Welcome to Teneo's UK ESG Insights. Each fortnight, we’ll help you to cut through the noise around ESG by exploring some key market developments and the implications for companies.
They Said it: Investors Speak Out on ESG
Larry Fink, the Chairman and CEO of Blackrock, has released his annual letter to CEOs, writing on behalf of his clients. In this letter, he highlighted the themes he believes are vital to driving durable long-term returns. Here he focused on the merits of stakeholder capitalism, asserting that successful companies always recognise the importance of engaging with and delivering for their key stakeholders. He highlighted how issues, including climate change, the pandemic, and social and political polarization, as well as opportunities, such as increasing availability of capital, are shaping the operating environment in which CEOs work. In particular, he called for companies to commit to action on net zero, as well as increase investor participation on ESG votes.
- Teneo takeaway: It’s not surprising to see that climate risks and opportunities are a key focus for this year’s letter to CEOs, having taken centre stage in Fink’s annual letters since 2020. Similarly, the other key call to action, increasing investor participation on ESG votes, is a continuation of Fink’s thesis that investor involvement and disclosure should be a pillar of good corporate governance. So what’s changed? This year, for the first time in his annual letters, Fink explicitly called for companies to release short-term targets for GHG reductions, building on his previous calls for long-term planning on net zero. It’s no longer good enough to have a long-term net zero goal, investors want to know how you are going to cut emissions in the short term. Finally, some possibly good news in here for the oil and gas sector, with Fink explicitly arguing that divestment from the sector is not the way to get the world to net zero, but it remains to be seen whether this rhetoric will help to slow the divestment and decline in investment in the sector.
Down With Greenwashing
The Competition and Markets Authority (CMA) is cracking down on corporate greenwashing of environmental credentials. It is taking particular aim at the fashion industry, reportedly selected for investigation due to its market size, and the scale of consumer concerns about the sector. Cecilia Parker Aranha, the CMA’s director of consumer protection, said ‘We know many shoppers are actively looking for brands which are doing good things for the environment - and we want to make sure the claims they see are stacking up.’ The CMA is expected to investigate other sectors, such as transport, food and drink and beauty, in the future.
- Teneo takeaway: This is part of a trend of more muscular approaches being taken by market regulators on corporate greenwashing. In September 2021, the Advertising Standards Agency also announced that it was going to shine a ‘greater regulatory spotlight’ on green corporate claims, and proceeded to ban an Alpro almond milk advertisement over its claims that it was ‘good for the planet.’ It is interesting to see how different, and often contradictory, approaches to sustainability interact with each other. Almond milk creates fewer emissions than its dairy alternative but is more water intensive; polyester made from recycled plastic bottles reduces plastic waste but is still reliant on fossil fuels. Increasingly, if you want to claim green credentials, you will have to prove you can meet all definitions of green, not just one.
Energy Transition: Teething Problems
The Institutional Investors Group on Climate Change (IIGCC) published an open letter calling for gas to be excluded from the EU taxonomy. The IIGCC, an investor coalition representing €50 trillion assets under management, claimed that ‘there is no remaining carbon budget for new investments in natural gas,’ citing the IEA’s Net Zero by 2050 analysis, which predicted that demand for natural gas will need to shrink by 55% by 2050 for the world to achieve net zero. This debate remains active, with Goldman Sachs’ research team arguing that the inclusion of gas and nuclear in the EU Taxonomy ‘opens the door to more nuanced views’ on what constitutes green.
- Teneo takeaway: A key question, as the EU taxonomy debate rages, is to what extent it will be able to set the international benchmark for such regulations. The UK, which is currently considering its own green taxonomy rules through the Green Technical Advisory Group, will be an interesting case study in whether other governments follow the EU’s lead. Of equal importance is the question of whether this will be enough to deliver the decarbonisation pathway that the UK, Europe and world so desperately needs. Gas is well placed to provide immediate carbon savings in shifting economies away from coal, but will its green status mean investment is diverted away from zero emission technologies?
UK Business secretary Kwasi Kwarteng is continuing his talks with energy companies this week, as the government tries to combat a cost of living crisis. The new energy price cap, due to be announced on 7 February, is forecast to raise average bills by around £700, to £2,000 per household. The crisis, caused mainly by increasing gas prices and exacerbated by a recent drop in UK wind power generation, has led to the collapse of 27 UK energy suppliers - most recently Together Energy. The government is exploring a number of options to shield consumers from price rises, including cutting VAT on domestic energy bills, expanding the Warm Home Discount and creating a commercial lending scheme to spread the cost of suppliers taking customers from bust companies over several years, rather than shouldering it this year alone.
- The government’s short-term priority will simply be to manage the energy crisis and avoid a dramatic increase in energy bills. The 50% increase forecast for bills would have a devastating impact on lower income families, as well as being politically toxic for the Conservative party. Beyond this, it remains to be seen whether this will provide the political impetus for the government to review its approach to energy pricing in general, which experts have argued is in dire need of reform. Dieter Helm, author of the Cost of Energy Review, provides an interesting analysis on what reform is needed in his energy blog.
Looking Ahead: Upcoming ESG Events & Happenings
- United Nations, Economic and Social Council Partnership Forum 2022 (Virtual) – 2 February
- The Economist, Sustainability Week Asia (Virtual) – 14-17 February
- Financial Times, European Financial Forum 2022 (Virtual) – 17 February
- ABI, ABI Annual Conference (London) – 22 February
- Investor Group on Climate Change, IGCC 2022 Summit (Sydney) – 28 February-1 March
- The Economist, 9th Annual World Ocean Summit Virtual Week (Virtual) – 1-4 March
- Financial Times, Climate Capital Live (London) – 8-10 March
- The Economist, Technology for Change Week (Virtual) – 8-11 March
