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Happy birthday to Europe’s sustainable finance directive

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Hello from New York. The unspeakable tragedy unfolding in Ukraine has accelerated the corporate retreat from Russia. On Thursday, it was the big Wall Street banks’ turn to withdraw. 

The Russia test for companies is a global example of how businesses are increasingly forced to face ethical decisions that might not have much to do with profits. This corporate exodus from Russia should not be a difficult call, argued Yale professor Jeffrey Sonnenfeld.

But these ethical dilemmas are difficult because they are popping up more frequently. For example, you might not have noticed this week, but Disney’s chief executive waded into a fight in Florida over gay rights just days after he tried to stay neutral.

In today’s newsletter, I write about the billions of dollars being reallocated to eco-friendly companies and asset managers as a result of Europe’s sustainable finance directive one year on (did you forget to wish SFDR a happy birthday yesterday?)

And please read Kristen’s piece for context on the corporate world’s Russia retreat by looking back at decisions to withdraw from Myanmar. 

Lastly, there is reason to be hopeful about Uzbekistan, which appears to have turned a corner on labour conditions for cotton workers.

Thanks for reading. See you on Monday. Patrick Temple-West

Winners emerge in new sustainable investor landscape

Schneider Electric logo
Schneider Electric and ASML are the two most widely held companies in article 9 funds, according to Morgan Stanley © Reuters

A year after Europe overhauled its sustainable investing sector, France’s Schneider Electric and Dutch chipmaker ASML have emerged as two of the biggest winners.

Recall that Europe’s Sustainable Finance Disclosure Regulation (SFDR) divided investment funds into three buckets. “Light green” funds (known as article 8 funds in the regulatory parlance) have environmental or social characteristics. “Dark green”, or article 9 funds, invest specifically in highly rated environmental and social companies.

Schneider Electric and ASML are the two most widely held companies in article 9 funds, according to Morgan Stanley. That’s surprising because both companies are not heavyweights in the big MSCI World index, Morgan Stanley said. The split underscores that eco-conscious investors are more and more willing to break away from conventional, benchmark indices.

As green funds hoover up money (even though they comprise only about a quarter of the asset management sector in Europe), these two companies are reaping the rewards. Investors poured €81bn into article 8 and 9 funds in the fourth quarter of 2021 as money into conventional funds slowed down, according to Morningstar.

The trend will probably continue this year. Europe’s awkwardly named MIFID II financial rules will soon require financial advisers to ask clients about their sustainability investing preferences — an obvious tailwind, Morningstar said.

SFDR has fuelled a battle among asset managers vying for green supremacy too. Nordic lender Nordea and Swiss firm Pictet manage the three largest article 9 funds, according to Morningstar, while AllianceBernstein owns the largest two article 8 funds. Unsurprisingly, BlackRock dominates the market for article 8 and 9 exchange traded funds.

More SFDR requirements will start in January 2023. With Europe’s sustainable finance regulations well under way, the big question is what will the US do? The Securities and Exchange Commission this month is expected to propose delayed climate disclosure rules. 

“This [SEC proposal] will be a big step forward for a regulator that is only beginning to address ESG issues,” said Michelle Dunstan, chief responsibility officer at AllianceBernstein. For at least another year, Europe will continue to dominate the sustainable investing market. Patrick Temple-West

To leave or not to leave: which is the more socially conscious decision?

The military coup in Myanmar a year ago ignited an outcry over human rights. But did companies scramble to withdraw from the country? Not necessarily. Corporate decisions to retreat from Myanmar are important to consider today as socially conscious investors push businesses to bail out of Russia.

Nearly 350 environmental, social and governance (ESG) funds hold at least $13.4bn worth of shares in 33 companies linked to the Myanmar military, an investigation by the Inclusive Development International and ALTSEAN-Burma found.

One striking discovery was that 69 per cent of the funds are guided by ratings and indices provided by MSCI, FTSE Russell and S&P Dow Jones Indices, the investigation revealed.

To critics, this is further evidence that ESG indices are opaque and based on a “deeply flawed ESG ratings system”, David Pred, executive director of Inclusive Development International, told Moral Money.

But some investors might disagree. Pulling out of a controversial country — and selling business divisions to unscrupulous buyers — could do more harm than good. 

Since companies pulled out of Myanmar last year, the economy has collapsed. Almost half of Myanmar’s population are living in poverty and women accounted for the majority of job losses in comparison to their male counterparts, according to the International Labour Organization. 

Alison Taylor, adjunct professor at NYU Stern School of Business, likened the situation to the “divest” versus “engagement” campaigns that investors take up with specific industries.

“It is not clear that companies entirely pulling out of a country are helpful,” Taylor said. “When companies pull out, it does good for the company to say ‘We look great, we look clean’.” But responsible businesses should go further than valuing short-term ESG scores, she added.

This might give some observers food for thought in Russia. This week, Levi’s said that it would be “suspending commercial operations in Russia” and McDonald’s, whose presence in Russia is a symbol of westernisation, announced it would temporarily close all its restaurants in the country. While these moves have been welcomed by some western investors (and governments) they remove work from local Russians.

And these stakeholder concerns have prompted Uniqlo, a Japanese clothing retailer, to stay in the country. The company’s chief executive Tadashi Yanai told Nikkei “clothing is a necessity of life”, a right that the citizens of Russia should have the same right to. 

“The decisions are very industry-specific. If you are a telecommunications or consumer business, it’s not clear that you are as exposed to oligarchs, in contrast to oil and gas.” NYU’s Taylor said. “It becomes a question of what is left for the people that live there?”

Regulation around ESG could clear discrepancies up, Pred says. But don’t expect this to emerge soon. Myanmar — like Russia — remains an ESG minefield. Kristen Talman

Good news (really) in Uzbekistan

Shavkat Mirziyoyev
Uzbekistan began reforms under President Shavkat Mirziyoyev, pictured, after the country’s dictator, Islam Karimov, died in 2016 © Reuters

For more than a decade, Uzbekistan has been known to have an atrocious human rights record. Human Rights Watch has regularly criticised Uzbekistan for forcing more than 1m citizens, including minors, to harvest cotton — one of its biggest exports.

But after the country’s dictator, Islam Karimov, died in 2016, Uzbekistan began reforms under President Shavkat Mirziyoyev. 

The progress is starting to show. On Thursday, a coalition of activists reported that for the first time in 11 years, there was no government-imposed forced labour during the 2021 cotton harvest.

“We commend President Mirziyoyev’s leadership in initiating and implementing the historic reforms necessary to end state-imposed forced labour and reform Uzbekistan’s cotton sector,” said Bennett Freeman, co-founder of the Cotton Campaign.

To pressure the government, companies from Zara parent Inditex to Marimekko signed the Uzbek Cotton Pledge, which requires brands to boycott the country’s cotton. After last year’s progress, pressure groups said it was time to wind down the boycott.

“We’re happy to announce the time has come to lift the Uzbek Cotton Pledge,” said Patricia Jurewicz, head of the Responsible Sourcing Network and Cotton Campaign co-founder.

Although state-imposed forced labour has ended, activists said there were still individual cases of compelled work. Additionally, human rights monitors were not always able to operate freely, they said. 

Uzbekistan remains a high-risk environment for labour exploitation, but it also presents an unusual opportunity for cotton buyers to build a new supply chain that includes transparency and traceability, the activists said.

The big question is whether such a boycott can be replicated in other countries. China is one of the world’s top cotton producers, and most of its cotton comes from Xinjiang where the Uyghurs have been forced to work. But the Uzbekistan situation suggests that is reason for hope. Patrick Temple-West

Smart read

  • Did Tim Cook really deserve his $99mn pay package for last year? Every penny of it, argues Sequoia Capital’s Michael Moritz, in this article lambasting proxy advisory firm Institutional Shareholder Services for its opposition to the award, which triggered a substantial shareholder revolt. Investors who “meekly follow” ISS’s voting recommendations “should discard their crutches and stand tall”, Moritz writes.

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    Happy birthday to Europe’s sustainable finance directive – Finance Essence

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