Take Five: A Victory for Vigilance
A selection of the major stories impacting ESG investors, in five easy pieces.
This week saw at least one success for scrutiny of corporates’ environmental impacts.
Follow the science I – Global food and drinks group Danone this week trumpeted the continued success of its ‘Renew’ strategy, unveiling a 4.3% increase in like-for-like sales in its 2024 annual results, and a recurring operating margin of 13.0%. Launched in 2022, Renew promised Danone would “reconnect with a sustainable profitable growth model”, partly by taking a more science-led approach to product development, including expansion of its health and nutrition portfolio. The firm made less noise about being forced to take a more science-led approach to its plastic pollution risks by three NGOs under France’s Duty of Vigilance law. Following an agreement reached last Friday, Danone will provide regular updates on risks arising from its use of plastic, introduce tougher policies to mitigate and reduce these risks (including by increasing re-use solutions), publish its plastic footprint, and meet annually with the NGOs for the next three years. Under the law, firms with a large presence in France must publish an annual ‘vigilance plan’ identifying the environmental and social risks in their operations and value chains globally, covering mitigation and prevention measures, and implementation reports. The firm should not be so shy, according to the NGOs. who said Danone’s new commitments – which include identifying the presence of plastic at every stage of its activities, according to the best available scientific methods – as a “significant step forward” which would send a “strong signal” to the entire agri-food sector.
Anything you can do – If all EU member states had laws similar to France’s Duty of Vigilance, there might be less of a need for the Corporate Sustainability Due Diligence Directive (CSDDD), which was cut down to size this week in the new European Commission’s (EC) first attempt to streamline its rulebook. By effectively deregulating rather than streamlining, Brussels has potentially also undermined existing national due diligence laws. In future, firms may well be able to point to their compliance with the watered-down CSDDD, and consider themselves free from any prior obligation to meet tougher domestic requirements. As well as turning the directive into a ceiling for due diligence obligations rather than a floor, the omnibus also extended its phase-in period, limited the information it could elicit from value chains, and stripped out requirements for firms to align their lobbying efforts with their transition plans – all pushed through without regard to standard EC decision-making processes. When it comes to imposing the will of the executive and restricting the ability of investors to scrutinise portfolio companies, there might be less difference between the new European and US administrations than is widely assumed. Comparisons between Mario Draghi and Elon Musk as their respective efficiency gurus might be stretching a point, however.
Transatlantic divide – The above-mentioned similarities between Europe and the US may well be seized upon by UK Prime Minister Keir Starmer as further evidence that Britain does not have to choose between its two larger neighbours. The UK’s finance sector appears to see things differently, with its banks taking their lead from their American counterparts, while its institutional investors are increasingly turning their eyes to Europe. Earlier this month, three large UK-based pension funds drafted five principles on climate stewardship for asset managers to follow to keep their mandates. This week, not only did BP provide a test case for the application of the principles, but one of their co-authors strongly implied State Street Global Advisors was not making the grade. In an effort to ‘Make my Money Matter’, the People’s Partnership withdrew £28 billion (US$35 billion) from the US-based index fund giant, switching the lion’s share to French rival Amundi. UK banks, on the other hand, followed their transatlantic counterparts in weakening alignment of their business models with net zero objectives. NatWest and Barclays both dropped climate targets from their bonus schemes for senior executives, while HSBC pushed back its net zero ambitions by 20 years. With such variations in approach, it is little wonder that umbrella body the Glasgow Financial Alliance for Net Zero has paused operations to consider its future role.
Rich pickings – This week saw its fair share of innovative funding mechanisms to enable the exploitation of natural resources, some of which had equity built into the design, others less so. COP16 reconvened in Rome with the launch of the Cali Fund, the broad outline of which was agreed before the summit failed to reach agreement on how to fund the goals of the Global Biodiversity Framework (GBF). Using mechanisms largely developed by the London School of Economics, the fund will direct revenues from firms benefiting from use of the digital sequence information on genetic resources to “custodians of biodiversity” in nature-rich countries. Sectors expected to be in scope include ‘big pharma’, ‘big ag’ and biotech, but much remains to be decided before COP17 in Armenia next year. Consultations are due to close in the next few months on key questions including the use of common standards for setting thresholds and contributions for commercial entities. Despite being a major contributor to biodiversity loss, the mining sector is of course out of scope of the Cali fund. It is, however, the subject of several fresh deal structures from rival bidders with an appetite for critical minerals, each with different approaches to loans and guarantees.
Follow the science II – As noted recently in this blog, countries have been slow to submit their updated nationally determined contributions (NDCs) to the Paris Agreement. They have been scarcely swifter to demonstrate their commitment to the GBF, according to the World Wide Fund for Nature’s tracker for submitted national biodiversity strategies and action plans (NBSAPs) and national targets. Having failed to deliver in Cali, the UK at least did submit its NBSAP this week in Rome, following on from the release of its full NDC last month. In its latest recommendations, the UK’s Climate Change Committee (CCC) does not comment directly on the adequacy of these two documents. But it does underline the complementarity between the two, identifying nature-based measures as one of five routes for delivering the UK’s seventh carbon budget. The CCC explains how to limit UK emissions to 535 MtCO2e in the five years to 2042, while keeping the average cost at 0.2% of GDP, referencing the scientific consensus represented in the sixth assessment reporting cycle (AR6) of the Intergovernmental Panel on climate Change (IPCC). Meanwhile this week in Hangzhou, China, the IPCC met to agree its next steps for AR7, as well as a planned report on CO2 removals and carbon capture. “it is evident that our timely, policy-relevant and actionable assessment reports have never been more pertinent,” said IPCC Chair Jim Skea.
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