Purpose on Payday

By Andrew Adie

While August failed to see the UK basking in high pressure weather systems it saw a significant upping of the ante and pressure building around the road to COP26, the UN Climate Change Conference due to be held in Glasgow in November.

This month started with a significant wake-up call from the IPCC (Intergovernmental Panel on Climate Change) which published its scientific report into the impact of global warming on the planet. The sobering assessment was described by UN Secretary General Antonio Guterres as a ‘code red for humanity’.

The report, the first major review of climate change science since 2013, concluded that human influence had ‘unequivocally’ resulted in climate change. It also warned that the Paris Agreement targets to limit global temperature rises to under 2˚C would be broken this Century unless there was a major cut in carbon emissions.

It sets a scientific foundation for the COP26 conference which will ratchet pressure on politicians to deliver a meaningful step change in carbon reduction targets and will result in growing pressure on corporates, politicians and society to work together to deliver the needed decarbonization, once COP26 concludes.

It remains concerning that only 59 countries, representing just over half of global greenhouse gas emissions, have signed up to be net zero by 2050. With around a third of FTSE 100 companies yet to commit to a net zero by 2050 target. Of those that have committed to net zero the question that is being asked with increasing urgency is ‘how will you get there’? What’s the plan for 2030? how will you cut your carbon output year-on-year?

Pressure continued to build when, on August 13th, the Financial Times’ Moral Money published an extensive interview with Tariq Fancy, former Blackrock CIO for sustainable investing in which he explicitly states that there is no reason to invest in ESG funds and calls for government action, especially in introducing a carbon tax. His intention is to spark a global debate and he appears to be succeeding. The headline of that article was “the whistleblower who calls ESG a deadly distraction.”

He has also published the first part of “The Secret Diary of a Sustainable Investor” on Medium. His central challenge, though there are many, is to the idea that sustainability creates more shareholder profit in the long-term. He also suggests that with green bonds, “it is not totally clear that they create more positive environmental impact.” The large asset managers are definitely in the spotlight of his scrutiny, as well as in subsequent articles published in the Financial Times.  

Today, the FT has also highlighted a survey which shows 72 of 130 climate themed funds hold shares in large polluters and found that 71% of another 593 broad ESG funds were misaligned with the Paris agreements.

Other international business media don’t appear to be following this story with quite the same focus and determination, in fact you could say Bloomberg appear to be more quizzical and highlighted how Blackrock voted against 255 board directors for failing to act on climate issues in the period up to the end of June.  

Mark Gilbert of Bloomberg Opinion yesterday called Tariq’s argument a “diatribe” which “doesn’t mean the fund management industry can’t do its bit to influence the companies they invest in to be less harmful in their activities.”      

He says “belatedly, asset managers are rising to the challenge of actively seeking change.”

Mark highlights how Tariq made the very same points back in March in USA Today.

One of the key conclusions from all of this (which relates back to the IPCC report and expectations for COP26) is that actual change in the way that businesses is run and contributes to reducing environmental damage and carbon emissions is determined by impact, not just ESG.

If business wants to avoid being accused of greenwash then it has to have a plan to make meaningful, positive change to the environment by cutting carbon output, switching to sustainable resources, cutting waste and pollution and helping drive sustainable consumption – not just saying it aspires to do so in 30 years.

While the focus on the environment and sustainability continues to be intense and won’t let up given we now have less than 100 days to go until COP26, August also saw a renewed focus on governance, driven by activists and a focus on regulation and compliance.

UK listed-businesses continue to see significant amounts of activist investor attention and M&A activity, with shareholder returns, pension scheme stewardship and purpose of the business in a post-Covid world (focused around whether the ‘old’ business model is fit for a ‘new’ world reality) all strong themes emerging around this corporate activity.

We have also seen attention focusing on supply chain governance and behaviour with the Small Business Commissioner threatening companies with expulsion from the Prompt Payment Code if they don’t adhere to the requirements to pay 95% of bills within 60 days.

The government has also announced a review of green energy tariffs amid concern about green washing.

In addition, analysis from New Street Consulting Group suggests that female executive directors at FTSE 100 companies are typically paid 40% less than their male counterparts, reigniting the debate around governance and the impact of equality and fair pay commitments.

The conclusion is that the wider ESG and sustainability landscape was as volatile in August as the weather and sets the mood music for the rest of the year, which will be tempestuous and with an expectation of meaningful change being delivered at COP26.