by Marc Gerber, Greg Norman, Simon Toms, Helena Derbyshire, Louise Batty, Adam Howard, Eve-Christie Vermynck, Damian Babic, Zoe Cooper Sutton, Caroline Kim, Abigail Reeves, Patrick Tsitsaros, Eleanor Williams, and Kathryn Gamble
This is Part III of a three-part post. For Part I, providing an overview of correct ESG predictions for companies based in the U.K. and Europe in 2021, click here. For Part II, which continues its analysis of ESG predictions, click here.
New Areas of Interest
Data, Tech and ESG[1]
As investors have focused on the E in ESG, many have divested fossil fuel-based holdings and shifted investment to technology, which is regarded as greener. For example, large ESG-focused exchange-traded funds (ETFs) now look very much like tech-sector ETFs, with Apple, Microsoft, Amazon, Alphabet and Facebook topping the holdings at several.
However, as the technology sector evolves and data becomes increasingly valuable, the need for effective management and safeguarding will determine whether it continues to be seen as an ESG-friendly industry. Cybersecurity, for example, has emerged as a critical governance risk when evaluating investments, a concern that has only been heightened by the shift to remote working during the pandemic.
Tech companies such as Microsoft and Apple have pushed back against calls to include disclosures of ESG issues in SEC filings. The companies have argued that the inclusion of such information would open them up to legal risks, given the current difficulties in quantifying ESG data. This reluctance has arisen despite both companies positioning themselves as sustainability leaders and greatly benefitting from the ESG boom, with Microsoft the most widely held company by U.S. ESG funds.
Cryptocurrencies, meanwhile, have been subject to an increased scrutiny for their environmental impact. Greenidge Generation has been sued over its purchase and planned expansion of a power plant in New York State to be used to mine bitcoin. Tesla chair Elon Musk also recently commented on the industry, saying “cryptocurrency is a good idea on many levels and we believe it has a promising future, but this cannot come at great cost to the environment”. Whether environmental concerns will affect the growth of cryptocurrencies remains to be seen.
Looking Forward: Our Expectations for the Rest of 2021
UN Climate Change Conference[2]
The 26th United Nations Climate Change Conference of the Parties (COP26) is still on track to be held in Glasgow in November 2021, with many participants gearing up to discuss the progress made since the Paris Agreement and what steps should be taken next.
As the host, the U.K. government has come in for criticism from the Climate Change Committee (CCC), the government’s environmental adviser, for failing to match rhetoric with action. In a recent CCC report on decarbonisation, the committee stated that plans for key sectors had been repeatedly delayed and it complained of a lack of strategy over the past 12 months. That came just a week after a CCC review of climate risks faced by the U.K. stated that the government had done little to prepare for the inevitable dangers posed by climate change. These have put more pressure on the government to take action in the months before November.
Greenwashing Concerns[3]
Greenwashing continues to be a major concern for ESG investors and regulators alike, as we have discussed above. In response, the U.K. Treasury has formed a new panel, the Green Technical Advisory Group (GTAG), to define the requirements for financial investments to be considered environmentally sustainable. This grew out of concerns that investors do not have enough information to understand the environmental impacts of their investments.
The U.K government opted not to adopt the EU’s taxonomy regulation ― its framework for classifying environmentally-sustainable economic activities, which comes into effect in 2022 ― and it is not yet clear what approach the GTAG will take. As mentioned above, the FCA’s “Dear Chair” letter to fund managers, sets out its guiding principles for investing, with a particular focus on what greenwashing is and how to avoid it. The overriding principle appears to be consistency, including fund names, objectives, policies and strategies. The FCA’s letter included specific examples of greenwashing, including passive funds with ESG-related names making investment decisions based on only high-level criteria and funds claiming to contribute to positive environmental impact that invest in low-carbon companies rather than those contributing to a net-zero transition. The impact of these measures on the U.K. market will become clearer in the coming months.
ESG and Board Composition[4]
Diversity, equity and inclusion has continued to be at the forefront of a number of developments, but there have been continual reminders of the amount of work that remains to be done.
More than half of directors appointed to public company boards in the U.K. in 2020 were women, but more than 80% of the appointees were white and a large proportion of these positions continued to be non-executive directorships, with very few women gaining the top executive positions.
At the end of July, the FCA announced a new proposal that would put pressure on U.K. companies to ensure that at least 40% of board directors are women. Under this amendment to the Listing Rules, companies would need to “comply or explain” why they have missed new board diversity targets for gender and ethnic minority representation. Although these targets will not be mandatory, they would provide a way to measure companies’ success in bringing greater diversity to their senior management. The FCA intends to consult on these proposals with the market’s response likely to shape the FCA’s plans over the next six months.
Flexible Working[5]
Throughout the pandemic, employers have had to wrestle with work force issues that fall under the S of ESG. Crafting guidelines for returning to the workplace has proved challenging for both governments and businesses in 2021, as the world faces new variants of COVID-19 and renewed surges. We may now be seeing the “new normal”, with a full return to the workplace varying by role and employer, and rules continuing to change with the nature of the pandemic. In many sectors, it seems that hybrid working is likely to become the norm.
This raises new issues. Under English law, for example, employees have a right to request flexible working once they have been with an employer for at least 26 weeks, and employers must address requests in a “reasonable manner”. Given that many employees have already worked flexibly for the last 18 months, refusing new flexible working requests may be deemed unreasonable.
Reputational considerations also come into play. The willingness of employers to embrace flexible working patterns is perceived to go hand in hand with diversity and inclusion initiatives. Employers who embrace flexibility are increasingly viewed as those most committed to gender diversity at senior levels, for instance.
However, it is also worth remembering that working from home has been most feasible and widespread in professional and other office-based sectors. In 2020, the proportion of employees working from home in the U.K. rose to 35.9% in 2020, but that was only 9.5% higher than 2019. For many people and industries, the pandemic has therefore not changed working practices. With a full return to office-based work seemingly now somewhat delayed, only time will tell what the long-term effect of all these changes will be.
Another six months of working from home has also led to a rise in conversations surrounding the impact of isolation and remote working on mental health. Some studies have indicated that almost one in five adults in the U.K. were likely to experience some form of depression during the pandemic. As the blurring of private and professional lives led some employees to claim they were working substantially longer hours, employers should consider their duty of care towards employees, which includes their mental as well as physical health. In serious cases, the effect of the changed job arrangement on mental health may amount to a breach of this duty of care, giving rise to the possibility that employers could face claims for personal injury or constructive dismissal. In some circumstances, mental illnesses may be considered a disability under the U.K. Equality Act 2010. Employers should therefore be careful not to discriminate and should take reasonable steps to facilitate employees struggling with their mental health.
Footnotes
[1] Forbes, “Data Governance: the next big ESG controversy” (4 February 2021); Bloomberg, “BlackRock’s record-breaking ESG fund looks just like a big tech ETF” (14 April 2021); Financial Times, “Top tech groups try to dilute ESG disclosure rules” (20 June 2021); Financial Times, “Bitcoin’s growing energy problem: ‘It’s a dirty currency’” (20 May 2021).
[2] Financial Times, “UK failing to match climate rhetoric with action, adviser warns” (24 June 2021).
[3] Bloomberg, “UK tackles ‘greenwashing’ with push to define sustainability” (8 June 2021).
[4] Financial Times, “Women take half of UK board seats” (9 June 2021); Financial Times, “UK boards face pressure to increase female directors under FCA plans” (28 July 2021).
[5] The Verge, “Apple employees push back against returning to the office in internal letter” (4 June 2021); BBC. “The bosses who want us back in the office” (25 March 2021); U.K. Office of National Statistics, “Homeworking hours, rewards and opportunities in the UK: 2011 to 2020” (19 April 2021).
Marc Gerber, Greg Norman, and Simon Toms are partners, Helena Derbyshire, Louise Batty, Adam Howard, Eve-Christie Vermynck, and Caroline Kim are of counsel, and Damian Babic, Zoe Cooper Sutton, Abigail Reeves, Patrick Tsitsaros, Eleanor Williams, and Kathryn Gamble are associates, at Skadden Arps, Slate, Meagher & Flom LLP.
Disclaimer
The views, opinions and positions expressed within all posts are those of the authors alone and do not represent those of the Program on Corporate Compliance and Enforcement or of New York University School of Law. The accuracy, completeness and validity of any statements made within this article are not guaranteed. We accept no liability for any errors, omissions or representations. The copyright of this content belongs to the authors and any liability with regards to infringement of intellectual property rights remains with them.