With G7 leaders putting ESG firmly back at the top of the agenda and investor activism getting louder and louder, there has never been a more crucial time to get your approach to ESG right. We have included some key themes from Q2 and best practice examples below, as well as some key recommendations for preparing your business for TCFD reporting.
MANDATORY CLIMATE-CHANGE REPORTING
In December last year, the FCA introduced new rules that required UK premium listed companies to report in line with the Taskforce on Climate-related Financial Disclosures (TCFD), or explain why they have not, making the UK the first country in the world to make TCFD-aligned disclosures mandatory. The rule came into force for accounting periods starting on or after 1 January 2021, so the first reports under these new rules will be published in Spring next year.
Spotlight on: Taskforce on Climate-related Financial Disclosures
The Taskforce on Climate-related Financial Disclosures (TCFD) was launched in 2015 by the Financial Stability Board to develop consistent climate-related financial risk disclosures for use by companies, banks, and investors in providing information to stakeholders. The aim of the TCFD is to increase the amount of reliable information regarding an entity’s exposure to climate-related risks and opportunities, with the overall goal of strengthening the stability of the financial system, create better understanding of climate change risks and to facilitate the transition to a more stable and sustainable economy.
The TCFD recommendations encompass four key pillars:
- Governance – disclosure on the organisation’s governance around climate-related risks and opportunities
- Strategy – disclosure on the actual and potential impacts of climate-related risks and opportunities on the organisation’s businesses, strategy, and financial planning, where such information is material
- Risk Management – disclosure on how the organisation identifies, assesses, and manages climate-related risks
- Metrics and Targets – disclosure on the metrics and targets used to assess and manage relevant climate-related risks and opportunities, where such information is material
Keen to push the green agenda further still, BEIS launched another consultation for potential TCFD take-up by publicly quoted companies, large private companies and LLPs. The consultation period closed on 5 May 2021 and proposed that these disclosures would become mandatory for those entities in scope for accounting periods commencing on or after 6 April 2022. A further consultation period has been launched by the FCA to extend the rules on TCFD disclosures to UK Standard listed companies also.
This progress is great to see; for years, a common complaint from the markets has been the lack of a uniform ESG code, which makes it hard to assess accurately the climate-related risks in various financial instruments. These changes make the UK one of the first in a growing group of countries using internationally accepted standards to enhance the quality of corporate ESG disclosure and enable global comparability.
This move sets a new bar for disclosure and provides companies with an advantage when it comes to attracting capital, which is increasingly flowing towards ESG opportunities and away from corporates with ESG-related risk; a recent study noted that half of recommended assets will be ESG within the next five years.
INVESTOR ACTIVISTS UP THE ANTE
We discussed in the first edition of ESG Insights how investors are increasingly flexing their collective muscle in order to influence corporate behaviour. AGM season has seen this trend accelerate significantly, with activists putting pressure on executive teams across almost every sector.
Executive pay has been a contentious topic across the board. Last month, Morrisons faced the UK’s largest investor rebellion over pay this year as 70% of shareholders rejected its remuneration report; specifically, investors objected to the company stripping out the cost of the Covid-19 crisis from bonus calculations. Just a few days previously 62% of Informa’s shareholders opposed its remuneration report due to concerns over the new executive bonus scheme, with the likes of Aston Martin, Hochschild, Pendragon, Cineworld, Rio Tinto and Foxtons also suffering a backlash over executive pay packets. There are exceptions to the rule, however. In May AstraZeneca found itself in the middle of this debate, with shareholder advisory groups recommending shareholders vote against the company’s pay policy at its upcoming AGM. A number of shareholders pushed back, arguing that CEO Pascal Soriot earned his millions as a result of his track record of value creation and the development of a pivotal Covid-19 vaccine.
Environmental issues continue to be at the forefront of investors agendas, particularly for Big Oil. A virtually unknown activist investor called Engine No. 1 successfully waged a battle to install three directors on the board of Exxon, with the goal of pushing the energy giant to reduce its carbon footprint, whilst 61% of Chevron shareholders voted in favour of an activist proposal from Dutch campaign group Follow This to force the group to cut its carbon emissions. Follow This also called for more ambitious environmental targets from both Royal Dutch Shell and BP at their recent AGMs.
ShareAction, the responsible-investment charity, has been very effective in coordinating different investors to force change at major UK companies, specifically using shareholder motions as a means to compel companies to tackle environmental and social issues. At the beginning of this year, they successfully got Amundi, Man Group and 13 other large investors to file a resolution at HSBC’s May AGM calling for the bank to curtail its financing of fossil fuels. After months of pressure, HSBC eventually put forward its own proposal pledging to overhaul its financing of coal; the shareholders subsequently withdrew their resolution. Barclays was similarly forced to table its own climate proposal at its annual meeting after shareholders targeted it with a resolution, however only 24% of investors supported their cause. Tesco was forced to set healthy food targets after an anti-obesity campaign by the charity ShareAction, with Morrisons being the latest target urged to take similar measures.
The list goes on. A clear conclusion from recent corporate events is that credible activists are receiving growing support from other shareholders, and any company is fair game in a bid to add real value over the long term.
THE IMPORTANCE OF STAKEHOLDER RELATIONSHIPS
Stakeholder considerations are a critical element of corporate ESG responsibilities. The pandemic has highlighted how important good stakeholder relations are to the success of businesses, with recent events making it clear that companies which fail to earn the trust of stakeholders do so at their peril. A notable example of this was Rio Tinto’s destruction of two ancient Aboriginal rock shelters in Western Australia last year, despite the Company being aware of their cultural significance. The incident had terrible ramifications for the Company, destroying trust with local communities and costing the CEO and other senior executives their jobs. Trust is hard fought for but easily lost.
More recently, we have seen Brewdog face very negative media coverage following an open letter to the CEO from a number of former employees, claiming the founders had created a culture of fear within the company. Such damaging allegations can be extremely costly, potentially derailing their plans for an IPO and scuppering efforts to bring institutional shareholders on board. Indeed, some of Brewdog’s 180,000 strong crowdfunding investors have turned against the Company and are deeply concerned by the issues raised. Such allegations can unwittingly place companies in the media spotlight, and can quickly spiral into a crisis if the response isn’t handled well.
And of course, for companies coming to market for the first time, scrutiny will be particularly acute. As seen during the Deliveroo IPO earlier this year, ESG-related concerns can have an impact on valuation and subsequent aftermarket performance.
There is growing pressure on corporates to disclose meaningful metrics around stakeholder engagement. The Investment Association, in its shareholder priorities for 2021, identified four areas as being critical drivers of long-term value, and both stakeholder engagement and diversity were highlighted. Companies are also obliged to include a statement in their Annual Reports explaining how Directors have complied with Section 172 of the Companies Act 2006, promoting the success of the business while paying due regard to a broad range of stakeholder issues.
Here at MHP we’ve been working with a number of clients on some really interesting issues across the whole ESG spectrum.
Taking these into consideration – along with the key themes discussed in this newsletter – there are some common actions corporates should consider with regards to their ESG strategies:
1. Take the time to understand the TCFD and its reporting requirements
- Make this a boardroom issue, who is responsible at the highest level for the development of climate-related disclosures?
- Liaise with key shareholders and other stakeholders to understand their view, and what they want to see within your reporting
- A stakeholder ESG materiality mapping exercise can be very useful in order to quantify the above
2. Engage with shareholders and their ESG teams to understand their views towards your ESG strategy
3. Keep abreast of themes / issues that are in focus for activists across the corporate landscape
4. Set up internal ESG committees that have oversight and report to management
5. Regularly review your ESG strategy to ensure there are no gaps or ‘blind spots’
Client in focus – Speedy Hire
Speedy Hire, the UK’s leading tools, equipment and plant hire services company, has made significant progress ingraining ESG in the Group’s strategy over the past twelve months, leading to it being recognised as an industry leader in ESG by Institutional Shareholder Services (ISS). Not only is the business seeking to reduce its own impact on the environment, it is also playing a critical role in improving the sustainability of construction projects across the country.
It is well recognised that the process of construction emits a large amount of CO2 and in the past two years, we have seen a vast number of contractors, housebuilders and those within the wider construction industry announce plans to reach net zero carbon. The focus is now on how these companies are going to achieve their targets, with rental companies like Speedy key to facilitating the move to greener construction. A key feature of Speedy’s ESG strategy is innovation. It works directly with suppliers to test, develop and bring new sustainable equipment to market, helping to drive already strong customer demand.
Below we take a look at some of the activities Speedy has undertaken recently to cement its leading ESG position over the past year:
- Appointment of an ESG director
Speedy appointed Amelia Woodley as ESG Director in May 2021, who has since been key in driving the Group’s ESG strategy.
Appointing an ESG Director who takes overall responsibility for a company’s ESG strategy can be important in ensuring your targets are sensible and assign accountability for delivery against your ESG commitments. They will report directly to the Board, who take overall responsibility for the ESG strategy.
- ESG Linked Remuneration
15% of Speedy’s management performance-based remuneration will be linked to the achievement of ESG targets.
Linking management remuneration to the achievement of ESG targets is becoming more commonplace, and will only grow in importance for investors over the coming years. Targets can include a reduction in CO2 and an improvement in social value.
- CO2 and Social Value targets
Speedy has committed to reaching net zero carbon emissions before 2050 and during the current financial year will set science-based targets to provide a clearly defined pathway on how it will achieve this.
It also uses the Hact/Simetrica database to assess social value and track improvements.
Companies shouldn’t forget that social value is just as important as carbon reduction within an ESG strategy. While net zero carbon targets can be verified by Science Based Targets, social value doesn’t have a clear verifier, so some companies choose to use the Hact/Simetrica database as a means of assessment, coupled with an internal audit.
- Engagement with Institutional Shareholder Services
Of 57 publicly listed industrial services companies analysed, ISS found Speedy to have the top performing ESG strategy, giving the Group ‘prime’ status.
External groups such as ISS analyse and provide independent ratings on a company’s ESG credentials, look at factors such as carbon emissions, waste management and their impact on society. A prime status is given to those with strong ESG metrics which score above a sector-specific threshold. Such recognised accreditation can help to signpost ESG leadership to investors.
- Capex and revenue relating to ESG
50% of Speedy’s capex planned for this year is geared towards sustainable products. 25% of revenue already comes from sustainable products.
Disclosing how much capex you are pledging to ESG related activities is a clear statement of intent that a company is taking ESG seriously. Similarly, disclosing how much revenue comes from more sustainable products or services demonstrates that ESG is also an opportunity for your business.
INTERESTING DEVELOPMENTS OVER THE QUARTER
Over the last three months, there have been some wider developments that are worth being aware of, as well as some specific events within the ESG calendar which you may want to get involved with:
- The FRC published a report in June which highlighted the need for ESG reporting to be developed using a common conceptual framework
- Over the past five months, investors have poured $54bn in to ESG bond funds, even as concerns over potential “greenwashing” have escalated
- New Morningstar data has shown that 50% of European passive funds are likely to be branded ESG by 2025
- Europe’s first actively managed, sustainable exchange-traded fund with a carbon offset is to be launched by Saturna Capital and HANetf on the London Stock Exchange in July
- Institutional investors view greenwashing – where an organisation presents itself as more environmentally friendly than it actually is – as their top concern as they attempt to integrate ESG factors into investment decisions, according to a study from Schroders
- The Bank of England said in May that it would shift purchases toward companies doing the most to fight climate change and in June launched a climate stress test for banks and insurers
- Bitcoin is responding to investors ESG concerns – Europe’s largest bitcoin ETP has pledged to being carbon neutral by funding renewable energy projects to offset all bitcoin-related emissions
- PwC’s executive survey from their ESG Revolution Report in June found that “lack of attention or support from leadership” ranked high on the list of barriers to ESG effectiveness