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Teneo UK ESG Insights 2.10.22

February 10, 2022
By Edward Bottomley

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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.

Missed Opportunities

The UK government’s long awaited Levelling Up White Paper was published last Wednesday, outlining twelve levelling up ‘missions’ for the government to complete before 2030 across areas such as education, transport and housing. The aim, according to Levelling Up Secretary Michael Gove, is to ‘drive real change in towns and cities across the UK, so that where you live will no longer determine how far you can go’, but many groups have expressed disappointment at the lack of information on net zero and green jobs. WWF’s executive director of advocacy and campaigns, Katie White, argued that ‘If this Government wants its promise to create meaningful opportunities for communities across the UK to be taken seriously, then climate and nature goals must be front and centre of both public and private investment to level up the UK.’

  • Teneo takeaway: This is not the first time the government’s green ambitions have come into question; no fewer than three legal challenges have been launched against its net zero strategy since it was released last October. By failing again to properly address net zero policies in this white paper, the government is minimizing the central role decarbonisation will play in every part of our future. As we move towards the 2050 net zero target, it is essential that we prepare by investing in green industries across the UK. New ways of living and working will require new skills, with green jobs providing an opportunity for regional economies to thrive. Although it is encouraging that devolution will be greatly increased as part of the levelling up strategy, it is not yet clear what powers local authorities will be granted and how this will tie in with climate objectives. In any case, this does not negate the need for thorough, well-communicated net zero measures from Westminster, which should be woven into every decision as we approach significant climate milestones.

ESG Boom and Rising Scrutiny

A report by NewClimate Institute and Carbon Market Watch has revealed that some of the world’s largest companies are failing to take the actions required to live up to their net zero emissions targets. The Climate Corporate Responsibility Monitor report examined 25 of the world's largest corporations who are collectively responsible for 5% of global greenhouse gas emissions. They were found to have unsatisfactory targets which will lead to them cutting emissions by an average of only 40%. They were called out for their ‘over-use’ of carbon offsetting, with Thomas Day of NewClimate Institute recommending that ‘Companies should not be claiming they are net zero by 2030 unless they are reducing their emissions by 90% by then.’

  • Teneo takeaway: This shines a spotlight on a debate which has been building over the past few months about the value of carbon offsetting, a practice which has been soaring in popularity. As companies decide whether to utilise offsetting, it is vital for them to consider the quality of those offsets as well as the ethical implications. The argument goes that businesses in high impact industries will latch onto this trend and use offsetting as a way to continue business as usual. However, the issue is not black and white. Abrupt strategic transformations are in many cases not practically or technologically possible (who actually wants to see what happens if gas is turned off tomorrow?) and in some sectors, emissions reductions can only carry companies so far. Offsetting offers a last-resort solution for companies as they tackle the emissions which they have otherwise been unable to counteract. It can therefore be a useful device, but only when a responsible approach is taken. Offsetting is never a feasible alternative to real action.

The Science Based Targets initiative (SBTi), a leading adviser to more than 2,000 private sector companies globally, is making changes in light of criticism of its governance. Bill Baue, a member of the SBTi’s Technical Advisory Group, first complained in February 2021 about the ‘apparent technical shortcomings and governance lapses’ at the SBTi, following up this month to point out that these have still not been resolved. In his original letter of complaint, Baue noted that the SBTi ‘limit[s] its recommendations to only two methodologies, both of which happen to have been created by SBTi partners’, and that this had led to ‘conflicts of interest’. The SBTi is due to announce reforms this year to ensure better oversight of these processes.

  • Teneo takeaway: This scrutiny of SBTi governance structures is interesting in the wider context of an ESG boom, with businesses rushing to bring in targets after making commitments at COP26. The SBTi is still a very new organisation, having been formed in 2015 at the outset of the Paris Agreement, and the widespread concern about ESG has only recently exploded. However, expectations are already high. Organisations which let standards drop are increasingly being held to account, even – or especially – if they are the ones setting the standards. Just last week, the US Securities and Exchange Commission cautioned credit ratings agencies about potential conflicts of interest as they navigate their way through the ESG space. The SBTi’s influential position will mean its adoption of mitigating measures will set an example for other organisations as demand for science-based targets continues to grow.

Reducing Investor Risks

A new report has been published on ‘responsible corporate political engagement’ by The Principles for Responsible Investment (PRI), a UN-supported organisation which has set standards that are adhered to by investors around the world. The report acknowledges that companies often take part in political engagement in a range of forms, for example lobbying, funding thinktanks and influencing the public via social media campaigns. Although the PRI has so far recorded ‘limited’ involvement from investors in corporate political engagement, it explains that they must ‘understand the intended objectives, processes and outcomes of investees’ political engagement to determine the extent to which they align with their long-term interests and shared societal needs.’ The PRI has said that it will issue further stewardship guidance for investors over the course of the year.

  • Teneo takeaway: While the PRI has covered climate lobbying in the past, this is the first time it has offered comprehensive guidance on the topic of responsible corporate political engagement. This coincides with a marked shift in the way investors have been interacting with companies since COP26, with more focus being placed on investors’ responsibilities. Investors have started to take a stronger stance on ESG risks and have shown that they have the power to influence companies’ positions. We have seen evidence of this in the cases of JP Morgan, which is facing petitions from investors over its fossil fuel engagements, and ExxonMobil, which added new board members after pleas from investors. It is likely we will see additional regulations in future as tolerance for companies’ poor ESG practices weakens.

A consultation on ESG ratings has been launched by the European Securities and Markets Authority (ESMA) amid concerns about a lack of regulation within the ratings industry. The ‘Call for Evidence’ will allow the regulator to collect information about the management of data and ratings by providers in the EU. The evidence will be presented later this year to the European Commission, which is investigating ESG ratings as part of its newly introduced Sustainable Finance Strategy. The ESMA had previously warned of the risks of an unregulated market as investor interest in ESG issues surges.

  • Teneo takeaway: ESG ratings providers are not generally subject to regulatory oversight, despite wielding enormous influence over investment allocation decisions. This problem has been climbing up regulators’ agendas as companies are held to greater account over greenwashing claims, with India becoming the first country to propose regulation last month. It is expected that the UK’s Financial Conduct Authority (FCA) will follow suit, after it announced last year that it was preparing to set out a regulatory position on ESG ratings in 2022. We can anticipate much more movement in this area from regulators across the globe as ESG ratings become a fundamental part of companies’ investor relationships.

Looking Ahead: Upcoming ESG Events & Happenings

The views and opinions in these articles are solely of the authors and do not necessarily reflect those of Teneo. They are offered to stimulate thought and discussion and not as legal, financial, accounting, tax or other professional advice or counsel.

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