New activities under the EU Taxonomy’s environmental objectives (aside from climate mitigation and adaptation) led to improvements for the environmental scores of a few entities this quarter, Sustainable Fitch has said, showcasing the ability of ESG scores to account for changes in the external classification environment. The data provider published its ESG Scores for Leveraged Finance Quarterly Briefing – Q2 2024, reviewing the scores of 250 entities and evaluating 100 new ones. Around 8% of assessed entities had material score changes in at least one category among E, S, or G in Q2, compared to 5% in Q1. Improvements were most notable for activities linked to the circular economy, such as online marketplaces for second-hand goods, paper packaging, and scrap metal management. Sustainable Fitch said it expected this trend to continue in Q3. Across the entire portfolio, average governance scores (63 out of 100) remained in the ‘good’ score category, followed by social scores (55) and environmental scores (37) – with averages unchanged from the previous quarter. European entities performed slightly better than peers in North America, with each category being scored two to three points higher. The North America universe of entities is more concentrated in industries with bigger negative environmental impacts – such as energy, utilities and mining – and social impacts such as fast food and gaming. Such a composition of issuers could drive down the performance of North American collateralised loan obligations (CLOs), which are still outperformed by their European counterparts. Composition changes have also impacted ESG scores at the CLO-level, with the removal of assets related to air travel, automobiles, fossil fuel utilities, having had a positive impact – while the addition of gambling-related assets and the removal of healthcare and telecommunications ones having negatively impacted CLO social performance.
Sustainable Investor
News in Brief
Policymakers should attempt to bring asset owners and managers together to galvanise investment in clean energy and natural capital, according to the Investment Association (IA). In a new report entitled ‘Financing Transition’, the UK asset management industry body laid out a raft of actions the government can take to attract more finance to green technologies. Better communication and alignment of goals between the ultimate owners of assets, like pension and sovereign wealth funds, and the groups that manage their investments, must be central to this effort, the IA said. The report also urged policymakers to adopt sustainability standards like the International Sustainability Standards Board (ISSB), design clear transition plans, improve public-private cooperation, and improve standards for scenario analysis. The report comes a month after Labour won a landslide victory in the UK general election on a more ambitious climate platform than that of the previous Conservative government. Labour’s plan includes mobilising more pension money to fund the green transition. “Our latest report underscores the UK investment management industry’s commitment to the goals set out in the Paris Agreement and the importance of clearly communicating the work our industry is doing to unlock the significant capital needed to support the green transition,” said Paul Scaping, Public Policy Specialist at the IA. Long-term risks and opportunities associated with climate change and other sustainability issues are central to investors’ fiduciary duty, he said.
Environmental and social-related stewardship could be more successful if shareholder advocacy focused on real-world impacts, as opposed to pledges and reports. A new paper published by NYU Stern Center for Business and Human Rights noted that “a company tossing a bone to [shareholder] activists by agreeing to a tepid report, or a non-binding pledge should not be confused with a company agreeing to meaningful operational change”. Investors should instead capitalise on broader social currents, compounding pressure from the media and civil society to translate shifting sentiment into meaningful corporate action, the report suggested. In addition, investors should look to support new sustainability laws and engage with policymakers and companies to fill the gaps. Large financial institutions must continue to engage quietly, NYU Stern said – ideally in powerful coalitions that target broad economic sectors – and also closely scrutinise company director-based strategies on their ESG-related credentials and ambition. Meanwhile, it’s important that asset managers build their ESG-related funds around a specific stewardship strategy. “Stewardship, as currently practiced, rarely changes business models,” said Michael Goldhaber, report author and Senior Research Scholar at NYU Stern. “But shareholder advocates can succeed when they work in tandem with other change agents to shape corporate behaviour over time. Their most valuable role is to translate shifting social sentiment into real-world change.”
The California State Teachers’ Retirement System (CalSTRS) increased its focus on climate risk disclosure during the 2024 proxy season, voting against boards of directors at a record 2,258 companies – up from 2,035 in 2023. The world’s largest educator-only pension fund voted at more than 10,000 global company meetings, on over 100,000 individual ballot items and 1,200 shareholder proposals – covering topics such as human capital management (including workforce and employee wellness), board governance, and climate-related risks. The pension fund has set out a number of expectations for portfolio companies to effectively manage climate-related risks and opportunities, including: publishing a report on sustainability-related disclosures that align with the International Financial Reporting Standards; disclosing Scope 1 and Scope 2 greenhouse gas (GHG) emissions; and for the highest global emitting companies – including those on the Climate Action 100+ focus list – to set appropriate targets to reduce GHG emissions and reach net zero by 2050. “At CalSTRS, we need consistent, accurate and comparable data from all companies in our portfolio to mitigate risk and accurately measure and reduce emissions,” said Aeisha Mastagni, Senior Portfolio Manager on CalSTRS’ Sustainable Investment and Stewardship Strategies team. “We will continue to use our voice alongside fellow institutional investors to hold companies accountable for climate-related disclosures.” Despite inconsistent levels of climate data disclosure, there was considerable improvement in methane emissions reporting from portfolio companies, CalSTRS said. The pension fund has been calling on eligible companies to join the Oil and Gas Methane Partnership 2.0 (OGMP 2.0) – a UN-led framework committed to the measurement, reporting and mitigation of methane emissions. As a result of CalSTRS-led engagements, ten companies have joined the OGMP 2.0, including ExxonMobil, Chevron, Harbour Energy, OMV and Vital Energy. The International Energy Agency estimates 30% of methane emissions from fossil fuel operations can be abated with no net cost.
Geopolitical confrontation is the top concern for large global investors, coming just ahead of climate change, a study by the Thinking Ahead Institute has found. The survey asked 26 global investors with around US$6 trillion in collective assets under management their views on a range of systemic threats. Geopolitical confrontation was number one, named by 84% of respondents as a threat, while climate change came second, with 72% concerned about escalation. Polarisation and the erosion of social cohesion were also named as major risks by 42% in the survey, which was conducted in partnership with Australia’s sovereign wealth fund, the Future Fund. Overall, 88% of respondents said they expected systemic risks to grow in incidence and size, while 73% said managing complexity was a top challenge. “There is a rocky road ahead for asset owners,” said Roger Urwin, Co-founder of the Thinking Ahead Institute. “All investors should prepare for a bumpier ride by building more resilience into their organisation – thinking ahead, more agile organisational design, better culture and stronger risk frameworks will all play their part.” The survey also found 38% considered artificial intelligence as integral to their future strategy, while 65% said attracting and retaining talent was a top issue.
Although investors still show appetite for the adoption of ESG principles, global macroeconomic and political upheaval has been distracting them from pursuing long-term sustainability. HSBC’s seventh ‘ESG Sentiment Survey’ collated the views of 150 financial institutions collectively representing US$6.7 trillion in assets, displaying results that sent “blurry signals”. Where ESG does not form an integral part of the investment process, the momentum has been lost, the report noted. “For those where ESG is an important framework, the refinement process is now well underway – for example, the reasons for doing ESG weakened across the board, but sustainability remains partly as an objective across many funds,” HSBC noted. Regional perspectives also diverge. Asia-based investors, for example, believe they are the main driver of sustainability compared to governments and businesses across the region. Respondents also highlighted climate adaptation and social issues as ongoing challenges for ESG-related investing. On adaptation, a third of respondents said they were actively considering the resilience of their investments and looking at technological solutions for adaptation. Fewer said they were either not interested in adaptation or did not look at it because investment returns were “less tangible”. On social issues, just under three-tenths said they did not consider social issues explicitly, with the majority looking at related themes from different angles – some considering it on a global basis uniformly, and others on a regional or country basis. “A small segment of respondents was working on social frameworks, whereas others found it challenging to do so,” the report added.
Investor Communications Japan (ICJ), a joint venture by global Fintech firm Broadridge Financial Solutions and the Tokyo Stock Exchange, has launched ESG Access, a solution enabling Japanese corporate issuers to assess their performance across environmental, community, employee and governance issues. The tool utilises an algorithm to convert more 300 million data points into a single rating. This includes aggregating more than 800 sources, including ESG or socially responsible investment analysis firms, government databases, publications and research reports – every month across 148 countries covering 30,000 companies. The service offers efficiencies to clients by removing the need for the time-consuming work of collecting and analysing data from dozens of rating agencies, tracking it over the years and allowing clients to strategically focus on improving their ratings. “This service provides Japanese corporate issuers with greater transparency and understanding of their ESG scores, enabling them to improve and pinpoint ways to boost their ratings and standing in the marketplace,” said Demi Derem, Senior Vice President of Investor Communications Solution at Broadridge. “Better understanding their ESG profile and how it can be improved will enable companies to strengthen relations with their stakeholders, including investors, suppliers, employees, board members and others.”
The Singapore government has joined forces with non-profit emissions trading group the IETA to create a platform aimed at helping companies acquire carbon credits under Article 6 of the Paris Agreement. The Singapore Carbon Market Alliance (SCMA) will be an invitation-only group that connects Singapore-based companies with suppliers of credits. Article 6 of the Paris Agreement sets out the rules by which countries can outsource some of their emissions reduction to other jurisdictions. It creates flexibility over where a country’s emissions reduction occur, while also providing climate finance to poorer nations. The initiative was launched by Singapore’s Senior Minister of State, Ministry of Trade and Industry, Low Yen Ling, at the Bloomberg Sustainable Business Summit. It will be run by the Singapore government agency, the Economic Development Board (EDB). “The SCMA will be a key platform for connection, knowledge-building and discussion around Article 6 credits,” said Jacqueline Poh, Managing Director of the EDB. “High-quality carbon credits can unlock climate financing and offer a complementary pathway for companies and countries, including Singapore, to meet climate goals,” she said. Dirk Forrister, CEO of the IETA (formerly known as the International Emissions Trading Association) said: “Achieving the Paris Agreement goals requires international collaboration and Singapore’s position as a major global hub makes it an excellent candidate to drive forward the development of a truly international carbon market.”
The new UK Labour government has announced a review of the Environmental Improvement Plan (EIP), to be completed by year-end to deliver legally binding targets to save nature. As part of the review, the government will develop a new statutory plan to protect and restore the natural environment, focusing on cleaning up waterways, reducing waste across the economy, planting more trees, improving air quality and halting the decline in species by 2030. The review will engage with stakeholders across the environment and nature, farming, resources, waste and water sectors, working hand-in-hand with businesses, local authorities and civil society across the country to develop ambitious targets. “Nature is dying. Britain is one of the most nature-depleted countries in the world. Our animal species face extinction. Our precious landscapes are in decline. Our rivers, lakes and seas are awash with sewage … and air pollution continues to plague our towns and cities,” said UK Secretary of State for the Environment, Food and Rural Affairs Steve Reed. “Nature underpins everything – the economy, food, health and society – but we stand at a moment in history when nature needs us to defend it. That is why today we begin to chart a new course.” The announcement came as the government published its Environmental Improvement Plan Annual Progress Report – the first revision to a 25-year environment plan – showing the “dire state” of the UK natural environment and demonstrated the need for accelerated action. The all-species indicator showed an overall decline to around 69% of its starting value in 1970, with 16% of species threatened with extinction. Beach litter remains abundant on UK coastlines, with plastic items constituting over 88% of the total litter collected. The government said it was committed to improving the environment, with five new priorities set out for this parliament: cleaning up rivers, lakes and seas; creating a roadmap to move the UK to a zero-waste economy; boosting food security; ensuring nature’s recovery; and protecting communities from the dangers of flooding.
Almost 90 global investors with more than US$2.3 trillion in collective assets have co-filed a petition calling on the Securities and Exchange Commission (SEC) to ensure greater tax transparency from US-listed companies. The petition recommends that such companies be required to publish basic tax and other financial information for each country in which they operate – this is formally known as country-by-country reporting (CbCR). CbCR has been introduced in other jurisdictions, such as the EU. “When multinational companies gamble on risky tax-planning strategies, it’s their investors who ultimately pay the price,” said Ian Gary, Executive Director of the FACT Coalition, which coordinated the filing. Signatories pointed to the reputational and legal risks surrounding ongoing high-profile transfer pricing cases against some of the country’s most powerful companies – Apple, Microsoft and Coca Cola – and how this has spurred a wave of direct, company-level advocacy from investors. “The SEC must act to give investors the information they need to determine whether these companies are building sustainable, long-term earnings based on genuine competitive advantage, or prioritising short-term profits through aggressive tax avoidance,” said Gary. There have been other investor-led efforts to improve multinational tax transparency, including new accounting rules which were completed last year by the US Financial Accounting Standards Board (FASB). “As headquarters to the most major multinational corporations, and as a market for thousands more, the US has an opportunity to lead a sea change in global tax transparency,” said FACT Policy Director Zorka Milin. Signatories of the petition include the Office of the New York City Comptroller, Boston Common Asset Management and the Local Authority Pension Fund Forum.
