Posts Tagged ‘esg’

Capital Markets ESG Insights: October

Posted on: October 17th, 2022 by Tomas White

In this latest iteration of the MHP Capital Markets’ quarterly ESG Insights newsletter,we examine how the energy crisis in Europe has impacted the road to net zero.

We discuss the anti-ESG rhetoric that is dominating headlines in the US, and explore the controversy surrounding HSBC’s ex-Head of Sustainability, Stuart Kirk, and key learnings from this, particularly when it comes to corporate communications that touch upon controversial topics. We also feature Benchmark Holdings as our Client in Focus.

For any questions or feedback please contact us at esg@mhpc.com

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For any questions or feedback, please contact the team at ESG@mhpc.com.

Capital Markets ESG Insights: July

Posted on: July 19th, 2022 by Tomas White

In this latest iteration of MHP Capital Markets’ quarterly ESG Insights newsletter, we examine how perceptions of ESG have evolved over the past six months following a wave of criticism across the market questioning its relevance and future.

With Scope 3 emissions dominating the corporate climate responsibility agenda this year, we take a closer look at how corporates are communicating their approach to becoming net zero in their supply chains.

Whilst this remains an important focus, we also explore how the market is beginning to look beyond net zero, examining those companies that are committing to take this further and become climate positive, and what this looks like in practice.

We also feature Tyman as our Client in Focus.

 

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For any questions or feedback, please contact the team at ESG@mhpc.com.

Climate Change: Turning a slow-motion global crisis into a news story

Posted on: May 12th, 2022 by Tomas White

COP26 has put climate change and wider environmental issues at the centre of the UK news agenda.

Keith Gladdis from Engine MHP’s Strategic Media team spoke with Ben Spencer, the Science Editor of the Sunday Times about how clients should navigate the issue.

 

Here are the six key takeaways:

 

Climate change isn’t about emissions, it’s about how it affects people.

Ben says: “Climate change is a very slow news story; it’s happening in slow motion and nothing really changes. That makes it very hard to present as a crisis.

“If I write a story about climate change it’s rarely about an increase in emissions it’s going to be about what it means for people. How we heat our homes, the kind of cars we drive the holidays we take or the food we eat. That’s what people want to read.

To prove the point the best performing story on the Sunday Times website on Sunday 18 April was one Ben penned about the future of gas-fired boilers

 

COP26 isn’t really the story

“This is undoubtedly a big year for climate change, it’s been described as make or break because we really need to see emissions dropping soon. However, COP26 is really a geopolitical story, a diplomatic story about persuading countries to come on board. It’s frankly not the most interesting of events, several thousand diplomats, activists and journalists talking about legal frameworks.

“I was talking to a former UN diplomat last week who said it’s less about there being a big moment at COP26, it’s more about ratcheting up the action, several big countries making pledges. It’s about the totality of what can be achieved rather than in previous summits where it’s been about whether a big agreement can be reached or not.”

 

Journalists are looking for substance.

“There’s a lot of talk about greenwashing and I think some claims companies make are laughable. If a company makes a bold statement on its environmental credentials that’s fine, but I want to know how they’re going to achieve that ambition and how quickly can it be done. There is a lot of scrutiny of these statements.

“It can be very positive if companies like Shell or Exxon Mobil seriously invest in renewables, that’s transformative but we will certainly scrutinise it.”

 

The issue of plastics will return

“The thing about climate change is that it’s very hard for people to actually grasp what it is. It is invisible, no-one can see it. It demands a leap of faith. That’s why an issue such as plastics will make a comeback.

“Plastics in the ocean are tangible, you can see the impact it has on nature.”

 

The political consensus is fragile

“The road to Net Zero have been relatively easy so far. We’ve built wind farms which most people wanted, and closed coal fired power stations which we wanted to do anyway. It’s when things start to affect the consumer that the political unity could fracture.

“It’s not long since Boris Johnson was considered a climate sceptic and David Cameron ordered his team to get rid of all the ‘green crap’. There’s huge potential for political friction, potential for a culture war.”

 

The Sunday Times is looking for ‘solutions based’ stories.

Ben said: “This year has been difficult for so many people and readers are looking for positivity. That’s why we’ve looking to deliver positive, solutions-based journalism.

“Readers know there’s a climate crisis and they want to know what can be done about it. We are looking at the great issues in our society and how science is going to solve them. Even when we are writing a critical story, we are looking for the constructive element.”

Capital Markets ESG Insights: April

Posted on: April 26th, 2022 by Tomas White

ESG insights is a quarterly report, which aims to examine some of the most pressing themes from the ESG landscape in the last few months.

We also look to include some practical recommendations, as well as featuring a Client in Focus, highlighting some of the good work being done in this area by our clients.

In this edition of our ESG Insights report, we explore some of the key ESG related themes arising from Russia’s invasion of Ukraine.

 

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For any questions or feedback, please contact the team at ESG@mhpc.com.

ESG Insights: Supply Chains

Posted on: February 17th, 2022 by Tomas White

The coronavirus pandemic has placed an unprecedented spotlight on supply chains; they are now a dominating feature on every news page, press release and regulatory announcement. It is easily the most common challenge on which we have been advising our clients for at least the last six months. With the knock-on impacts of Brexit, the Suez Canal blockage and of course COVID-19 persisting, it seems inevitable that risk managers will continue to sweat over supply chain bottlenecks and breakdowns for many months to come.

When scrutinising supply chains through an ESG lens, management teams must look beyond pandemic considerations. While companies continue to respond to COVID-19 using expanded inventories, contract extensions or onshoring, the pressures upon international logistics have masked the growing impact of climate change on supply chain networks.

Weathering disruption

Climate change is already impacting corporate profitability. Extreme weather has cost Europe approximately €500bn over the past 40 years, and last year was a major factor behind the power outages experienced by a whopping c.4% of the world’s population (c.350 million people). This year carries the burdens of increasing agricultural commodity prices and materials shortages due to the sheer magnitude of these events in 2021, the second-most costly year on record for the world’s insurers after “hurricane-riddled” 2017. As the director of the Sustainability Initiative at MIT told Bloomberg last month:

“It’s not the next big supply chain crisis. It’s the next big supply chain crises, plural.”

Supply chain vulnerability to climate change is not new, but greater awareness of the problem is. Last summer, the UK government’s Climate Change Committee concluded in their climate risk assessment that “enhancing supply chain resilience should be a priority for post-COVID recovery planning”, and a recent government report said that “more will be required in the next eighteen months to address this complex risk area”.

Yet complacency on this issue persists. Findings published by AXA Climate in December revealed that 40% of risk managers felt their organisation did not have a climate risk governance mechanism in place. Conclusions from KPMG’s recent report on global manufacturing suggested that, despite 68% of CEOs saying they will ensure their supply chains are resilient, they “may not yet have grasped that the goals of digital transformation and ESG are both consistent and work powerfully together [to] mitigate supply chain risk and enhance sustainability”.

Climate risk visibility

Climate change creates not just greater risk but greater uncertainty. As the on-demand global economy recalibrates to a more robust set of logistical networks, businesses have the opportunity to integrate supply chain climate adaptation. In the past, risk managers have relied on historical data to inform their decision-making. However, we do not know with any precision how severe climate fluctuations will become as the rate of change accelerates; historical observations are less useful for accurately informing future risk. Speaking to Michael Gloor, CEO of climate risk analytics firm Correntics, what is needed is a forward-looking approach:

“Due to the complexity of global supply chains, climate risk transparency requires more and more of a software and data-driven approach… we need to focus on key resilience issues in a company’s value chain and to identify the adaptation measures with the best cost-benefit ratios.”

The recently published annual Carbon Disclosure Project report shed grim light on the state of climate risk adaptability and transparency. For example, approximately 63% of suppliers reported that they continue to source commodities from countries with a high deforestation risk and, despite expectations that the gap between global demand and supplies of fresh water will reach 40% in less than a decade, two thirds of suppliers failed to reduce their water withdrawals from water-stressed areas. The most frequently reported water risks were flooding and increased water scarcity, yet only 13% of suppliers confirmed that they have procedures in place for identifying and assessing water-related risks that fully cover their supply chains.

For business, these risks and uncertainties could have serious consequences. They increase the likelihood of food poverty, drought, wildfires and flooding disrupting supply chains, problems which will likely get worse as climate conditions deteriorate. In financial terms alone, the CDP concluded that environmental supply chain disruption will cost companies $120 billion within the next five years.

Supply change

Environmental issues are interconnected. Social governance objectives for your supply chain better insulate stakeholders from the physical risks posed by disruptive weather. Safe working conditions and longer-term relationships with partners and employees can stimulate sustainable practises that make the sourcing of raw materials less susceptible to extreme events, while improving visibility over the composite parts of your product pipeline.

It’s hard to ignore the irony that supply chains are both the most vulnerable pieces of the corporate jigsaw to the impacts of climate change and the most responsible for causing climate risk thanks to their carbon footprint (i.e. Scope 3 emissions). Whilst corporates are rightly focused on reducing these emissions, Scope 3 tunnel vision must not blind managers to the very real and escalating risks of climate disruption to suppliers, their employees, and the goods and raw materials fundamentally underpinning corporate growth.

As the KPMG report noted, businesses “won’t likely have a healthy supply chain if they don’t focus on ESG, and without a healthy supply chain, they will likely struggle to meet their long-term goals”. Having visibility on what’s happening is crucial to comprehending climate risks, and a company that is aware of its supply chain is better equipped to deal with them.

Recommendations

Focus on adaptability and resilience

Much of the impact of climate change is unpredictable. Avoid trying to calculate risks that are in fact unknowns. Build adaptability and resilience into your business and avoid dependency on risk models which can distort the sustainability of your value chain.

Improve visibility

Where possible, use a data-driven approach to improve visibility across your product pipelines and clearly communicate findings to stakeholders. Be prepared to leverage supplier relationships with those that fall short of the mark on sustainable sourcing. Incorporating AI and blockchain technologies can also help streamline your value chain and reduce your Scope 3 emissions footprint.

Embed ESG into your supply chain

ESG means little if it remains tucked away safely at HQ. A good place to start (or to benchmark against) is ‘’The Sustainable Procurement Pathway’, found on pages 23-27 of this CDP report; this is a comprehensive guide developed by the CDP to help organisations assess and improve the management of supply chain footprints.

What does sustainability really mean in the investment industry

Posted on: January 25th, 2022 by Tomas White

Our research asked investors to consider what role sustainability plays in their personal investments, pensions and stock trading, and what they understand when presented with the wide variety of ESG labels used by financial services providers.

Amongst the key findings were: 

  • 62% of investors would pull out of a fund that was failing to meet its sustainability credentials – with one in eight doing so as quickly as possible
  • Only half of investors trust that funds labelled as ‘ethical’ or ‘ESG’ actually invest in sustainable assets
  • Poor ESG communications mean investors struggle to understand what they are investing in

Sustainable-Investment

 

The research highlights that, while some people hold financial returns as their only objective for investing, there is clearly a growing group who are looking to see their sustainable beliefs reflected in the way their money is managed.

The fund management industry now faces the issue of giving investors the level of information they need to find funds that invest in line with their priorities, in an accessible and easy-to-understand manner – current labels and descriptions are not yet sufficient and with an increasing number of investors threatening to vote with their feet, addressing this critical communications challenge must be a key focus for the industry.

The headline findings from our research are summarised below – examining:

  • The most important factors for investors when assessing the sustainability
  • How individuals act on these beliefs
  • The extent to which current ESG labels are consistent with investor expectations
  • Differences in perspectives on sustainable investing between men and women

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To explore the push towards a cleaner, fairer and more sustainable world economy – and the implications of some of the findings contained in our research – MHP Mischief Financial Services Director Cat Ommanney spoke to FT Moral Money Editor Simon Mundy.

They discuss:

  • The FT’s editorial stance on sustainability
  • What the investment world looks like in 2030
  • Whether the focus on ESG is just a bubble
  • The relative importance of E, S and G factors.
  • The biggest communications challenge facing asset managers regarding sustainability
  • The main hurdles in reaching our climate change goals
  • The clarity of current ESG labelling
  • How the investment industry can best effect change.

 

ESG Insights: January

Posted on: January 20th, 2022 by Tomas White

KEY THEMES

1. The challenge of decarbonisation: Scope 3 emissions
2. Effective ESG reporting: the biggest challenges facing corporates
3. Engage or Divest: the rise of shareholder activism and fund divestment

1. The challenge of decarbonisation: Scope 3 emissions

Scope 3 emissions – the greenhouse gases created indirectly by a business beyond its control, most commonly through its supply chain – will dominate this year’s focus on corporate climate responsibility. This differs from the more familiar Scope 1 and 2 emissions, the former directly generated from a company’s core business and the latter indirectly produced by energy bought by a company. But too much focus on Scope 1 and 2 emissions risks becoming another, often inadvertent way of greenwashing, particularly as public and private vigilance can be overwhelmed by carbon neutral and net-zero pledges publicised constantly across all industries.

For most, Scope 3 emissions unlock the real climate impact of a business. On average, they are 11.4 times higher than operational emissions and account for more than 70% of a corporate’s carbon footprint. If you strip out the Utilities sector, that figure is much higher:

2021 saw increasing awareness of how Scope 3 is key to any serious corporate climate commitment. IKEA set a benchmark for Scope 3 awareness in retail last year with a report that focused on their planned value chain emissions reductions by 2030. They found that it would be “the equivalent to cutting the average climate footprint per product by an estimated 70%”. IKEA isn’t alone. Maersk, the world’s second-largest container company, took unprecedented steps for the shipping industry last week by accelerating plans to achieve net zero emissions in its business by 2040, a decade earlier than previously planned.

According to the CDP (Carbon Disclosure Project), only 37% of suppliers in 2020 said they were taking action and engaging with their own stakeholders on Scope 3, even lower than the previous year. For far too long there has been a worrying misconception that businesses have no control over Scope 3 emissions. They do, and there are several steps that corporates can take to demonstrate this.

1. Digitise your supply chain

This is the most straightforward method for cutting Scope 3 emissions. There are plenty of tools available to help drive sustainability performance and enhance the visibility and traceability of your product. A recent report by Schneider Electric highlighted the value of incorporating AI and blockchain technologies to reduce carbon footprints, and hinted at the growing influence of these technologies in operations and supply chain management. Morrison’s created a stir last month by pledging to reduce carbon emissions across parts of the supply chain out of its control by 30% within the decade, offering 400 suppliers free access to software analytics so they can manage operational carbon emissions effectively.

2. Leverage supplier relationships

Do not underestimate your clout with partners in your supply chain. As of this year, Tesco will be introducing fully electric HGV’s to serve its Welsh distribution centre, initiating the process of switching to a new provider with fleet-wide zero-emissions transport operations by 2025. Leverage your relationships with suppliers and agree on carbon footprint reporting parameters and reforms. As the case of Morrison’s shows, shared supply chain analytics are a practical way to get started.

3. Innovate

Interrogate your product or service’s development to find inefficiencies that can be eradicated from the decision-making and logistics process. Weir Group announced its commitment to a Science-Based Targets initiative last month, recognising its carbon footprint is “dominated” by emissions beyond their own facilities, namely, by the customer’s use of their products. Weir’s commitment to accelerate Scope 3 reduction depends upon conscious innovation: engineering products and solutions that shrink emissions output. The announcement confirmed that some of Weir’s technologies were “already offer[ing] energy savings of up to 40%”.

2. Effective ESG reporting: the biggest challenges facing corporates

ESG reporting is a challenging endeavour, with a multitude of differing frameworks, evolving regulation and – at present – limitations to the comparability of relevant data. To understand the various challenges facing corporates who are keen to meet best practice, and initial steps that can be taken to help address these challenges, the Financial Reporting Council’s ESG paper is a sensible starting point.

The FRC has identified and grouped the main ESG challenges within six stages: Production, Audit and assurance, Distribution, Consumption, Supervision and Regulation.

  1. Production – Companies face challenges in how they measure, manage, control and assure ESG data, with reporting often aspirational and high level but without providing users information about progress or whether financial data is aligned with the commitment.
  2. Audit and assurance – There can be a lack of credibility in ESG information, and independent assurance may be insufficient to meet expectations given the current level of data maturity.
  3. Distribution – ESG information is often located in separate places, reports and media, and often not in an accessible or reusable format.
  4. Consumption – Users often have difficulty obtaining ESG data, and where it does exist it is often based on differing methodologies with limited comparability.
  5. Supervision – With increasing expectations of more and better ESG reporting, there is a need to supervise whether companies, auditors and assurance providers meet appropriate standards.
  6. Regulation – Different countries, organisations and markets are responding to ESG challenges at differing speeds and depths, making international comparability and coordination difficult.

To address the above challenges is not a quick fix. The FRC has proposed three modes of action as being most helpful in addressing these challenges:

  1. Co-ordinating – Further coordination is needed within the UK and internationally across reporting, markets and regulation;
  2. Connecting – Whilst the UK can, and already has, made progress, connecting with others internationally will be a more effective longer term outcome; this can be achieved by leveraging partnerships in order to provide leadership, guidance and support, along with a commitment to drive change;
  3. Contributing – All interested parties must contribute collectively to the broader discussion on these matters, if ESG is to work effectively across multiple markets.

Following the publication of the FRC’s paper, in November the International Financial Reporting Standards Foundation (IFRS) announced the formation of the International Sustainability Standards Board (ISSB), aiming to establish a global consensus for climate and sustainability disclosures. The ISSB will consolidate with the Climate Disclosure Standards Board (CDSB) and the Value Reporting Foundation (VRF) by June 2022, resulting in the formation of a new global standards setter. The ISSB is expected to come out with a first set of ‘baseline’ global standards on climate-related disclosures in mid-2022.

In the meantime, we have identified factors that corporates should prioritise to ensure their own ESG data is accessible and credible, and move their own ESG reporting forward in line with the direction of travel:

  • Available – Make your ESG data accessible not only to your shareholders but broader stakeholders.
  • Digitisation – Consider electronic distribution of ESG data and a digital tagging system to make it easily identifiable.
  • Prioritisation – Speak with shareholders and your broader stakeholders such as suppliers, customers and employees to understand their priorities when it comes to your ESG data and reporting.
  • Verification – Consider engaging with an external third party to validate the quality of your ESG data.

For a more detailed discussion on the FRC’s ESG paper, please click here to watch our video with the FRC’s Executive Director of Regulatory Standards, Mark Babington.

3. Engage or Divest: the rise of shareholder activism and fund divestment

It’s nothing new that businesses are increasingly focused on developing and communicating effective ESG strategies to shareholders and stakeholders alike, with poor ESG credentials now a veritable risk to accessing capital. This is increasingly critical as investors look to ‘Engage or Divest’; they either engage in ESG-related activism, or divest holdings in those companies which don’t meet specfic ESG thresholds.

In recent months large shareholders have actively engaged with investments, using their influence to engender change and force companies to improve their ESG credentials, as well as divesting away from those holdings which are in traditionally ‘ESG-unfriendly’ industries or where performance is lagging.

For example, Nest, the £20bn state-backed workplace pension scheme, in December announced plans to reduce its portfolio emissions by 30% by 2025 and disposed of holdings worth £40m in ExxonMobil, among other oil and utility companies, citing lack of progress on managing climate change risks. Similarly, Dutch civil service pension fund ABP confirmed it will stop investing in fossil fuel producers and sell the majority of such holdings, which account for 3% (€15bn) of its total assets, by Q1 2023.

Despite growing levels of ESG-related investor activism, management teams need to remain focused on their responsibilities to shareholders in terms of value creation and returns. Unilever recently came under fire from Terry Smith of Fundsmith, amongst other investors, who believes it has become obsessed with ESG at the expense of business fundamentals; in his view, this has been the cause of the share price decline over the last 2-3 years.

Total ESG assets are predicted to reach USD$53trn by 2025. It remains to be seen as to whether more shareholders will look to divest of ESG-unfriendly assets, or if they will be emboldened by 2021’s victories and look to take a more active role across the corporate landscape to push for greater ESG performance. Either way, this underlines the importance of effective ESG performance and communication.

RECOMMENDATIONS

In recent months we have been working with a number of clients on interesting issues related to ESG. Taking these into consideration – along with the key themes discussed in this newsletter – we have collated some recommendations corporates should consider with regards to their ESG communications:

  • Focus on reducing Scope 3 emissions to get ahead of the curve and ensure your ESG credentials don’t fall below investor ESG thresholds.
  • Make your ESG data readily available, engaging, easy to digest and ideally verified by a third party to showcase quality of data and transparency.
  • When communicating ESG-related commitments such as net zero carbon strategies, consider hosting a dedicated capital markets event.
  • Who you are is as important as what you do; ensure that your corporate purpose is intertwined with your sustainability strategy.

CLIENT IN FOCUS

Shaftesbury PLC is a Real Estate Investment Trust which owns a 16-acre portfolio based in the heart of London’s West End. It has a portfolio of around 600 buildings, clustered in high profile locations, many of which make a significant contribution to the heritage of this historic part of London. Shaftesbury’s portfolio is focused around five iconic villages: Carnaby, Covent Garden, Chinatown, Soho and Fitzrovia; across the estate there are over 600 businesses, including retailers, restaurateurs, cafés, bars and office occupiers, as well as residential properties.

In November 2021, Shaftesbury launched its Sustainability commitment, complete with net zero carbon roadmap and an ambition to reach net zero by 2030. An accompanying launch event for Shaftesbury’s stakeholders, including shareholders, partners and advisors, was seen as an effective way for the REIT to lay out its ambitious strategy, together with how it plans to achieve it. The event also provided an opportunity for discussion with stakeholders, a reflection of Shaftesbury’s collaborative approach.

For any corporates considering a commitment of this nature, below are some takeaways from Shaftesbury as to how you can make your communications particularly effective:

Stay aligned to your corporate values – Shaftesbury’s purpose is to contribute to the success of London’s West End by curating lively and thriving villages where people live, work, and visit. It has a proven management strategy to create and foster distinctive, attractive and prosperous locations, led by an experienced management team focused on delivering these long-term strategic objectives and staying aligned to its five core values:

  1. being human in how we operate
  2. original in how we nurture talent and think
  3. community minded in our approach to the West End
  4. being responsible, and
  5. long term in our approach to everything

The above values are engrained within everything Shaftesbury does, including its newly announced Sustainability commitment.

Talk about your approach – Shaftesbury was keen to emphasise its strategic approach; that is, to carefully manage, re-use and adapt its portfolio of mostly smaller, mixed-use and heritage buildings, all of which are in conservation areas and in many cases of listed status. Through refurbishment, reconfiguration and change of use – as opposed to demolition – Shaftesbury’s strategy avoids the high levels of carbon emissions and waste that are inherent in demolition and new construction projects, whilst also protecting the unique heritage of its West End location. Shaftesbury’s approach is also very collaborative, and its commitment to reach net zero carbon will involve working closely with partners, occupiers and broader stakeholders.

Utilise appropriate governance – When developing its sustainability commitment, Shaftesbury put in place governance processes to provide accountability and reinforce its commitment to reach net zero carbon by 2030, and carbon neutral for its own operations by 2025. A Board-level Sustainability Committee has been established – in addition to the existing Executive Sustainability Committee – to review progress and ensure specific deliverables are met as Shaftesbury moves towards its net zero carbon target. Additionally, Shaftesbury discloses climate risks in line with the requirements of the Task Force on Climate-related Financial Disclosures (TCFD), the details of which can be found in its Annual Report, as well as publishing an Annual Sustainability Report. Shaftesbury is also a member of the Better Buildings Partnership, a collaboration of the UK’s leading commercial property owners who are working together to improve the sustainability of existing commercial building stock.

Publicise your commitment – Shaftesbury was keen to host a capital markets event to ensure all stakeholders were well informed about its pledge. This provided Shaftesbury CEO, Brian Bickell, and Head of Sustainability, Matt Smith, to talk through the commitment and provide clear details of how they will approach what is an ambitious target. This interactive event was a great opportunity to not only raise awareness of the commitment, but also provided credibility and weight behind Shaftesbury’s plans, as well as an opportunity for open discussion with stakeholders, to both reassure and gain feedback for further consideration.

OTHER DEVELOPMENTS

  1. The Financial Conduct Authority’s (FCA) new rules and guidance came into effect on 1 January 2022, requiring all publicly-listed companies to declare whether they meet TCFD recommendations in their financial reporting, and FCA-regulated asset managers to disclose how they incorporate climate-related risk into their investment decisions.
  2. The Institute of Directors has demanded public companies improve the ethnic diversity of their boards, after many FTSE 100 companies failed to meet the 31 December 2021 deadline.
  3. The International Financial Reporting Standards Foundation (IFRS) announced the International Sustainability Standards Board (ISSB) on 3 November 2021, aiming to establish a global consensus for climate and sustainability disclosures.
  4. The ISSB will consolidate with the Climate Disclosure Standards Board (CDSB) and the Value Reporting Foundation (VRF) by June 2022, resulting in the formation of a new global standards setter.
  5. The ISSB is expected to come out with a first set of ‘baseline’ global standards on climate-related disclosures in mid-2022.
  6. Analysis from the CFA Institute found that the correlation between MSCI’s ranking system with S&P and Sustainalytics was below 50%, which can be confusing for fund managers and companies.
  7. Oil and gas shares and energy equity funds outperformed ESG-aligned companies and funds in 2022, according to Morningstar data.
  8. ESG ratings provider Sustainalytics launched its ‘Corporate Supply Chain ESG Solutions’ to help companies assess and manage ESG risks within their supply chains.

UPCOMING KEY EVENTS

Get in touch

MHP Mischief’s Capital Markets team provide strategic financial communications advice to private and public companies across a range of sectors. We advise companies on all aspects of their engagement with the capital markets, from financial reporting, M&A, IPOs and fundraisings to corporate profile raising activity, ESG communications and reputation management. For any questions or feedback please do get in touch.

ESG Insight: COP26 round up

Posted on: November 19th, 2021 by Tomas White

Glasgow breakthroughs

UK Prime Minister Boris Johnson launched an international pact signed by 40 countries and organisations including the EU, China, US, India to make clean technologies the most affordable, accessible, and attractive choice globally by 2030. The agenda takes a sectoral focus on ‘Glasgow Breakthroughs’, with annual global reviews in each sector starting in 2022:

  • Power – clean power the most affordable and reliable option for all countries to meet their energy needs efficiently by 2030
  • Transport – zero emission vehicles to be more accessible, affordable, and sustainable in all regions by 2030
  • Steel – near-zero emissions steel production in every region by 2030
  • Hydrogen – affordable renewable and low carbon hydrogen to become globally available by 2030
  • Agriculture – climate-resilient, sustainable agriculture to be the most attractive and widely adopted option for farmers everywhere by 2030

A notable new supporting initiative is ‘The Breakthrough Energy Catalyst’ programme, which aims to raise $3bn in concessional capital to catalyse $30bn of investments to reduce clean technology costs and create markets for green products for green hydrogen, Direct Air Capture, long-duration energy storage, and sustainable aviation fuel.

The detail

Climate Finance

There are a whirlwind of new alliances, pacts and taskforces to navigate in the world of climate finance targets, standards and capital. We’ve broken down the key takeaways from the last two week’s announcements below.

Glasgow Financial Alliance for Net Zero (GFANZ)

  • Former Governor of the Bank of England Mark Carney declared the initiative had been backed by more than 450 financial institutions across 45 countries and had leveraged up to $130 trillion of private finance to help global economy’s transition to net zero, in alignment with the Paris Climate Agreement goal of limiting global warming to 1.5oC

  • The commitment provides a targeted framework through which signatories can reduce carbon emissions from their lending and investment portfolios and achieve net zero by 2050
  • Investors must disclose five-year decarbonisation plans within the next 12-18 months under the Net-Zero Asset Owner Alliance
  • Under the Net Zero Asset Managers initiative, signatories commit to rigorous transparency and accountability, publishing Task Force on Climate-Related Financial Disclosures (TCFD) reporting annually, complete with climate action plans
  • Annual reporting against PCAF Standards uses the low/no overshot 1.5 oC scenarios consistent with the International Panel on Climate Change (IPCC) and Paris Aligned Investment Initiative

Climate Transition Taskforce

  • Chancellor Rishi Sunak set out ambitions for the UK to become the world’s first net zero financial centre
  • A science-based ‘gold standard’ for transition plans will be drawn up by a Transition Plan Taskforce by the end of 2022, with firms expected to start publishing transition plans in 2023
  • The UK also committed a total package of £576m to mobilise finance into emerging markets and developing economies to fund their green transition

Deforestation

On Tuesday 2 November, over 100 countries signed up to the pledge to end deforestation by 2030. Backed by £7.2bn of new private funding, the pledge increases the committed amount to a £14bn mix of public and private finance. Key signatories include Brazil, Indonesia, Colombia, and the Democratic Republic of the Congo, which together contain 85% of the world’s forests.

28 countries also committed to remove deforestation from the global food trade, and over 30 financial institutions, including Schroders and Axa, pledged to end investment in deforestation-linked activities.

Methane

The US and EU announced a global pledge to limit methane emissions by 30% compared to 2020 levels. The Global Methane Pledge now has 110 signatories, and accounts for over 50% of anthropogenic methane emissions and 70% of the global economy.

Leading emitters include natural gas production, cattle, and agricultural farming industries. While no specific funding amounts or sectoral policies have been confirmed, we can expect greater detail to come.

Coal

More than 40 countries and 22 organisations including HSBC, NatWest, and Lloyds Banking Group, signed up for the UK’s pledge to end all investment in new coal power generation domestically and internationally.

Major economies committed to phase out coal power in the 2030s while poorer nations agreed to follow suit by the 2040s. However, there was significant disappointment that major coal producers and consumers including the US, Australia, India, and China (which made a related pledge in September) are not party to the deal.

Glasgow Climate Pact

After two weeks of intense negotiations, in the eleventh hour, intervention by India and China blunted a commitment by 197 countries to end the use of coal. The key compromise was to change the commitment’s wording from “phase-out” to “phase-down”, arguably placing far less urgency on the intensity and timeline with which signatories will reduce coal use.

Nevertheless, the pact represents historic global governmental consensus on the imperative to reduce coal use, the first COP agreement to do so, with countries also compelled to strengthen their unilateral carbon-cutting targets by the end of 2022.

Carbon Markets

Negotiations surrounding the historically contentious issue of international carbon trading markets under Article 6 of the agreement made good, although somewhat compromised, progress in Glasgow.

New comprehensive accounting rules for the international transfer of carbon market units – crucially, the introduction of “corresponding adjustments” – will help shut down the notorious problem of emissions ‘double-counting’, whereby the buyer and seller both claim a carbon offset to buttress their net zero credentials. Now, only the buyer can use transferred emission reductions.

Autos

Alongside many governments, financial institutions, and local governments/metropolitan areas globally, 11 automotive manufacturers including Volvo, Ford, General Motors, and Jaguar signed a declaration on accelerating the transition to 100% zero emission cars and vans by 2035 in leading markets and 2040 globally.

To achieve this, governments committed to adopt policies to enable, accelerate, and incentivise the transition, automotive manufacturers committed to align their business strategies and build consumer demand, and financial institutions agreed to make capital and financial products available to enable the transition for consumers, businesses, charging infrastructure and manufacturers.

Further regulatory developments in and around COP26

  • Britain to be the first G20 country to make the TCFD recommendations mandatory – the government confirmed just ahead of COP26 that from April 6, 2022, over 1,300 of the largest UK-registered companies and financial institutions will be required to apply the TCFD recommendations. It follows the FCA who, in December 2020, introduced a rule for companies with a UK premium listing to disclose, on a comply or explain basis, against the recommendations of the TCFD. This new rule applies for accounting periods beginning on or after 1 January 2021
  • FCA set to require intermediaries to take into account sustainability issues when advising clients – in a discussion paper published on 3rd November to coincide with COP26 Finance Day, the FCA said it is introducing Sustainability Disclosure Requirements for firms involved in investment management and decision-making processes
  • IFRS announces global sustainability standards board – efforts to establish a global consensus for climate and sustainability disclosures took a major step forward as the International Financial Reporting Standards Foundation (IFRS) announced the new International Sustainability Standards Board (ISSB) on 3rd November. The ISSB will consolidate with the Climate Disclosure Standards Board (CDSB) and the Value Reporting Foundation (VRF) by June 2022, resulting in the formation of a new global standards setter. The ISSB is expected to come out with a first set of ‘baseline’ global standards on climate-related disclosures in mid-2022, which would build on the TCFD recommendations

A step in the right direction, but is it enough?

The COP26 summit in Glasgow may have ended on a sombre note, with many seeing the “phase-down” commitment as a watered-down pledge indicative of the difficulties in leveraging global consensus on the urgency required to tackle the climate crisis. For the UK, Natasha Clark, Political and Environment Correspondent at the Sun, told MHP Mischief,

“for the PM the further headache is how he sells green policies to voters, many of whom care about the environment and climate change, but don’t want it to hit them in the pocket.”

Mark Babington, Executive Director of Regulatory Standards at the FRC commented,

“there is a real focus on ensuring COP26 delivers tangible outcomes, and therefore yes, I think there is real commitment, and real buy-in [from Government] to do that”

Mark Landler, the New York Times London Bureau Chief said,

“if we emerge from this COP with some sense of how climate finance works, how emissions reduction targets are measured [then] I think it will be seen as a successful COP”

See our full interviews with Mr Babington and Mr Landler here!

All in all, the summit laid bare the tensions in global efforts to tackle global warming, with many debating whether it is fair to expect developing countries with fewer financial resources to make the same pledges as more developed nations, and whether developed nations need to do even more on climate finance to alleviate historic injustices in the global climate agenda.

Nevertheless, progress has been made. Building global consensus on the need for greater and faster action is a challenging process and whilst this COP may have concluded with an unsatisfactory climate act, through such an intensely public process, the summit has escalated the narrative on fossil fuel use, biodiversity, and Global South engagement and support to an unprecedented degree.

Sustainability – the non-negotiable requirement

Posted on: November 2nd, 2021 by Tomas White

Whether it’s how you travel, how you shop or how you invest, seemingly every activity is considered with regards to its carbon footprint and ethicality. This is no bad thing, given scientists’ warning that if we raise global temperatures by more than 2°C (which is likely in the next 13 – 31 years), the world will become uninhabitable.

With more and more of us mindful of our own impact, so too are businesses acutely aware of the need to disclose their sustainability measures and demonstrate they are actively playing a role in lessening the impact of climate change, whilst still offering a stellar service.

In the investment industry, the move to “green” appears to have taken place almost overnight. In the last quarter of 2020, 215 new sustainable funds were launched, swiftly followed by a further 169 new sustainable funds in Q1 this year. This has been supported by 128 asset managers, collectively managing $43trillion in assets, signing up to reach net zero emissions by 2050; all fund managers active in Europe pledging to adhere to the EU’s Sustainable Finance Disclosure Regulations (SFDRs) and the industry as a whole moving to reach the Paris Agreement Goals.

While such a push is to be applauded, the speed of this change is such that there is an overwhelming amount of confusion around what any of these assurances and claims actually mean.

SFDR, CMIP6, IPCC, WTF?

The unintended consequences of this phenomenal shift towards sustainability are far-reaching:

1) End investors, already often overwhelmed by swathes of information about their funds have not been fully updated on what new terms and rules mean to their investments, resulting in a wealth of misunderstanding;

2) Regulation and enforcements surrounding what is considered sustainable are somewhat lacking, creating a murky land of supposed transparency;

3) Every fund manager now appears to be doing the same thing – and greenwashing is rife.

The vast majority of sustainable funds adhere to relevant sector regulation and cite the use of environmental, social, and corporate governance (ESG) criteria to evaluate investments or assess their societal impact. But what this really means is rarely explained, meaning consumers either have to blindly trust that their investments are truly being used in a sustainable manner, or undergo a huge amount of due diligence (requiring an impressive amount of prior knowledge) to really look under the hood of a fund. The fact remains that with most consumers unaware of the difference between E, S or G, this level of examination is unrealistic.

This lack of transparent information, driven, in part by a lack of relevant data, is often coupled with the dearth of stringent regulation around the area. Pledges to reach net zero are never investigated, commitments to consider ESG criteria are rarely probed and, more often than not, new sustainable funds are simply existing funds with a different, colourful, wrapper. The end issue for investors being that sorting the wheat from the chaff is a thankless and near impossible task; and for fund managers who really are investing sustainably, their voices and actions are often drowned out amongst the market noise.

How to stand out in a sea of green

Fortunately, all is not lost. While the industry is far from perfect, the opportunity to improve is within touching distance. Starting by supporting the consumer, there is huge scope to provide clear information on what sustainability is – educating the end investor on why they should care and clearly explaining how asset managers are making their investments work hard for them – in a truly sustainable manner.

Where regulation falls short, the industry has the opportunity to fix itself from the inside out – calling out good and bad practices; celebrating transparency and recognising where more needs to be done. There are several firms already doing just this, and the results in terms of market inflows, speak for themselves.

Finally, consumers are becoming increasingly engaged and discerning. A recent report from data analytics firm, Kantar, predicts that by 2029, over half of the global population will be “Eco Actives” –those who care about the environment and the role they play in protecting it. This in turn means that they will seek out businesses who share their values, fund managers who not only invest sustainably but who encourage and strive for a more sustainable and transparent industry.

We have all seen the rise in consumers voting with their feet and when faced with such an emotive and important subject, this behaviour is likely to be exacerbated. With so much noise about investing sustainably, this topic is becoming a hugely polarising issue – resulting in even more tribal and demonstrative actions and driving consumers to make the move from being vocal about what they want to taking physical steps to achieve it.

The net result being that industry players who clearly and proactively demonstrate their sustainable credentials, and those who provide consumers with the level of information and clarity they require, will not only help with the survival of our planet, but will also be those reaping those rewards.

ESG Insights: October

Posted on: October 11th, 2021 by Tomas White

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 validation. The 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