Analysis

ESG Insights: October

With COP26 just around the corner, the focus on ESG communications is front and centre for capital markets audiences. Below we discuss some key themes from Q3 and examples of best practice, as well as some recommendations on how to get your ESG reporting and disclosures right.

Key Themes

1. Corporates raise the bar when it comes to ESG reporting

Environmental, Social and Governance (ESG) metrics have been top of the agenda for the capital markets for a number of years, however the demand for increased transparency and disclosure on sustainable and socially responsible practices is on the up.

Businesses are finding themselves subject to increasing scrutiny and demands from stakeholders for increased accountability when it comes to all things ESG-related. In light of this evolving landscape, we are beginning to see corporate UK raise the bar when it comes to ESG communications, in terms of their purpose, strategic direction and – importantly – ESG disclosures.

Recent results announcements and capital markets events have shone a spotlight on this area of focus, with financial audiences quickly becoming well-versed in what makes for a credible, realistic and – importantly – measurable approach to sustainability.

From a communications perspective, it is still relatively early days for this area of the market, with many companies looking across the market for ‘best practice’ examples. Through our ‘Client in Focus’ feature, we have attempted to share those of our corporate clients who we believe are doing this particularly effectively, with Halma – this month’s chosen example – widely regarded as leading the way when it comes to ESG communications.

They are not alone, however, and many corporates have been developing their own strategies. At the beginning of September, Barratt Developments’ Full Year results announcement revealed an ambitious plan to become the ‘leading national sustainable housebuilder’, with a detailed roadmap to reduce their carbon footprint and LTPP incentive schemes linked to their success in reducing emissions. ASOS’ Capital Markets Event, ‘Fashion with Integrity’, focused on their own roadmap to net zero as well as an increased focus on human rights and transparency within its supply chain, including a focus on ethical trading, sustainable sourcing and animal welfare. Importantly, this strategy was informed by a detailed materiality assessment and contained measurable targets for the near-, medium- and long-term, all of which have been submitted for SBTi validationThe Restaurant Group shared its strengthened ESG Strategy, ‘Preserving The Future’, in its latest Interim Results, which includes playing an active role in developing sector wide plans to reduce emissions and committing to Net Zero carbon emissions by 2035.

Becoming a certified B Corp is another way companies can look to demonstrate their ESG credentials, with Kin + Carta recently announcing they are looking to become the first public company listed on the London Stock Exchange to do so.

Interestingly, some corporates – which had meaningful sustainability strategies already in place – have recently announced accelerated climate action plans, in many cases driven by the latest IPCC report which concluded decisive action was imperative in order for society to avoid the most significant impacts. P&G is one such example, whereby new commitments build on existing climate goals announced just last year, with new net-zero ambitions put in place as well as interim 2030 goals.

 

2. Update on regulatory developments

One of the biggest concerns when it comes to ESG reporting is the myriad of different reporting frameworks, which inevitably makes it harder for both measuring and comparing corporate disclosures in this regard.

However, efforts are being made by different bodies to create more harmony between the various standards and frameworks. The Sustainability Accounting Standards Board (SASB) and the International Integrated Reporting Council (IIRC) completed their merger in June and created the Value Reporting Foundation.

The International Financial Reporting Standards (IFRS) has proposed the creation of a new International Sustainability Standards Board, within the governance structure of the IFRS Foundation. Expectations are that this could be created by November, in time for the COP26, the 26th UN Climate Change summit in Glasgow, Scotland. It is expected to mirror the role the International Accounting Standards Board plays in setting financial reporting standards.

As the UK is to host this year’s ‘Conference of the Parties’, it has been eager to lead the charge on climate risk regulation. The FCA has already introduced the new listing rule which requires companies with a premium listing to include a compliance statement in their annual financial report, stating whether they have made disclosures consistent with the TCFD recommendations, and providing an explanation should they not do so. The first cohort of UK reporters will need to publish their statements in 2022. However, many FTSE 350 companies have already embraced the TCFD recommendations.

The Department for Business, Energy and Industrial Strategy (BEIS) closed its consultation on mandatory climate-related disclosures by publicly quoted companies on 5 May 2021. The consultation proposes that the TCFD disclosure requirements would apply to UK companies with more than 500 employees which are listed or are banking or insurance companies; AIM companies with more than 500 employees; and other companies and LLPs which have more than 500 employees and a turnover in excess of £500 million. Such legislation will likely be introduced later in 2021.

 

3. COP26 and the shadow of corporate greenwashing

COP26 is now just round the corner, with the 26th UN Climate Change Conference taking place in Glasgow between the 1st and 12th November. Whilst the intentions and stated aims of the conference certainly seem noble, there is intense media scrutiny on its participants and underlying concern that COP26 might in fact predominantly be an extensive exercise in national and corporate ‘greenwashing’, the practice of focusing your attention on talking up your green credentials, rather than actually improving them.

In addition to these concerns, there are increasingly loud voices calling for COP26 to be delayed due to the ongoing pandemic and associated vaccine distribution inequality, which will mean many potential participants, particularly those from developing countries, are not able to attend. Perhaps most notable of these voices is Greta Thunberg, who has formally declined to attend for these very reasons. Scottish Greens co-leader Lorna Slater said: “I worry that COP26 will be an exercise in backslapping and greenwashing without anything coming out of it”.

So how do you ensure a corporate ESG strategy is seen as credible, authentic, and not simply greenwashing? This is a question being asked more than ever by companies globally, and whilst there is no quick fix, there are some simple steps we would recommend as a starting point:

  1. Look inward – Focus internally on what your business does and how it operates. From there, build out a corporate purpose which combines elements of good ESG practice. If this comes from the top and is embedded in your culture, the impact of your ESG policies will be much more effective.
  2. Be truthful – Don’t be afraid to say, “we can do better”. No business is perfect, but realising that and communicating accordingly is an important step in the right direction and much better than spending money, time and effort covering up the problem areas with hollow rhetoric, as per ExxonMobil, which spent twice as much on marketing its green credentials than it actually invested in biofuels!
  3. Set targets – Setting targets around ESG can be daunting, especially for businesses that haven’t done it before. Now, more than ever, these targets need to come with clearly defined timeframes and methodologies. A vague promise to reach net zero by 2050 by a board which will be long departed by then carries less and less weight these days. So, focus on the targets that are achievable, set clearly defined milestones to track progress and clearly outline how these targets can and will be achieved.

Consider COP26 as a springboard from which to rethink your company’s approach to ESG; are you flowing downriver with the greenwashers or making real progress?

Recommendations

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 – we have collated some common actions corporates should consider with regards to their ESG strategies:

  • Really integrate ESG into your wider corporate strategy and show how it is central to long term value creation, rather than having separate sustainability teams and strategies
  • Have senior executives lead on ESG to show you are taking it seriously, with remuneration linked to specific ESG targets if possible
  • Be honest, transparent, and open about progress and treat ESG reporting like financial reporting – don’t just talk about the positive aspects
  • Talk about materiality assessments which underpin your ESG strategy, to show investors that you really understand the material ESG risks and opportunities that matter most to the business
  • Have a long-term focus – aim to create a balance between short-term and long-term items in your regular reporting, and bring communications back to long term objectives

For companies that do ESG really well and authentically, there’s a real opportunity to differentiate themselves and capture attention in what is a busy and competitive investor market.

Client in Focus

Halma is a FTSE-100 global group of life-saving technology companies focused on growing a safer, cleaner, and healthier future. At a time when the media and commentators are increasingly growing weary of so-called ‘purpose-washing’, Halma is notably different. Operating under the guiding hand of its purpose, it is addressing some of the biggest challenges facing people and our planet, from air quality to preventable blindness.

Halma operates in three sectors: safety, environment, and healthcare. Binding its 50 companies together is its purpose: to grow a safer, cleaner, healthier future for everyone, every day. This purpose underscores its sustainable growth model where long-term value for all stakeholders is delivered by a simple formula: Strong growth + sustainable returns + positive impact = long-term sustainable value creation. This formula is brought to life in many ways…

Rising to the challenge of COVID-19

Living its purpose, Halma and its companies rose to the challenge presented by COVID-19 by helping to save lives and protect people around the globe.

At the start of the pandemic, demand for personal protective equipment increased dramatically. Six Halma companies – Apollo, Avire, Crowcon, FFE, Palintest and Texecom – moved swiftly to turn their 3D printing facilities over to the production of much-needed equipment for the NHS, printing tens of thousands of facemasks.

Halma companies also applied their proven technologies to support the fight against COVID-19. One critical area was treating patients with respiratory issues. Halma companies Alicat, Perma Pure, and Maxtec supplied critical ventilator components which ensured the right volume and pressure of oxygen was delivered to patients.

It wasn’t just in the medical sector where Halma companies lived their purpose. In the safety sector BEA, which manufactures automatic door sensors, responded swiftly to customers’ needs by redesigning touchless switches to limit COVID-19 transmission.

Changing lives and livelihoods  

The effects of the pandemic were not equal, with India particularly hard hit. In late 2020 Halma launched Water for Life, a campaign that is helping to build a safe and clean water supply. Its specialised testing kits from Halma water company Palintest have benefitted 8,000 people in the villages of Bhagalpur and Buxar in the state of Bihar in India. Through the campaign, community volunteers from across ten villages are being trained to maintain the water quality and provide 3,000 people with the resources to safely harvest water.

Focusing on the long term

Halma companies’ life-saving technologies have a positive impact on the communities in which they operate with around two thirds of Halma’s revenue contributing towards the broad aims of four United Nations Sustainable Development Goals that are highly aligned with their purpose, products, and services.

With a focus on a sustainable future, there is a continued commitment to reduce the group’s own negative impact combined with growing the business. In this way, Halma believes it can have an increasingly net positive impact on people and the planet, whilst continuing to drive stakeholder value.

A new approach to amplifying its positive impact was announced in Halma’s Annual Report and Accounts 2021. By introducing a Sustainability Framework, it is prioritising three areas (known as Key Sustainability Objectives) that are aligned with Halma’s purpose and most relevant to its companies. They are i) Climate Change ii) Diversity, Equity, and Inclusion and iii) Circular Economy.

These commitments and numerous inspirational case studies showing them in action reflect Halma’s sustainable business model, where purpose drives performance, performance generates profit, and profit grows Halma’s purpose.

Find out more: www.Halma.com

Read their: Annual Reportresults

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:

  • A survey from BNP Paribas reveals that investors are allocating a higher proportion of their portfolios to ESG orientated investments
  • Boardroom ESG expertise leads to better performance on corporate sustainability, according to a joint survey by NN Investment Partners and Glass Lewis
  • Research from the Chartered Institute of Personnel and Development (CIPD) reveals just 13 FTSE 100 companies published their ethnicity pay gap, as MPs debate whether to make such disclosures mandatory
  • Over 50 investors demanded that companies be held to account for their Net Zero commitments, requesting full disclosure on plans to reduce carbon emissions and for the ability for investors to vote on these plans at Company AGMs
  • The FRC publishes the 125 successful signatories to the UK Stewardship Code, citing better integration of stewardship, and ESG factors into investment decision-making
  • UK’s debut green gilt sale receives over £100bn from investors, the highest ever total for a Government bond offer
  • The Bank for International Settlements warns of a Green Bond bubble, stating that “ESG assets valuations may be stretched” and could “signal market overheating”
  • report from Util warns of greenwashing and suggests sustainable funds don’t focus enough on the absolute impact of activities on the environment or society
  • The Competition and Markets Authority has given UK companies until the end of the year to sort out its environmental credentials in an attempt to crack down on greenwashing
  • Climate-focused investment funds are undermining the fight against global warming by routinely engaging in greenwashing, accordingly to Edhec, a French business school
  • A Financial Times article outlines the rise of the Chief Diversity Officer in companies following the murder of George Floyd and Black Lives Matter protests last year