustainability and environmental impact…

The Wall Street Journal questions: Are ESG Ratings Purely Subjective? Are They Fair?

The Financial Times reports: Regulators take aim at ESG ratings in fight against greenwashing

Responsible Investor announces: Chair of the European Insurance and Occupational Pensions Authority voices concerns over ESG ratings.

Bloomberg states: Tesla’s Removal From S&P Index Sparks Debate About ESG Ratings 

Research by The London Business School indicates: ESG metrics prove inconsistent

 

ESG Surveys are also an interesting topic prominent in the headlines…

IFA Magazine reveals: Investors ‘overly reliant’ on ESG ratings

Investment Week discloses: Survey: Greenwashing concerning but not a deterrent to impact investing

Wealth Adviser declares: Two-thirds of investors globally prefer using active funds to integrate ESG

Edie tells us: Two-thirds of investors don’t think businesses are disclosing high-quality ESG information

That concludes our roundup of the ESG in the News for this month.  Look out for our next edition coming soon.

Last month FSL attended the Chartered Governance Institute’s (CGI) ESG Summit 2022.  The focus of the day was on how to steer ESG changes within the boardroom and understanding the changing regulatory needs.  The event was well attended and included speakers from the FCA, PwC, FRC, MSCI, HSBC and Goldman Sachs.

A recent FTSE 350 Boardroom Bellwether survey gathered the views of company secretaries on how boards are responding to the challenges of the economy, market conditions and the wider business and governance environment.  In the context of ESG, the results show that “awareness of climate change issues has grown considerably since December 2019, with 96% of companies having discussed climate change at least once in the last year. The majority of survey respondents have also published plans to tackle climate change, with plans covering a range of time spans.  In addition, 57% of companies had published an ambition to be net zero at the time the survey was taken”.  David Mortimer of the CGI told attendees that the latest research highlighted that the global population did not think that their governments are doing enough to deal with climate change and environmental risks.  However they thought that businesses, Non-Governmental Organisations (NGOs) and investors/shareholders are in a position to take actions and drive change.  The ‘Say on Climate’ campaign is a way for shareholders to have their say on a company’s plan for climate at AGMs and is similar to ‘Say on Pay’, which has been around for many years.  This is quite a controversial approach as many think the climate plan should be based solely on the board’s agenda.

These views were backed by the FCA’s Director of ESG, Sacha Sadan, who said “Climate is not going to be fixed by one person in your business… it needs to be embedded within all members of your organisation”.  He spoke further about the recently launched International Sustainability Standards Board (ISSB) accounting metric system for sustainability.  This is hoped to be a standardised report for all to consistently follow that takes into account reporting factors from the Task Force on Climate-Related Financial Disclosures (TCFD) and those from the Sustainable Accounting Standards Board (SASB).  ESG pressure on listed companies is coming from investors and regulators, but there is also pressure on limited companies from their employees, supply chains and consumers.

The Summit continued with panel debates on steering ESG changes in the boardroom and the impact of TCFD.  Recent research conducted by the OCEG and Diligent reported that 58% of respondents had minimal confidence in their company’s ESG capabilities and that this could have a big impact on their consumers, employees and brand.  On a more positive note, since the pandemic, the agenda for boards has changed substantially to include more ‘S’ topics as part of ESG discussions, not just ‘E’ issues such as climate change.  The additional issues include topics such as mental health, menopause and transgender.

The event concluded with sessions on ESG ratings, greenwashing and stakeholder engagement.  Overall an interesting day that provided a different angle to ESG and increased awareness, for many attending, of the need for boards to embed ESG policy within their wider business strategy.

The latest figures from Opimas (a management consultancy focused on global capital markets).  Their latest report, ESG Data is Now Worth It, states that the ESG data market surpassed $1 billion for the first time in 2021.   The numbers show that the ESG data market grew 28% annually on average over the past 5 years, and is estimated to exceed $1.3 billion this year.

This area of interest is further compounded by discussions at the recent Economist Sustainability Week event, with sessions on ESG data and reporting.  In this article, we will examine the core points that emerged from these discussions regarding inefficiencies in ESG reporting; the importance of ESG data; harmonizing ESG ratings; and how digitalisation will improve company ESG data.

Novisto, a sustainability management software provider began its presentation, on how digitalisation will improve company ESG data by reporting that only a third of investors think that the quality of data they see is good enough.  Marie-Josée Privyk, Chief ESG Innovation Officer at Novisto stated that in order to tackle concerns about the availability and quality of ESG data, regulation should mandate firms to make disclosures.  She believes legislation should prescribe which reporting standards to use, require mandatory auditing and allow for digital accessibility.  She thinks this would result in information becoming widely available through regulation, comparable through standardisation, and reliable through auditing.  Marie-Josée argued that this would only be possible through digitalisation and in the long term will allow investors to analyse an organisation’s performance over time between peers or against targets.

Marleen Oberheide of OneTrust, spoke on the importance of data in ESG reporting and that the abundance of data is causing confusion to businesses around what to gather, report and compare. She claimed that with a deficiency in standardisation, organisations are lacking guidance and are struggling to put data into context.  Marleen felt that ultimately, compliance will push reporting towards standardisation which will result in data becoming auditable and comparable, making the data meaningful and providing context.

A panel discussion on tackling inefficiencies in ESG reporting offered interesting insights into current reporting practices.  The panellists started the discussion by questioning whether we are measuring the right things to get accurate ratings for each industry, arguing against a universal approach to ratings. The panellists also reflected on emerging reporting frameworks, claiming it is only a matter of time before we have a standardised methodology for ESG reporting, given that there is a standardised methodology for measuring carbon and water.  The panel also addressed digitalisation, contending that companies with high degrees of digitalisation are more likely to do a good job in sustainability reporting and disclosures.  The discussion with an agreement that greater innovation in disclosure needs to take place to bridge the gap between the market and science.

Harmonizing ESG ratings was the topic for another panel discussion of investment managers, software providers and sustainability framework reporters.  The group began by examining whether there is a need to harmonize ESG data, given the move towards harmonizing ESG reporting.  The panel concluded that rating agencies should be given the freedom to collect as much data as possible before they are restricted by any kind of framework.  Additionally, they believe that harmonizing ESG ratings does not make sense as often rating agencies are focused on different things.  The panel also agreed it would be more useful for companies to have a single portal for ESG data disclosure that ESG rating agencies could draw from, this was considered a possible gamechanger.

The experts and panellists offered unique insights into the future of ESG reporting and data.  The consensus is that additional regulation is needed around the disclosure of data, as it will ultimately lead to greater accessibility of information and higher quality data.  Digitalisation is another area the experts believe would transform the future of ESG reporting and would lead to data becoming more reliable and comparable.  This would allow investors to compare an organisation’s performance over time, between peers or against targets. 

“ESG in the News” is a regular series of articles containing recent ESG news headlines that we think are worth sharing.

In this edition, we examine the latest articles that focus on the impact of the war in Ukraine on ESG.  Latest figures show that ESG funds, like others, have suffered since the Russian attack began….

     Investment Week reports: ESG funds suffer following outbreak of war in Ukraine

     The Wall Street Journal states:  Russia War in Ukraine Exposes Weakness in ESG Fund

The geopolitical uncertainty of the invasion has caused fund managers and investors to re-evaluate their approach to ESG…

     The Financial Times asks:  Stay or sell? Russia’s war shows the difficulties of nuance in responsible investing 

     Private Banker International says:  Russia-Ukraine crisis impacting on ESG investment

     City AM suggests:  Investors question ESG label in wake of Ukraine war

     The National Law Review asserts:  Ukraine Invasion Creates ESG Shifts

      Investment Week reveals:  War in Ukraine triggers debate over inclusion of weapons in ESG funds

      Canaccord explain:  ESG & Ukraine – A Challenge For Investors

The war is also having an impact on the ESG data providers and making them question the effectiveness of their ratings…

     Bloomberg tells us:  ESG Rating Firms Reeling as War Exposes Russian Blind Spot

     MSCI’s podcast discusses:  ESG and the Invasion of Ukraine

That concludes our roundup of the ESG in the News for this month.  Look out for our next edition coming soon.

The Sustainable Development Goals (SDGs) are the United Nations (UN) shared blueprint to fundamentally transform the planet. The UN SDGs comprise of 17 goals.  Underneath the goals, there is an interconnected set of 169 targets and 230 indicators.  Essentially, the UN SDGs are a shared measurement system which incorporates three dimensions:

• Environmental: such as action on climate change and protecting terrestrial and marine environments;
• Social: such as ending poverty, improving health, and achieving gender equality; and
• Economic: such as full employment and resilient infrastructures.

Some of the goals include:

No poverty:  Building a more sustainable future for the world has to include a reduction in poverty. This goal seeks to end poverty in all its forms everywhere around the world.

Clean Water and Sanitation: Sustainably ensuring that all have access to clean, safe, water is key to building a sustainable future for our world. This goal seeks to ensure the availability and sustainable management of water and sanitation for all.

Sustainable Cities and Communities: With the aim to make human settlements safe, inclusive and sustainable, this goal strives for a future in which cities provide opportunities for all, with access to basic services, energy, housing, transportation and more.

Responsible Consumption and Production: Over extraction of resources, degradation of natural resources, waste, and improving sustainability factors need to be considered and improved in order to achieve the responsible consumption and production goal.

Climate Action: This goal puts the spotlight on the increasing greenhouse emissions, climate change, and the associated impact.

Life Below Water: This goal is focused on conserving and sustainably utilising our oceans, seas, and marine resources for sustainable development.

Life on Land: This goal aims to protect, restore and promote sustainable use of terrestrial ecosystems, sustainably manage forests, combat desertification, halt and reverse land degradation and halt biodiversity loss.

The achievement of the UN SDGs is intrinsically linked to the engagement of the private sector.  The significant momentum for ESG investing demonstrates how investors have overwhelmingly endorsed responsible investing.  Within the investment management industry, shareholders have an opportunity to hold organisations to account and encourage them towards more sustainable business practices.  Furthermore, many wealth management firms have integrated the SDGs into the creation of ESG funds and model portfolios.

“ESG in the News” is a regular series of articles containing recent ESG news headlines that we think are worth sharing.

In this edition, we review critical issues affecting the mass adoption of ESG principles in investment.  Firstly we focus on the headlines illustrating how governments are seeking to maintain their focus on climate change…

     The Financial Times states: UK-EU rule split risks complexity for ESG investors 

     ESG Clarity tells us: UK government issues climate disclosure guidance

Greenwashing is also a topic of concern…

     Kirkland & Ellis says: EU Financial Markets Watchdog Promises Action on Greenwashing

     The Financial Times believes: ‘Greenwashing’ warnings accelerate drive for business sustainability standards

     City A.M. declares: Think-tank calls for ESG regulation to clampdown on ‘greenwashing’

     As a result, ESG Clarity reveals: Morningstar drops sustainable tag from 1,200 funds

ESG regulation news is never far from anyone’s lips…

     Environmental Finance believes: EU Platform social taxonomy overhaul tackles practical difficulties

     ETF Stream asserts: There is no silver bullet for ESG standardisation

     Finextra suggests: Harnessing technology to drive ESG compliance in advance of new SFDR regulation

     Pension Age claims: Regulation driving ESG consideration for investors

ESG Surveys are also an interesting topic prominent in the headlines…

     Bloomberg reveals: Talent Crunch Threatens Companies Failing on ESG, Survey Finds

     Edie reports: Boardrooms holding back progress towards ESG leadership, survey finds

That concludes our roundup of the ESG in the News for this month.  Look out for our next edition coming soon.