Corporate ESG Monthly – 6 October 2021

06 October 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

  •  2021 UK Climate Finance Results: International Climate Finance (ICF) to double. The UK ICF is a portfolio of investments with a goal to support developing countries take up low-carbon development at scale, manage natural resources sustainably and manage risk/build resilience to the impacts of climate change. Between 2011 and 2021, UK aid has supported 88 million people cope with climate change, improved 41 million people’s access to clean energy and avoided or reduced 180 million tonnes of greenhouse gas emissions. The 2021 UK Integrated Review of Security, Defence, Development and Foreign Policy identified addressing climate change and biodiversity loss, as the UK government’s top international priority. In support of this, the UK has committed to doubling ICF to £11.6 billion between April 2021 and March 2026, compared with the previous 5-year commitment of £5.8 billion between April 2016 and March 2021. Read more
  • Debut EU green bond expected in October. Following the publication of the EU’s Green Bond framework, the EU will look to issue its debut green bond in October (subject to market conditions) as it prepares to issue €250 billion worth of green bonds over the next five years. The green bond programme will form part of the €800 billion Next Generation EU (NGEU) Covid recovery package, of which at least 30% has been committed to be funded through green bonds. Johannes Hahn, Commissioner in charge of Budget and Administration, said: “The EU's intention to issue up to €250 billion in green bonds between now and end-2026 will make us the largest green bond issuer in the world. This is also an expression of our commitment to sustainability and places sustainable finance at the forefront of the EU's recovery effort”.  Read more.
  • ESMA scopes sustainable finance within 2022 work programme. The European Securities and Markets Authority (ESMA) has outlined a programme of activities focussed on sustainable finance within its strategic agenda for 2022. ESMA will continue monitoring and assessing ESG-related market developments and risks and will work to further integrate environmental risks, particularly with regard to the ESG investment value chain. The regulator will also assess the way Credit Rating Agencies (CRAs) incorporate ESG factors into their methodologies for credit ratings and outlooks and how CRAs also ensure the robustness of their methodologies in this context. Read more.

Corporate Strategy Developments

  • Firms ask suppliers to commit to Net Zero. Unilever and Tesco wrote to their suppliers last week, asking for their commitment to helping meet the companies’ Net Zero targets. Unilever is targeting Net Zero across its value chain – comprising 56,000 suppliers – by 2039, a target set in 2020. As part of this invitation, Unilever requests its suppliers halve their absolute greenhouse gas (GHG) emissions by 2030, report publicly on their progress and share emissions and footprint data with Unilever. Meanwhile, Tesco announced a new target of Net Zero from supply chain and products by 2050 and has also asked suppliers for their cooperation on this. Over the next 12 months, Tesco will set out a plan for achieving this new target and provide support to all suppliers in establishing their own Net Zero ambitions and science-based targets. Read more: Unilever, Tesco.

Disclosure

Reporting: ISS introduces new EU Taxonomy aligned reporting solution

ISS ESG announced the addition of ‘automated portfolio reporting capabilities’ to its EU Regulatory Solutions suite, aiming to facilitate compliance with the EU Taxonomy reporting obligations and Sustainable Finance Disclosure Requirements (SFDR). The new EU Taxonomy Report provides a snapshot of the Taxonomy-eligible portion of a portfolio, as well as a full ‘alignment assessment’ across all issuers within a user’s portfolio. The alignment assessment includes a view of EU Taxonomy alignment by Objective; covering Climate Change Adaptation and Mitigation requirements, with four remaining objectives to be added once the regulations have fully defined their activities. The SFDR Report covers all mandatory datapoints related to specific Principal Adverse Impact (PAI) indicators and metrics, addressing SFDR Level 1 disclosure obligations by leveraging assets from other ISS ESG solutions. Read more.

Reporting: FCA urged to go beyond TCFD and require social impact reporting

The Impact Investing Institute urged the UK Financial Conduct Authority (FCA) to extend its proposal that requires reporting in line with the Task Force on Climate-related Financial Disclosures (TCFD), in response to an FCA consultation on the matter. The institute recommends the FCA looks to establish reporting and bond standards that also account for the social impact of market participants, and the interrelationship between environmental and social issues via three key recommendations:

  1. Require listed companies, asset managers, life insurers and FCA-regulated pension providers report on ‘S’ factors, as well as ‘E’ factors
  2. Align the reporting standards it requires to the concept of ‘double materiality’
  3. Create a comprehensive bond standard that recognises the social co-benefits generated by green bonds. Read more.

Ratings: Fitch enters the ESG rating arena

Sustainable Fitch, Fitch Group’s new sustainability-focused analytics ecosystem, introduces new ESG ratings solutions that target fixed income investment products. The new ESG ratings aim to provide assessments of ESG performance at the entity, instrument, and ESG framework level. Ratings coverage will initially be focused on the ESG-labelled market, including green, social, sustainability and sustainability-linked bonds (SLB), with plans to expand over the entire fixed-income investable universe. The ESG ratings are presented on a scale ranging from 1 (“Excellent”) to 5 (“Poor”), and are supported by subgrades and detailed underlying datasets, allowing for granular comparative analysis. The reports also include qualitative commentary and additional information on instrument relevance and alignment with major standards and taxonomies. Read more.

Ratings: MSCI launches Implied Temperature Rise portfolio solution

The new Implied Temperature Rise solution converts companies’ current and projected greenhouse gas emissions into an estimated rise in global temperature; taking into consideration the emissions reduction targets of each company within a given portfolio. Used alongside MSCI’s Target Scorecard - a framework to assess companies’ decarbonization and net zero climate targets – the series of analytical tools will help investors analyse the pace at which the companies they invest in are transitioning their businesses to meet their climate goals. Covering nearly 10,000 publicly listed companies, based on the MSCI ACWI Investable Market Index, the solution assesses the strength of a companies’ commitment, comparing projected emissions with the global carbon budget required to meet global climate targets. Global climate targets include the Intergovernmental Panel on Climate Change’s (IPCC) 2°C goal, and the Paris Agreement goal of limiting global warming to 1.5°C. Read more.

Capital Markets

Primary Market

  • Southern Housing Group, Sustainability Bond. Southern issued a new £250m Sustainability Bond from their newly published Sustainable Finance Framework. Use of Proceeds for this issuance include construction of Affordable Housing, renovations to existing buildings to improve the energy efficiency, and – as a novel development within sectoral issuance – operations of the ‘Southern360’ community initiatives. Read more.
  • Vodafone, Sustainable Financing Framework. Vodafone released a new Sustainable Financing Framework which will replace their existing Green Bond Framework from 2018. This is a holistic approach to sustainable financing where Use of Proceeds and Sustainability-Linked frameworks are combined into one single document. Read more.
  • Walmart, Green Bond. Walmart issued a $2bn green bond, the largest ever from a US corporation, as it surpassed the joint $1.5bn record held by NextEra Energy Capital and Apple. Walmart’s Financing Framework permits use of proceeds from “commercial paper, term loans, bond issuances and other options”, in line with the corporate trend of setting up ‘debt instrument agnostic’ frameworks. Read more.
  • Philip Morris, Business Transformation Linked Financing Framework. The first tobacco company to enter the Sustainability linked financing space. Distinct use of the SLB structure, focusing on “social transition” (from cigarettes to smoke free products). Read more.

Secondary Market

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Investors

Asset managers make progress on ESG efforts but key areas for improvement still remain

Firm wide responsible investment (RI) policies have now become the norm, with 99 per cent of surveyed managers stating they have RI policies in place. However, only 74 per cent and 61 per cent of asset managers could evidence ESG considerations influencing respective buy or sell decisions over the past six months. Read more.

Border to Coast, one of the largest UK pension pools, commits to net zero

The interim targets for 2030, support efforts to achieve up to a 50% global reduction in CO2 emissions, which was identified as a requirement in the IPCC special report on global warming. The formal Climate Change Policy includes efforts to: (i) Vote against company Chairs in high emitting sectors; (ii) Support climate-related resolutions at company meetings; (iii) Engage with companies in relation to business sustainability and disclosure of climate risk. Read more.

$46 Trillion Investor Group call for stronger policies ahead of COP26

587 investors, with $46.6 trillion in assets under management, issued the strongest-ever investor call for climate policy action. The investors issued a joint statement urging governments to implement a set of measures to help mobilise investments to address the climate crisis. The 2021 Global Investor Statement to Governments explains that investors are looking to decrease their climate risk exposure and invest in the net zero transition. However, allocating capital is currently limited by the state of government commitments. Investor signatories to the statement are calling on all governments to undertake five priority actions before COP26: (i) strengthening 2030 Nationally Determined Contributions (NDCs) to align with limiting warming to 1.5-degrees Celsius; (ii) committing to domestic mid-century net-zero emissions targets; (iii) implementing policies to deliver on climate targets, such as carbon pricing; (iv) ensuring that COVID-19 economic recovery plans support the transition to net-zero emissions, and; (v) committing to implementing mandatory climate risk disclosure requirements aligned with TCFD recommendations. Read more.

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