A new report by ShareAction, a charity and pressure group, reflects growing demands for companies to disclose ESG and climate-related information.

By Paul A. Davies and Michael D. Green

Background

Pressure continues to grow on asset managers and their advisors to incorporate companies’ environmental, social, and governance (ESG) performance and climate risks in their screening and assessment of any investment. These demands have focused on investments in equities and private equity funds so far. However, a new report by ShareAction — a charity and pressure group that is seeking to encourage institutional investors to invest responsibly — has called on investors in corporate bonds to also incorporate ESG and climate considerations in their decision making.

ShareAction’s report, which was released at the end of January 2019, focused on whether corporate bond investors are “motivated to speed up alignment with the Paris Agreement and participate in forceful engagement”. The report highlighted that, to date, ESG issues have been regarded as an issue for equity investors. However, ShareAction’s report called for debt holders to also be held responsible for engaging on climate and ESG issues.

Key Findings

ShareAction’s report was based on a survey of asset owners, bond managers, issuers, and other experts in the bond market. Notably, the report found that:

• Bond investors regard ESG issues as being relevant to their investments, particularly because they almost universally see ESG as a manifestation of downside risk.
• ESG teams within asset management firms are typically required to straddle both equity and bond portfolios.
• The available data is often too poor for ESG and climate issues to be taken into account during the investment decision-making process.
• Asset managers lack clarity on the expectations of clients and beneficiaries in relation to climate change.
• Bondholders are focused on the implications of climate-related risks in terms of managing portfolios and selecting assets. However, bondholders are not considering the question of limiting global warming to 2 (or even 1.5) degrees (which is the target under the Paris Agreement).
• Bond investors regard climate change as an issue for governments to tackle. Further, bond investors consider that the investment industry’s impact will be limited in terms of mitigating the effects of climate change.

Implications

Based on these and other key findings, ShareAction is seeking for institutional investors (including bond investors) to target high-impact issuers of debt and to collectively engage with issuers more forcefully.

ShareAction’s report and recommendations demonstrate the direction of travel for ESG and climate change matters. The European Commission has previously put forward measures to integrate sustainability and ESG considerations into its financial policy and reporting framework (for more information, see this prior Latham blog post). In January 2019, the European Commission’s Technical Expert Group also released its findings on climate reporting. The report appears to be accelerating the incorporation of the recommendations of the Financial Stability Board’s Task Force on Climate-Related Financial Disclosures for those companies subject to the Non-Financial Reporting Directive.

Based on these developments, pressure will likely increase on companies to disclose ESG and climate-related information. The corollary is that asset managers (both in relation to equities and bonds) and advisors are more likely than ever to take account of these ESG and climate-related disclosures in making new investments and when re-engaging with companies in relation to existing investments.