This would require the US to submit a new set of commitments to cut emissions ahead of the (delayed) Climate Summit, COP26...
TCFD status report
At the start of November, the taskforce for Climate related Financial Disclosures (TCFD) published its 2020 status report. This looks at the alignment of corporate disclosures with the TCFD recommendations. The number of organisations supporting the TCFD has risen above 1,500 although this does not necessarily translate into reporting aligned with TCFD, but it is clear that adoption rates are rising, in particular as mandatory reporting is appearing on regulators’ agenda in a number of markets.
Climate change – liability risk
In Australia, the Retail Employee Superannuation Trust (REST) settled a lawsuit brought by a member over its disclosure of the impact of climate risks on the fund. As part of the settlement, REST agreed a number of actions including: to ensure that the investment managers it engages take active steps to consider, measure and manage financial risks posed by climate change and other relevant ESG risks; implementing a long-term objective to achieve a net zero carbon footprint for the fund by 2050; measuring, monitoring and reporting outcomes on its climate-related progress and actions in line with the recommendations of the TCFD; and seeking to require that its investment managers and advisers comply with these and all the other recommendations. As a result, this may well have an impact on how superannuation trustees more broadly consider their duties to members.
Australia to publish its own green taxonomy
In Australia the Australian Sustainable Finance Initiative (ASFI), which represents the country’s four largest banks, major insurers, fund managers, pension funds and financial regulators, have published their ‘national roadmap’ for Sustainable Finance. This makes 37 recommendations for the development of sustainable finance including a proposal for Australia to develop its own green investment taxonomy, which should align and harmonise with emerging international sustainable finance taxonomies and to build on existing frameworks, while also reflecting the unique characteristics of the Australian market.
SASB IIRC merger and IFRS consultation
A common criticism raised by both companies and investors is about the wide range of ESG reporting standards that exist. There have already been some initiatives to try to resolve this with some coalescence around Sustainability Accounting Standards Board (SASB) and TCFD over recent months. This has taken a step further with the announcement last week that – as a reflection of their complementary approaches – the International Integrated Reporting Council (IIRC) and SASB will merge to create the Value Reporting Council.
However, finding the ‘silver bullet’ reporting framework for ESG reporting is difficult, as ESG information has different target audiences, with different purposes. Standardisation in some form though, is on its way with a need to focus on what to report (framed by materiality) and how to calculate what is reported e.g. the green house gas (GHG) protocol for GHG emissions.
It is also worth noting that the International Financial Reporting Standards (IFRS) Foundation is consulting on whether it should create a second board – the Sustainability Standards Board (SSB) – which would sit alongside the International Accounting Standards Board (IASB). This initiative appears to have very strong momentum.
The announcement included some key headlines – notably the plan to phase out sales of internal combustion engine vehicles by 2030.
We are now in the thick of the Australian AGM season and the Martin Currie Australia team have been busy analysing the proxies, the AGMs themselves, the guidance and commentary provided, and have undertaken pre-AGM engagements with the boards and management of individual stocks. This allows us to do a deeper dive into the key themes coming out of the AGMs, most of which we have found to have an ESG undertone. Among the most notable has been a focus on ‘reasonable’ remuneration, in particular, where the impacts of the COVID-19 crisis have depressed earnings and share prices at a time when performance rights have been granted.
Something else that we are seeing more of in the annual reports prepared in advance of AGMs is information on the risks and actions taken during the year to deal with climate change and waste, with almost all companies also now submitting a sustainability report as part of their annual report.
Following the events with Rio Tinto and the Juukan Gorge, Indigenous relations has also become a significant theme for investors. However, we do note that shareholder resolutions related to cultural heritage at BHP and Insurance Australian Group have subsequently been withdrawn following company engagement.
A final evolving theme worth noting is the push by companies for virtual-only AGMs in the future. While we understand that this year it was unavoidable, we recognise that it can limit smaller shareholders’ abilities to engage with corporate officials, raise questions, and hinder the transparent expression of views.
Stakeholder primacy in the post-Covid world
During November we also published a thought leadership piece looking at the debate around stakeholder primacy. The issue has gathered significant momentum through the course of the last eighteen months, in particular, following the Business Roundtable statement in 2019 which laid out a move towards a new corporate model.
A stakeholder model does not avoid accountability. For us, a stakeholder model means that although the board is accountable first and foremost to shareholders (who elect them) the business is run in a way that emphasises and understands the dependencies and interrelationships between a business and its key stakeholders – customers, suppliers, employees, investors, communities and others.
We have seen strong evidence from corporate behaviour during the COVID-19 pandemic that suggests corporates have embraced this view when times are more difficult and, as such, this shift represents much more than empty rhetoric. Part of this change comes down to businesses embracing a wider purpose beyond the bottom line. We believe that a key part of driving long-term shareholder and societal value is by embracing this symbiotic relationship.
The principal focus of our one-to-one engagement has been framed by the Australian AGM season and the key topics outlined above.
On the topic of Indigenous heritage, we had two recent meetings with the management of BHP on the topic. The company has reviewed its heritage management and processes post the Juukan Gorge destruction and have set up a Heritage Advisory Council in conjunction with Banjima People to provide mine planning input at its South Flank iron ore mine. BHP also has an in-house process for escalation for senior management sign-off if BHP discover heritage sites subsequent to Section 18 approval and prior to commencement of mining. BHP has had input into and supports changes to the Aboriginal Heritage Act, currently being reformed, that gives Traditional owners more say in the protection of heritage sites in Western Australia.
Over the course of December, regulation and work on the associated regulatory changes (in Europe) will continue. There are also a number of key committee meetings that will set out priorities for our industry and trade associations for the next few years. We will provide an update on these as they evolve.
Regulatory information and risk warnings
This information is issued and approved by Martin Currie Investment Management Limited (‘MCIM’). It does not constitute investment advice. Market and currency movements may cause the capital value of shares, and the income from them, to fall as well as rise and you may get back less than you invested.
The information contained in this document has been compiled with considerable care to ensure its accuracy. But no representation or warranty, express or implied, is made to its accuracy or completeness.
The document does not form the basis of, nor should it be relied upon in connection with, any subsequent contract or agreement. It does not constitute, and may not be used for the purpose of, an offer or invitation to subscribe for or otherwise acquire shares in any of the products mentioned.
Past performance is not a guide to future returns.
The views expressed are opinions of the portfolio managers as of the date of this document and are subject to change based on market and other conditions and may differ from other portfolio managers or of the firm as a whole. These opinions are not intended to be a forecast of future events, research, a guarantee of future results or investment advice.
The analysis of Environmental, Social and Governance (ESG) factors form an important part of the investment process and helps inform investment decisions. The strategy does not necessarily target particular sustainability outcomes.
The information provided should not be considered a recommendation to purchase a particular strategy / fund or sell any particular security. It should not be assumed that any of the security transactions discussed here were or will prove to be profitable.