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Issue #102: A weekly update on responsible investment.
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\\ Weekly Insights \\

If there is one article to read this week to get a critical ESG industry progress pulse, it is this interview between two ESG pioneers, Jean Rogers, founder of the Sustainability Accounting Standards Board (SASB) and, [recent] global head of ESG at Blackstone; and Robert Eccles, founding chairman of SASB, professor of management practice at Oxford and a founder of the International Integrated Reporting Council (IIRC) on their thoughts on the COP announcement to form International Sustainability Standards Board (ISSB).

What happened: In Glasgow the IFRS Foundation (the group that made international accounting standards) announced the formation of the new board, an organisation meant to develop a global baseline of sustainability disclosures for financial markets.

Rogers and Eccles shared their thoughts on this change. I have summarised some key points below:

What is most exciting about ISSB?

Bob Eccles: Financial accounting standards and reporting requirements have created the deep and liquid capital markets we have today which have generated substantial wealth. But the information shaping these markets is now too narrow and too short-term for the capital markets to contribute to a sustainable society. Resource allocation decisions by companies and investors need to change, and the standards developed by the ISSB will give both the information they need to do so.

The IFRS Foundation said it will complete consolidation of the Climate Disclosure Standards Board (CDSB) and the Value Reporting Foundation (VRF) by June. Will this help the mission?

Jean Rogers: What’s important are the learnings, not the work products, which were developed for different markets and purposes.

Eccles: The consolidation of the CDSB and the VRF into the ISSB means that we won’t be starting with a clean sheet. CDSB and VRF bring valuable intellectual property, great human capital and budget dollars (especially from the VRF).

What does ISSB offer beyond SASB?

Rogers: SASB was developed as a U.S. standard focused on an arcane and specific definition of materiality. The SASB standards are not fit for purpose for use in global markets and are a nightmare for a regulator that would have to develop the capacity to enforce across 80 or so industries. It’s not possible, even for the SEC.

Any areas of concern?

Eccles: My first concern is whether the EU will support the ISSB, or just focus on its taxonomy and Corporate Sustainability Reporting Directive (CSRD). The big issue here is their framing of “double materiality.” I have no problem with the EU asking companies to provide information that meets the needs of all stakeholders, but I see no rational reason why jurisdictions wanting to protect investors wouldn’t seek to achieve a global baseline of consistent standards.

Will these standards make any difference or is it more “blah, blah, blah?”

Rogers: At the end of the day, ISSB is another voluntary standards setter with no enforcement capabilities. So, they must have buy-in from the regulators overseeing the markets they serve. The EU has enforcement capability.

Eccles: Mandated reporting according to a set of standards is not a silver bullet. Corporate form that establishes the role of companies in society is also important. Climate- and ESG-competent boards are essential, as is executive compensation tied to targets. With standards, it will be possible.

This was a widely celebrated announcement. Is it fair it can make an impact?

Rogers: The opportunity for ISSB is not to achieve global standardisation, but to align global markets around an approach to sustainability standards setting and core principles, while allowing for jurisdictional differences in implementation.

Is there anything ISSB can help solve that hasn’t yet gotten enough recognition?

Eccles: The ISSB needs to pay as much attention to social issues as environmental ones. Climate change and income inequality are destabilising system-level issues that will make it hard for universal owners to earn the returns they need for their ultimate beneficiaries.

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\\ Top Stories \\

FTSE 100 CEO pay drops as investors flex muscle during pandemic
An analysis of annual reports by PwC has also shown that many more companies are now involving environment, social or corporate governance criteria in their pay policies. Median total remuneration for FTSE 100 chief executives dropped 9 per cent in the 2021 financial year to £2.9m. Almost a third of CEOs received no bonus, either as a result of not meeting targets, or the bonus being cancelled or waived. This was twice the number that did not get a bonus in 2020. Executives have warned that the trend towards lower pay could harm the ability of listed companies to recruit the most talented people, given higher rewards among privately owned businesses and those offered by companies in overseas markets such as the US. Companies backed by private equity also do not face public shareholder battles over remuneration, which have become increasingly common as investors have sought to stop executives from profiting during a difficult time for most workers.
Financial Times.

To B Or Not To B? Why Food And Drink Companies Are Embracing B Corp Status
Becoming a B Corp isn’t exactly the same as winning an Oscar, but it’s a distinction that more F&B companies are pursuing — and pointing to. Companies go through a fairly elaborate evaluation, hoping for independent recognition of good practices ranging from workplace to environment to community. Only one in three companies scores high enough to be approved, according to B Lab, which certifies companies. Companies pay $150 to submit a B Impact Assessment and fees on a sliding scale for annual certifications, from $1,000 for companies with up to $150,000 sales, to $50,000 for sales up to $999.9 million.

Busting sustainable finance myths: Why Tariq Fancy is only half right on ESG
Telling people that where they park their retirement savings is going to help save the world (it won’t) distracts them from doing things that will save the world.
Rebuttal: Having a green pension is 21x more effective at cutting our carbon footprints than stopping flying, going vegetarian and switching energy provider, combined. Much of the UK’s £2.6 trillion of pensions is being invested in fossil fuels, tobacco, the destruction of the Amazon rainforest, and other dirty business. Clearly, moving our pensions to greener providers will be impactful. Pension funds, as institutional investors, automatically have a long-term perspective on how they invest. It therefore makes a lot of sense for institutional investors to take ESG seriously, as a fiduciary duty.
Read the rest of the myth busting in FInExtra.

A Church’s Ethical Investing Mission Gets a Reality Check
For almost a decade, the church has tried to use its influence to improve the safety, environmental, and human-rights records of the world’s mining industry. It is well positioned to do so. Some of the world’s biggest mining companies have roots in a British colonial empire that once dominated the world’s natural resources. Today, four mining giants — Rio Tinto, Glencore, BHP Group, and Anglo American — make up almost 9% of the market value of the FTSE 100 Index of the most valuable companies trading on the London Stock Exchange, among the most significant weightings of any industry. Have they had enough of an impact? This article influences the church’s history within the mining industry.


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\\ Paper AND Report Highlight \\

ESG Hyperboles and Reality [Paper]
George Serafeim: Harvard Business School.

ESG has rapidly become a household name leading to both confusion about what it means and creating unrealistic expectations about its effects. In this paper, the author uses more than a decade of research to dispel several myths about ESG and provide answers to important questions around theories of influence, the relation between ESG and corporate value, and the usefulness of ESG assessments and ratings.

Read the paper.

The Corporate ESG Guide: The ESG Landscape and Economies in Transition

Investor Update

Note: I love Investor Update’s reports and highly recommend corporate ESG teams dig into this piece further.

What are 3 of their key findings

  1. There is a lack of clear transition pathways for some key sectors, which is deterring some corporates from setting specific climate targets. This, combined with a misalignment of incentives within corporate leadership, is creating a conflict between long-term climate considerations and short-term market pressures.
  2. Investors face a similarly conflicted challenge in reconciling the implications of decarbonisation commitments and their duty to deliver investment returns.
  3. The lack of common understanding around key ESG concepts is a persistent obstacle to their measurement and application in investment decision-making, compounded by ESG-linked investment products considering divergent aspects of ESG performance and data.

How has ESG become a driver in terms of cost of capital?

  • A rise in the cost of capital for companies that fall short of investors’ expectations around ESG is now widely observed with the reverse equally evident and prominent in equity and bond valuations.
  • A group of stakeholders highlighted that this superficially efficient market outcome is in fact proving counter-productive by marginalising companies with credible transition strategies and meaningful emission reduction commitments that require investor support in order to execute those plans.
  • More positively, corporates that can demonstrate a differentiated ESG performance are benefitting from increased capital sponsorship, accelerating the transition to a decarbonised industrial world.

What developments have been observed recently?

  • Governments and regulators are increasing the pressure to decarbonise on the private sector
  • Large asset managers are increasingly phasing out their investments in fossil fuels and intensifying engagement efforts
  • There is still significant room for improvement — according to ShareAction, over 50% of investors have a flawed approach to ESG, including engagement on ESG issues ESG data continues to be a challenge, underminding the effectiveness of the investment process
  • The EU is advancing its sustainable finance framework, with an increasing focus on sustainability reporting and corporate governance
  • The voluntary standard space is in continuous development, with the IFRS sustainability reporting initiative enjoying significant support
  • Many corporates are ill-prepared for the change: less than 30% of CEOs are concerned about climate change, the boards are lacking ESG expertise and over 80% of corporates’ strategies are not Paris-aligned
  • Investors’ demands for ESG data coverage and quality continues to grow

Download the full paper here.

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