ESG+ Newsletter – 15 February 2024

This week’s newsletter takes in a range of developments over the last week, from a delay in EU regulations, further evidence of the development of biodiversity standards, integration of ESG standards into Chinese markets and potential changes to stock exchange listing rules as a means of making markets more competitive. We also review data on ESG hiring, the World Bank bond issuances and delve into the importance of governance for tech start-ups.

Biodiversity Net Gain legislation comes into force in UK 

Hailed as a ‘gamechanger’ for nature investment, the UK has formally introduced Biodiversity Net Gain (BNG) legislation, Environmental Finance reports. The new legislation requires that all new developments create at least a 10% net gain in biodiversity which will be turned into a tradeable BNG unit. If developers cannot achieve BNG onsite, they will need to purchase statutory biodiversity credits. A net gain in biodiversity is achieved by enhancing or restoring natural habitats, ideally on the development site. While the legislation was delayed last year, the UK follows Australia in becoming one of the world’s first countries to create a biodiversity credits market. This legislation has been welcomed by the Green Finance Institute, a UK government-backed organisation focused on scaling sustainable finance, which has predicted that the avoided losses to biodiversity could generate more than £11bn for the UK economy. Nature markets, like the one created by UK BNG legislation, should provide a mechanism to funnel investment into nature restoration and biodiversity improvements, which have a wide range of benefits for the economy, society, and the environment.  

EU delays sector specific requirements under CSRD  

The EU has announced a two-year delay to the implementation of aspects of the CSRD amid mounting opposition from business leaders, Bloomberg reports. While much of the CSRD is already in force following approval of the general European Sustainability Reporting Standards (ESRS) in 2023, requirements for sector-specific disclosures have been postponed until June 2026. The CSRD has been subject to much debate, and this isn’t the first time that the EU has rowed back on the planned rules. Last year, the Commission stated that under CSRD companies could themselves elect to decide which ESG information would be material to report. This drew the ire of investors who stated that it would leave the door open for greenwashing and make life harder for asset managers to compare information. 

This latest move has also drawn criticism from a group of academics who, in a letter to the Commission, argued that the postponement would both negate the gains promised by the sector-specific requirements and also make it harder for companies to determine what they need to disclose. In an updated statement yesterday, the EU offered a compromise by amending their statement to clarify that the delay “does not prevent the Commission from publishing the sector specific sustainability reporting standards” before 2026. While the delay may be frustrating for ESG reporting advocates, the flipside is that it may in fact lead to better buy-in from the affected sectors and ultimately more accurate reporting in the long-term. 

World Bank sees growing momentum in outcome-based bonds

Following the recent launch, and success, of its plastic waste reduction bond, the World Bank is planning more products, which will be structured on an outcomes-based performance framework. Thematic areas of focus may include health, the blue economy, and further wildlife structures, following its rhino conservation bond in 2022. The bonds to date have been structured so that investors receive their commitment back at the end of a seven-year period, plus a minimum interest payment. Returns are also influenced by the success or impact of the funded initiative. Unlike more conventional ESG bonds, which tend to be linked to company performance, the proceeds are deployed to finance sustainability projects.

The World Bank has raised US$200bn from its broader sustainable development bond programme since its launch seven years ago and is optimistic about the future of the outcomes-based approach. The overarching goal is to bring in “big institutional investors in a way that they still feel it is safe enough” to partake – as stated by Michael Bennett, the head of derivatives and structured finance, told Environmental Finance. Debt markets have tended to lag equity markets historically, on both ESG integration and impact creation; however, given the need for repayment over a set time period in debt, there is perhaps an event greater need for long-term thinking through broadening risk assessments and outcome-based considerations. As greater institutional investor involvement is generated, there may be scope for increased resilience in the wider ESG sector as macroeconomic conditions present challenges for equity markets.

America’s ESG hiring boom is starting to cool 

Amid the general pushback on ESG and related investments, recent data trends show companies have slowed hiring on environmental, social and governance positions as they focus on managing costs and generating higher returns. The Wall Street Journal analyses various reasons for these cuts, including investors seeking faster returns and corporate boards placing more importance on managing supply chain, cybersecurity, AI, and geopolitical risks. Tech, financial-services, and consulting companies were particularly active with ESG departures, representative of broader cutbacks in those sectors. Other companies are incorporating ESG into already established roles in lieu of positions wholly devoted to it. The drop in new ESG hires hasn’t necessarily weakened companies’ investments in those areas though: “Ninety-two percent of chief executives stand by their ESG programs, while the remaining 8% have ramped them down” the article notes. Regardless of the pushback and intensifying scrutiny on ESG, the raft of new and potential regulations, from California, Europe, and the SEC (among others) means that subject matter experts will continue to be sought after, if perhaps through a different lens of regulatory preparedness, as opposed to investor or stakeholder demands.

Debates over the future of the UK listing environment 

Across the globe, there is fierce debate as to the best means of ensuring capital markets remain competitive in attracting listings while simultaneously ensuring continued protection of shareholder interests. In the latest proposed changes, the UK’s Financial Conduct Authority (FCA) has proposed changes to the London Stock Exchange’s listing rules, aimed at making the UK’s Listing Rules more accessible, effective and competitive through a simplified and disclosure-based listing regime, by:

• Combining the premium and standard listing segments into a single category;
• Eliminating the three-year track record requirement for an IPO;
• Facilitating the adoption of dual classes of shares; and
• Dispensing with the need for a shareholder vote or circular for significant or related-party transactions.

In response, as highlighted by the Financial Times, international investors have expressed concerns over the changes, fearing they will weaken shareholder rights and corporate governance standards. The International Corporate Governance Network (“ICGN”), a group of global institutional investors, responded by arguing that these reforms could expose investors to undue risks, with potential negative impacts on financial markets and economic recovery. The letter, co-signed by several of the world’s largest investors, argues that the changes are likely to harm “the UK’s reputation as a market with robust investor protection, high corporate governance standards, strong reporting and a stable policy environment.” The debate underscores broader discussions about the balance between governance standards and competitiveness in several markets, something covered in last week’s newsletter. Divergent opinions exist regarding whether governance standards should evolve and adapt or if they have “gone too far” and require a “reset” to promote the attractiveness of listings. 

Chinese Stock Exchanges announce mandatory sustainability reporting requirements

China’s three major stock exchanges, in Shanghai, Shenzhen and Beijing, have released new sustainability reporting guidelines for larger listed companies, as per ESG Today. The guidelines will require larger cap and dual-listed issuers to disclose on a broad range of ESG topics, starting in 2026 based on 2025 data. China’s move aligns with other major markets, such as the EU and the US, that are introducing sustainability reporting requirements. The guidelines cover core content topics including governance, strategy, impact, risk and opportunity management, and indicators and goals, seeking to provide improved information on various ESG categories such as climate change, energy use, and anti-corruption. The mandatory reporting requirements will apply to over 450 companies, representing around half of the listed market value. The Beijing exchange, which houses smaller and medium companies, will introduce the guidelines on a voluntary basis along the same timeframe. While scrutiny on the efficacy of ESG ramps up globally, there appears to be no pause in the increasing reporting requirements on companies, in every corner of the globe.

The importance of good governance to tech start-ups 

While corporate governance is sometimes seen as the unsexy burden of large, listed companies, it can unlock a number of benefits for businesses of all sizes, listed or not, including rapidly growing tech start-ups. As discussed in the Financial Times this week, the strong growth and innovation incentives offered for tech start-ups create risks that, if not properly managed, may hurt the company’s reputation and even endanger its survival. For example, poor governance in the tech sector has recently been associated with cases of theft and fraud. Even without delving into fraud, much like at larger businesses, a lack of alignment between key stakeholders’ incentives may lead to detrimental business decisions, an aspect placed even further under the microscope by the rapid development and adoption of new AI technologies. These technologies create risks not only to business operations but also to wider society, and call for the development of specific governance frameworks, akin to our recent paper, which cites the importance of governance to ensuring the benefits of AI are harnessed while protecting stakeholders against emerging risks.

ICYMI 

• Only 27% of Execs Report Having Access to High Quality Sustainability Data. A study found that while 90% of senior business executives viewed sustainability as important to their organisations’ commercial success, only around one in four report that they have access to high quality sustainability data, and nearly 60% anticipate difficulty complying with new sustainability reporting regulations. 
• Fidelity’s Ikawa Q&A: Traceability targets and collaborative engagement in Japan. In an interview with ESGClarity, Tomohiro Ikawa, head of engagement in Japan at Fidelity International, explains how the team is applying the firm’s sustainable commitments in the region, discusses a success story from the fund and broader corporate governance developments in Japan, as well as areas of focus going into 2024.
• Globally representative evidence on the actual and perceived support for climate action. A new study by European economists found that 69% of the global population would be willing to contribute 1% of their personal income every month to fight global warming. Despite these encouraging statistics, individuals systematically underestimate the willingness of their fellow citizens to act, revealing a striking perception gap around support for climate action.