SRI agencies

We face a twin crisis of climate change and declining biodiversity, and both need to be tackled without delay. Climate change and nature loss are fundamentally linked. One cannot be solved without solving the other. But navigating the climate transition is already challenging enough, let alone addressing the myriad impacts of investments on ecosystems and species. The dilemma for investors is how to take concrete actions on both fronts without being overwhelmed by complexity.

Summary

• How to solve climate and biodiversity issues without complexity overload
• Insisting on an integrated approach could lead to analysis paralysis
• Ensuring that the work done on both topics is compatible will work best

Investors are keeping the faith in trying to combat global warming, despite growing headwinds, the 2023 Robeco Global Climate Survey has revealed. The number of investors for whom climate change is a significant part of their investment policy has remained stable at above seven in ten.

Indicators used to measure progress in addressing challenges such as climate change and nature loss can be counter-productive if the metrics themselves become the focus. To address the expectations set down in the latest IPCC report, responsible finance needs to focus on how it can influence the actions of customers and other financial institutions.

• The pace of action on climate change since the Paris Agreement has been substantial, although the results have fallen short of what is needed to reach global climate goals
• Financial institutions that target investment or financing for portfolio greenhouse gas (GHG) emissions alone may find it easier to meet their targets, but the underlying climate and nature risks will continue to grow
• The financial sector can only start to address the underlying sources of risk if they understand and respond to the systems-wide risks that require changing underlying economic behaviors

Banks responded with strategies to marginally increase returns on their investments in a way that wouldn’t add credit risk. Yet, in the process they locked themselves into strategies that, as interest rates rose, became very brittle. They had replaced low but flexible profit margins with a structurally unprofitable set-up where they were paying out more on deposits then they were collecting from their investments. And when they acknowledged the issue, this created a crisis of confidence that created a cascade of losses, including some bank failures.

The way this relates to the issue of GHG emissions and financial institutions is that, when financial institutions take a ‘portfolio decarbonization’ approach, they try to calibrate their exposures to a specific climate trajectory independent of the bigger picture. In so doing they swap one type of measurable risk (emissions) for another that is more opaque and uncertain (long-term physical climate and nature risks).

The risk that financial institutions taking this approach are trying to mitigate is the direct financial cost from the price of a ton of GHG emissions rising towards its full value. The source of financial loss being managed is customers facing rising direct emissions costs in their operations that incrementally lower credit quality and could impair profitability. 

The more opaque and uncertain risk that’s being replaced through this strategy is more complex than the asset-liability mismatch outlined in the recent example of the banking sector’s duration risk, but it provides a basic structure, instead of a structural challenge of higher costs and lower income due to interest rate policy and the bank’s yield on its investment. In the case of climate and nature risk, the potential is for structural changes that impair the ability of the economy to produce the same level of returns with the same regularity as in the past.

From this perspective, the realization of more uncertain outcomes will require higher returns to deliver the same risk-adjusted returns or else result in lower risk-adjusted returns across the board. The impact is likely to be discontinuous at the customer level compared to aggregate impacts. More expectations of higher risk-adjusted returns by investors will coincide with a greater challenge for individual financial institutions to manage the full scope of climate and nature risks that will assert themselves as long as the ‘business-as-usual’ approach continues.

The IPCC report describes this in terms of: “Adverse climate impacts can reduce the availability of financial resources by incurring losses and damages and through impeding national economic growth, thereby further increasing financial constraints for adaptation, particularly for developing and least developed countries”. 

No amount of just calibrating financing & investment portfolios around GHG emissions, or refining a more and more granular reporting framework of the emissions, will mitigate this type of risk on its own. It requires a much more systems-wide analysis of how climate and nature risks translate into future economic risks, and how to translate this understanding into actions that produce deep change across the economy. 

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EPA’s recent comment period for proposed regulations to address methane emissions from the U.S. oil and gas industry resulted in historic industry support to reduce this extremely potent greenhouse gas. Check out this recent blog to see how company comments stacked up and what comes next.

The “anti-ESG” brigade is in force. However, indications are the US may not be, to paraphrase Florida Governor Ron DeSantis, “where ‘woke’ goes to die”.

J.P. Morgan Chase, Mastercard and Wells Fargo are attempting to block shareholder resolutions that target what two right-wing think tanks allege is anti-conservative bias in their businesses.

Two oil service firms and an industry association have signed on to a lawsuit by 25 Republican state attorneys general to block a US government rule which allows managers to consider ESG risks in their investment decisions.

But in February, red state North Dakota voted overwhelmingly against a bill to bar state investment with alleged energy firm boycotters, similar to the bills passed in Texas and other Republican states last year.

Shareholder resolutions requesting US firms disclose the pay gap between white male employees and women and ethnic minorities is on the up.

• Since 2016, investment management firm Arjuna Capital has persuaded 28 Fortune 500 companies to disclose racial and gender pay gap data.
• In the US, black workers’ median earnings represent 64% of white workers’ earnings and women’s earnings represent 83% of men’s earnings.
• Walt Disney published statistically adjusted racial and gender pay gap data last September after a historic majority vote by investors at the company’s AGM.

“The ESG Performance Report includes our performance across our six environmental, social and governance (ESG) priority areas, and includes ESG data for current and previous years. Within the Responsible Business section of our Annual Report, we provide a summary and highlights of our progress in 2022.”

Hodgson's Choice: U.S., Canada Press Contractors for Climate Disclosures

As the global conversation on decarbonization and the responsibility of companies to achieve a Net Zero future continues to heat up, the federal governments of both the United States and Canada are attempting to leverage their procurement power to drive action.

Planet Tracker: Nature’s role in a liveable future for all – a commentary on the latest IPCC report

The IPCC Sixth Synthesis Report published on 20^th March 2023, underscores the urgency of taking more ambitious action and shows that, if we act now, we can still secure a liveable sustainable future for all”.  

This report is regarded as particularly significant, as AR6 is expected to be the last IPCC report released while limiting the Earth's warming to a 1.5°C (2.7°F) increase still remains possible.

But what does this Synthesis Report say about nature? A close inspection demonstrates a clear recognition of the interconnection between nature and climate.

The UN Secretary-General, António Guterres, commented that the “IPCC report is a how-to guide to defuse the climate time-bomb…In short, our world needs climate action on all fronts — everything, everywhere, all at once”.

To achieve this goal, a number of intertwined factors need to be addressed by policymakers alongside climate change. This includes nature and its ecosystems.

Environmental Defense Fund: MethaneSAT - A New Era of Transparency for Methane Measurement

MethaneSAT: A New Era of Transparency for Methane Measurement will take you through how a new generation of satellites is paving the way for vast improvements in methane emission detection and quantification on a global scale. MethaneSAT, a satellite mission and wholly-owned subsidiary of Environmental Defense Fund, will join this satellite ecosystem and usher in a new level of transparency into methane emissions through regular, frequent data accessible to companies, regulators, investors, and the public.

MethaneSAT’s key capabilities are:

• Quantification of total regional emissions
• Automation of computations used to measure emission rates, cutting a process that can take months down to days
• High precision & resolution - detects excess methane concentration at 3 ppb and has 100m x 400m native pixels
• Broad area coverage - orbits Earth in 95 minutes, with a swath width of 200km
• Free public data access
• Operators around the world will be able to find and fix problems faster, and stakeholders will be able to evaluate performance against methane goals, commitments, and legal obligations.

As You Sow: Carbon Clean 200

Just a few years ago, much of the business community viewed climate advocates with indifference or skepticism. Today, companies representing 40% of the global stock market have committed to science-based targets around reducing their greenhouse gas emissions in line with the Paris Agreement.

In many cases, these businesses are already making billions of dollars supplying climate solutions to the market. Even corporations that are less directly implicated in the economic upside of climate action recognize the imperative for a low-carbon economy because no business can profit in an environment of climate chaos.

The Clean200 lists the 200 major corporate players from 35 countries around the world that are at the forefront of this transition. 

Klement on Investing: The impact of ESG scandals

ESG scandals are (luckily) a rare thing. If we rely on the RepRisk Relative Risk Indicator, then risk ratings in excess of 25 points happens only in one in 200 companies. And as I have reported here, RRI readings of 35 or above become existential threats for the CEO of a company. But once a company experiences an ESG scandal, it has significant and lasting consequences for the company, but also its peers.

One such ESG scandal that still looms large in many UK investors’ minds are the sweatshop practices in factories of UK fast fashion retailer boohoo. I have described it in some detail here, so I won’t go into the details. Suffice it to say that even today, almost three years later, the first thing investors think about when they think about boohoo tends to be that scandal. It’s akin to asking you what the first thing is that comes to mind when you think about BP…

Trase: Beyond forests: traders face EU regulatory risks from soy expansion in Brazil

Soy traders are more exposed to the conversion of Brazil’s savannah and grassland habitats than they are to forests. As the EU considers including other ecosystems in its new due diligence legislation, Trase analysis reveals which traders face the biggest regulatory risks.

Under the incoming EU regulation on deforestation-free products , commodity traders will soon have to prove that products such as soybeans and palm oil destined for the EU market are not linked to the conversion of forests. In future, this may be broadened out to include other ecosystems.

Sustainability/ERM: Mining and Metals Supplement – 2023 Trends Report

The ESG risks and opportunities facing the mining and metals sector are transformational, with decarbonization as the most immediate challenge. Companies are grappling with the conflicting investor demands to reduce fossil fuel use, decrease emissions, and minimize the environmental footprint of operations, while maintaining their profitability.

As nations and non-state actors increase their climate commitments, consensus has emerged on the need to transition asset portfolios away from thermal coal towards critical materials that are essential for the transition to a low carbon economy such as copper, nickel, cobalt, lithium, and aluminum. Furthermore, biodiversity and water stewardship are rapidly becoming the next most pressing ESG focuses after carbon.

Ceres: Hot and Cold: How Asset Managers Voted on Climate-Related Shareholder Proposals in 2022, and What It Means for 2023

This report forecasts what to expect in the 2023 proxy season for climate-related shareholder resolutions based on trends in 2022’s record-breaking but complicated season.

It highlights the significance of 115 agreements reached between shareholders and companies in advance of voting, with companies committing to take actions sought, such as setting greenhouse gas reduction targets, in exchange for shareholders withdrawing resolutions. It also looks at the trendlines of how the largest asset managers voted on climate-related proposals in 2022 compared with the previous year. 

Nestlé: 2022 Creating Shared Value and Sustainability Report

Nestlé is publishing its 2022 Annual Report alongside its Creating Shared Value and Sustainability (CSV) Report. As the publications highlight, Nestlé’s results were resilient in a year defined by many challenges. Staying on course required a constant rebalancing between forward-looking investments, affordability, and meeting its commitments to shareholders and other stakeholders. The company continued to deliver fast-paced innovations, advanced its digital capabilities and maintained its rigorous focus on strategic portfolio management.

For the first time, the reports provide an overview of the nutritional value of Nestlé's global portfolio. They also provide an update on the company's progress of its Net Zero roadmap.

Report contains:

• ESG Analysis
• Active Ownership commentary on
  • Climate Risk
  • Equality
  • Governance
  • The Power of Collaboration
• Engagement Results
• 2022 Proxy Season

The macro picture has been challenging, particularly with uncertainty on the likely peak of the interest rate cycle. Company specific fundamentals remain positive, supported by stable earnings and corporate activity.

Equity market see-saw continues

After having a tough 2022, global equity markets started 2023 on a strong footing. Signs of easing inflation supported sentiment and the market started to weigh in on expectations of a peak in interest rates. Sentiment also got a boost from China dropping its zero-Covid policy.

Given the backdrop, growth-oriented sectors like consumer discretionary and technology led the rally, significantly outperforming more traditional defensive sectors like healthcare, utilities and consumer staples. This was a reversal trade of what had happened in the full-year 2022. The seesaw pattern continued in February 2023, as global equity markets fell during the month.

The old adage of ‘good news’ is ‘bad news’ continued in the market…

This report includes commentary on:

• Russia's war in Ukraine
• The effects of the pandemic
• Developments in organised labour
• Deepening climate crisis
• Zevin's in-house research on ESG-related risks and opportunities

Robeco: Confusion and noise require constructive dialogue for AGM season

Opposing shareholder proposals and an anti-ESG backlash will make for a confusing AGM season, Robeco’s Active Ownership team believes. While the public debate will become more polarized, constructive engagement between management and their shareholders will become more necessary.

Summary

• Growing number of resolutions aim to frustrate companies’ ESG efforts
• Climate change preparedness expected to come under scrutiny
• Thorny issue of executive pay in focus as Covid-era share options vest

GIB Asset Management: Value unlock in Korea & Taiwan: Rabbits, Hidden Treasure & Winds of Change

"Our Active Engagement approach leans on identifying hidden value in businesses and using the tool of Engagement to unlock and drive its greater market recognition. Two markets stand out with an abundance of potential material engagement outcomes – Korea and Taiwan.

In our inaugural Engagement trip after COVID restrictions were lifted, we walk through our work with a series of portfolio companies. We focus on the way we hope to deliver change, how we believe these changes can manifest and the impact of such enhancements to propel forward returns for our investors.

As we enter the Year of the Rabbit in the new Chinese Lunar Year, astrologists point to a year blessed with ‘wealth, partnership and successes’. An auspicious and apt backdrop for our portfolio wide approach to friendly Active Engagement.

Gong hei fat choy!"

"The macroeconomic, political and capital cycle backdrop is particularly supportive for a resurgence in corporate profits. A ‘once in a generation’ opportunity has arrived that provides a fertile environment for a sharp improvement in Return on Equity (ROE). This in turn can finance the throes of a new investment cycle. Exciting times are ahead.

But investors have always stymied such exuberance through unpalatable valuations. India’s relative valuation premium versus peer markets across wider Emerging Markets have touched all[1]time highs. For us though, much of this can be justified through the power of peerlessly predictable, consistent and high ROE growth.

As a result, our Engagement approach in India differs to Korea and Taiwan. Our primary focus in India aims at introducing measures, incentives and suggestions that protect and improve businesses’ free cash flow profile. By extending the durability of a company’s compounding power, we argue there exists further margin for valuation growth; implied expectations from current (albeit high) valuations underestimate the true tenacity of business models and its barriers to competitive entry.

A number of well-trodden Indian adages have been upended in recent times – in particular, “The shortest distance between A to B in India is never in a straight line”; “India grows fastest at night” and “In India, it is not because of the government, it is in spite of the government”.

That said, “diamonds are forever” might have some life left in it just yet… "

GIB Asset Management: Impact and Engagement Report 2022

GIB Asset Management’s impact and engagement report covers its two equity funds: GIB AM Emerging Markets Active Engagement Fund (Article 8) and GIB AM Sustainable World Fund (Article 9), as well as its Fixed Income Fund: GIB AM Sustainable World Corporate Bond Fund (Article 9)

The report explains how each Fund approaches impact and engagement, and provides information on both over 2022.

Nomura: Why Cybersecurity Is the Biggest Hidden ESG Risk

Cybersecurity is fast becoming the top global risk by impact and likelihood along with climate change and geopolitical conflict. In response, investors need an efficient model to integrate cybersecurity into their investment decisions.

Cybersecurity is emerging as a major next generation ESG consideration for investors, with strong alignment to financial and investment risk, growing regulatory scrutiny, and the potential for real-world impact.

Financial Materiality of Corporate Cybersecurity Risk

Investors have a growing interest in assessing the underlying cybersecurity risk inherent in their corporate investment portfolios. Cybercrime affects individual enterprises through increased frequency of data breaches and ransomware attacks, higher corporate cyber defense and insurance spending, and reputational damage. Large-scale cyberattacks can cause operational and business disruption, and generate significant litigation risk.

Cybercrime rates are growing in severity and frequency as economic digitalization expands the cyber “attack surface” available for hackers to exploit. Estimates of the rate of cyber-attacks per company are 31% higher in 2021 compared to 2020 with the average cost for individual data breaches in 2022 reaching $4.35 million.

HSBC: ESG Sentiment Survey

• “Our fourth ESG survey shows that regulations are increasingly driving investors and companies to integrate ESG
• Regional differences remain - Europe is ahead of North America, but Asia has strong momentum as it plays catch-up
• Interest is growing in both biodiversity and carbon credits, but investors remain cautious about actually investing in them

Clients of HSBC Global Research can access the full report via the HSBC Global Research website or by contacting Wai-Shin Chan

We are always being asked what clients are thinking and doing when it comes to ESG. So, last year, we launched a regular ESG survey. This is our fourth edition, and it captures the impact of tightening regulations as global regulators work to tighten up all parts of the ESG ecosystem. Here are a few of our major findings:

• There was a balance between general fund inflows and ESG inflows that shows ESG is a significant part of fund inflows, not a driver of fund inflows.
• One of the biggest surprises was that only a small proportion of funds are using ESG indices as a benchmark. More use traditional indices. Most use absolute returns.
• ESG incorporation across decision-making is lower than a year ago given the events of 2022 - but most respondents expect it to increase in 2023.
• Climate change continues to dominate environmental issues, with water and pollution the themes to watch.
• Diversity and inclusion remain a key social focus, but supply chains have risen to be almost on par.
• Some three-fifths of respondents expect ESG to become mainstream within a decade; only one-fifth believe this may never happen.

The respondents represent USD11.5trn in assets under management (AUM) across 390 institutions.

HSBC: Waste - Reduce, Reuse and Recycle

• "Over the past ten years, the number of waste companies in the HSBC Climate Solutions Database (HCSD) has risen >3.0x
• The growing share of waste companies demonstrates positive revenue momentum and rising climate integration
• An increasing focus on recycling and circularity should be supportive for the waste companies in our proprietary HCSD

Clients of HSBC Global Research can access the full report via the HSBC Global Research website or by contacting Wai-Shin Chan

Climate Alpha (α) highlights emerging trends across various climate themes using our proprietary HSBC Climate Solutions Database (HCSD) and Framework. In this edition, we highlight the Waste theme. Please see page 2 for our detailed definition of the Waste theme under our framework.

Geography and revenue momentum: According to our 2021-22 annual revenue analysis of global companies, 178 stocks in the HCSD were identified under the Waste theme. The Asia Pacific region leads with the largest share (58%) of waste companies, followed by Europe at 24% and the Americas at 16%. More than half (53%) of all waste companies in HCSD are pure-play climate stocks, as they derive > 50% of their revenues from climate-related business. In aggregate, the theme's revenue has risen c3.5x since 2015, and the Americas region accounts for the highest share of revenue.

Rising waste generation - a growing concern: Waste accounts for roughly 5% of global GHG emissions; amid a rising population, rapid urbanisation and economic growth, global waste generation is expected to surge by 73% by 2050, according to the World Bank. Moreover, the rise of new technologies, such as battery operated transport solutions, are growing areas of concern from a waste perspective. Significant effort, therefore, is required to accelerate waste reduction, management and recycling, to achieve global climate goals. In terms of investment opportunities, we think companies that offer sustainable waste management solutions could gain from a growing emphasis on this sector and our HCSD could help investors to identify those opportunities.”

Creative Investment Research: The Fed and SVB

By quickly ring-fencing SVB and saving depositors, the Fed showed it is becoming more of a learning organization. Combined with its excellent performance managing the worst inflation spike in 40 years, instigated by the worst pandemic in 100 years, the Fed demonstrated an ability to quickly adjust when circumstances demand flexibility. This is new behavior.

Creative Investment Research: Is Your Money Safe at a Minority-owned Bank?

Yes. By quickly ring-fencing SVB and saving depositors, the Fed showed it is becoming more of a learning organization. Combined with its excellent performance managing the worst inflation spike in 40 years, instigated by the worst pandemic in 100 years, the Fed demonstrated an ability to quickly adjust when circumstances demand flexibility. (See here)

Their new Bank Term Funding Program (BTFP), a key protection (or bailout) for depositors, sounds like the fund we suggested for Black banks in October 2019: Economist Offers $50 Billion Federal Solution to the Black Banking Crisis

Also see: National Bankers Association Assures Consumers Their Money Is Safe At Minority Banks Amid Financial Meltdown

Planet Tracker: Net Zero Transition Plan Assessment Template For Investors in Consumer Goods Companies

A Credible Plan in Five Steps

Decarbonisation is a business imperative for companies looking to remain competitive in the long term. As such, organisations must develop a clear understanding of their current carbon footprint and devise strategies for reducing and ultimately eliminating their emissions.

Planet Tracker has developed a disclosure assessment template which can be used by investors and lenders to determine the credibility of  a company’s climate transition plan.

The template synthesises key elements of existing frameworks to enable investors to check a company’s climate transition plan to see if it provides information for the following five sections – company overview, climate alignment, policy & governance, risk assessment and strategic analysis – to provide a credible summary of the company’s decarbonisation strategy.

Please download and use our attached Net Zero Transition Plan Disclosure Guidance Template for consumer goods companies.

Environmental Defense Fund: Plugging the Leaks: An Investor Guide to Oil and Gas Methane Risk

I'm excited to announce the launch of Plugging the Leaks: An Investor Guide to Oil and Gas Methane Risk, a new report from the Environmental Defense Fund that gets investors up to speed on company best practice on credible methane management.

Climate-warming methane emissions are posing material financial risks to the oil and gas industry, especially as global policy, data, and investor pressure heats up.

Promisingly, investors have been incredibly successful in engaging companies to join the Oil and Gas Methane Partnership (OGMP), an industry-leading framework to credibly measure and report methane emissions. With engagement season coming up, continued shareholder pressure can accelerate the industry's decarbonization efforts, by eliminating routine flaring, setting ambitious targets across all assets, and leading on policy advocacy.

As it stands, the oil and gas supply chain is losing far too much methane - the primary component of natural gas, and a powerful short-term greenhouse gas. But 75% of emissions are technically feasible to reduce - and half (or even more) of which are cost-effective.

The business case for credible methane reductions - to seize a leadership opportunity, to address material risks, and to counter short-term climate impacts - has never been so compelling.

Environmental Defense Fund: Tackling Transferred Emissions (Webinar |  21 March)

Tuesday, March 21 at 11am ET (US) / 5pm CET

Register here

Tackling Transferred Emissions: Climate Principles for Oil and Gas Mergers and Acquisitions

Oil and gas M&A have taken on new significance not just as a key element of business strategy but as a potential source of climate risk. Traditional oil and gas dealmaking help companies reach their own emissions reduction targets, but they do not contribute to global greenhouse gas emissions reduction. These transactions may not be compatible with global net zero efforts that demands sustained and proactive climate stewardship.

Join Environmental Defense Fund, Ceres, and our key partners as we discuss the importance of Transferred Emissions, an introduction to the Climate Principles for Oil and Gas Mergers and Acquisitions, and ways to take advantage of opportunities by using the principles.

FTSE Russell: Sustainability in the UK: A year on

Last year, we investigated the sustainability profile of the FTSE UK index and its peculiarities in the context of challenges in creating a sustainability index in the UK. In this paper, we review and update the changes over the last twelve months.

Although there were changes in the structure of the index, the broader picture remained the same. Natural resources companies continue to dominate the FTSE UK Index, which resulted in a relatively high carbon emissions and carbon reserves intensity score.

At the same time, the UK index still has a fairly high ESG score overall, with very few stocks averaging a higher ESG score and low carbon emissions intensity at the same time, and they are limited to very few specific industries.

This feature of the UK market remains a challenge for investors looking to construct benchmarks that have a high ESG score, and a low carbon reserves and carbon emissions intensity. The FTSE Russell multiple tilt approach, however, provides a solution to this conundrum

FTSE Russell: Rethinking the sovereign environmental score assessment - Sovereign ESG revisited

The current sovereign environmental, social and governance (ESG) scoring framework is far from perfect. Disparate methodologies and assessment criteria have created different mixed sets of Environmental scores (E scores), resulting in difficulties when comparing and contrasting country rankings across ESG providers.

What constitutes good and meaningful environmental assessment remains unclear, however, and it remains questionable whether assessment is being done accurately, rigorously and transparently.

Green bonds saw a big slowdown in European markets and the United States last year due to soaring interest rates and geopolitical conflicts. But China’s onshore green bond market-maintained momentum. 

Global Canopy: Forest 500 analysis – companies unprepared for incoming EU deforestation regulation

We are three years past the 2020 deadline that many organisations set themselves to halt deforestation, and just two years away from the UN’s deadline of 2025 for companies and financial institutions to eliminate commodity-driven deforestation and conversion. Yet globally, deforestation and demand for commodities linked to it is still growing. Approximately 9 million hectares of forest is lost due to agricultural expansion every year. This agricultural driven deforestation is adding to climate change, causing biodiversity loss and is linked with human rights violations against Indigenous peoples and local communities.

The new EU regulation on deforestation-free products (EUDR) is a welcome and significant step in the efforts to eliminate deforestation. Without this intervention, the EU’s consumption and production of wood, cattle, soy, palm oil, cocoa and coffee would rise to around 248,000 hectares of deforestation annually by 2030.

The regulation means companies will need to know if and how they are exposed to commodity-driven deforestation, and mitigate that risk if they want to place a product on or export products from the EU market. And it has global implications too, because all companies that wish to access the EU market through their buyers or suppliers will also have to comply with this legislation.

The 350 companies included in the Forest 500 are the most exposed to the forest-risk commodities driving over two thirds of tropical deforestation (palm oil, soy, beef, leather, timber, pulp and paper), and with that comes a responsibility and opportunity to drive change through these supply chains.

World Benchmarking Alliance: Digital Inclusion Benchmark

This third iteration of the Digital Inclusion Benchmark assess 200 of the world’s top telecommunication, digital hardware and IT software and services companies.

This is the first iteration that includes the Core Social Indicators (CSI). These indicators form part of the way companies can build positive impact and people-centred transformation More specifically, the benchmark measures what companies are doing to:

• enhance universal access to digital technologies
• improve all levels of digital skills
• foster trustworthy use by mitigating risks and harms
• innovate openly, inclusively, and ethically.

HSBC: Investor questions on board and executive pay

• “We answer eight common questions from investors on board and executive remuneration design, trends and best practice
• Questions focus on pay alignment with investor interests, specific metrics, mega grants, clawbacks and pay levels
• We think an improved focus on pay methodologies is needed to avoid poor outcomes and promote right behaviours

Clients of HSBC Global Research can access the full report via the HSBC Global Research website or by contacting Wai-Shin Chan

Why it is important: Pay is a critical tool for driving behaviours and motivating executives to focus on the factors that are of key importance to a company and investors. We think only appropriately structured and implemented compensation policies have the potential to enhance company value.

Eight common questions: Over the past several weeks, we have spoken with investors around the world about ESG pay metrics, as we discussed in our previous note ESG-linked pay: value driver or peril?, 18 January 2023. Some questions also touched on financial metrics and other compensation practices. In this report, we address eight common questions asked by investors:

• How can executive pay be aligned with investor interests?
• Are there any concerns about using total shareholder return (TSR) in variable pay?
• Are front-loaded awards (mega grants) only relevant for IPOs?
• Do ESG metrics in executive pay drive company value?
• Are there any common market or sector-specific trends in ESG-linked pay?
• Should the company use a health and safety/emissions/culture-related/etc metric in a CEO's pay?
• Are malus and clawbacks only applicable in cases of material misstatement in the company's accounts?
• Remuneration of non-executive directors in some companies seems to be much higher compared to peers within the same sector. What is the reason for that?

In our view, there is an opportunity for investors to enhance their analysis of remuneration practices. Investors should consider how executive pay is linked to a company's purpose and strategic objectives, as well as tailored to its needs and challenges. Remuneration policies should be assessed along with other governance practices to ensure alignment between director priorities and investor expectations. For more information on our governance assessment framework, see Spotting good governance...and red flags, 28 April 2022.”

Planet Tracker: Stressing about water footprints

The United Nations (UN) 2023 Water Conference in New York from 22 to 24 March 2023 will be the first UN Conference to focus strictly on water since 1977. It builds on the momentum generated by frameworks such as the Paris Agreement and the Global Biodiversity Framework.

Commonly traded food products consume vastly different amounts of water.

This blog examines how much water major food products require and exposes this hidden trade network. For example, cocoa beans consume 100 times as much total water as sugar crops. Beef, the most water-intensive animal derived product, consumes about 3 to 4 times more than chicken or pork.

Climate change raises concerns about those which have a larger water footprint. The world’s largest importers and exporters of these crops need to be particularly mindful of such issues. This is not just an economic matter but a humanitarian one as well.

Two of the top three food exporters are facing water stress in major crop categories such as cereals and seeds & vegetable oils. Food security issues and the associated water risk are not going away.

Planet Tracker: Red Carpet Fashion Needs to be Green

Perhaps the most discussed fashion event of the year will be the Oscars – the Academy Awards - red carpet parade on 12 March 2023, with live streamed blogs of the fashion choices on show and much discussion in subsequent press coverage.

But one of the biggest challenges facing the fashion industry in its move towards greater sustainability is changing the way we consume fashion and a red carpet outfit is often the antithesis of a sustainable fashion choice.

It could be argued that the very term fashion implies unsustainable behaviour with its emphasis on regularly changing tastes and the need to discard garments as soon as they are “out of fashion”, rather than because they are no longer fit to wear.

Fortunately, there is a growing number of broader efforts to promote more sustainable fashion choices at the academy awards, such as The Red Carpet Green Dress initiative which works with designers and actors.

We hope to see the trend towards more sustainable fashion choices on the red carpet continue and that this starts to receive as much coverage as does “best” or “worst” dressed opinion.

Planet Tracker: PepsiCo’s operating profits at high risk due to climate change and transition

Analysis from Planet Tracker shows that the food and beverage giant’s transition plan fails to align the company with its goal of a 1.5°C pathway by 2030.

• PepsiCo is exposed to a potential financial risk of USD 4.4 billion per year, by the end of the decade, or 42% of its three-year annual operating profit.
• Current emissions trajectory and sparse data reporting aligns the company with a 2°C warming scenario by 2030.
• PepsiCo is on a path to miss crucial targets set by the Science-Based Targets initiative by 58%

Download the Investor Engagement Sheet

Planet Tracker: Biocrastination

The World Economic Forum’s 2023 Global Risks Report has revealed that six of the world’s top 10 risks are related to the environment.

Biodiversity loss and ecosystem collapse only ranked 18^th in the upcoming 2-year period, as opposed to fourth in the 10-year period, suggesting the issue is perceived as a rising future risk rather than an immediate challenge.

Defining biodiversity loss as a future risk increases the likelihood that action will not be taken to address the serious and significant short-term threats. Waiting another 10 years for further confirmation of these negative trends is not acceptable.

The vast majority of business leaders do not see how they can effectively manage biodiversity risk. Only two countries’ corporate leaders (Chad & UK) place biodiversity loss and ecosystem collapse as a top five risk within the next two years.

Investors and lenders across the world should demand a rethink from the executives of corporates and put an end to biocrastination”.

Planet Tracker: Valuing the global food system

Planet Tracker has created an interactive dashboard to enable users to value the global food system by adjusting various valuation variables.

Planet Tracker defines the food system as commencing with input providers (e.g. agricultural chemicals and machinery) through to producers and traders, food & beverage manufacturers and distributors, and ending with the retailers, food service and waste companies.

Planet Tracker estimated the enterprise value of the global food system to be around USD 14 trillion with revenues in the region of USD 15 to 19 trillion. This is equivalent to between 16 and 20% of GDP. It’s noteworthy that up to 70% of revenues come from 0.06% of all companies. For further details please see ‘How much is your food worth?’.

The Planet Tracker Valuing the Food System dashboard provides two main valuation approaches: Scenario 1 (S1) based on the number of businesses and Scenario 2 (S2) based on the protein price (both discussed in more detail in ‘How much is your food worth?’).

Planet Tracker: EU Regulation to cause log jam in commodity flows

Financial Institutions are potentially in scope at first review

Deforestation regulation in the EU is likely to be adopted in the next 12 months requiring EU importers to confirm that cattle, cocoa, coffee, oil palm, rubber, soya, wood and derived products are deforestation-free.

China, Brazil and Indonesia are the biggest non-EU exporters of commodities covered by the Regulation and, as a percentage, are also the largest countries to be subject to the Regulation.

The impacts are likely two-fold. Firstly, this Regulation asks a major question of importing corporates as to whether they have traceability within their supply chains. Secondly, it has the potential to disrupt corporates which do not have traceability and responsible sourcing embedded within their supply chain (and it is clear that many companies exposed to this risk are unprepared to tackle deforestation).

Looking ahead, there have been calls for Financial Institutions to be included within the Regulation and this is a possibility at the first review in two years (2025). This will put further pressure on potential violators and provide recourse and liability to those funding deforestation and land use change.

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One indicator of the importance of a topic to investment managers is whether it features on the agenda at annual shareholder meetings.

So where does biodiversity rank? How does it compare with the climate agenda?

Recognition of biodiversity and nature-related issues is well behind climate change. In the last five years only (2018 to 2022 inclusive) there were 15 proposals which Planet Tracker classified as related to biodiversity, compared to 174 proposals to create a climate change report.

A Planet Tracker analysis shows biodiversity is rarely discussed, but we are confident that it will rise up the corporate and engagement agenda, pushed by an agreement of 188 countries at COP15 United Nations Convention on Biological Diversity in Montréal, which agreed a Global Biodiversity Framework (GBF) at the end of 2022.

Furthermore, a rise in shareholder proposals on deforestation looks inevitable following the European Council and European Parliament’s recent political agreement on a new regulation which will ban products linked to deforestation being sold within the EU.

Corporates should prepare for a rise in biodiversity shareholder proposals as investors are going to require this information in the near future.

Having recently delivered a number of ESG comms mini-audits and worked with other companies on their broader sustainable investor communications plans, I am constantly surprised by how much time companies spend on reporting (months) and on data disclosure to ESG/sustainable investors (weeks) relative to the amount of time they spend finding out who all of this reporting and disclosure is actually for (typically, somewhere between no time and a few hours).

(If a company can’t put a name and a face to the 1, 2, 3, 10 … individual analysts and portfolio managers that it believes it is communicating with, how can they know that they are communicating the right stuff rather than just the stuff that conventional wisdom, standard setters and ESG ratings agencies assume might be relevant to investors?).

How many investors & analysts actually matter to each company?  I reckon it’s 58

For all of the talk about “what INVESTORS want on sustainability”, the reality is that – for any specific company, there are a specific group of individuals at investment firms and investment research providers.  For an average company, I reckon there are 58 individuals who can be identified as the primary target audience for the sustainability information provided by companies for material investment action.

Of course, there is no such thing as an ‘average company … of average size … in an average geography … with average exposure to sustainability issues’ … which is why we encourage all companies … before embarking on their sustainable investor communications in any given year to create / update their Register of SRI Interest.

However, the generic process discussed below should help all companies progress from the scary and paralysing prospect of “what capital markets want on sustainability” to the more accessible (and real) “what Lisa from Investor A, Iason from Ratings Agency B and Juan from Data Provider C want on sustainability’.

Here is how we identify the priority 58.

(NB - all of these analysts and investors can be identified for free using the SRI-Connect Directory)

Lead (sector) analysts at current major holders (7)

The first priority group is, of course, the specialist sustainability sector analysts at any current major holders.  These are the individuals who have nominated responsibility for covering your company’s sector within the investment firms that actually hold your shares.

If we assume that ‘Top 20’ is a workable cut-off for ‘major’ holders, European and North American firms should be able to identify between 8 – 10 of these analysts.  Outside those regions, the number may drop to 4-6.  So, we’ll take 7 as an average.

Issue analysts at major holders (+2 = 9)

Some asset managers (strangely IMHO) don’t allocate coverage responsibility based on sector (as they do for ‘mainstream’ research), instead they allocate by sustainability issue.  Let’s say there are 2 such investors within each firm’s top 20.

Heads of research at major holders (+4 = 13)

Then, in some cases, a company won’t be able to identify a sector- or issue-covering specialist.  In these cases, the company will need to use the Head of SRI/ESG research as a proxy contact until they can identify the right coverage analyst.  We have added 4 to our total as an average between an expectation of 6 such analysts in EU & NAM and 2 elsewhere.

(Heads of SRI/ESG Research … please take note.  Encourage your analysts to update their sector and issue coverage on SRI-Connect via here (and/or do it on your own website).  Otherwise, you inevitably become the de facto contact point for companies).

Overall, companies should be able to identify an average of 13 specialist analysts interested in their sustainability performance.  Yep, that feels about right.

Analysts at target investors (+10 = 23)

Then, I have never met a company that does not want to expand the pool of capital available to it.  So, all firms will want to include the relevant analysts from a target group of firms.  Let’s not be greedy, let’s say a company has a target list of 20 investors and half of these have an interest in sustainability.  (Again, companies should prioritise sector specialists over issue specialists and both over ‘Heads of SRI/ESG research’.

Sustainability specialist investors (+10 = 33)

Beyond the largest institutional investors, there are about twenty investors worldwide that have developed advanced and specialist expertise in sustainable investment that differentiates them from the broader approaches being adopted by other (often larger) institutions.  Such investors used to be identifiable as those with specialist and thematic funds; then they because the pioneers of fundamental integrated analysis and are now those most enthusiastically embracing ‘sustainable economic transition’ and ‘impact’.

If a given company wants to engage with at least half of these, that adds 10 individuals to the target list.

Issue-focused thought-leading investors (+3 = 36)

Beyond this, there are typically a few opinion-leader investors who are globally-vocal about the issues facing your sector even if they don’t and may never hold your company.  Their views are part of the sustainable investment debate; you want to be part of that same debate; add them to the list.  (NB this does not mean every investor with a perspective on climate change.  Rather it means the (typically two or three) driving forces behind research or campaigns of particular relevance to your company.

Analysts at research and engagement service providers (+22 in total = 58)

• Finally, we come to the research providers – who probably should be prioritized at roughly the same level as investors.  Certainly not more (as it’s the investors that actually buy, hold or sell companies’ shares) … but not less either (as research providers reach (with their distribution) (smaller, non-target and quants) investors that companies can’t realistically expect to reach.

From these we suggest that companies need to identify (rationale below):

• A => 10 x lead sector analysts from ESG Ratings Agencies’
  • (3 x ‘big guns’, 3 with regional focus, 3 from the CRAs + 1)
• B = > 5 x sustainability specialists at sell-side brokers
  • … because they produce contextualized RESEARCH (as opposed to data and ratings), integrate into valuation and have broad distribution reach (including to ‘mainstream’ investors)
• C => 3 x analysts at credit ratings agencies
  • … for the same reasons as sell-side brokers … but in fixed income
• D => 1 x influencers from data providers
  • … because the analysts that work for ‘insights’ teams contextualise raw data in a way that makes it usable by investors
• E => 2 x analysts at ‘engagement service providers’
  • … where these have a particular focus on issues of relevance to your company
• FG => 1 x analysts at ‘for impact’ or ‘grant-funded’ research providers
  • … where these have a particular focus on issues of relevance to your company
• Grand total = 58 …

… relevant individuals at significant organisations … all of whom have names and faces and parents and likes and dislikes … but may not be called Lisa or Iason or Juan.

In short, they are human beings whose specific sustainable investment needs and priorities can be understood and met by companies.

BUT…

(Much as I abhor the Trumpian (Trumpish? Trumpesque?) capitalization, it is a big ‘BUT’)

… while these 58 individuals can usefully be identified as priorities in the communications purposes, I do not for so much as one second suggest that this should be done to the exclusion of other investors or research providers.  Having identified the priorities, companies should then take steps to ensure that all sustainability information is provided equally and openly for the benefit of all investment users and that all investors and research providers to participate in an annual sustainability performance update webinar.

(Finally, please note that I don’t purport to represent what other stakeholders need.  There are lots of audiences that companies need to communicate with.  I don’t pretend to know about these audiences or what they need.  My focus is on understanding and communicating about the investment value chain.)

Discuss…

(Like almost all quantitative data in sustainable investment) … 58 is a meaningless number.

What is meaningful and interesting is the process by which it is generated.  Do you agree with this?  Have I missed any categories?  Have I over-prioritised some?  Do companies actually go through this process?  Do they need to?)

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