Norway’s oil fund sends a warning shot to ESG laggards

Fresh from her brief detention by German police at a protest against a coal mine expansion, Greta Thunberg makes a return to Davos today. But unlike in 2019 and 2020, when she warned that “our house is on fire”, Thunberg is not addressing the World Economic Forum itself. Instead, she and other activists are holding a discussion with Fatih Birol, executive director of the International Energy Agency, to build pressure on governments and businesses for more ambitious climate action. The meeting is a conspicuous sign of the emphasis that the IEA — long a conservative, oil-focused body — is placing on these issues.

Another notable event here today is the official launch of the Coalition of Trade Ministers on Climate, a new body spearheaded by the EU, Ecuador, Kenya and New Zealand. The debate around the EU’s planned carbon tariffs is just one example of how trade concerns can complicate climate action by states. A permanent forum for discussions between trade ministers looks like a useful development. More details on that and other developments from the day in tomorrow’s newsletter. (Simon Mundy)

Norway oil fund boss: ‘Boards need to sharpen up’

The ESG backlash is so 2022. Strap in for the backlash to the backlash.

Leading the charge is Norway’s vast $1.2tn oil fund, run by former hedge fund manager Nicolai Tangen. On the sidelines of the World Economic Forum in Davos, Tangen told me and my colleague Stephen Morris that he was focusing on responsible investing, having said in December that his fund would vote against companies that clashed with the values of Norges Bank Investment Management on emissions targets, executive pay or diversity.

“That’s a really, really important stance,” Tangen said. “Boards really need to sharpen up. There are too many board members who are asleep. Too many boards still haven’t got it.” 

US executive pay, for example, rose by about 15 per cent between 2020 and 2021. “There’s never been a worse time for corporate greed,” Tangen said, reiterating that NBIM had and would continue to vote against excessive pay packages.

“This backlash [to ESG] is just terrible,” he said. “I don’t understand how you can sit in Texas and say it’s just politics and it’s not important. It has nothing to do with politics, it’s common sense. It has to do with preserving the world. If you can’t live in this world then the value of the Norwegian sovereign wealth fund is zero. The whole thing is meaningless.”

Divestment is not necessarily the answer here, Tangen added: “When you have a small problem in your marriage it’s not like you have to divorce straight away.” But he reckons this more active strategy is already yielding results on pay and on board structures, encouraging companies to split chair and chief executive roles, for example.

“We’re being listened to,” he said. (Katie Martin)

‘Responsible remuneration’ seeks to link pay and purpose

If the way to a chief executive’s heart is still through their pay package, then it stands to reason that remuneration should be a lever for changing corporate behaviour for the better.

That is the theory behind the launch today in Davos of six “principles of responsible remuneration”, which start with the idea that a company’s pay policy should “reflect and support its commitment to its stated purpose and values”.

The initiative’s backers, who include André Hoffmann, vice-chair of pharmaceuticals group Roche, and Colin Mayer, professor at Oxford’s Saïd Business School, hope organisations will sign up to the principles as a first step towards linking pay to long-term financial, environmental and social impact goals.

Frederic Barge, managing director of Reward Value, a non-profit research foundation that has developed the principles and the research behind them, said he expected signatories to take concrete action. “If we just add an ESG sticker to current practices we’re not going to solve the issue,” he told Moral Money at Davos. 

Barge pointed to companies such as DSM, the ingredients and bioscience group, which has made “strong progress” linking remuneration and purpose, and Nestlé of Switzerland, which he said was taking the first steps towards establishing such a link.

The principles commit signatories to focus on broad sustainable performance, impact, “long-term value creation, over short-term financial results”, engagement from multiple stakeholders, and transparency.

Still, the initiative faces a number of challenges persuading companies, investors, remuneration consultants, and proxy advisers to come on board. Many are still geared towards the existing system of shorter term financial targets and incentives. Pushback against “woke” capitalism, particularly in the US, may deter boards from signing up. Chiefs are also notoriously touchy about anything that affects their own pay and bonuses.

An FT analysis in 2021 of how companies were linking climate targets to executive pay uncovered some scepticism. One danger, critics said, was that companies might game the system by implementing “less rigorous programmes with easy-to-hit targets”. Another wider question is whether executive pay is even the right lever to force the profound action necessary to arrest climate change and address other social priorities.

Adopting responsible remuneration requires “systemic change”, Barge acknowledged, but “companies need to take these steps now rather than waiting until the dust has settled”. (Andrew Hill)

How quickly can India’s booming car market go green?

India has just overtaken Japan to become the world’s third-largest automotive market. It’s a reflection of the country’s accelerating development and rising disposable incomes — but also a reminder of the urgent need to green the transport sector of what will soon be the most populous country on Earth.

India has a low electric vehicle (EV) adoption rate of approximately 2 per cent. But 35-40 per cent of all vehicles sold in the country are expected to be EVs by 2030, according to Bain, a management consultancy. Prime Minister Narendra Modi’s government has placed policies and incentives to expedite the lagging adoption of EVs as part of its plan to reach net zero by 2070.

The green transformation of India’s automobile industry is taking shape very differently from that of the two larger markets, China and the US. First, Tesla — which has enjoyed tremendous success as an early entrant in the US and China — has little role to play. Elon Musk has so far steered clear of selling EVs in India after Modi’s government refused to grant tax breaks on imported vehicles.

Second, the growth of EVs will be largely driven by two-wheeled vehicles — not by four-wheel cars. With less developed infrastructure and higher affordability, motorbikes and scooters are more attractive choices for the mass market in India, where GDP per capita is still below $2,500.

The Indian government has set a target of 80 per cent EV penetration among two-wheeler sales by 2030. For passenger cars, on the other hand, the goal is 30 per cent. There is far to go in this market, but if the analysts at Bain are right, it could create revenue of up to $100bn this decade. (Tamami Shimizuishi, Nikkei)

Smart read

The Guardian, in collaboration with Die Zeit and Source Material, has published a searing investigation of carbon credits approved by Verra, the biggest offset standard-setter. Their analysis of a sample of Verra-endorsed offsets found that more than 90 per cent were “worthless”. Verra has published a response.