Take Five: Growing Pains

ESG Investor 12/07/2024

"A selection of the major stories impacting ESG investors, in five easy pieces. 

A new UK government began to face up to some well-established dichotomies for investors.

What price growth? – Less than a week into her new job, UK Chancellor of the Exchequer Rachel Reeves endorsed the Financial Conduct Authority’s (FCA) new listing rules as “a significant first step towards reinvigorating our capital markets”. The rules, informed by Lord Hill’s UK Listings Review, would attract “the most innovative companies” to list in London, she said, thus supporting the new government’s central “growth mission”. Many asset owners see things differently, however, with one leading advocate of investor rights and corporate governance standards feeling “frustrated and disappointed” at the outcome of the lengthy consultation process. Some investors’ concerns centred on a more relaxed approach to dual share class structures, which give company directors of newly listed firms greater voting power than other shareholders – or “flexibility over enhanced voting rights”, as the FCA puts it – but there are also fears about a reduced investor voice on M&A and other key decisions. The regulator’s statement noted the need to arrest a sharp fall in UK listings since 2008, but failed to mention Brexit, the global IPO landscape or the factors contributing to the success of New York – London’s primary listings rival. Given the reforms were in train well before Labour’s 4 July landslide victory, Reeves had little choice but to support them – regardless of her views on the right balance between growth and governance. But she will have much more influence over next Wednesday’s King’s Speech, which is expected to make good on pre-election commitments to audit reform and the International Sustainability Standards Board’s disclosure standards.

Targeting ESG – As you might imagine, we at ESG Investor are far from oblivious to the stream of claims that ESG is a) dead b) broken c) a fad or d) a ‘woke’ plot to undermine Western hegemony. None of this shakes our view that our favourite acronym is a useful, if imperfect, shorthand for factors not captured in traditional accounting and finance that can pose risks to both shareholders and the wider world. But neither are we blind to the need to evolve the tools, methods and assumptions used by investors to identify and act on ESG factors – which is currently an immature endeavour, at best. As such, we welcome new ideas such as the reforms proposed this week on to how to assess firms’ ESG performance in order to escape the “measurement trap” of today’s ratings-led approach. Drawing on their research on green innovation, Professor Lauren Cohen of Harvard Business School and colleagues argue for an unbundling of ‘E’, ‘S’ and ‘G’ to help firms focus on the aspects most relevant to their operations, supported by a sector-based “guided regulatory framework” – with objectives and standards determined by collaboration. This targeted approach, they claim, would result in “a more effective investment ecosystem where each actor can better express and deliver upon specialised preferences and abilities”. The EU has delayed sector-specific disclosure rules under the Corporate Sustainability Reporting Directive, but could a streamlined approach help issuers and investors?

Under pressure – More US-based asset managers decided this week that they would not participate in Climate Action 100+’s (CA100+) phase two, which asks institutional investors to encourage heavy-emitting companies to take action on supply chain CO2 emissions and implement transition plans. That the two Morgan Stanley Investment Management units withdrawing from the coalition should include Calvert Research and Management will raise eyebrows, due to its long-standing position as a pioneer in sustainable investing. US managers which have already resigned or repositioned their CA100+ involvement include BlackRock, State Street Global Advisors, PIMCO and JP Morgan Asset Management – whose parting comments were echoed in Calvert’s assertion that “we are well-positioned to continue to serve our clients through our own engagement initiatives going forward”. Anecdotally, CA100+ members have been put under intense pressure in recent months, with some pointing the finger at those with most to lose from asset managers taking a “more ambitious” approach to addressing climate risks in their portfolios.

You want it darker? – Whether they are actively engaged with carbon-intensive firms or not, many asset owners have struggled to alight on scenario analysis frameworks that offer realistic and reliable readings of climate change’s impact on the value of their equity portfolios. Faced with the many uncertainties involved in bringing high-level impacts down to the asset level, approaches built on traditional finance sector methodologies and assumptions have frequently underwhelmed investors by seemingly underplaying the financial impacts and existential risks that temperature rises pose to society. A paper from Riccardo Rebonato, Scientific Director of the EDHEC-Risk Climate Impact Institute, may provide a more credible – if sobering – alternative. Rebonato employs a fully probabilistic approach to address the uncertainties arising from the physical and economic impacts of climate change – also integrating economic output, transaction costs and physical damages, and incorporating state-dependent discounting. The outputs may cast a shadow, with global equity valuations potentially crashing by 40% if abatement remains at historic rates – even in the absence of tipping points. But at least the EDHEC approach delivers on investors’ desire to bring together the financial and the physical.

Primed – Founder Jeff Bezos’ large stake in Amazon means the firm has rarely had to be too concerned about the outcome of AGM votes on shareholder resolutions, but the retail giant’s management will be keeping a close eye on the ballot box this week. More than 3,000 workers at a warehouse in the UK’s West Midlands are voting for the first time on whether to be represented by a trade union for collective bargaining on rights and pay. The vote is the culmination of a long-running campaign for recognition by the GMB trade union against a firm that has been hostile to collective action by workers globally, and has a history of imposing unsafe conditions on them. Having failed to win resolutions in support of employee rights, institutional investors last month wrote to the firm to express their dismay at anti-union tactics, calling also for a reputable third party to assess the implementation of human rights policies. The result of the ballot will be known on Saturday." 

Copyright ESG Investor

Link

Take Five: Growing Pains