Corporate ESG Monthly – 4 August 2021

04 August 2021

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Breaking down trending ESG trades & themes to help Corporates get ahead of the latest issues shaping the market.

Institutional Developments

  • The UK aims for net zero across road, rail, and aviation with its new transport decarbonisation plan. Transport is the largest contributor to UK greenhouse gas emissions (GHG), with road transport alone accounting for almost a quarter of UK total emissions in 2019. The new “greenprint” plan published includes new targets and initiatives such as: Phasing out the sale of new diesel and petrol heavy goods vehicles (HGVs) by 2040, creating a net zero rail network by 2050, and launching a “Jet Zero” consultation aimed at achieving net zero aviation emissions by 2050 - including net zero domestic aviation emissions by 2040. While the UK leads many countries in setting climate ambitions, it has faced criticism for its lack of progress on meeting its goals, with its own Climate Change Committee warning that the lack of progress on firm climate policies is causing the country to fall behind on its commitments. Read more.
  • EU launches green bond framework to help it meet climate goals. In July the European Commission made a new European Green Bond Standard (EU GBS) proposal that is now with the European Parliament and Council to be agreed. The voluntary EU GBS framework will form a 'gold standard' for companies and governments when raising funds for environmentally accretive activities and will be 100% based on the EU’s taxonomy, or list of activities it considers to be green. While there will be no obligation on issuers to use the EU GBS, the more rigorous oversight of those which do is likely to lead many companies to adopt it. However, the standard will introduce additional reporting and verification requirements to comply. Read more.
  • The Science Based Targets initiative (SBTi) raises the corporate climate target-setting bar to 1.5°C. In response to increasing urgency for climate action and the success of science-based targets to date, the SBTi is unveiling a new strategy to increase the minimum ambition in corporate target setting from ‘well below 2°C’ to ‘1.5°C’ above pre-industrial levels. 1.5°C-aligned targets are now the most common choice for businesses, representing 66% of all submissions to the SBTi in 2021. Companies that had targets approved in 2020 or earlier will have until 2025 (as per the current SBTi criteria) to update their targets, with all companies and financial institutions that submit targets from 15 July 2022 needing to align to the new criteria. Read more.
  • The UK Financial Conduct Authority (FCA) tackles ‘greenwashing’ fund mis-selling risks. UK financial regulators are making it increasingly clear that they will act against firms that mislead the public about the climate credentials of their products. The discussion is ongoing as to whether asset managers, life insurers, pension providers and standard listed companies should be brought within the scope of climate-related disclosure rules by the FCA. Ultimately, it is noted that better information will help clients and consumers make more informed decisions about their investments. Read more.
  • Charting the course for a social taxonomy. The EU’s Platform for Sustainable Finance has published the draft Social Taxonomy report which is built around the idea of: i) what constitutes a substantial social contribution, ii) how to not do significant harm, and iii) what activities are harmful. There has been increasing focus on the requirement of Social impact clarity, with Nikolaj Halkjær Pedersen, Senior Lead on Human Rights at the UN-convened Principles for Responsible Investment, noting: “To avoid blue-washing (social-washing), we need a social taxonomy just as much as we need a green taxonomy”. The report is in the early stages and it is yet to be decided whether the subgroup’s work will translate into the evolution of the existing Green Taxonomy into a broader Sustainability Taxonomy, which would have a dual focus on social and environmental factors - including a number of transition activities, or whether there will be two separate taxonomies connected through minimum social and environmental safeguards. Read more.

Disclosure

Reporting: FCA publishes proposals to require diversity-related disclosures

The FCA has published a consultation paper on proposals to require premium and standard listed companies to make disclosures in relation to gender and ethnic diversity at board and executive management level. As part of this paper, views are sought on changes to the Listing Rules which would require companies to include in their annual report and accounts a ‘comply or explain statement’ confirming whether they have met specified board diversity targets as at a date during the financial year of their choosing. ‘Comply or explain’ targets are: at least 40% of the board are women; at least one of the positions of CEO, CFO or Senior Independent Director is occupied by a woman; and, at least one member of the board is from a non-white ethnic minority background. Read more.

Reporting: GRI and EFRAG collaborate on developments of EU sustainability reporting standards

The Global Reporting Initiative (GRI) and the European Financing Reporting Advisory Group (EFRAG) announced a new cooperation agreement for the development of EU sustainability reporting standards. EFRAG was mandated by the European Commission in June 2020 to prepare for new EU Sustainability Reporting standards, as part of the revision of the Non-Financial Reporting Directive (NFRD), and is currently leading the technical work to develop European sustainability reporting standards for companies, as required by the new Corporate Sustainability Reporting Directive (CSRD) proposal. Under the new collaboration, GRI and EFRAG have agreed to share technical expertise to foster the development of the reporting standards, as well as the progress of converged standards at an international level. Read more.

Ratings: IOSCO consults on regulation of ESG data and ratings providers

The International Organisation of Securities Commissions (IOSCO) published a consultation report that proposes a set of recommendations to mitigate risks flowing from activities of ESG ratings and data products providers. Prior to publishing the Report, IOSCO undertook a fact-finding exercise that revealed a lack of transparency about the methodologies behind the ratings or data products and an often-uneven coverage of products offered across industries and countries. The report highlights that the lack of standards in this area may present a risk of greenwashing or misallocation of assets and could lead to a lack of trust in ESG ratings or in data products’ robustness and relevance. Read more.

Ratings: Moody’s launches ESG data analysis tool targeting SMEs

Global financial risk assessment firm Moody’s has launched a ‘first-of-its-kind’ ESG Score Predictor. The tool will be used to provide transparency regarding ESG risk for SMEs worldwide by generating real-time predicted ESG scores. Assessing exposure to ESG risks requires easy and reliable access to comparable and standardised metrics. The new ESG Score Predictor was designed to achieve a consistent way to report and rate those with more qualitative ESG metrics. The tool is based upon a model derived from Moody’s already existing and proprietary ESG scoring methodology for large-cap corporates which provides financial institutions with quantitative data for portfolio and risk management. This allows companies to monitor ESG risk across global supply chains. Read more.

Capital Markets

Primary Market

  • Valeo, Sustainability-Linked Bond. Valeo is the first European player in the automotive sector to issue a Sustainability-Linked Bond. It has taken a holistic approach to sustainable financing where the Use of Proceeds and Sustainability-Linked technology are combined into one single framework. The step-up Margin is 37.5 basis points (bps) higher than the more common 25 bps, albeit the total financial penalty is in line with what has been observed so far in the market. Read more.
  • Metropolitan Housing Trust, Sustainability Bond. The Trust is one of the largest housing associations in the UK to issue a bond in this format, and is an “early adopter“ of the Sustainable Reporting Standards (SRS) developed by the ESG Social Housing Working Group. The framework covers well established project categories for the sector such as affordable housing, green buildings, energy efficiency, and affordable infrastructure as well as novel categories aiming to support local retailers and public transportation. Read more.
  • Flagship Finance, Sustainability Bond. An inaugural sustainability bond for Flagship Finance. This issuance represents the sector’s longest-dated sustainability bond to date. And, the framework contains a wide range of project categories including projects targeted at alleviating homelessness and digital training. Read more.

Secondary Market

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Investor Developments

PLSA seeks views on new responsible investment quality mark for pension schemes

The Pensions and Lifetime Savings Association (PLSA) has opened a consultation on a new Responsible Investment Quality Mark (RIQM). RIQM is intended to recognise pension schemes that meet the highest standards for incorporating ESG factors across their operations. Read more.

UK pension schemes must act now on climate – before it is too late, says AXA Investment Managers

There is a window of opportunity for schemes to act, with the divergence in credit spreads between lower-and higher-rated issuers at its lowest point in the post-Global Financial Crisis era (just 39 bps spread differential between BBB- and A-rated global credit). The same lack of dispersion holds between climate leaders and climate laggards – with no premium to pay for investing in lower emitting or more climate-aligned bonds. This means that now is potentially one of the cheapest times for pension schemes to integrate climate factors into their investment processes. Read more.

Pension trustees increasingly rely on investment consultants to deliver ESG agenda

A new study from the Pensions Management Institute (PMI) and BMO Global Asset Management finds that, as ESG has risen to the top of pension trustees’ agendas, most trustees are relying on investment consultants for their schemes’ adherence to sustainability goals. Many pension trustees remain anxious about the changes. One in five trustee boards are not confident that they understand the new Task Force on Climate-related Financial Disclosures (TCFD) reporting rules. As a result of trustees’ lack of confidence in their own and asset managers’ ESG capabilities, investment consultants have been picking up the slack. Read more.

Legal

Europe is proposing a border carbon tax. What is it and how will it work?

The EU proposal includes carbon tariff on imports from countries that are not taking similarly aggressive steps to slash their own planet-warming greenhouse gas emissions. Carbon border taxes are intended to solve a basic problem. If a single country tries to impose policies to cut emissions domestically, it runs the risk that certain sectors (e.g. cement and steel) will face higher costs and be at a disadvantage to foreign competitors with looser environmental rules. However, sceptics say a carbon border tax could prove challenging to implement while angering Europe’s major trading partners, including Russia and China. The EU’s proposal is an early test case of whether this idea can succeed. Read more.

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