In this month’s ESG Market Alert, we cover:

• Forestry investments – a top priority for UK pension schemes;
• The French Duty of Vigilance Law: Proceedings initiated against food sector leaders/Decision regarding an oil major's alleged breach;
• FRC tightens scrutiny of ESG in company audits and updates ESG Statement of Intent; and
• Market Practice Development – Increasing opportunities for IBs and investors in unlisted ESG companies in emerging markets.

Forestry investments – a top priority for UK pension schemes

Two UK pension schemes, Nest and Cushon, with more than £26 billion in combined assets, have prioritised forestry investment strategies and are in search of asset managers with whom to partner. The two schemes are undertaking this joint effort in order to offset environmentally damaging emissions from other investments and, by combining forces, to secure lower fees for third party manager services.

Both pension schemes have said that they will avoid forestry projects where logging contributes to deforestation. Nest is expected to invest around 2% of its assets in forestry investments and Cushon anticipates that it could invest up to 5% of its assets in sustainable investments, including in “controversial” carbon credit schemes. Carbon credit schemes, which have become more prevalent in recent years, make it possible to offset polluter emissions by investing in forestry projects. However, such schemes are often unregulated and are subjected to criticism regarding their quality and verification. Among the concerns relating to carbon credit schemes are the reports that the projects do not capture as much carbon as they claim. This is because, in practice, it is often difficult to track accurately the trees and amount of carbon stored as they are usually in remote areas outside of the UK.

The French Duty of Vigilance Law: Proceedings initiated against food sector leader/Decision regarding an oil major's alleged breach

Duty of Vigilance for parent companies

Since 2017, under the Duty of Vigilance Law, French corporations with over 5,000 employees in France and/or over 10,000 employees worldwide (including affiliates' employees) are required to set up, publish and implement a "vigilance plan". Vigilance plans identify, anticipate and seek to prevent human rights violations that might result from the activities of the parent company and group, as well as suppliers and subcontractors.

Legal proceedings initiated against leaders in the food sector under the French Duty of Vigilance Law

While the Duty of Vigilance Law has not led to any fines or penalties yet, on 28 September 2022 nine leading food manufacturers and distributors were given formal notice from non-profit groups ("NGOs") to reduce their use of plastic. The NGOs argue that, while some of these companies are among the world's largest producers of plastic waste, their vigilance plans are, at best, insufficient to identify risks and prevent plastic-related harm, and, at worst, non-existent. In addition, three NGOs have initiated court proceedings against one of the ten biggest plastic polluters in the world (according to the Break Free From Plastic report) in light of the alleged absence of any corrective action taken by this manufacturer with respect to its vigilance plan. They request the court to order the company to publish a new vigilance plan including a six-month deplastification plan.

Expected decision on 28 February 2023 regarding an oil major’s alleged breach of vigilance plan

Further, in light of certain oil projects underway in Africa, NGOs have initiated proceedings against a major oil company on the basis that it had not adequately assessed the project's threats to human rights and to the environment. The NGOs are asking that the oil company be ordered to take urgent measures to prevent the “manifestly illegal disturbance” resulting from the company's alleged failure to comply with its duty of vigilance. As a subsidiary remedy, the plaintiffs seek an order that the company is required to establish, publish and implement a set of measures in its vigilance plan to prevent (i) serious violations of human rights and fundamental freedoms, health and safety of persons and (ii) serious environmental damage. The trial hearing took place on 7 December 2022 and the ruling of the Paris Civil Court is expected on 28 February 2023.

FRC tightens scrutiny of ESG in company audits and updates Statement of Intent

Britain’s accounting watchdog, the FRC, has said it will monitor whether auditors are making spot checks on compliance with ESG reporting requirements in company audits. The intention is to prevent ‘greenwashing’ or exaggerating sustainability claims by companies to attract investors.

The FRC will continue to monitor the work done by auditors on climate-related risks faced by the companies that are being audited. The focus will be on the use of ESG data and the link between investors and ESG reporting by those companies. The FRC seeks to improve transparency on climate and wider ESG risks and opportunities and aims to rely on ‘in-flight’ reviews of internal checks at auditors during an audit.

The FRC also published an updated Statement of Intent on ESG, focusing on cross-FRC analysis and responses to ESG challenges. The FRC acknowledges the rapidly changing landscape of ESG reporting and the steep increase in stakeholders’ need for better guidance. In addition, it emphasises the practical needs of stakeholders and the importance of engagement with international developments and other regulatory bodies. In 2023, the FRC will focus on developing guidance related to ESG data, reviewing corporate governance and will publish a report on a common framework for climate transition plans.

Market Practice Development – Increasing opportunities for IBs and investors in unlisted ESG companies in emerging markets

The increasing focus on ESG has prompted the Oxford Business Group to highlight current trends that are creating opportunities for investment banks and investors in unlisted ESG companies in emerging markets.

First, with recent market pressures emerging markets equities have seen a rebound, with the potential to reignite optimism in investors. Importantly for investors, certain ESG companies in emerging markets can be seen as undervalued due to the relative lack of available data.

Second, the increasing strain placed on supply lines and energy resources presents opportunities for growth for strong ESG companies in emerging markets to access cleaner and more efficient energy sources. This is bolstered by increasing governmental investment in such projects.

Finally, investors should consider the difference in approach between emerging markets and developed economies when it comes to investing in sustainable projects. While companies in more developed markets normally utilise ESG to meet narrow targets such as emission goals, companies in emerging markets are often utilising ESG to address social issues. The Oxford Business Group suggests that the approach to ESG in emerging markets has the potential to improve business operations, in turn, encouraging a cycle of beneficial investment.