ESG Essentials: Fair Reward Framework and new NZAOA member

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Investors Sharpen Fair Pay Focus

The Fair Reward Framework (FRF) will soon be launched by asset owners including the Church of England Pensions Board and Brunel Pension Partnership, addressing issues surrounding corporate pay and tensions between companies, shareholders, and stakeholders.

The FRF will create clear, comparable metrics and the ultimate objective is to improve companies’ approaches to addressing inequalities, securing investee companies’ social licenses, and improving sustainability through corporate pay practices.

The Taskforce on Social Factors (TSF) recently unveiled guidance to help UK pension fund trustees improve their assessment of social factors in investment decisions and stewardship. 

The framework’s systemic stewardship approach could help inform proxy voting during the upcoming AGM season. According to Fidelity and Schroders, executive pay will likely face an elevated level of scrutiny.

EU regulator calls for action against climate threat to insurance 

The European Insurance and Operations Authority (EIOPA), the EU’s insurance regulator, has called for urgent action to protect Europe from climate risk as rising economic damage from natural disasters raises concerns that some areas could be rendered uninsurable.

The regulator proposed solutions such as tightening building rules, creating national and EU-wide schemes to share risks and drawing more deeply on reinsurance markets. The EU suffered over €50bn in economic losses from natural catastrophes in both 2021 and 2022, three times more than the annual average in the previous decade.

EIOPA wants to make greater use of reinsurance markets and aims to encourage investors to put more money into EU insurance-linked securities, such as catastrophe bonds, which pay out for certain extreme weather events. So far, reinsurers have contributed by charging more for the cover they provide to primary insurers and tightening their terms, making insurance more affordable and accessible.

Source: Graph produced by The Financial Times, data sourced from Howden (left) and Aon (right)

NZAOA sets new engagement targets for members

The UN-convened Net Zero Asset Owner Alliance (NZAOA) has released its new Target Setting Protocol, adding new pressure on its members to maintain momentum around climate action in the financial sector.

The NZAOA has 89 members in 19 countries representing $9.5tn assets under management. Members have committed to implementing emission reductions within their portfolios in a collaborative effort to support the global push for net zero carbon emissions. 

Further, they have pledged to put pressure on the businesses they invest in, as well as the asset management firms that invest much of NZAOA members’ funds, urging them to adopt more environmentally conscious practices.

The new protocol pushes members to expand their net-zero efforts across entire portfolios, as the NZAOA expanded their coverage to include a much wider range of non-public assets, including private debt funds, directly held private debt and directly held real estate funds. It has also expanded to pay more attention to sovereign debt using the Assessing Sovereign Climate-Related Opportunities and Risks (ASCOR) database.

US government climate advisers lobbied SBTi to allow carbon offsets 

Continuing the SBTi carbon credit debacle, it was revealed this week that advisers to former US climate envoy John Kerry heavily lobbied the Science-Based Targets initiative (SBTi) to allow the use of carbon credits to meet emissions reduction targets.

The push, spanning over two years, sought to align the SBTi’s policies with a US clean-energy scheme designed to aid developing nations in transitioning away from fossil fuels.

The SBTi’s recent decision to permit companies to use carbon credits was subsequently retracted after an internal revolt. While proponents argued that carbon credits offer a means to achieving climate goals, critics expressed concerns about their efficacy and potential to undermine genuine emission reductions.

The debate surrounding carbon credits within the SBTi reflects broader tensions regarding climate finance and emissions reduction strategies. As countries strive to adhere to the Paris Agreement’s ambitious targets, the role of carbon markets and offsetting mechanisms remains contentious.

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