ESG+ Newsletter – 9th February 2023

Investors potentially penalised either way on sustainable bonds

This month, ESG bond issuances reached their highest levels in over a year according to Bloomberg, as companies and governments look to the sustainable debt market for capital raising activity. Sustainability-linked bonds (SLBs) – which make up a segment of that market – saw their issuance volume increase from $8.8 billion to $22.4 billion in the previous month. While the ‘green’ capital is flowing, a recent analysis, covered in Responsible Investor, by Barclays has claimed that a majority of SLBs set to be measured based on performance up to 2022 and 2023 are likely to miss their targets.

Issues around what happens if SLBs miss their targets have been under increased scrutiny, with Federated Hermes publishing an in-depth piece on the issue last year, asking whether such bonds had a step-up problem. While it may have been assumed that bondholders would benefit from additional payments as a ‘penalty’ to the company, Barclays’ analysts argue that this gain may be offset by the deterioration in the ESG quality of the issuer, prompting forced “sales and thus spread-widening.” As these products face greater regulatory and investor scrutiny, such issues may increasingly come to the fore. For example, also reported on by Responsible Investor, the Dutch financial regulator recently announced that it will focus on the transparency of green and SLBs, while Moody’s highlighted that the perception of “greenwashing” surrounding these products could temper investors’ appetite, impacting the ESG bond issuance levels. Across the ESG spectrum, regulatory and stakeholder sophistication and expectation are rising.

Clear link between board representation and gender diverse management

Bloomberg released its annual Gender-Equality Index (GEI) this week, with participation from over 600 companies, each subject to an assessment of their gender diversity performance, with the importance of Board representation a noteworthy finding. Companies with greater than 30% women representation on the Board have, on average, 27% of women executives, compared to 20% of women executives in firms with less than 30% of women on the Board. While these findings demonstrate that representation at the highest level of the organisation can increase gender diversity within the wider workforce, the report also found that there is still a long way to go to achieve gender parity in leadership positions, with women representing 43% of employees at the companies assessed, but only 8% of CEOs in the same group. With 64% of the companies assessed implementing diversity and inclusion goals for managers in performance reviews, maybe reward structures will play a role in spurring change.

The Wall Street Journal though has published a piece highlighting the dangers of ‘Diversity Policing’. Citing practices at Texas Tech University, the article examines the biological sciences department’s practice of rewarding DEI statements during the job application process. The article claims that this serves as an “ideological litmus test” whilst punishing those with a limited understanding of identity politics. While the approach appears imperfect, so are all interview practices – perhaps hiring individuals who demonstrate a commitment to diversity is another means of ensuring it thrives in an organisation.

Clean tech subsidies may set off a climate solutions race

Reuters’ in-depth commentary arm, Breakingviews, this week published an examination of the debate around green subsidies – namely the Inflation Reduction Act and a recently announced European “Green Deal” equivalent. Although subsidies are deemed by some to be a more realistic alternative to emissions taxation (carrot over stick), as explicitly referred to in the announcement of the EU’s plan, the provision of state aid can also conjure up negative connotations. While the pros are well-understood and clear, the cons – which may fall into the realm of protectionism – are less so and muddied by an array of variables. For instance, and as laid out in the article, the usual response to an isolationist policy is the imposition of tariffs, with some critiquing the IRA for undermining “one of the core principles of the World Trade Organisation” through discriminating against non-U.S. manufacturers.

The EU Green Deal is similarly complex, especially in the context of the single market. Highly leveraged countries may be more inhibited from providing subsidies than others due to financial constraints, for example. One solution offered by Reuters is the expansion of countries that can benefit from subsidies through building up supply chains in allied countries; the provision of grants; or the relaxing of limits on deficits and debt to tap greater loaning potential. The bottom line, in our view, is that these developments have huge potential to push forward essential technology; “Hefty dollops of state aid could set off a virtuous cycle of lowering costs in immature technologies…” Inter-state competition has traditionally been viewed as creating hostility; however, perhaps a transition to a genuinely sustainable path needs a reimagining of the relationship between state and society. By funnelling funds to those willing to try and solve the climate crisis, the 21st century could see a climate solutions race replace previous arms and space races, something economists were unlikely to have foreseen at the time of the bay of pigs.

CDP says disclosure on transition plans almost non-existent

CDP has published a new report analysing the climate disclosures of companies across the world, finding that less than half a per cent of 18,600 companies that disclosed climate information through its platform last year have a credible climate transition plan to net-zero by mid-century. While the report did not pass judgement on whether transition plans existed, it instead assessed disclosure against 21 key indicators from its annual climate questionnaire, identified as details necessary for a credible transition plan.

CDP describes a climate transition plan as “a time-bound action plan that clearly outlines how an organization will achieve its strategy to pivot its existing assets, operations and entire business model towards a trajectory that aligns with the latest and most ambitious climate science recommendations”. As reported by Business Green, firms in the apparel, fossil fuel, and hospitality industries were generally the worst performers when it came to climate transition plan disclosure, while companies in the power generation and infrastructure industries were on average the highest performers – perhaps reflecting greater pressure to change. While some may feel the report provides safety in numbers from stakeholder pressure, the report is the latest development in a shift from accepting commitments on transition plans, to highlighting lack of action as a means of spurring accountability.

GCC Exchanges latest to publish ESG metric guidance

In a further sign of the growing clamour for greater disclosure on ESG metrics – and their importance in attempting to attract capital – the Gulf Cooperation Council (GCC) Exchanges Committee, chaired by the Saudi Exchange and including the Abu Dhabi Securities Exchange, Bahrain Bourse, Boursa Kuwait, the Qatar Stock Exchange, the Muscat Stock Exchange, and Dubai Financial Market published 29 voluntary ESG Disclosure Metrics to serve as guidance for GCC listed companies. The metrics, which focus on areas like GHG emissions, energy usage, water usage, gender pay, employee turnover, gender diversity, and data privacy, amongst others, are all aligned with the World Federation of Exchanges and Sustainable Stock Exchanges Initiative. 

With international capital increasingly demanding greater disclosure of sustainability and ESG data, the Committee aims to support the development of regional capital markets, create an advanced capital market ecosystem in the GCC region and elevate its position on the global stage. Driving the sustainable agenda is a key priority across the GCC and this standardisation aims to aid a level of uniformity in ESG disclosures while ensuring transparency and comparability of information to key stakeholders both regionally and globally.

Concerns raised by investors about the EU’s CSDD

The European Commission’s proposal for a Corporate Sustainability and Due Diligence Directive aims to promote sustainable and responsible business practices throughout global value chains, extending the responsibility of businesses well beyond their own operations. On 24 January, despite pushback from certain quarters, the ECON Committee of the European Parliament decided that the scope of the proposal should include financial services.  In response, the Institutional Investors Group on Climate Change (IIGCC), representing more than 375 institutional investors managing more than €60 trillion in assets, has expressed its views in a paper sent to Members of the European Parliament (MEPs), as covered by Environmental Finance.

While supporting the proposal in general, the IIGCC criticises its “workability” and the extended scope of the legislation, particularly in relation to investors’ due diligence. The IIGCC has made specific demands on EU lawmakers, which include clarifying what responsibility investors would have for corporate responses to CSDD, working to ensure consistency of the directive with other EU policy files on sustainable finance, as well as strengthening requirements for the adoption of climate transition plans.

Proxy advisors caught up in ESG polarisation

The two major proxy advisory firms, Glass Lewis and Institutional Shareholder Services (“ISS”) have been targeted again, in what Bloomberg law has called a “Republican crusade against ESG investing”, on the back of targeting investment managers for actions and pronouncements on ESG. As covered in previous editions of the newsletter, Republican attorney-generals from 21 states have criticized proxy advisors, ISS and Glass Lewis, arguing that their voting recommendations on ESG issues are not of financial materiality to shareholders.

Last week, Glass Lewis responded to the criticism, stating that their vote recommendations on climate change as well as Board and leadership composition are based on the objective of “mitigating risk and promoting the long-term economic interest of shareholders”. In the response, Glass Lewis highlighted the fact that 96% of companies in the S&P 500 now publish sustainability reports as evidence that climate risk is now “a material risk-return factor.” While negative voting recommendations have regularly led to criticism of proxy advisers and their approach to evaluating governance from public companies, in recent years, politicians are increasingly wading into the argument.

ICYMI

• Consultation is underway on a new standard for the mining sector. The draft GRI Mining Standard, currently in its public comment period, will become the latest addition to a growing suite of Sector Standards. Developed by a multi-stakeholder expert group, the Standard identifies 25 topics that encapsulate the full range of impacts for mining organizations. Once feedback has been considered, the final Mining Standard is expected to be published in Q4 2023.
• Global elite produces almost half of the greenhouse emissions. UN-backed research has found that the 10% most polluting people in society are responsible for nearly 50% of the annual greenhouse gas emissions behind climate change, reports the Financial Times. It is hoped that the findings will provide a “strong incentive” for policies targeting the elite group and support the case for a “profound transformation” of national and international tax regimes in order to bring about meaningful change.
• Asia ESG fund compliance costs are expected to soar. As ESG investment and regulatory requirements continue to multiply and evolve, Asian fund firms will continue to face increasing costs to keep up with the rising number of regulations. Yet despite the growing costs of compliance, more than two-thirds of Singapore fund firms see further investment into ESG strategies as the top expected driver of growth over the next three years, notes the Financial Times.

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