More stick, less carrot. How regulatory scrutiny and shareholder activism will define the Climate Change agenda in 2022

By Dafydd Rees

It’s the most important public debate of our times. In 2022 Climate Change will be top of the agenda. Here in the UK, research for SEC Newgate, ahead of the COP26 Climate Change Summit, identified the issue as a bigger concern than the COVID-19 pandemic or the state of the economy. While our politicians may struggle to reach a global consensus despite that common language of concern, in the weeks since the Glasgow Conference the direction of travel for business and finance has become crystal clear.

There are multiple opportunities for investors interested in supporting the technological innovation required to reach net-zero emissions while ESG is the fastest growing segment of the global financial services industry. The global consultancy, PWC predicts ESG will account for more than half of Europe’s funds under management by 2025.

My purpose, however, is to spell out some of the hard truths awaiting business and especially finance in 2022. Over the next 12 months pressure will be applied on several fronts to ensure green pledges are made reality. And alongside the fossil fuels industry, the financial services sector is firmly in the spotlight, most notably in the USA. In a report published before Christmas by the Sierra Club Fossil Free Finance Campaign, the world’s banks were labelled as the fifth largest emitter of greenhouse gases.

The danger of ethical funds being perceived as little more than a marketing trick is very real. Consistent metrics are needed to address the insidious accusation that green finance is little more than greenwashing. In 2022 divestment, shareholder activism and greater regulatory scrutiny will all become mainstream concerns.

International business media such as the Financial Times and Bloomberg have repeatedly questioned the reliability of ESG ratings and highlighted a need for standardisation. A lack of agreement about methodologies or inputs has become increasingly apparent and left investors confused. Should ESG assessments rate the company’s impact on the world or the impact of the world on the company, or indeed both?

Consumers, according to the SEC Newgate ESG monitor, a global report conducted among 10,000 consumers in ten countries, gauging attitudes to ESG and responsible business, want greater regulation. Almost three in four respondents called for consistency in reporting ESG, while more than seven in ten believed firms should be penalised for poor ESG practices.

Here in the UK, from April, the UK is to enforce mandatory financial disclosures by large-listed companies. It makes the UK the first G20 country to enshrine that pledge into law. Any company with an annual turnover of more than £500 million will have to provide details of its net-zero transition plans. There is also action at a global level. New International Sustainability Standards Board climate disclosure requirements are expected to be announced in the first quarter of 2022, with the first new comparable standards to help investors make informed decisions to be issued by the end of the year.

The SEC Newgate ESG Monitor has clearly identified the rise of the consumer activist as a global phenomenon. In 2021, the power of shareholder activism was evident in the remarkable success of the climate campaign launched by the small hedge fund, Engine Number 1, which targeted Exxon, the world’s biggest non-state oil company.  Within months, Engine, which owned just 0.02% of the company, had three seats on the board. In 2021, according to Thomson Reuters, there were 16 climate-related shareholder resolutions at FTSE 350 companies, more than three times the number in 2020. 

Some of the world’s largest pension funds and institutional investors are hardening their stance and signalling a readiness to divest. Asset managers in the US and in Europe are using their funds to exert their influence to finance the transition to a lower-carbon and greener economy. The Netherlands-based pension fund ABP has already announced divestment plans, while pensions provider Aviva has warned it’s to get tougher in its assessment of climate risk. It will sell out from about 30 fossil fuel intensive companies over the period of the next three years. Nest, the £20 billion UK government backed workplace pension scheme has committed to a 30% reduction in the carbon footprint of its portfolio by the end of 2025.

Shell had pulled out of its involvement with the Cambo oil field project in the North Sea in the teeth of opposition from campaigners, while the FTSE 100 energy company SSE is under fire from US hedge fund Elliott Management over its funding for renewables beyond 2026.

It seems Kermit the Frog might have been right all along. It’s not easy being green. Decarbonising the global economy will be complex and challenging. But that doesn’t mean the scrutiny of sustainability claims should be any less comprehensive. The UK and international business media are increasingly moving the focus from the general to the specific. In 2022 it will not be enough for business to say that we need to work together to tackle climate change. Consumers, the media, politicians and policymakers want answers.