ESG round-up: EU passes nature restoration law

The latest developments in sustainable finance: France’s Say on Climate law gains support from parliamentary parties; $15trn investor coalition engages fast food companies on antibiotics.

The EU has passed legislation to boost biodiversity and climate action across Europe. The nature restoration law – which was a key part of the European Green Deal – will see recovery measures put in place on 20 percent of the EU’s land and sea by 2030, increasing to include all declining ecosystems by 2050. The vote saw 336 MEPs vote in favour of the law, 300 against, and 13 abstentions. The proposal was initially adopted by the European Commission in June last year and has faced significant backlash from centre right groups which campaigned to block it.

France’s proposed Say on Climate law has seen growing cross-party support after being rejected in the first instance by a parliamentary committee last week. The proposal – led by Caisse des Dépôts chair and French MP Alexandre Holroyd and put together with the French SIF – is seeking to make it mandatory for listed companies to disclose their climate plans for shareholders to vote on. The amendment has been endorsed by an additional five parties since the committee’s rejection. The amendments are due to be considered again next week in a plenary session and then subject to a vote in the French Parliament.

A group of investors with $15.2 trillion in combined assets led by the FAIRR Investor Network are engaging global fast food companies on antibiotic use in their meat supply chains. Investors – including Schroders, LGIM, and EOS at Federated Hermes – are targeting 12 large fast food companies, including McDonalds, KFC, Pizza Hut and Burger King, and have asked for disclosure on the quantity and type of antibiotics used, and progress towards antibiotics reduction targets, in line with the World Health Organisation guidelines. As a first step, the investor group will write to the companies with a request to provide additional information, followed by company dialogues until December 2023. FAIRR will publish the first formal company assessments in spring 2024.

The European Bank for Reconstruction and Development (EBRD) has launched a climate governance platform for businesses in Egypt in partnership with the Climate Governance Initiative (CGI). The initiative Chapter Zero Egypt aims to promote the understanding and adoption of effective climate governance practices among corporates and financial institutions in the country. The initiative is the 27th chapter to join the CGI global network, as well as the first in Africa and the second in the southern and eastern Mediterranean region.

The platform will facilitate the development and sharing of expertise between non-executive directors, senior management business leaders and policy experts to ensure that good climate governance practices are communicated to boost low-carbon development, sustainable enterprise and economic growth.

Microsoft shareholders have filed a formal shareholder proposal calling on the company’s board to issue a report on the material risks of its generative artificial intelligence technology facilitating misinformation and disinformation, as well as assessing the effectiveness of its efforts to remediate those harms. The proposal – led by Arjuna Capital – raises concerns that AI tools such as ChatGPT may “dramatically increase misinformation and disinformation globally, posing serious threats to democracy and democratic principles”, citing several studies and reports alleging that ChatGPT could be the tool spreading misinformation the most.

Shareholders are also concerned that Microsoft may be exposing itself to significant litigation and regulatory risks, with ChatGPT already under investigations by European and Canadian data protection authorities. Investors will have the opportunity to vote on the shareholder proposal at Microsoft’s AGM at the end of the year, provided it is not blocked by the company.

The working group on sustainable finance taxonomies for Latin America and the Caribbean has published an overarching framework for the regions. Colombia and Mexico have both already launched taxonomies, with several other countries in the region also in the process of developing one. The framework draws on the European taxonomy, as well as other international practices, with the goal of ensuring a high level of transparency and interoperability to facilitate cross-border capital flows for social and environmentally sustainable investors. The guidance – financed by the European Union through the EUROCLIMA+ programme – has also been issued to enable private sector actors to make informed investment decisions.

Members of the working group include the UN Environment Programme Finance Initiative (UNEP FI), the UN Development Programme (UNDP), the International Finance Corporation (IFC), the Inter-American Development Bank (IDB), the International Monetary Fund (IMF), the World Bank, the Economic Commission for Latin America and the Caribbean (ECLAC), the Development Bank of Latin America, and the Food and Agriculture Organisation, with the European Commission acting as an external adviser.

ESG controversies led to a 2-5 percent stock market underperformance for companies after a period of six months, according to data from Clarity AI. The sustainability tech platform’s analysis covered more than 10,000 controversial incidents for around 1,500 companies across a four-year period, with each incident being classified as low, medium, or high severity. The incidents were ranked according to the increase in the ESG-derived risks for the company as estimated by Clarity AI’s models, which consider the magnitude of the issue, its impact on stakeholders, and the management by the company.

The incident types were divided into negative environmental impact, corporate governance issues, market dominance abuse, and company mismanagement of its products and services. The largest share price downgrades were found for high severity cases relating to  products and services mismanagement and negative environmental impact, which saw a respective -11.8 percent and -8.9 percent market value divergence on average.

Schroders, in partnership with the California Public Employees’ Retirement System (CalPERS) and the Oxford Rethinking Performance Initiative at the University of Oxford’s Saïd Business School, has released a framework to assess human capital value creation. The research has shown a positive correlation between human capital returns and forward excess returns across most sectors, confirming that human capital is a driver of company productivity and profitability, and that companies with durable management frameworks produce better returns and value for investors.