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 email@example.com
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.
In a (hopefully) post-pandemic environment with an economy facing the biggest drop in living standards since the 1950s as wages fail to keep pace with inflation, there’s one issue dominating debate: pay.
And there’s nothing that brings it into sharper relief than annual reports and AGMs. With swathes of the population grappling with soaring energy bills and rising retail prices, executive remuneration is a hot button.
With an ever-growing focus on ESG, all corners of the investment community are becoming more outspoken on this issue; institutions, activists, and campaign groups are all gaining confidence in taking a firmer stance.
All of this means the media are looking at remuneration with renewed interest.
Remuneration tables in annual reports have always been an easy target for journalists. Even before the pandemic changed the environment, little effort was required to scroll to the remco report (journalists rarely read anything else in an annual report*) and produce a “CEO paid £XXm in salary and bonuses” story.
It’s an even easier sell to an editor when the company in question has suffered a fall in revenue or profit (ideally both). Throw in a share price collapse and you have the Holy triumvirate. I know, I spent years doing just this for national newspapers.
Even before Covid-19, exec pay was getting harder to justify in an ESG-cognisant world, complete with demands for ratios showing the multiple of a shopfloor salary to the CEO’s. Institutional investors were also becoming more active, calling out what they saw as egregious pay or bonus packages.
But after two years of Government bail-outs, rates relief, furlough money and other taxpayer-funded support for businesses, the spotlight on C-suite remuneration is harsher than before.
Here are some key points worth considering as AGM season really gets going:
Are you in the cross hairs?
Journalists will be looking for companies with a history of investor revolts over pay. If your business has faced trouble before, then expect them to be watching closely.
Other actions likely to score hits on a hack’s radar are management or board changes, investor activism, windfalls (think energy companies), soaring profits or surging share prices which could be linked to long-term incentive plans (LTIPs), inflating total pay.
Government support for businesses during the pandemic will also attract attention. Companies seen to have done well through the pandemic will also be in focus; those which might not have attracted such attention before could now find themselves under scrutiny for handing out bonuses to bosses while having not paid back government support.
“Acme Widgets took £1m in taxpayer cash it is yet to hand back but awards boss £1m bonus” is an easy headline to write and could leave the affected business in a very uncomfortable position.
Journalists often get confused by LTIPs. Many grapple with – or maybe choose to ignore – the concept of an LTIP paying out in a single year, not realising or overlooking it is a reward for several years’ performance. Payouts from such schemes mean they often relate to results pre-dating the unique conditions created by the pandemic.
Do not be surprised if a story fails to make this distinction, meaning that comparison of total remuneration packages for consecutive years can – unfairly – flag huge increases. It’s a point that can be argued with journalists but it’s not a battle that is easily won.
Journalists generally like proxy advisers such as Glass Lewis and Institutional Shareholder Services (ISS). This is because they can often get hold of their reports explaining whether votes – it’s mainly remuneration ones the media focus on – should be supported or not, explaining their reasoning with a helpful round-up of competitors’ actions. This analysis often generates a quote.
Other groups the journalists frequently tap up for reports include the Investment Association (beware its “red top” rating”) and PIRC. The former is less chatty with the press, the latter often seen as lightweight or too reactionary.
If your company hasn’t got the backing of Glass Lewis or ISS, be on alert. Keep a watching brief if the Investment Association isn’t on side.
Some fund managers may find their individual perspective is trumped by a ‘house view’ or blanket policy, not least on government support. Be conscious of these policies and particularly those investors with a track record of speaking out publicly.
It’s probably too late
By now most remcos will have met and decided how much will be handed out, and probably written reports explaining it. For companies yet to write the committee’s report on pay awards, tone is critical.
You will need to have explanations for hefty pay awards or bonuses that will stand up to the most robust examination, almost certainly at an intensity not seen before. This is because the media will be trying to point out the gulf between the majority of their readers who are seeing their living standards eroded, juxtaposing it with highly paid chief executives, some of whom receive sums many cannot fathom.
Forewarned is forearmed
So how can companies insulate themselves from unwanted attention? Here are a few recommendations:
Ensure you remain aware of the views of the shareholder advisory firms
Stay close to your larger institutional shareholders and take note of their concerns
Flag any potentially thorny issues to your advisory teams well in advance
If remuneration is looking out of kilter (due to LTIPs etc) make sure the drafting reflects the situation clearly
Be prepared for the hard questions
Ensure that the right tone runs through all your communications
*Though journalists usually do a Ctrl+F search for “SFO” and “Serious Fraud Office”. I’ve heard tales of annual reports with special characters inserted between the letters or words to beat this search function. Clever if it works, but disastrous if discovered.
If you would like to speak to MHP about strategic communications advice around this and a range of other boardroom topics, then please don’t hesitate to get in touch.
Alan Tovey spent 20 years as a business journalist on national newspapers, most recently the Daily Telegraph and Sunday Telegraph, before joining MHP’s Capital Markets team in November.
Simon Hockridge is a Managing Director in MHP’s Capital Markets team, with over 15 years of experience in strategic financial communications for listed businesses.
One of the defining features of Russian propaganda over the past few years has been the endless stream of lies it spews out. These often take the form of “doublespeak”, a term derived from George Orwell’s novel 1984, which distorts or reverses the meaning of words. Thus Russia blames Ukraine for every massacre of its own civilians and even the British for its other war crimes.
We observe this daily on social media in tweets from official Russian channels, whether from its local embassies, UN representatives or government officials. A simple example is the use of the following phrase in a recent tweet dated 18 April: “West shows total intolerance towards alternative views”. A breathtaking twisting of reality, when as we know Russia has closed down all independent thought. Indeed, one reads it and wonders for which audience it is designed – Russia’s dwindling cohort of aficionados, apologists and appeasers?
This culture of deception originates from the Russian concept of “vranyo”. This is a term derived from one of two Russian words for lies. Put simply, it means this: “When I lie to you, you know I’m lying to you, I know you know I’m lying and I still lie to you.” Russia has launched vranyo into overdrive for its war in order to confuse, distort and obfuscate and as means to exert power over its appeasers.
Meanwhile, we observe at home, the British Prime Minister being accused of being a serial liar. The latest meme on the topic is a word cloud created by his accusers to somehow prove their point, albeit it may suggest that he attracts bullies, not merely that he is prone to sophistry.
Given Mr Johnson’s pride in being a swot, one can speculate that he knows only too well about vranyo. Indeed the genesis of this blog comes from the fact that Defence Secretary Ben Wallace, who trained at the end of the Cold War at Sandhurst, the Royal Military Academy, is reported as being familiar with the concept, and therefore so must be the Prime Minister.
One can therefore speculate that Johnson is deploying (skillfully or clumsily, depending on your take) the art of vranyo with the British public when it comes to Partygate. Whether he gets away with it is another matter but suffice to say the Russian regime got away with it for years – and arguably is still toying with its appeasers, who nod earnestly at every deception.
Johnson may not be so lucky, given the inevitable cycle of British general elections and the voting booths of public opinion.
The Russian invasion of Ukraine has dominated the news and business agenda, with companies and boardrooms having to pivot at pace to discuss the direct and indirect impact on employees, trading, supply chains and reputations. We’ve reflected on some of the themes we’ve seen over the last few weeks to help inform thinking around the challenges that the conflict has posed for companies, including:
How companies have spoken about the war and disclosed exposure to the region in announcements;
Questions every company should ask before addressing the conflict;
The top questions from the media everyone should be prepared to answer;
Some of the most interesting media coverage of the conflict and its wider impact.
Putting things into context
Since the beginning of Russia’s invasion of Ukraine, over half of the stories in the business pages have been about the impact on companies, international trade and the global economy.
Similar to what we saw two years ago when the COVID-19 pandemic first hit in March 2020, this is the biggest refocusing of resources on the news desks and reallocation of space in the papers since “lockdown” entered the lexicon. This, combined with the focus from the media on the cost of living crisis, has squeezed the coverage of corporate reporting during results season to a minimum. Last Monday, every single story in the Daily Mail City & Finance section was linked to Russia and Ukraine.
How companies are talking about Ukraine/Russia in RNS announcements
Pauline Guenot, Harry Clarke and Pete Lambie
Russia’s invasion of Ukraine began towards the end of February, when most companies were preparing to announce results. This meant that the conflict coincided with a point in time at which the majority of PLCs are obliged to be making announcements, posing both a reputational challenge and a significant post balance sheet event for companies with December year ends.
Companies want to know, “Do we need to mention Ukraine within our results statement?” and if so, “How do we do it?”.
To inform these decisions, we sampled 107 results statements that have been issued since the invasion began, finding a clear split in approaches – 55 (51% of announcements) referenced the conflict. Of these, only 20 companies had direct exposure to the region.
Where companies chose to refer to Russia/Ukraine in results statements:
20 did so within the body or notes to financial statements (including Going Concern statements);
18 did so in the outlook statement;
15 referenced it in the front page or CEO quote.
RNS’ clarifying exposure
Several companies have issued standalone announcements to the LSE to clarify their position and/or exposure to the conflict.
The majority of these announcements have used notably emotive language to condemn the invasion:
Companies called for a return to peace, notably Marsh McLennan “we join all those calling for a swift and peaceful resolution to this deadly conflict” and Coca Cola HBC, “we add our voice to the many who desperately want peace to return to Ukraine”;
Asos was one of the few companies referring to the conflict as a “war”;
Plexus included the Russian population in their statement: “our thoughts are with the Ukrainian people, as well as with ordinary Russians who are suffering consequences”.
For those continuing to operate in Russia and Ukraine, the level of condemnation of the Russian invasion varies. Petropavlovsk and Anglo Asian Mining only focus on identifying the risks and financial impacts, with Petropavlovsk referring to the conflict with neutral terms such as ‘events in Ukraine’ and investment trusts holding securities in Russian companies shared their thoughts with the ‘victims of the humanitarian crisis’.
For those making standalone announcements about operations in Russia and Ukraine, we identified four of their priorities:
Clarifying continuity of operations and financial exposure, which continues to be a theme, with Inchcape announcing the exit of its Russian business this morning (15 March). There have also been a number of RNS’ even when financial exposure is immaterial, as with Watches of Switzerland (worth nothing that JD Sports issued an RNS Reach to clarify the immateriality, rather than a full regulatory announcement);
Protecting their employees, with Imperial Brands continuing to pay Russian employees and prioritising the safety and wellbeing of their 600 employees in Ukraine, and Wizz Air setting an employee and family support scheme;
Expressing support for those affected, with JD Sports ‘expressing the utmost sympathy for all Ukrainians’, Wizz Air offering new jobs with relocation support for Ukrainians who wish to join them and Avast helping in the fight against disinformation by maintaining and bolstering its product offering;
Offering support for humanitarian efforts, with SourceBio International offering medical supplies, while Coca Cola HBC and WPP respectively supporting the Red Cross and UNHCR.
Five questions we’re asking clients before they talk about the conflict
Antonia Green, Crisis and Risk Specialist
As with any conflict, some are choosing to pause their communications activity while others are pivoting to talk about how they are responding to the situation. Communications strategies will entirely depend on the nature of your business, but there are some key questions we urge clients to consider before taking a stance on an issue (or deciding not to):
What is your connection to the issue? Don’t just consider whether you sell in the region, but do you have teams based there? Do you have investments in the area? Before you come out with a position, you have to know where you stand as a business. Look at your full organisational structure, ownership and product or service offering.
Are you making a business commitment to reflect the stance you are communicating? Empty words of sympathy without a clear action to help improve the situation are not enough.
How is your team impacted? If you have a presence in the region, how are you keeping teams safe and supporting them?
Is your voice needed? Or should you be leaving space for more authoritative or representative voices?
Will your employees feel that your words are authentic and representative of the business? If you publicly commit to a stance or a value that your staff feel your organisation doesn’t embody, they may speak out. You need to do the work internally.
Top questions that every company should be prepared to answer
Two weeks into the crisis, companies can still expect to be questioned by the media about their dealings with Russia and how the Ukraine conflict is impacting them. If I were a reporter put in front of a company and given free rein to ask questions, here are the major themes I would look to cover. As for media calls after results and trading updates, expect the normal “how is business/ sales/ profits” questions to go out of the window rapidly as Ukraine remains the top story and journalists have been tasked by news desks to find business angles on it.
1. What is your exposure to the conflict in Ukraine? How is it impacting your business?
Conversely, savvy reporters will be looking for those benefiting from the conflict, such as defence companies or businesses picking up sales as buyers seek alternate suppliers if previous ones are no longer accessible.
2. What operations do you have in Russia/Ukraine?
Bases or staff there, subsidiary companies.
3. What are you doing to protect or safeguard staff in the region?
4. How much/what percentage of your revenues are to Russia/Ukraine?
5. Are you dependent on Russia for supplies/ components or business critical operations? Will you be making long-term changes to your supply chains as a consequence?
6. Are you pulling out of Russia, or closing/ pausing operations there?
If not, expect very difficult follow-up questions asking how this is justified.
7. Will you continue to do business with Russia or Russian companies?
Reporters are likely to ask about the stance both in the short and long-term.
8. Do you have any dealings with those subject to individual sanctions? How will this affect your company?
9. How are sanctions affecting your business operations? Are there any knock-on impacts from direct sanctions on Russia?
10. What pressures have you come under from UK/ Western governments/ investors/ customers/ the public/ media to halt dealings with Russia? What form did this take?
We have already gone through several phases of the news cycle, which began with companies’ exposure to and operations in the region, and moved on through the impact of sanctions and the role of advisers and Board members to UK listed Russian corporates.
What we’re beginning to see now is a rollout of the business desk’s pandemic playbook – with the story moving on to “which companies are going to benefit?” (the new breed of “Covid winners” stories), with a focus on defence companies, and “what are companies doing to help?” (as we saw with support for key workers and schools during the pandemic) – this was last weekend’s Sunday Times splash, with a consortium of UK companies lobbying to fast-track employment for Ukrainian refugees.
Articles you should read on Russia/Ukraine
This is a thoughtful leader column in The Economist reflecting on Putin’s repression at home and ‘re-Stalinisation’ of Russia. Read more.
This piece provides an eminently sensible assessment of how tick box approaches to ESG ignore the nuances of an increasingly volatile world. Read more.
A Russian armoured convey being caught by a co-ordinated Ukraine strike was a brilliant use of shocking images to highlight the reality of modern warfare. Read more.
The Times highlights a recurrent PR strategy for CEO’s: the ‘self-sanctioning’ over MeToo, Black Lives Matter and currently the new Cold War. Read more.
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.
“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.
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.
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.
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.
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.
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.
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.
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.
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.
Auditand 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.
Distribution – ESG information is often located in separate places, reports and media, and often not in an accessible or reusable format.
Consumption – Users often have difficulty obtaining ESG data, and where it does exist it is often based on differing methodologies with limited comparability.
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.
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:
Co-ordinating – Further coordination is needed within the UK and internationally across reporting, markets and regulation;
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;
Contributing – All interested parties must contribute collectively to the broader discussion on these matters, if ESG is to work effectively across multiple markets.
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, usingtheir 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.
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:
being human in how we operate
original in how we nurture talent and think
community minded in our approach to the West End
being responsible, and
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.
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.
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.
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.
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.
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
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.
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.
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.
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.
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”
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.
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:
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.
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!
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?
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.
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
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