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Teneo UK ESG Insights 3.25.22

March 25, 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.

EU Member States Agree to Impose Carbon Tax

European Union member states have reached an agreement on a proposed carbon tax. The agreement will impose a carbon dioxide emissions tariff, known as the carbon border adjustment mechanism, on imports of polluting goods that do not meet EU climate production standards. The approach will be phased in from 2023 to 2026 and will target high-carbon leakage risks such as steel, iron, cement, fertilizers, aluminium and electricity production. Several groups have been ardently campaigning for the carbon tax since 2017 and the decision follows a proposal by the EU Commission in July 2021 for a carbon border adjustment mechanism (CBAM). The system is a key part of the European Union’s Fit for 55 package and will function in parallel with the EU’s Emissions Trading System. It aims to protect Europe’s emissions ambitions and protect European industries from being undermined by producers in nations with lower environmental standards which can produce products at a lower cost.

  • Teneo takeaway: This announcement marks a significant point of collaboration between EU member states and is a critical step in the bloc’s decarbonisation agenda. The agreement is a vital enabler for businesses, ensuring that they are not put at a competitive disadvantage while attempting to reduce the impact of their products and operations.

SEC's Climate Disclosure Proposals

On Tuesday, commissioners at the US Securities and Exchange Commission (SEC) announced a number of draft rulings on emissions disclosures. First, a draft rule under which companies would be required to disclose their own direct and indirect greenhouse gas emissions, known as Scope 1 and Scope 2 emissions. In addition, companies with a market value of $700 million or more would be required to disclose their Scope 3 emissions from 2024, with the market cap threshold reducing to $250 million from 2025. A “safe harbour for liability for Scope 3 emissions disclosure” is also included, due to the concerns from larger companies in the consultation process that this could leave them vulnerable to lawsuits if reported information is found to be incorrect – as Scope 3 emissions are considerably harder to calculate.

  • Teneo takeaway: The rulings have been a long time coming from the US, as President Joe Biden pushes to join global efforts to avert climate-related catastrophes. This follows the lead from the UK, as next month, the biggest companies trading on the London Stock Exchange will start reporting their climate-related disclosures- according to the requirements of the Taskforce on Climate-Related Financial Disclosures- for the first time, putting the UK on track to be the first of the G20 countries to make such disclosures mandatory. Despite the SEC ruling in the US, pushback is expected from Republicans who argue that the rulings will increase costs for companies.

"Start of the Asset Management World"

Once a niche sub-section of all businesses, in the last 18-months the ESG and sustainability industry has become the central focus for investors – and by extension recruiters – as assets in sustainable funds grew 53% year on year to $2.74tn in 2021. However, the relatively sudden boom of this industry means that real expertise is scarce, which has led to fierce competition and bidding wars to secure the very best talent. Research from the CFA found that less than 1% of the 1m investment professionals included in the study listed ESG skills on their profile, highlighting a significant mismatch in supply and demand. Mark Vesey, Chief Executive of Aviva Investors stated that ESG professionals are the new “stars of the asset management world” as funds are desperate to not only attract talent but also retain their existing ESG employees. This means that they are pushing salaries up by half for the top hires, and even looking outside the investment industry towards Big Four consultancies, Government departments and NGOs to find experts.

  • Teneo takeaway: This fierce competition for ESG talent indicates just how serious investors are and are becoming about sustainability practices and meeting industry-wide climate targets. While it may be argued that this is little more than a trend that is set to die out in a few years, the University of Oxford’s Robert Eccles has argued that “It wasn’t so long ago that ESG was considered philanthropy and a way to lose money”. However it has since proven itself to becoming one of the most significant areas in investment management as analysts predict assets to exceed $53tn by 2025, representing over a third of global AUM. Funds are ready to heavily compensate ESG experts as they know their value, and young people flocking to the industry know how valuable they can be.

Pension Funds Take Action on Deforestation

The UK Government has announced that it is working with pension funds to help them end their involvement in deforestation. In a recent article, Guy Opperman, Minister for Pensions, and Lord Goldsmith, Minister for the Pacific and the International Environment, outlined the actions the Government is taking to ‘put combating climate change at the heart of our pensions.’ As part of this focus on green pensions, the Government will begin ‘reaching out to UK pension funds, to help them further understand deforestation issues and how to manage this risk as effectively as possible’. The article highlights that UK pension schemes have been required to report on climate-related risks since last October, and 81% of occupational pension scheme assets will be assessed by October 2022.

  • Teneo takeaway: This move is part of a wider push by the UK Government towards green finance and marks another step towards increased scrutiny of pensions’ environmental credentials. During COP26, many pension funds committed to reducing activities associated with deforestation and in January 2022, the organisation Make My Money Matter found that pension schemes with ‘credible’ net zero commitments had passed the £1trn mark. In recent months, there has been a general rising interest in the impact of pension investments – for example, in January there were complaints from environmental and animal rights groups when UK councils were found to be investing in factory farming through pension funds. With the public becoming more interested in ESG issues, the Government’s decision to crack down on pension funds’ contributions to deforestation is a sign that it is recognising the environmental, social and financial risks of irresponsible investment. This is something which is being mirrored across other industries as ESG takes a more central role. 

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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