What’s the big deal?
By Christopher Jones, Partner
Once they have cut through the near impenetrable prolix, seasoned sustainability reporters may be thinking ‘What’s the big deal ? This is a consolidation of the best and most complex sustainability requirements from existing frameworks and standards’; following their review of the long-awaited drafts for both EFRAG’s European Sustainability Reporting Standards (ESRS) and IFRS’s International Sustainability Standard Board’s S1 and S2 papers. For those unfamiliar, the ESRS disclosures will be required for larger and listed EU companies (as well as those with significant operations within the EU) from January 2024. Meanwhile, the ISSB standards seems likely to be the government and stock exchange adopted ESG disclosure for the UK and other non-EU countries such as Norway in the next couple of years (if not a UK Taxonomy to match the EUs).
Much of the guidance deliberately builds on existing standards and frameworks from SASB and TCFD, but adds a unifying badge to this regulatory consolidation of general sustainability and climate risk disclosures. Buchanan’s review stumbled across a few inconsistencies and contradictions in the drafts, but it is ‘draft’ and there will be some leeway for reporters in their first few years of publications, as well as some settling down of the requirements. What’s clear is that the scope and granularity is going to be a challenge for those at the start of, or early on in their sustainability journey. But we hope that the ‘double materiality’ assessment enables companies to prioritise their disclosures and avoid many that just aren’t relevant or material.
So what is the big deal (apart from the fact your inbox is going to be inundated with invites to forums and roundtables to discuss these requirements from ‘professional’ service companies hoping to panic you into a £2,000 seminar event.)? The big deal is that the ‘financial materiality’ of your ESG risk and opportunity profile is the game-changing stipulation and drags sustainability disclosure out from the purview of your comms/IR/marketing departments and slams it down on the CFO’s desk. Hard. We’re witnessing the shift from sustainability being an exercise in supplementary corporate communications to one embedded within strategy, risk and financing management processes.
Finance teams will now need to provide clear quantifiable £££$$$EUR assessments of the impacts of primary ESG risks and opportunities, over short-, medium- and long-term time horizons, and be audited. The EU’s taxonomy regulation will also assess your overall eligibility for their ‘sustainability’ classifications which may or may not support your attractiveness to responsible investors.
Sobering, I know.
A number of thoughts may be flooding through your mind, not least ‘this is going to make the already demanding reporting obligations, even more onerous’. It’s clear that ESG risk assessment now needs to be part of your Audit and Risk oversight, if not already. Your sustainability strategy needs to fully align with your growth strategy and your non-financial performance measures require the same exacting internal reporting governance and mechanisms as financial metrics. Only then will they withstand the scrutiny that will come from the audit partner who’ll be running their rule over your previously unassured data.
Add to this the fact that your reporting boundary will also be expanded to cover material impacts related to the upstream and downstream value chain; and these assessments are no longer limited to matters within the company’s control. What might alert some is that these factors and their financial impacts will likely be included in future analyst coverage and sentiment, which had previously been limited to a secondary reputational consideration rather than influencing their core recommendations. So, whether this is a big deal or not will depend on your ESG disclosure progress to date and your company’s mindset towards sustainability integration. What’s for certain, non-financial performance is now…er…financial.
Regearing the O&G Supply Chain to meet Net ZeroBy Barry Archer, Director, Energy
At Offshore Europe 2023 in Aberdeen this month, there was determination and optimism within the oil and gas supply chain about a pivot toward new energy projects. This industrial shift is happening now and is set to continue in-step with declining hydrocarbon demand over the next couple of decades as energy consumption needs are increasingly met by low and zero carbon solutions.
The oil and gas supply chain, and the skills, capabilities and technologies that have been built up over decades are actively being leveraged and are an integral part of the success of new low carbon energy projects. In offshore wind the UK has the second largest capacity globally with almost 14GW coming from complex projects such as Hornsea, Dogger Bank and Seagreen.
This process is happening organically, where services and skills can be repurposed, and inorganically through M&A activity. Core competencies are being leveraged and added to, diversification into new business streams is expanding companies service offerings. The new energy market, with the likes of renewables (wind, solar, tidal, wave, biomass etc..), CCS and hydrogen, and the distribution infrastructure necessary to deliver energy to consumers, will need a robust and capable supply chain that can support their meaningful growth into the 2030s and 2040s, and beyond.
The UK oil and gas industry which today consists of 220,000 jobs, and in 2022 generated according to the latest OEUK economic report around £30bn in gross value added (c.1.5% of the UK economy) is a strategic asset for the UK that must be utilised.
The energy trilemma looms large over the energy transition discussion and is inescapable for all stakeholders. This is particularly true for policymakers who are steering the energy transition, and investors who are funding it. Moving from a hydrocarbon-based energy system to one based on low carbon technologies must be done while delicately balancing energy security, energy affordability and energy sustainability. It needs to be understood that a sudden change in one direction will have negative consequences for the economy.
The reality is that oil and gas will remain an important component of the UK’s energy mix into the next decade. The latest OEUK economic report notes that over 75% of all the UK’s energy consumed is still from oil and gas, with coal, renewables and nuclear making up the remainder. Just as the proportion of the oil and gas generated energy we all use will gradually decline, so to in step will the major source of revenues for oil and gas suppliers as new revenue streams develop and mature.
An agile, collaborative, and innovative approach from all stakeholders will be necessary given the need to develop new supply chains, technologies, and business models to successfully bridge to a net zero future, coupled with a need for long-term strategic planning to reduce investment risk.
How the UK can reopen for businessby Simon Compton, Associate Partner
A challenging environment
Headline figures from the first half of 2023 don’t make great reading for those with a vested interest in the success of UK capital markets. In the year to date, we have seen a grand total of six companies make the move to public ownership. This compares with over 50 IPOs to date in 2023 on US exchanges, a similar number in the Middle East and over 35 flotations on the main European stock markets.
In addition, a number of large UK listed companies including CRH PLC, Flutter Entertainment PLC and Ferguson PLC are looking at either moving to the US or adopting a dual listing. However, it is not all gloom and doom and whilst a move to the US makes good headlines, it is worth bearing in mind that IPO levels have always been cyclical with alternative funding options going in and out of favour depending on the wider economic outlook and investor risk appetite.
Help is at hand
Whilst the complete set of reasons behind the current drop in IPOs are many and varied, there is growing consensus that an excess of bureaucracy and restrictive legislation lie at the heart of the problem. The US stands in stark contrast with fewer regulations, significantly better executive remuneration packages and a 40-50% upside on valuation likely to be achieved upon listing when compared with the UK.
The good news is that the Financial Conduct Authority (“FCA”) is well aware of the problem and has unveiled a complete overhaul of the UK listing rules. This includes plans to scrap rules forcing a shareholder vote on transactions between UK-listed companies and related parties, as well as removing a requirement for firms to have three years of audited financial accounts before listing. These developments come on top of policy changes in late 2021 that allowed stock market debutants to reduce their free float requirements from 25% to 10%.
It is also worth bearing in mind that whilst updates are clearly needed to the UK’s regulatory framework, commentators have undoubtedly been a bit hasty in launching all-out attacks on an exchange that has proven itself time and again as a long term value creator and weathered many greater storms in the past.
London has been a welcome home for institutional money that has financed countless home-grown and international businesses from both established and emerging economies and across multiple sectors. This sort of history is not going to be undone by a few rather zealous headline writers.
Balance over bureaucracy
Changes however are needed, and ones of this scale may appear at first glance to be a knee-jerk response that run the risk of undoing London’s hard-won reputation as the global gold standard for good governance amongst listed companies. However, this is not the time for slow and steady policy evolution, given the speed with which London is losing business to competing international stock exchanges. The FCA has grabbed the bull by the horns and should be applauded for its swift action.
It is also the case that if you look at the myriad number of rules, regulations, codes and guidelines that have emerged over the past decade, it becomes apparent that London may well have gone too far in its attempts to protect shareholder interests. All the good intentions have resulted in an extremely burdensome regime that has had the effect of regulating many public companies into the ground.
Each rule and regulation appear sensible by themselves but when added together become a mountain of administration that arguably doesn’t leave enough room for management teams to focus on critical issues like value creation, innovation and productivity. The FCA has recognised this and their response will no doubt be seen as an important milestone in the years ahead.
A way forward
Immediate action is exactly what is needed as part of the UK’s response to the current drop in IPO activity. That is not to say that good governance shouldn’t remain of critical importance, but it is equally true that investing can’t be made completely safe and that risk has always been the price of growth.
What the FCA has done with these changes is effectively put the onus back on investors to play a more important role in holding companies to account and to run a stricter rule over those looking to come to market. The companies most likely to succeed in this new environment are those that can clearly demonstrate their investment case in a way that shows awareness and management of operational and financial risks in addition to an emphasis on maximising shareholder returns.
At Buchanan, our expertise lies in helping companies articulate the risks and opportunities associated with their equity story, as well as formulate coherent ESG strategies and frameworks that de-risk their proposition in the minds of investors.
In addition to the overhaul of the listing rules which will undoubtedly help lessen the bureaucratic burden on our listed companies, the UK also needs to look more broadly at factors like executive pay and corporate culture without sacrificing its hard won reputation for long term value accretion. It is only by taking a holistic and unified approach to this challenge that we will remain attractive to the corporate stars of tomorrow and maintain our hard-won status as a thriving shareholder democracy.
Regulators are closing in on green claims that may be stalling effective climate action.by Brett Jacobs, Associate Partner, ESG
Companies relying on carbon offsets to hasten their journeys to carbon neutrality, or to soften consumer perception about unsustainable business habits, may soon be in for a wake-up call. Regulators are getting tougher on greenwashing.
The European Parliament has voted to approve the adoption of proposed rules requiring companies to substantiate and verify their environmental claims and labels, aiming to protect consumers from the risks that green claims are not what they imply.
The new rules set out the European Parliament’s negotiating position with EU member states on the EU Commission’s proposed “Directive on Green Claims”, which was released in March 2023. Even though the UK is no longer a member of the EU, UK companies operating within any EU member states will still be subject to its legislation. The Commission says that the new rules are meant to address a need for unambiguous, verifiable information for consumers, highlighted by its recent study that found that more than half of green claims by companies in the EU were vague or misleading, and 40% were completely unsubstantiated.
For UK-only operators, the UK’s advertising watchdog, the Advertising Standards Authority (ASA), is to begin stricter enforcement later this year around the use of terms such as ‘carbon neutral’, ‘net zero’ and ‘nature positive’ as part of a greenwashing crackdown.
Under the plans, the ASA is more likely to take action against firms that don’t back up claims that the purchase of carbon credits – to achieve so-called ‘carbon offsetting’ – really are effective in neutralising the impacts of their products or services on the climate and/or nature.
The decision follows recent enforcement by the ASA against Lufthansa and Etihad about green claims, where the ASA ruled that consumers were more likely to interpret visual references to environmental aspirations as indications that significant steps to mitigate environmental harm have already been taken.
The UK Competition and Markets Authority (CMA) has also launched a wider review of potentially misleading environmental and sustainable claims across the UK fashion and fast-moving consumer goods sectors. The unequivocal message is that the freedoms of companies to run loosely phrased ‘feel good’ green campaigns, as well as make vague promises and pledges to address their carbon and biodiversity footprints, will increasingly attract the scrutiny of regulators.
Why does this matter?
There are significant regulatory and reputational risks and – ultimately – possible material financial and legal impacts to being complacent or blind to the consequences of corporate greenwashing.
In companies’ defence, many businesses are already embracing the energy transition, aligning with the objectives of the Paris Agreement and starting to tackle the broader degradation of nature and biodiversity from deforestation, plastic and chemical pollution, and various other consequences of human activity.
The key questions for companies, capital markets and consumers alike are what climate and nature-friendly ambitions, promises and pledges are supportable and investable today?
Climate and nature commitments will increasingly need the appliance of science
Validation is at the heart of current scrutiny by UK and EU lawmakers, to derisk commercial environments such that financial markets and consumers can both trust – but, if necessary, verify – green claims and intentions.
Forthcoming consumer protections and market regulations are likely to put the onus on companies to show their workings. Companies that already understand their carbon and biodiversity footprints, and the purpose and science of carbon offsetting, should have nothing to fear from increased transparency. Indeed, carbon credits can be a persuasive tool to evidence for both investors and consumers that companies can invest beyond the business ecosystem to protect and sustain the natural ecosystems and resources that supply their business models.
Quality of carbon credits
However, there is currently substantial potential risk for companies in miscommunicating the use of carbon credits.
Not only is there risk in investing in low quality credits that do not evidence sequestered carbon with sufficient scientific rigour, the net present value of the carbon credit itself is unlikely to be priced fairly. This will be a problem for the operators of carbon removal projects and the local and indigenous communities who would rely on the fair value of carbon credits as the funding needed to incentivise responsible project stewardship.
This is also likely to generate unintended reputational issues for companies, in terms of a potential misallocation of capital that investors would have expected companies to invest more wisely.
Furthermore, the key claim that companies would want consumers to believe – that carbon offsetting in some way negates today the longer-term environmental harm from the company’s activities, products or services – is fundamentally flawed and undermined by low quality, hard to verify credits, and effectively stalling the otherwise painful but necessary changes that all companies will have to make to shift from linear to circular business models. This is central to regulatory concerns about greenwashing.
Buchanan is working with clients to ensure that their ESG and sustainability narratives are as robust as their financial ones, by helping them to avoid the potential reputational risks of greenwashing.
We encourage clients to think beyond a compliance-led mindset and explore what carbon offsetting could really prove about their company’s purpose, values and journey on a net zero transition.
Companies are getting better at calculating the carbon footprints of their activities, products and services, and how they intend to mitigate or neutralise them. But time is running short to take meaningful action on climate change and nature loss. Words must not speak louder than actions, or market watchdogs and lawmakers may soon respond with actions of their own.
“The key to evolving the Buchanan brand was distilling the essence of our business. Sounds simple. Tough to get right.”by Neil Stockwell, Creative Lead
While it had become recognisably Buchanan, the previous identity had served its purpose. Our aim in repositioning ourselves was to demonstrate that our clients are the heart of our business. Everyone says it but we had to show it. Our task was to ensure that the Buchanan visual approach echoed the focus on meaningful engagement – whatever the audience.
The process was galvanised by a clearer (and more liberating) articulation of the three facets of our business: ‘PR’ becomes ‘Communications’; ‘ESG’ becomes ‘Sustainability’; ‘Design’ becomes ‘Creative’. This culminated in a succinct new proposition: ‘Financial Stakeholder Engagement’.
In line with the refocused messaging, we revisited our visual identity, reducing or refining what had become superfluous and distracting. We wanted to provide our team with a visual spirit that is not only distinctly Buchanan but is also straight-forward to use. Most importantly, our visual identity must allow the content to shine. Specifically, the brandmark loses its ‘pocket’ bringing more emphasis to the name; hero imagery features our clients’ work; wallpapers and colour palettes are more muted hues; team photography has a touch more drama, and crucially; typography works harder via the combination of a contemporary editorially-focused serif with a hard-working versatile sans.
The revitalisation of our website has been instrumental in the repositioning process. An issue unearthed in research, was our audience’s need for reliable, trusted sources. Cited examples for these sources were predominantly recognised news and editorial outlets – remarkably apt for much of our work with the Fourth Estate.
So, rather than simply emulating their article-driven online approaches, we alluded to their print origins with a ‘page turn’ interaction. Given that the majority of our visitors were accessing the site from a desktop, this horizontal scroll is a subtle but deliberate design decision which initially surprises the visitor but soon becomes familiar. This interaction, allied to type choices, image sizing, controlled colour usage and other editorial page furniture, creates a distinctive and ownable experience that references places our audiences find dependable and authoritative.
Plainly these are early days for the new positioning, but we believe the business is now equipped with the foundations of a visual approach which can hit many notes. Who knows, we may have even coined new ‘category’ for our profession! Hubris aside, Financial Stakeholder Engagement is certainly a clearer articulation of what Buchanan does and with it comes a more visually malleable way to communicate its relevance to our audiences.
If COP 26 was hailed as the ‘ambition COP’, with the international community making strong commitments on climate issues, COP 27 is where these pledges are expected to be brought to life, including a progression in global carbon trading markets and standardised international sustainability disclosures, with this last development answering the prayers of many.
Adapting for change
The focus of COP to date has primarily been on emissions reduction, however other themes expected to dominate the summit this week include climate adaptation and breakthrough private sector solutions to accelerate commercially viable decarbonisation. Good policy and good finance solutions will be required to deploy these mitigation and adaptation measures, ease the impact of environmental loss and damage and ensure the green transition is fair for developed and developing countries alike.
The role of Capital Markets
The capital markets have a key role in funding this transition. The scale of investment required will be larger than any individual state will be able to finance alone. Therefore, the global financial system will need to come together to provide pragmatic solutions, whilst negotiating a resurgence in climate risk scepticism that has been fuelled by rampant global inflation, European war and a cost-of-living crisis.
By accident or design, we are facing a resetting of energy and food systems to drive a more sustainable, healthy and equitable future. Investors and policymakers will need to support the transition towards more sustainable global consumption, while working on ways to help soften the impact of supply chain shocks from climate, disease or geopolitics.
Better data and improved regulation
Meanwhile, the progress Buchanan is seeing from our clients in the development of their environmental, social and governance data means that investors can now begin to understand the impact of their investments. Structured information gathering on natural capital issues and disclosure legislation is helping investors identify both negative risks and positive impact opportunities, laying the groundwork for better regulation in order to address specific issues.
Help comes with a common standard
The IFRS sustainability initiative launched at last year’s COP 26 – the International Sustainability Standards Board (ISSB) – to set a global disclosure standard is on track to finalise its plans in early 2023 with regulators likely to change existing rules to incorporate the new standard. This will build on the existing Task Force on Climate-related Financial Disclosure (TCFD) framework adopted by main market companies in the UK and institutions around the world.
The objective of this enhanced accountability is to drive the transition toward not only a net zero future but also a just and nature-positive one, at the pace required.
African tech start-ups raised over $2 billion dollars in 2021, a 206% increase from 2020, according to Disrupt Africa’s recent funding report. Nigeria, Egypt, South Africa, and Kenya were the premier investment destinations on the continent and fintech remained the most invested sector. Of the 564 tech start-ups harnessing the investment, 5 achieved Unicorn Status (up from 0 in 2020). They were: Flutterwave, a provider of payment infrastructure for the continent; OPay a mobile-based platform for payment transport and delivery; Chipper Cash, a money transfer app; Wave a mobile money app and Andela, a HR-tech unicorn which aims to pair African IT talent with a growing global IT demand.
Despite a record year of private equity funding for Africa start-ups, there are still perhaps some gaps. Disrupt Africa reports the average investment in each start-up in 2021 was around $3.8 million dollars. It is clear that in order to grow into global businesses, the more established start-ups require much larger sums to drive growth. The FT spoke with Niklas Adalbarth, the co-founder of Klarna (market cap: $45.6bn), who is trying to address this gap in growth capital investment. Adalbarth, along with dozens of tech executives have started a fund looking to raise $2 billion to find and support the next tech Unicorns. Buchanan expects to see the growth in private equity investment to continue into 2022 as Africa’s tech sector expands in both depth and breadth.