Corporate ESG Monthly – 4 November 2021

04 November 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

  • UK government reveals net-zero strategy. The UK government’s long-awaited strategy for reaching net zero emissions was launched on 18th October. The strategy includes a range of packages, such as support for electric vehicles, offshore wind, hydrogen, sustainable aviation fuel technologies, and nuclear power. The plan could promote the creation of over 440,000 jobs in addition to unlocking £90bn in private sector investments. A ‘Greening Finance: A Roadmap to Sustainable Investing’ was also included to set out the government’s long-term ambition to green the financial system and align it with the UK’s world-leading net-zero commitment. However, there are concerns regarding funding: according to the treasury’s Net Zero Review, the plan will lead to tens of billions of lost revenue from fossil fuel taxes, and could lead to other risks from green policies, such as business moving abroad and the potential need for new taxes. Read more.
  • EU banks set for regular climate stress tests. As part of a review of the EU banking rules, the European Commission has outlined proposals that will require banks to systematically identify, disclose and manage ESG risks as part of their risk management. This includes regular climate stress testing by both supervisors and banks, requiring the latter to disclose the degree to which they are exposed to ESG risks. The proposed measures are intended to make the banking sector more resilient, in addition to ensuring that banks take due account of sustainability considerations. Read more.
  • Climate pact on methane advances as nations join the US and EU. The US and EU have announced that two dozen countries have joined a global pact to pare methane emissions, as world leaders seek to galvanise momentum against greenhouse gas ahead of critical climate talks at COP26. Countries in the agreement are pledging to support a collective goal of cutting methane emissions at least 30% from 2020 levels by the end of the decade - with reductions coming from the oil industry, agriculture, and waste. Read more.

Disclosure

Reporting: TCFD releases guidance for companies to disclose net zero

The Task Force on Climate-related Financial Disclosures (TCFD) has published its 2021 Status Report which includes updates to its climate risk reporting recommendations, along with guidance for companies to disclose their plans and progress relating to their transition to a net-zero economy. The updated guidance also elevates seven categories of metrics to "particularly important" for assessing financial impact. The categories include Scopes 1, 2 and 3 greenhouse gas emissions, metrics on climate-related transition and physical risks and opportunities, capital deployment, internal carbon price and remuneration. More broadly, the Status Report suggests 2,600 organisations across 89 countries now support the recommendations (up by 9% from 2020). Read more.

Reporting: Corporate directors see ESG reporting as necessity

According to a recent PwC survey of 851 corporate directors, 64% of those surveyed said ESG is tied to company strategy, up 15% from 2020. At the same time, however, only 25% said they understand ESG risks very well. As the ESG conversation intensifies in the boardroom, more companies are making changes to their executive compensation plans to reflect that focus. More than half of directors’ support linking their compensation to ESG-focussed targets. In particular, there is increased focus on facilitating greater diversity in boardrooms. In 2020, 71% of corporate directors said that boardroom diversity was an issue that would work itself out. That number dropped to 33% this year. Read more.

Ratings: CDP widens scope to cover biodiversity, oceans and land use

CDP has released its new strategy for 2021-25, 'Accelerating the rate of change', which recognises the urgent need to ensure companies, cities, states and regions have concrete plans to deliver on their stated commitments, and provide evidence of progress against those goals. Over the next five years, CDP will further develop its’ systems and processes to support greater transparency and accountability from businesses, cities and governments. In support of this objective, CDP is expanding its definition of "E" in ESG, to cover planetary boundaries, including oceans, land use, biodiversity, food production and waste. Read more.

Ratings: Sustainalytics ESG research and ratings added to Bloomberg Terminal

Business and financial markets information service provider, Bloomberg, has announced that Sustainalytics' ESG Research and Ratings are now available via the Bloomberg Terminal. To measure company-level ESG risk, Sustainalytics’ ESG Risk Ratings combine the concepts of management and exposure to arrive at an overall quantitative rating, which is expressed across a risk spectrum of severe, high, medium, low or negligible. The addition of Sustainalytics to Bloomberg Terminals complements the existing sustainable finance solutions on the platform, including data-driven insights to help investors integrate ESG throughout the full investment process, standardised company-reporting and third-party ESG data. Read more.

Capital Markets

Primary Market

  • CK Hutchison, Green bond. CK Hutchinson became one of the first multinational diversified conglomerates to issue in an ESG-labelled format. It is a holistic family framework which allows the group’s direct or indirect subsidiaries to raise debt in a number of different formats e.g. bonds and loans. Read more.
  • Tesco, Sustainability-Linked Bond. Tesco released its second Sustainability-Linked Bond (SLB), making it the first UK repeat issuer, following their debut SLB in January 2021. It represents only the 4th SLB ever issued in the GBP market, following on from prior GBP SLBs; Enel, Anglian Water and Modulaire Group. Read more.
  • Wesfarmers, Sustainability-Linked Bond. Wesfarmers joined Tesco, Woolworths Group LTD, and the Picard Groupe SA, as those in the consumer discretionary/staples sector to issue an SLB. The bond showcases Wesfarmers evolving Sustainable Finance strategy, following a Sustainability-Linked Loan in March 2021. Read more.
  • Gasunie, Sustainability-Linked Bond. The first regulated gas Transmission System Operator (TSO) to publish a SLB Framework. The company has also committed to considering setting Science Based Targets once the methodology for the Oil and Gas sector becomes available Read more.

Secondary Market

For further analysis and information on the Secondary Market, please take a look at the full monthly newsletter on Agile Markets. If you do not have access to Agile Markets, please contact us here.

Investors

BlackRock emphasises climate and natural capital in majority of engagements

Environmental issues came to the fore in 58% of BlackRock’s engagements in the period from 1 July to 30 September, while social issues were brought up in 38% of discussions. Governance continued to dominate these conversations, being raised over 90% of the time. Asset managers are starting to evolve their voting policies, under pressure from both investors and governments to use their influence to help improve companies’ environmental, social, and governance practices. Read more.

Natural capital investing “inextricably linked” to fighting climate change (Federated Hermes)

Investors are becoming increasingly aware of investment opportunities in ‘natural capital’, including assets important for carbon storage, carbon sequestration, soil erosion protection, flood risk management, biodiversity, and water quality. A recent report from Mercer found that biodiversity and natural capital are rising up institutional investor allocation agendas, with 24% of European allocators now looking at these asset classes as they deepen their focus on the environment. Read more.

Centre launches to expand transition pathway initiative

The Transition Pathway Initiative (TPI) is an asset owner initiative, backed by investors with a combined $40trn in assets under management or advisement, and provides data on the assessment of companies transitioning to a net zero economy. The initiative has announced the launch of a "landmark" TPI Global Climate Transition Centre, which is intended to be opened in early 2022 and set to be based in London (Grantham Research Institute on Climate Change). The Centre will drastically expand the number of companies assessed by the initiative and expand its scope into the fixed income market; in particular, corporate and sovereign bonds, which are intended to form a "critical part" of the post-COP26 architecture for sustainable finance. Read more.

Carbon Markets

Putting carbon markets to work on the path to net zero

Carbon markets are rapidly approaching critical mass from an institutional investor’s perspective. Active and liquid carbon markets will be critical in helping the world attain net-zero emissions. Institutional investors have a vested interest in this goal, because if it is missed, their portfolios will be exposed to increasing levels of climate risk. Investing in carbon markets remains a difficult proposition for institutions, but this could change rapidly. Carbon allowances could provide downside protection and enhance risk-adjusted returns in scenarios involving immediate or delayed climate actions. Read more.

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