Prime time for sustainable investing reporting is delayed to 2023

admin 11 August 2021 Clean energy investing 0

Reading our coverage of the Intergovernmental Panel on Climate Change’s “hell on earth” climate report Monday, I got the sinking feeling that we have been here before. In 2009, the FT wrote about climate scientists meeting “for a deeply depressing conference” to discuss “the world warming by potentially a calamitous 4C as a result of human activities”.

It is sobering to realise how little the climate action from businesses, banks and investors has moved the needle. Will this report galvanise a greater sense of urgency?

Recent history suggests we cannot be confident of that. What we can expect is more scrutiny of why, for all their net-zero pledges, the business leaders who claim to have prioritised this challenge are not making more of a dent. (Patrick Temple-West)

A debacle at PRI risks emboldening ESG’s doubters

Mark Carney applauded the work of the UN Principles for Responsible Investing in his “Road to Glasgow” speech last February, teeing up this November’s COP26 climate meeting. Gary Gensler, the US Securities and Exchange Commission chair, chose PRI as the venue to unveil his climate change reporting proposals in July.

Launched in 2006 by the late Kofi Annan (pictured), UN-supported PRI has grown into a top standards setter for sustainable investing. Almost all the world’s large pension funds, asset managers — and even some blank-cheque companies — have signed on to its voluntary requirements.

Now, PRI has run into trouble, telling members in an August 2 message that it won’t require them to report on how they measure up to its standards until 2023, rather than next year as planned.

PRI overhauled its reporting process last year to be harder to satisfy but simpler to submit. That overhaul was “too ambitious” it admitted as it apologised “for this mistake”.

PRI is delaying the start of its first full reporting period until early 2023, while postponing additional minimum requirements for members and engagement with signatories who do not meet those requirements in 2021.

“It’s important for PRI to get this right but until 2023 seems like a long time to get things sorted out,” said Bob Eccles, an Oxford Saïd Business School visiting professor.

PRI’s signatories had long complained about the technical difficulties with reporting on the PRI interface. Certain written answers could not be submitted, sources said, and the portal was only open for a limited period of time in the first quarter — when most companies were scrambling to finish year-end audits.

The debacle will raise doubts for asset managers — who have touted their PRI bona fides in regulatory filings. PRI’s problems are likely to embolden ESG sceptics such as the SEC’s Hester Peirce (pictured) who have argued that additional reporting would be too expensive and complex.

The organisation’s problems come after Fiona Reynolds, PRI’s chief executive, said she would leave at the end of the year. Her successor will need to enjoy smoothing feathers. (Patrick Temple-West)

Moody’s Rob Fauber explains its newfound risk (analysis) appetite

Moody’s bought RMS, a disaster risk analysis company, for $2bn last week, marking the latest in a string of environmental, social and governance-themed deals by the credit-rating agency.

In 2019, Moody’s bought a majority stake in Vigeo Eiris, a prominent European ESG research outfit. It later bought Four Twenty Seven, a climate research specialist.

RMS (which stands for Risk Management Solutions) mostly sells to property and casualty insurers, and reinsurance companies. Moody’s wants to pitch its catastrophe analysis expertise to two new sectors: banks and governments, chief executive Rob Fauber told Moral Money.

Most big banks are incorporating climate concerns into their risk management work as regulators apply green stress tests. But smaller banks “are just beginning to start to think about climate change,” Fauber said.

Historically, banks’ collateral has been insured, but that could soon change, he said. A bank can’t be sure it will get insurance for a warehouse in the California hills where forest fires are becoming more devastating.

Governments too will need to understand climate risks better to determine whether to fund a new sea wall or wildfire trenches, he said.

As new regulatory risks loom for ESG raters and data providers, Fauber noted that Moody’s core credit-rating business is already heavily regulated. “I wouldn’t be surprised if it (ESG) follows a similar model,” he said, insisting: “We support smart and thoughtful regulation.” (Patrick Temple-West)

Quotas change the boardroom diversity equation in Germany

Nasdaq last week won regulatory approval to push companies listed on its US stock exchange to meet certain board diversity quotas. A similar effort in Germany is already showing progress.

When Germany’s Bundestag agreed in June to require public company boards to have at least one woman, 64 companies were identified as needing to fulfil the quota by the end of the year, according to research by the German Institute for Economic Research (DIW Berlin). By last Friday, that number had dipped to 62.

“It was always argued [this] would not be possible due to legal issues and company freedom,” said Katharina Wrohlich, head of DIW Berlin’s gender economics research group. “But consulting firms have said they’ve already seen internal movement.”

Headhunters now expect compliance to accelerate. “When we search for executive roles [in Germany], companies now say they only want to see female candidates,” said Caspar von Blomberg, head of Egon Zehnder’s public and social sector practice in Germany.

German supervisory boards often promote from within, showing up the gaps in female representation in some executive roles, Wrohlich said. That means it is not good enough to “only hire women in human resources”, she said. “Companies also need to be prepared to fill any position that opens with a woman, including [in] finance.”

Will Nasdaq’s move spark similar ripple effects? Possibly, but it has cast its demands on foreign issuers more broadly, allowing their boards to meet its new targets by appointing candidates with diverse “religious or linguistic backgrounds”. (Kristen Talman)

Bolsonaro proves no bar to ESG standards advancing in Brazil

Despite president Jair Bolsonaro’s disregard for Amazon rainforest protections and climate change in general, Brazil’s banking regulators are moving ahead with ESG rules that look, well, rather European.

Brazil’s newly autonomous central bank has proposed rules to require financial companies to disclose climate risks and other ESG criteria. They are modelled after the Task Force on Climate-related Financial Disclosures, but go broader to include social and — crucially for Brazil — environmental risks.

A 60-day public comment period closed on June 5 and final rules are pending.

If approved, the rules would take effect in two steps through to the end of 2022. First, financial institutions would disclose qualitative information on governance, social, environmental and climate risks. Next, they would publish more specific ESG disclosures, including risk management metrics and targets.

“The central bank is trying to position itself relative to what is happening across the world,” said Natalie Unterstell, head of Talanoa, a think-tank focused on climate policies. “We have high quality climate science, but we weren’t bridging the gap with banks.”

Brazil’s central bankers, like peers around the world, are increasingly worried that climate risks are underappreciated at financial companies and could quickly damage their creditworthiness.

As an emerging economy, Brazil is also grappling with environmental risks in addition to the global climate concerns. In São Paulo, for example, apartment buildings are being constructed on land contaminated by the previous heavy industry occupants.

“That is an important consideration for banks,” said Christopher Wells, Santander’s global head of environmental and social risk. “Europeans very often miss that because it is a past issue for Europeans.” (Mariana Lemann)

Chart of the day

Chart showing the annual carbon emissions under five theoretical pathways (gigatonnes of CO2 per year) and the effect on surface temperature (Global warming since 1850-1900 (C) )

Monday’s landmark report by the UN’s Intergovernmental Panel on Climate Change lays bare the urgent need to prepare for changes that are already under way at 1.1C of warming so far, and will only get worse at every increment. The comprehensive scientific analysis, accepted by 195 governments, clearly outlines how weather events that are “unprecedented” in human history will become more common. It was hailed by one contributor as “one of the most important scientific reports ever published”. Please read Camilla Hodgson’s analysis here.

Tips from Tamami

Nikkei’s Tamami Shimizuishi helps you stay up to date on stories you may have missed from the eastern hemisphere.

The #MeToo movement caught fire in China over the weekend, as a sexual assault scandal at Alibaba put a rare spotlight on the country’s workplace culture.

A female employee accused her supervisor of sexual assault after a “drunken night” entertaining clients. She reported the incident to the company, she said, but it took no immediate action. Her allegations, posted on Alibaba’s intranet, were shared on a social media platform and the public furore exploded.

China’s biggest ecommerce company responded by firing a manager accused of assault on Monday. Two other executives who failed to act after the incident resigned, including its head of human resources.

The company’s human resources division didn’t “pay enough attention and care to our people”, Alibaba chief Daniel Zhang told employees. “We must rebuild, and we must change,” he said.

There is a growing hope that the newly energised #MeToo movement — alongside a growing awareness of ESG risks among Chinese companies — will improve women’s rights in China. But some remain cautious, as earlier sexual assault scandals have been met with online censorship and official pushback.

Grit in the oyster

Less than half of US corporate executives agree that diversity, equity and inclusion are valuable to a business’s success, according to a new survey from Momentive (formerly SurveyMonkey). Half of the executives polled consider DEI “a distraction from our company’s real work”.

“This statistic surprises me,” said Zander Luire, Momentive’s chief executive. “As any good leader should understand, diversity, equity, and inclusion is your real work.”

Smart read

Can a company claim to be socially responsible if its campaign contributions and lobbying perpetuate a political system that rewards partisanship, fails to address big policy challenges and leaves business with the cost of filling the gap? In this column, Andrew Edgecliffe-Johnson argues there is an urgent need for business to change its approach to government relations.

Prime time for sustainable investing reporting is delayed to 2023