Microsoft may be forced to pay £1bn in legal fees after seemingly overcharging for their software, forcing UK businesses to use Microsoft Azure, its cloud computing service, and restrict competition in the sector.  

𝗪𝗵𝗮𝘁 𝘄𝗮𝘀 𝗽𝗶𝗰𝗸𝗲𝗱 𝘂𝗽 𝗼𝗻 𝘁𝗵𝗲 𝗜𝗻𝘁𝗲𝗴𝗿𝘂𝗺 𝗘𝗦𝗚 𝗣𝗹𝗮𝘁𝗳𝗼𝗿𝗺? 💻  

On Tuesday the 3rd of December, the real-time sentiment tracker picked up multiple accounts of this story, flagging it as a rising concern.  

𝗪𝗵𝗮𝘁 𝗮𝗰𝘁𝘂𝗮𝗹𝗹𝘆 𝗵𝗮𝗽𝗽𝗲𝗻𝗲𝗱? 📰  

A £1bn class action lawsuit has been brought forward in the UK by regulation expert, Dr Maria Luisa Stasi and has been filed with the UK’s Competition Appeal Tribunal.  

The suit alleges that customers using competitors such as Google Cloud or Amazon AWS are being forced to pay higher fees for Windows Server licenses on these platforms, rather than those using Microsoft's own Azure cloud platform.  

The UK’s Competition and Markets Authority (CMA) has also been investigating and monitoring the cloud computing industry, as concerns continue to stack against tech giants like Microsoft for monopolising the market.  

This has a significant impact on UK SME’s, many of whom are facing significant charges from Microsoft as the company continues to push prices up for their Windows Server.   

𝗛𝗼𝘄 𝗱𝗶𝗱 𝗶𝗻𝘃𝗲𝘀𝘁𝗼𝗿𝘀 𝗿𝗲𝗮𝗰𝘁? 📉  

This type of claim is still relatively new, having only been introduced in the UK in 2015; meaning investors will need to exercise patience before they are able to factor claims like this into their long-term decision making.   

While we may not see the true implications of this immediately, it is something to monitor as regulatory standards continue to tighten.  

A key aspect to note is that the CMA have demonstrated their willingness to go after a tech giant such as Microsoft, meaning there will be little wriggle room for smaller companies in the sector.   

𝗖𝗮𝗻 𝗶𝗻𝘃𝗲𝘀𝘁𝗼𝗿𝘀 𝘂𝘀𝗲 𝗘𝗦𝗚 𝗱𝗮𝘁𝗮 𝘁𝗼 𝗮𝗻𝘁𝗶𝗰𝗶𝗽𝗮𝘁𝗲 𝘁𝗵𝗲𝘀𝗲 𝗲𝘃𝗲𝗻𝘁𝘀? 🗂️  

The Integrum ESG Platform has given Microsoft an overall score of 1 out of 4 for the Competitive Behaviour metric.   

Whilst we have captured that the company has a Fair Competition Policy in place, their recent actions show this is either not robust enough or they are blatantly contradicting it.   

Their poor performance for this metric can be attributed to their opaqueness regarding their lack of disclosure of any legal fines on this issue in their most recent 10-K.  

This is just one of many examples demonstrating how ESG data, both fundamental and real-time, can unravel stories and increase awareness on ESG risks.

Kraft Heinz recently released their 2024 ESG Report but despite their comprehensive set of sustainability targets, progress towards them has clearly faltered.

Up until last year, Kraft Heinz had reported promising progress towards their goal of achieving ‘100% recyclable, reusable or compostable packaging by 2025’, with a steady increase in their proportion of sustainable packaging from 70% in 2019 to 87% in 2022.

However, in their most recently reported year, this progress has stagnated with the proportion remaining at 87%.

This is below the 94% our analyst Molly Frazer had estimated when we ran a trend analysis on the company’s recycling goals last year – and speaks to the challenges we predicted companies like Kraft Heinz would face.

A statement in the company’s latest ESG report also casts doubts on their belief in their ability to meet their goal on time. They wrote:

"While we are proud of the progress we have made and remain committed to our goal, we may not be able to achieve it by the end of 2025 due to the challenges posed by the broader packaging ecosystem required to make the remaining portion of our portfolio recyclable, reusable, or compostable."

When compared against its peers, 87% put Kraft Heinz in the promising position of being in the second quartile on the Integrum ESG Platform.

But as consumer frustration builds over waste caused by unsustainable packaging, it remains to be seen how far off their target Kraft Heinz lands come 2025.

You can read the full CSSF decision here.

𝟮. 𝗪𝗵𝘆 𝗱𝗼𝗲𝘀 𝘁𝗵𝗶𝘀 𝗺𝗮𝘁𝘁𝗲𝗿?

It was reported that European Article 8 funds have €7.4trn in assets in June of this year - this sanction will therefore have potential consequences for many asset managers.

There are three key reasons we believe fund managers should be concerned:

🇪🇺 Impending European regulatory action on ESG misselling

👎 Reputational damage is hard to recover from

💰 Smaller managers will not have the resources to defend their claims

The SEC has charged global asset manager Invesco Advisers Inc. for misleading claims about its ESG-related investments.

You can read the SEC's official findings here.

What happened?

The SEC found that Invesco overstated the extent to which ESG factors were integrated into its assets under management, prompting a $17.5 million civil penalty.

Invesco had made claims in its marketing materials from 2020 to 2022 that between 70% – 94% of its parent company’s assets under management were “ESG integrated”.

However, the SEC's investigation found that these amounts included a significant proportion of assets held in passive ETFs, that did not consider ESG factors in investment decisions.

The SEC also found that despite the ESG integration claims by the asset manager, the firm actually did not have "any written policy defining ESG integration.”

What does the data say?

This risk was captured on the Integrum ESG Platform, with the investment management company scoring just 0.5 on this issue out of a possible 4 — highlighting their lack of disclosure on their responsible marketing and labelling practices.

This case underscores the importance of transparency and robust policies, and follows a broader trend of regulatory crackdowns as authorities push back against greenwashing in response to rising concerns over the integrity of ESG claims.

Integrum ESG measures company level support for the UNSDGs using a methodology based on the Cambridge Impact Framework.

The 17 SDGs are mapped to 6 ‘Impact Metrics’ that evaluates companies’ positive impact on sustainability.

The promising news is that over the last reporting year we have seen improvements in the average awareness scores for all 6 metrics, showing that companies are taking more notice of their role in achieving the goals.

Gorman has also made significant moves to position the firm as leaders in the sustainability space, including establishing the MS Institute for Sustainable Investing back in 2013.

Other laudable achievements include achieving carbon neutrality in 2022 across direct Scope 1 emissions, indirect Scope 2 from energy purchasing, and Scope 3 from business travel and owned assets that are leased.

The firm has also made considerable headway towards their goal of mobilising $1 trillion for sustainable solutions by 2030, with the current figure sitting at over £820 billion (including $640 billion mobilised towards low-carbon and green solutions).

James Gorman of course should not take all the plaudits - he has overseen this growth by building a team of individuals who are now considered leaders within the sustainability space, including Jessica Alsford (current CSO, having been Head of Sustainability Research since 2012) and Matthew Slovik (current Head of Global Sustainable Finance, joining from the integration team in 2010).

So what does this mean for Disney?

From an ESG perspective, we can forecast that the personnel Gorman brings in and the influence he has on the company's direction as a whole should only be positive.

Currently Disney score a 'B' on the Integrum ESG Platform, ranking 37th out of 383 companies in the 'Services' sector and 8th out of 62 companies in the 'Media & Entertainment' sub-sector.

There are certainly areas that can be improved under Gorman's watch, including:

◉ Competitive Behavior

Disney only scores a '1' for this metric - the company has a policy in place for anticompetitive practice (including price manipulation), but does not disclose breaches or penalties. They also do not disclose data on financial penalties due to anticompetitive business practices.

This is particularly relevant given Disney is frequently facing a number of anti-trust litigation cases, primarily regarding their popular streaming services. This includes the FuboTV antitrust case against the launch of Disney's new sports streaming service and a class action lawsuit brought by YouTube and DirecTV Stream subscribers amongst others.

◉ Climate Stability

Disney's is placed in the top quartile for their target setting and policies with regards to the company's greenhouse gas emissions, also disclosing a breakdown of all of their scope 1, 2 and 3 emissions (see page 65 of their 2023 Sustainability & Social Impact Report).

However, when looking at the actual numbers they disclose on their combined scope 1 & 2 GHG emissions (1720761 tCO₂e) the company falls into the bottom quartile of its peer group.

Gorman and the CEO he appoints will have a significant role to play in ensuring the company is aligned in achieving their 2030 environmental goals, including achieving net zero emissions for direct operations by 2030.

◉ Reputational Risk

Bob Iger's reign as CEO has been peppered with controversies; be that Elon Musk describing the company’s diversity programs as being “enforced by Disney’s DEI Gestapo”, or Iger's own response to the WGA & SAG-AFTRA strikes (calling the demands of these unions ''unrealistic'', ''disturbing'' and ''very disruptive'').

The new CEO should be one who can navigate the company to their long-term sustainable objectives while dealing with the barrage of scrutiny that a conglomerate and household name like Disney will face for doing so.

While there is certainly work to be done for Disney, by bringing in James Gorman investors and onlookers should be confident that a proven figurehead who cares about and understands sustainable growth is at the helm.

Eyes will now be on the choice of CEO.

As well as producing a host of other alcoholic brands (Smirnoff, Captain Morgans, Tanqueray), Guinness remains one of Diageo’s key assets, with “the brand delivering 15% organic net sales growth, double-digit growth for seven consecutive halves” (pg. 11, Diageo Annual Report 2024).

Diageo also managed to maintain or increase share in their top three markets for Guinness (Great Britain, Ireland and US) in 2024.

So next time you treat yourself to a Guinness I hope it tastes that little bit creamier, knowing it’s a stout solution for a sustainable future (sorry I just had to).

Vanguard Investments Australia were fined a record A$12.9 million ($8.9 million USD) penalty for misleading sustainable investment claims.

The Vanguard Ethically Conscious Global Aggregate Bond Index Fund followed the Bloomberg Barclays MSCI Global Aggregate SRI Exclusions Float Adjusted Index, which Vanguard claimed excluded issuers with significant activities in areas including fossil fuels, alcohol and tobacco.

This was not the case, with the court finding that approximately 74% of the securities in the fund were not properly researched or screened against applicable ESG criteria, exposing investors to investments they would reasonably expect not to be included within the fund.

Our CEO Shai Hill commented on this story when the institution were first found guilty of greenwashing, you can read his commentary here.

The lesson to be learned remains the same.

As an investor, if you base your product on an index where exclusions or inclusions are based on 'guesstimated' ESG data, then unless you have made this methodology crystal clear to investors, you are the ones in regulatory jeopardy.

You cannot hide behind index providers.

Tyson Foods saw a spike in their negative sentiment owing to news of the company facing a greenwashing lawsuit.

On the Integrum ESG Platform, we can see that Tyson receives an awareness score of 4 on the GHG emissions metric which translates to excellent policies and management of the issue. There is a significant gap between the company's values and its actions.

Despite receiving a top awareness score for GHG emissions - representing excellent policies and reporting on the issue - Tyson Foods' carbon emissions place them in the bottom quartile compared to sector peers.

Volkswagen AG [VOW.DE] - Recalls and Failed Audits 🚙

Volkswagen has faced a challenging month, with its former CEO's "dieselgate" trial unfolding in court and the potential closure of a factory in its home country on the horizon. To top it off, the company found itself at the center of not one, but two controversial news stories this month.

Earlier this month, nearly 99,000 Volkswagen ID.4 electric crossover SUVs were recalled because the door handles may unexpectedly open while driving.

More recently, reports of the company’s audit of its’ Xinjiang manufacturing plant which failed to meet key aspects of the SA8000 standard have surfaced. This independent audit was prompted by investor demand last year, given concerns about the working conditions for their employees in China.

Nike, Inc. [NKE:NYSE] - Workers' Rights Action 👟

Lastly, our sentiment tracker also picked up a story about Nike, where one of its top investors (Norway’s sovereign wealth fund) decided to support a proposal at the AGM held earlier this month, urging the company to review binding labor agreements to address human rights concerns in high-risk countries.

While rival sports brands Adidas and Puma have signed the Pakistan Accord, a legally binding agreement between brands and trade unions, Nike has shied away from it so far.

This action followed pressure from over 60 investors calling on Nike to pay the $2.2 million reportedly owed to more than 4,000 garment workers in Cambodia and Thailand, who lost wages due to factory closures during the COVID-19 pandemic.

Last week, Australia passed a law which will require certain organisations to include climate disclosure in their annual reports for financial years commencing after January 1st 2025.

The new reporting requirements are largely in line with the IFRS S2 standards, and will make emissions disclosure mandatory, alongside disclosure on governance, strategy and risk management processes used to assess and manage climate risks.

Currently, data on the Integrum ESG Platform shows that approximately 20% of Australian companies do not disclose their Scope 1 &2 carbon emissions.

This new law means that this number should shrink to 0 by 2028 (there is a phased in approach based on company size).

In Australia, the fiscal year concludes in June, so many annual reports are currently being released for FY24.

That is the case for two large Australian companies;

🗃️ CAR Group [CAR:ASX], who recently published they FY24 report in which they quantified their global carbon footprint for the first time, having previously published data for only Australian operations.

🗃️ Similarly, The Lottery Corporation [TLC:ASX]  recently published their inaugural standalone Sustainability report, which included emissions disclosure for the first time.

It will be interesting to see how many more Australian companies adopt these disclosure requirements earlier than mandated. We will be keeping an eye on the impact of this on industry practices and investor confidence.

https://www.cityam.com/integrum-esg-2/

𝗔 𝗴𝗹𝗼𝗯𝗮𝗹 𝘀𝗲𝘁 𝗼𝗳 𝗘𝗦𝗚 𝗱𝗶𝘀𝗰𝗹𝗼𝘀𝘂𝗿𝗲 𝘀𝘁𝗮𝗻𝗱𝗮𝗿𝗱𝘀 𝗵𝗮𝘀 𝗲𝗺𝗲𝗿𝗴𝗲𝗱. 

It will be known as the IFRS Sustainability Disclosure Standards (https://www.ifrs.org/issued-standards/ifrs-sustainability-standards-navigator/).

The Standards will be managed by the International Sustainability Standards Board, but they are the intellectual property of the IFRS Foundation, and will sit alongside the IFRS International Accounting Standards. 

The G7 Finance Ministers have already endorsed them (when the draft standards were released). The UK financial regulator has already said these standards will form the core of its 'Sustainable Disclosure Regulation', and several of the largest accountancy firms are already building assurance practices around these standards.

So whilst some prefer the broader GRI Standards, and the EU wants to advance its EFRAG Sustainability Reporting Standards, we think it is clear that the battle to become the global benchmark has now been won by ISSB.

𝗪𝗵𝗮𝘁 𝗱𝗼 𝘁𝗵𝗲𝘀𝗲 𝗻𝗲𝘄 𝗜𝗙𝗥𝗦 𝗦𝘁𝗮𝗻𝗱𝗮𝗿𝗱𝘀 𝗹𝗼𝗼𝗸 𝗹𝗶𝗸𝗲?

Well, they are not really new; 

➡️ The 'IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information' will apply the SASB Standards that have been in the market for many years. 

➡️ The only addition will be the 'IFRS S2 Climate-related disclosures', based on the FSB Task Force on Climate-related Financial Disclosures (TCFD) recommendations.

You can read the full results of the survey here.

One of the key readings taken from this survey was that over half of asset owner participants believe that the primary obstacle to increased sustainable investment adoption is concerns about availability of ESG data and the use of estimated data.

We have written about the issue with guesstimated data before.

Some large ESG ratings firms have padded their systems with estimates and averages in order to provide larger (and more expensive) coverage and more 'comprehensive' data solutions.

However, there are many issues with this approach - three key problems being:

𝟭. 𝙎𝙝𝙤𝙧𝙩-𝙩𝙚𝙧𝙢𝙞𝙨𝙢 𝙞𝙨 𝙖 𝙗𝙧𝙚𝙖𝙘𝙝 𝙤𝙛 𝙛𝙞𝙙𝙪𝙘𝙞𝙖𝙧𝙮 𝙙𝙪𝙩𝙮.

Many investors blindly trust these large legacy brands and their ESG ratings; in fact some asset owners demand that their asset managers use one of them.

However, it should be noted that relying on the estimated ESG data provided by these firms could constitute a breach of fiduciary duty.

That is to say, relying on data you can not validate or interrogate in order to satisfy a short-term reporting or regulatory requirement is not acting in the best interest of the investors that these funds truly serve.

𝟮. 𝙏𝙝𝙚 𝙬𝙤𝙧𝙙 '𝙚𝙨𝙩𝙞𝙢𝙖𝙩𝙚𝙙' 𝙨𝙪𝙜𝙜𝙚𝙨𝙩𝙨 𝙖𝙣 𝙖𝙣𝙖𝙡𝙮𝙨𝙩 𝙢𝙞𝙜𝙝𝙩 𝙝𝙖𝙫𝙚 𝙨𝙩𝙪𝙙𝙞𝙚𝙙 𝙩𝙝𝙖𝙩 𝙘𝙤𝙢𝙥𝙖𝙣𝙮 𝙖𝙣𝙙 𝙞𝙩𝙨 𝙞𝙣𝙙𝙪𝙨𝙩𝙧𝙮 𝙖𝙣𝙙 𝙢𝙖𝙙𝙚 𝙖𝙣 𝙞𝙣𝙛𝙤𝙧𝙢𝙚𝙙 𝙘𝙤𝙢𝙥𝙖𝙣𝙮-𝙨𝙥𝙚𝙘𝙞𝙛𝙞𝙘 𝙚𝙨𝙩𝙞𝙢𝙖𝙩𝙚.

In reality, although their precise methodology is typically opaque, the estimated value is just an average, calculated from that company's regional and sectoral peer group. That's why we call it a 'guesstimate'.

The example we give to investors is that it is like hiring an analyst after you were reassured that they got 70% in their final mathematics exam. You then learn that actually, they never showed up for that exam and this score was in fact a class average. Which leads onto the next key point:

𝟯. 𝙄𝙩 𝙞𝙨 𝙣𝙤𝙩 𝙘𝙡𝙚𝙖𝙧 𝙬𝙝𝙖𝙩 𝙘𝙤𝙢𝙥𝙖𝙣𝙮 𝙙𝙖𝙩𝙚 𝙞𝙨 𝙛𝙖𝙘𝙩𝙪𝙖𝙡 𝙖𝙣𝙙 𝙬𝙝𝙖𝙩 𝙞𝙨 𝙚𝙨𝙩𝙞𝙢𝙖𝙩𝙚𝙙.

Depending on the third party data provider you may be subscribed to, you can sometimes click through some of the data they have collected - for example, a company's CO2 emissions number.

But you won't know whether it is an actual value disclosed by the company, or a value estimated by the many analysts working for that ratings firm.

No estimated data - no black boxes.

Here at Integrum ESG, we have always committed to never using estimated data and only providing a 'glass box' to our investor clients.

Our affordable, customisable and transparent ESG solution was built by investors with over 20 years of experience in equity research - therefore we understand the real dangers of using opaque data which is only updated once every so often.

Last month, my colleague Hazel Cranmer wrote a post on the issues of companies relying solely on carbon ‘offsetting’ to reach decarbonisation goals.  

She argued carbon offsets fail to make genuine carbon reductions, and that we should instead invest in ‘carbon insetting’; avoiding emissions at the source “rather than being forced to clean them up”.  

As the carbon market heads into turmoil following the recent announcement from Zimbabwe (https://www.bloomberg.com/news/articles/2023-05-18/global-carbon-market-in-turmoil-after-zimbabwe-grabs-offset-money?leadSource=uverify%20wall), offset schemes have become more unreliable in achieving carbon neutral status. 

It has become apparent that this sentiment is widely shared, with both the EU parliament and UK’s advertising watchdog proposing bans last week on adverts making ‘carbon neutral’ product claims using offsets. (https://www.theguardian.com/environment/2023/may/15/uk-advertising-watchdog-to-crack-down-on-carbon-offsetting-claims-aoe &  https://us10.campaign-archive.com/?e=6cd1763d23&u=f89d68518db6e2585b0808206&id=35b50e16fc) .  

The crackdown comes as no surprise, given the seemingly endless cases of companies being exposed for greenwashing. 

Examples include the TotalEnergies lawsuit, who claimed their Thermoplus heating oil was carbon neutral through compensating for emissions via offsetting schemes in India and Peru, and the banning of Lufthansa’s recent campaign declaring their green efforts (carbon offsets) were ‘protecting the world’s future’. 

𝗛𝗼𝘄 𝗺𝗶𝗴𝗵𝘁 𝘁𝗵𝗲𝘀𝗲 𝗽𝗿𝗼𝗽𝗼𝘀𝗮𝗹𝘀 𝗮𝗳𝗳𝗲𝗰𝘁 𝘁𝗵𝗲 𝘀𝘂𝘀𝘁𝗮𝗶𝗻𝗮𝗯𝗶𝗹𝗶𝘁𝘆 𝗹𝗮𝗻𝗱𝘀𝗰𝗮𝗽𝗲?

I believe we will see two changes: 

1. More accurate sustainable purchasing decisions 

Despite growing success in exposing dubious green claims, it is likely that many other companies make similar statements but evade consequences. The recent proposals should hopefully discourage such behaviour, prompting companies to either verify their claims or refrain from making them altogether. We should then, in theory, be able to trust what companies are advertising to us and make more accurate decisions on what we buy based on sustainability grounds. 

2. A shift towards carbon ‘insetting’ 

Apprehension of lawsuits could push companies towards more credible initiatives to substantiate their green claims. In essence, the crackdown should serve as a catalyst for companies to shift their reliance on feeble offsetting schemes and embrace more robust approaches in reducing the carbon footprint of their offerings. 

𝗜𝘀 𝘁𝗵𝗲𝗿𝗲 𝗮𝗻𝘆 𝘂𝘀𝗲 𝗳𝗼𝗿 𝗰𝗮𝗿𝗯𝗼𝗻 𝗼𝗳𝗳𝘀𝗲𝘁 𝘀𝗰𝗵𝗲𝗺𝗲𝘀 𝗶𝗻 𝘀𝘂𝘀𝘁𝗮𝗶𝗻𝗮𝗯𝗶𝗹𝗶𝘁𝘆 𝘀𝘁𝗿𝗮𝘁𝗲𝗴𝗶𝗲𝘀?

We at Integrum ESG do not include carbon offsets in calculating the carbon footprint of companies (as per GHG Protocol guidelines).  

However, investments in offsetting schemes should not be discouraged entirely. Not only do they contribute to the pool of climate finance needed to reach international climate goals, but they also demonstrate a company’s dedication to global climate mitigation beyond their value chain; a policy valued by ESG ratings providers and investors. 

But what do you think?

When CEOs of large public companies are receiving large wages and bonuses, should these bonuses be rewarded when there is a reduction in company value? Why should shareholders reward poor performance, and therefore reinforce misalignment?

A recent example of this is seen when Uber's CEO Dara Khosrowshahi, was rewarded with a 146.9% increase on his $2 million bonus (on top of his $24 million compensation package) in 2022 due to a vague ‘better-than-baseline company performance’ even though the company stock had fallen by 40% (https://www.cmswire.com/leadership/what-the-heck-is-happening-at-uber/).

Alignment and executive pay  

One of the most important governance metrics (with the highest number of sub-metrics captured under this metric by Integrum ESG) is Remuneration Alignment, which evaluates executive pay alignment with company shareholders’ interests. 

A long-standing issue exists (particularly in large public companies with many shareholders), where separation of ownership (shareholders) and control (managers/executives) leads to a loss of alignment with the owners’ interests, often now called ‘the agency problem’.

Executive pay in large public companies can be a controversial topic due to leviathan compensation packages, which are used to combat the agency problem, keeping interests aligned with performance-related remuneration goals and long-term incentives that are of importance to the company, usually containing key performance indicators (KPIs).

Many KPIs are increasingly focused on ESG targets such as aiming for net zero by 2050, in line with the Paris Agreement. 

Will things change?

Ultimately, the responsibility of executive pay and alignment is down to the Remuneration Committee on the board.

The U.S. Securities and Exchange Commission adopted a Pay Versus Performance disclosure rule in August last year. This makes it mandatory for US companies to disclose the relationship between executive compensation actually paid compared to the financial performance of the company. 

It is clear that remuneration alignment is building in importance for regulators and shareholders alike, particularly when considering the desired transparency they expect from corporates and fund managers.

Our Real-time ESG Tracker picked up a significant negative red spike for MillerKnoll (MLKN), starting by flagging one of the first tweets made about the controversy.

Our systems immediately sent out an alert to our clients with MillerKnoll in their portfolio.

𝗪𝗵𝗮𝘁 𝗱𝗶𝗱 𝘄𝗲 𝗹𝗲𝗮𝗿𝗻?

MillerKnoll CEO, Andi Owen, came under fire after a video was released of her scolding her employees for complaining about not receiving bonuses - advising them to "leave pity city" and focus on making money for the company.

This was even though she herself had made almost $1.2 million in bonuses in the previous year, as part of a pay package worth nearly $5 million.

These comments had ramifications on public sentiment and their share price.

𝗪𝗵𝗮𝘁 𝗼𝘂𝗿 𝗥𝗲𝗮𝗹-𝗧𝗶𝗺𝗲 𝗘𝗦𝗚 𝗧𝗿𝗮𝗰𝗸𝗲𝗿 𝘀𝗮𝘄 🚩

The video was first leaked on Twitter on Friday 14th April just past midnight (GMT).

Our Real-Time ESG Tracker then immediately caught this tweet and all further tweets and articles relating to it.

The number of stories peaked on the 19th April, being reported on via many mainstream media sources and forcing the CEO to come out and apologise.

Since that initial story, the share price of MillerKnoll has continued to fall and has brought the issue of executive pay and bonuses back into the limelight.

The EU regulators (ESA) have just proposed a set of revisions to the SFDR (Sustainable Finance Disclosure Requirement).

The consultation closes July and 2 law firms we have spoken to estimate any changes would come into legal effect in Jan 2024.

𝗛𝗲𝗿𝗲'𝘀 𝗮 𝘀𝘂𝗺𝗺𝗮𝗿𝘆 𝗼𝗳 𝘁𝗵𝗲 𝟱 𝗸𝗲𝘆 𝗽𝗼𝗶𝗻𝘁𝘀 𝗳𝗿𝗼𝗺 𝘁𝗵𝗲 𝟭𝟱𝟴-𝗽𝗮𝗴𝗲 𝗰𝗼𝗻𝘀𝘂𝗹𝘁𝗮𝘁𝗶𝗼𝗻 𝗽𝗮𝗽𝗲𝗿:

1️⃣ The number of mandatory PAIs (indicators that funds making sustainable investments will have to report to) will be increased from 14 to 18.  

The new 4 are 'Social' indicators, relating to the companies the fund invests in:

🚩 Revenue earned in countries which don't co-operate with the EU on tax

🚩 Involvement in production of tobacco

🚩 Whether the company tries to block trade unions

🚩 % of staff earning less than an adequate wage

2️⃣ If the fund has an emissions reduction objective, it must publish quantified details.

3️⃣ More disclosure will be required on a fund's EU Taxonomy alignment (bringing SFDR and the Taxonomy closer together).

4️⃣ The requirement for a company to 'do no significant harm' to certain EU environmental and social objectives - if it is to classify as a 'sustainable investment' - will be more precisely defined (with quantified 'thresholds' to limit fund managers' discretion).  

5️⃣ The regulatory disclosures that fund managers have to publish (Annexes II-V) will have a summary dashboard at the front, designed for non-professionals to understand.

𝗙𝗼𝗿 𝗮𝗻 𝗔𝗿𝘁𝗶𝗰𝗹𝗲 𝟴 𝗳𝘂𝗻𝗱, 𝗶𝘁 𝘄𝗶𝗹𝗹 𝗰𝗼𝗻𝘁𝗮𝗶𝗻 𝟱 𝗸𝗲𝘆 𝗯𝗼𝘅𝗲𝘀:

🚩 What 'environmental and social characteristics' are promoted by the fund (max 250 characters)

🚩 What % of the fund's investments are sustainable

🚩 What % of the fund's investments are Taxonomy-aligned

🚩 Does the fund consider the PAIs

🚩 If the fund supports an emissions reduction target, what is the total % reduction targeted, and by what year

𝗪𝗵𝗮𝘁 𝗰𝗼𝗻𝗰𝗹𝘂𝘀𝗶𝗼𝗻𝘀 𝘀𝗵𝗼𝘂𝗹𝗱 𝘄𝗲 𝗱𝗿𝗮𝘄 𝗳𝗿𝗼𝗺 𝘁𝗵𝗲𝘀𝗲 𝗻𝗲𝘄 𝗽𝗿𝗼𝗽𝗼𝘀𝗮𝗹𝘀?

💭 The SFDR compliance headache is not going away: 

The EU seems determined to keep 'raising the bar' for any fund marketing itself as 'sustainable'.

💭 Investors' need for agile software that can keep up with increasing disclosure requirements is going to increase.

💭 Our argument about 𝐀𝐫𝐭𝐢𝐜𝐥𝐞 𝟴+ (linked here) gets stronger:

If a fund wants to be labelled Article 8 without reporting to the PAI, it will have to publish a front page 'dashboard' every quarter, that says "This product did not make sustainable investments" and then "This product did not consider the most significant negative impacts of its investments on the environment and society" (the regulator wants this wording to replace 'PAIs', to make it clearer).

Which will surely make any investor think "𝘵𝘩𝘪𝘴 𝘧𝘶𝘯𝘥 𝘮𝘪𝘨𝘩𝘵 𝘩𝘢𝘷𝘦 𝘢𝘯 𝘈𝘳𝘵𝘪𝘤𝘭𝘦 8 𝘭𝘢𝘣𝘦𝘭, 𝘣𝘶𝘵 𝘪𝘵 𝘪𝘴 𝘯𝘰𝘵 𝘪𝘯 𝘢𝘯𝘺 𝘮𝘦𝘢𝘯𝘪𝘯𝘨𝘧𝘶𝘭 𝘸𝘢𝘺 𝘢 𝘴𝘶𝘴𝘵𝘢𝘪𝘯𝘢𝘣𝘭𝘦 𝘧𝘶𝘯𝘥".

𝗪𝗵𝗮𝘁 𝗱𝗶𝗱 𝘄𝗲 𝘀𝗲𝗲?

Our proprietary Real-Time ESG tracker picked up a significant negative red spike for Pinduoduo(PDD), which has continued to rise throughout the day.  

Our systems immediately sent out an alert to our clients with Pinduoduo in their portfolio.

𝗪𝗵𝗮𝘁 𝗱𝗶𝗱 𝘄𝗲 𝗹𝗲𝗮𝗿𝗻?

Google has suspended Pinduoduo, one of China’s most popular e-commerce platforms, from its Play Store.

It has been suggested that versions of the app were found to include malware, exploiting zero-day exploits to hack users.

While this accusation has been rejected by a spokesperson of the Chinese company, the app has been suspended from the Play Store while an investigation continues and users of the app have been warned and prompted to uninstall.

Signed into law in August 2022, the Inflation Reduction Act (IRA) has been hailed as “the most significant climate legislation in U.S. history” according to the US Environmental Protection Agency (https://www.epa.gov/green-power-markets/inflation-reduction-act).

The main intention of the IRA is to catalyse investment in clean energy: the act itself includes $370b of energy-related spending; two of the main beneficiaries of this will be clean energy and electric vehicle (EV) companies.  

The funds are to be delivered through tax incentives, grants, and loan guarantees. According to McKinsey, US solar, wind, heat pumps and EV industry all stand to gain from production and investment tax credits of $30 billion for manufacturing (https://www.mckinsey.com/industries/public-and-social-sector/our-insights/the-inflation-reduction-act-heres-whats-in-it). 

We looked into 4 companies that are starting to benefit from the IRA:

𝗧𝗲𝘀𝗹𝗮 - On 22nd February, Tesla announced a shift in cell production from Germany to the US after considering incentives available through the IRA, making it one of the first firms to declare a strategy shift prompted by the law. [1]

𝗠𝗲𝗿𝗰𝗲𝗱𝗲𝘀-𝗕𝗲𝗻𝘇 𝗚𝗿𝗼𝘂𝗽 - Mercedes are now in the process of building 10,000 fast-charging points in North America from 2023, targeting 2,500 charging points at 400 locations across most U.S. states and Canada by 2027. [2]

𝗟𝗶𝗻𝗱𝗲 - According to a recent Reuters report, Linde has estimated the total investment opportunity for the company in the United States alone could exceed $30 billion over the next decade. [3]

𝗙𝗶𝗿𝘀𝘁 𝗦𝗼𝗹𝗮𝗿 - The company has recently announced a big expansion, planning to invest up to $1.2 billion in scaling production of American-made photovoltaic (PV) solar modules. The investment is forecast to expand the company’s ability to produce American-made solar modules for the US solar market to over 10 gigawatts (GW) by 2025. [4]

𝗧𝗵𝗲 𝗿𝗲𝗮𝗰𝘁𝗶𝗼𝗻 𝗳𝗿𝗼𝗺 𝘁𝗵𝗲 𝗘𝗨 𝗮𝗰𝗿𝗼𝘀𝘀 𝘁𝗵𝗲 𝗽𝗼𝗻𝗱 𝗵𝗮𝘀 𝗯𝗲𝗲𝗻 𝗹𝗲𝘀𝘀 𝗲𝗻𝘁𝗵𝘂𝘀𝗶𝗮𝘀𝘁𝗶𝗰.

European officials have complained that the IRA; which – amongst other things - limits tax credits to EVs assembled in the United States, and violates U.S. commitments not to subsidise domestic industries or discriminate against foreign ones.  

There are genuine fears that it could lure businesses away from the bloc with generous tax breaks - and there is no smoke without fire.  

The CEO of Enel in December publicly claimed the IRA is more efficient than EU aid to support domestic production of energy sector components.  

The response by the European Commission has been to unveil its Green Deal Industrial plan, signifying a potential relaxation of state aid towards clean tech, although this is struggling to get ubiquitous support among all member states.  The EU has warned against a subsidy race but has welcomed the commission’s response to the IRA.

This is a post made by our CEO Shai Hill on LinkedIn on 10th March 2023.

The large legacy ESG ratings brands use a vast amount of estimated data.

That's how they are able to cover >10,000 companies, including emerging market companies that don't actually publish any ESG data.

There are 3 problems here:

1. 𝗧𝗵𝗲𝘆 𝗱𝗼𝗻'𝘁 𝗺𝗮𝗸𝗲 𝗰𝗹𝗲𝗮𝗿 𝘄𝗵𝗮𝘁 𝗰𝗼𝗺𝗽𝗮𝗻𝘆 𝗱𝗮𝘁𝗮 𝗶𝘀 𝗮𝗰𝘁𝘂𝗮𝗹 𝗮𝗻𝗱 𝘄𝗵𝗮𝘁 𝗶𝘀 𝗲𝘀𝘁𝗶𝗺𝗮𝘁𝗲𝗱.

Depending on your subscription, you can sometimes click through to a CO2 emissions number, but you won't know whether it is an actual value disclosed by the company, or a value estimated by that ratings firm.

2. 𝗧𝗵𝗲 𝘄𝗼𝗿𝗱 '𝗲𝘀𝘁𝗶𝗺𝗮𝘁𝗲𝗱' 𝘀𝘂𝗴𝗴𝗲𝘀𝘁𝘀 𝗮𝗻 𝗮𝗻𝗮𝗹𝘆𝘀𝘁 𝗺𝗶𝗴𝗵𝘁 𝗵𝗮𝘃𝗲 𝘀𝘁𝘂𝗱𝗶𝗲𝗱 𝘁𝗵𝗮𝘁 𝗰𝗼𝗺𝗽𝗮𝗻𝘆 𝗮𝗻𝗱 𝗶𝘁𝘀 𝗶𝗻𝗱𝘂𝘀𝘁𝗿𝘆 𝗮𝗻𝗱 𝗺𝗮𝗱𝗲 𝗮𝗻 𝗶𝗻𝗳𝗼𝗿𝗺𝗲𝗱 𝗰𝗼𝗺𝗽𝗮𝗻𝘆-𝘀𝗽𝗲𝗰𝗶𝗳𝗶𝗰 𝗲𝘀𝘁𝗶𝗺𝗮𝘁𝗲.

In reality, although their precise methodology is typically opaque, the estimated value is just an average, calculated from that company's regional and sectoral peer group. That's why we call it a 'guesstimate'.

As I warn investors, it's like hiring an analyst after you were reassured that they got 70% in their final mathematics exam. You then learn that actually, they never showed up for that exam and this score was in fact a class average.

You can surely appreciate that if they had sat the exam, their score might have been very different from 70%.

3. 𝗔 𝘀𝗲𝗿𝗶𝗼𝘂𝘀 𝗽𝘂𝘀𝗵𝗯𝗮𝗰𝗸 𝗺𝗶𝗴𝗵𝘁 𝗯𝗲 𝗯𝗲𝗴𝗶𝗻𝗻𝗶𝗻𝗴 𝗳𝗿𝗼𝗺 𝗮𝘀𝘀𝗲𝘁 𝗼𝘄𝗻𝗲𝗿𝘀.

These are the institutions who ultimately own the capital that asset management firms invest (on their behalf).

Many asset owners trust the large legacy brands in ESG ratings; in fact some demand that their asset managers use one of them.

But many never realised how many of the 'reassuring' grades they review each quarter are based on guesstimated data.

Within the UK, some asset owners (public pension fund trustees) are even receiving advice that relying on estimated ESG data might constitute a breach of fiduciary duty.

What do we think?

We only use company-disclosed data behind any fundamental analysis we do - and if the company hasn't disclosed data that a recognised framework like the SASB Standards would expect to be disclosed, we make that clear and mark the company down for it.

Many of you might disagree that this is the best approach. But if you are going to use estimated data - you should at least know it's estimated data.

𝗕𝘂𝘁 𝘄𝗵𝗮𝘁 𝗱𝗼 𝘆𝗼𝘂 𝘁𝗵𝗶𝗻𝗸? When reviewing ESG data and scores for a company, do you see estimated ESG data as necessary gap filling?

(2) The double, triple, quadruple accounting problem at the fund level. The example given at the conference was a good one; jet fuel emissions.  

These could be counted in the scope 1 of the airline operating the flight, the scope 3 of any company whose employees are taking the flight for business, or the scope 3 of the company who refined the jet fuel.  

The SEC recently signalled they were scaling back their ambitious disclosure requirements on scope 3 [1], however some disclosure will be required under the new IFRS S2 standards [2]. So, there is mixed opinion from standard setters/regulators. 

Scope 4 (measuring avoided emissions) [3] is of growing interest to LPs who take climate investing very seriously; climate funds should invest in companies with technologies/approaches that will reduce global emissions significantly, with the acknowledgement that those companies are often in ‘unattractive’ industries like Steel, or Cement. 

Calculating their Scope 4 will reveal their positive impact - but again, estimations will play a large role in their quantification.

Read our Head of Research Hannah Bennett's thoughts here.

Please note these are the 12 largest positions only - you can see all 100 holdings by either filling in the form HERE or by requesting the full list via contact@integrumesg.com.

We recently created a post on LinkedIn explaining how regulators in the EU, UK and US are investigating ESG funds as there have been growing concerns that asset managers are promising more than they can deliver in an effort to sell their products.

There are fears that to meet the growing demand for ESG products many asset managers have simply rebranded their existing products rather than trying to create new ones, which has created concerns around greenwashing.

A recent analysis by PwC showed that of 1,061 Article 9 funds -- whereby a product needs to have sustainability as its “objective” -- showed that only 286 were new.  The rest were reclassifications of existing funds.

A probe of Article 9 products by Swedish authorities last month found “many cases” in which managers failed to provide necessary information, and as a result the Stockholm based regulator has warned that it will act to stamp out false ESG claims.

Furthermore - the EC has recently announced guidelines suggesting that the hurdle for an Art 9 fund should be 100% which has prompted firms like Amundi and Blackrock to remove Article 9 labels from some of its funds.

This has prompted the team here at Integrum ESG to use our 'Screener Tool' to create an Article 9 fund where every company meets the 12 specific sustainability objectives that a company must support if it is to be compatible with an Article 9.

We are happy to have been recognised as the "Best Global AI-Powered ESG Data Provider" by Corporate Vision Magazine in their annual Artificial Intelligence Awards.

This recognises the incredible work done by the Integrum ESG Machine Learning team.

Their contribution cannot be understated - creating and refining our cutting edge models so that they are able to capture, verify and display granular and relevant ESG data with unrivalled rapidity.

Might a clear legal standard of ‘sustainable’ emerge? The law firm Bates Wells believes that the 2015 Paris Climate Accord will be the legal standard – and the recent court ruling against Shell in The Hague set this as a legal precedent. How many investment funds are using a tool like THIS to evidence that their investments are consistent with a global warming scenario ‘well below 2 degrees’ (which is the objective of the Paris Climate Accord)?

So, ESG regulatory risks and legal liabilities may be mounting for fund management firms. The easiest way for any fund management firm to mitigate these risks is to state clearly that environmental and social objectives are not promoted by the fund, nor is ESG analysis systematically integrated into the investment process. Then all these mis-selling risks fall away.

It just seems that, fearful of losing investors, very few fund management firms want to do this.

The alternative is for these firms to build, or subscribe to, data tools that will map their funds to the Paris Accord, assess them against the 14 SFDR Adverse Indicators, and enable them to explain the key ESG risks in every existing investment.

How can Integrum ESG help meet these challenges?

- Fund managers are often relying on ESG ratings they cannot understand. When a regulator or investor asks "why are you comfortable with the ESG performance of this company?" they will struggle to answer, because the ESG score that has reassured them is a set of black boxes. The Integrum ESG dashboard presents glass boxes, with the reason for every score, for every metric, and the underlying data that explains and supports the ESG rating.

- Applying a Cambridge University model, the Integrum ESG dashboard calculates the extent to which your fund is aligned to the Paris Climate Accord - and surfaces the data that supports this calculation, company by company.

- The latest Integrum ESG dashboard feature, soon to be deployed, will provide the evidence of why, or why not, your fund can be classified as Article 8. It will map and assess the alignment of every uploaded fund to the SFDR Principal Adverse Indicators, and the EU Taxonomy Objectives.

Do you want to learn more about how Integrum ESG can help you meet these challenges? If so, CLICK HERE.

Recently we posted a poll on LinkedIn (which you can see HERE) which discussed how the plant-based meat market will develop and the main reasons why there has been a drop in the sales of plant-based meat in 2021.

One of the main reasons for this drop in sales is that consumers have now started to realise that many plant-based meats are highly processed, additive-laden and not very healthy.

This has prompted the team here at Integrum ESG to take a look at Processed Food companies that are best at managing health risks to customers.

See below for a list of the 14 companies that rank highest out of the highest possible score of 4.