ESG News Update: August 12, 2020
General ESG News:
JD Supra: ESG in 2020: A Half-Year Review
At the start of the year, a Morningstar report confirmed that investment pouring into European ESG funds had more than doubled year-on-year — a total of €120 billion in 2019 compared to €48.8 billion in 2018. In June, Morningstar released a first-of-its-kind report examining the comparative performance of European ESG funds over one-year, five-year and 10-year periods. The report revealed that close to six out of 10 sustainable funds in fact delivered higher returns than their comparators over the past decade. The last few months have underscored this statistic, with ESG funds reportedly outperforming others in Q1 2020.
Whilst ESG funds continue to make strides, institutional investors also have continued to push their own ESG agendas directly.
In the past few years, the “E” and “G” of ESG have received most of the attention, with shareholders focused on concerns such as director remuneration and climate change-friendly policies. The “S” often has struggled to gain substantive traction, partly due to the difficulty in quantifying such concerns and the lack of available data. However, the pandemic has brought much needed attention to the “S” — in particular, in relation to the treatment of workers by their employers.
Assets under management in funds that abide by environmental, social and governance (ESG) principles have surpassed $1 trillion for the first time on record, according to data compiled by Morningstar.
“Governments around the world have been stepping up their support for green projects in recent years, both through regulation and through fiscal spending,” analysts at UBS said in a research note published on Tuesday.
As the coronavirus pandemic exposed the fragility of global supply chains, it prompted a renewed focus among brands and corporations on how to rebuild them in a more resilient and sustainable way. As a result, banks are now seeing a growing interest in what is still a nascent funding tool: sustainable supply chain finance.
Sustainable supply chain finance typically involves incorporating ESG criteria into the funding conditions. Essentially, suppliers are rewarded if they perform well against certain ESG goals, such as through better rates or access to the financing program in the first place — a "carrot" approach that incentivizes partners to do better.
The definition of environmental, social and governance (ESG) criteria and their role in a company’s value and business strategy have evolved over the past two decades from an issue of debate to one of necessity. In many geographies, implementing tangible ESG programming and reporting has evolved from a compliance obligation to a key part of a corporate strategic agenda.
An effective ESG strategy enables businesses to improve performance, manage risk and enhance market position, addressing all stakeholders, inspiring investor confidence and enhancing shareholder value.
When quizzed over the definition of commonly used green investing terms, confusion was rife. Even the best known – Environmental, Social and Governance (ESG) – was only correctly defined by 31% of the investors polled, and just one in six (16%) non-investors.
Jenny Ross, Which? money editor, said: “With such a bewildering array of products and confusing labels for investments claiming to be ethical it’s no surprise that concerns have been raised about greenwashing in the industry.
S&P Global: Diversity And Inclusion As A Social Imperative
The Black Lives Matter movement has pushed the long-standing issue of systemic racism to the fore. Stakeholders' increased awareness and activism are pushing corporate transparency and accountability to unprecedented levels. As customers, employees, and shareholders are opening their eyes to the reality of what the Black community faces, they are calling on corporates to address discrimination within their organizations.
In particular, we foresee inclusion practices as critical to the success of a company's workforce and diversity strategy and therefore to its ESG performance, and potentially also its credit quality if failure to adopt inclusion practices translates into a loss of customers and reduces profitability.
Benefits Canada: Climate risk goes beyond the ‘E’ in ESG
“Climate risks oftentimes are evaluated more under ‘E’ in [environmental, social and governance risk assessments],” said Jeff Schlegelmilch, director of the National Center for Disaster Preparedness at Columbia University’s Earth Institute, in a webinar hosted by AllianceBernstein. “[But] these disasters have cascading impacts that erode tax bases that create and exacerbate social inequality. And there are also challenges with some of the limits of disclosure.”
The focus on the “cascading impacts” of climate disasters needs to occur across asset classes, he added. For example, some banks have started to take a look at the NCDP’s hazard index as they underwrite municipal bonds.
The National (UAE): Socially conscious investing gains prominence amid Covid-19
For more and more companies, doing the right thing is becoming as much a business imperative as a social responsibility, especially in the market for renewable energy.
ESG is where profits are, signaling that doing the right thing increasingly is the smartest bet. The iShares exchange-traded fund investing in companies it thinks have “positive environmental, social and governance characteristics”, one of the largest of the type, produced a total return this year that is more than three times the performance of the S&P 500 index.
Financial Standard (Australia): ESG funds crowned winners of COVID-19 crisis
Morningstar's latest Global Sustainable Fund Flows report, which examined 3432 sustainable open-end funds and exchange-traded funds (ETFs) across the globe in the second quarter of 2020, found that sustainable funds outperformed following the March market sell-off.
Assets in Australasian sustainable funds increased substantially during the second quarter, up 18% from $14.9 billion (US$10.6 billion) at the close of the first quarter to $17.7 billion (US$12.6 billion).
China Daily: Infusing investment with sustainability
"Like a commander in an army, the fund manager should take responsibility for the valuation of returns and risks, and the ESG label is like an insurance to mitigate risks when we discount cash flows of the equities," said Yang, associate director of Sino-French joint venture AXA SPDB Asset Managers.
In China, investments under the theme of "sustainability" gained momentum during the COVID-19 pandemic. Issuance of bonds with the "green" label had tripled in April compared with March, according to a report from the Climate Bonds Initiative (CBI), an international non-profit institute.
ESG Disclosures, Standards and Rankings:
Financial regulatory and enforcement momentum focusing on environmental, social and governance (“ESG”) issues is building up from recent activities by US, EU and UK financial regulators. As a result, we anticipate that asset managers and financial intermediaries will increasingly seek to obtain and analyze ESG-related data and information from companies in which they directly or indirectly invest. The companies themselves, particularly publicly traded companies, will be expected to provide more ESG-related disclosure. As a result, there likely will be an increased demand for ESG data from vendors and others throughout their business supply chains.
Investors are increasingly creating their own proprietary ESG research and scoring methodologies, although they continue to use ratings firms as a key source of information, according to speakers at IR Magazine’s ESG Integration Forum – Summer 2020.
In one sign that top-line ESG scores are carrying less importance, most providers now make them publicly available. Two weeks ago, Sustainalytics said it would make its ESG Risk Ratings, which cover more than 4,000 companies, freely accessible on its website. MSCI took a similar move at the end of last year.
The topic of ESG has garnered increased attention by investors in recent years and has emerged as an increasingly important and popular metric by which potential investors evaluate investment opportunities.
While ESG has increasingly risen to the forefront of investor considerations, public companies demonstrate significant discrepancies in their approach to ESG disclosures.
Institutional investors are ramping up their efforts when it comes to assessing the performance of companies using environmental, social and governance (ESG) factors, according to the fifth EY Climate Change and Sustainability Services (CCaSS) survey of 298 institutional investors globally.
At the same time, investors are increasingly holding companies accountable, with ESG factors playing a central role in their decisions.
The survey also identifies a growing disconnect between the increased focus on evaluating ESG performance from investors and the availability and robustness of standardized and rigorous nonfinancial data from corporates.
SME Finance Forum: ESG column: No accounting for climate risk
Accounting is also a practice that tends to resist change – and this matters, particularly when it comes to environmental, social and corporate governance (ESG) concerns. If wider risks to society were explicitly and widely accounted for, analysing corporate sustainability would be a simpler and more meaningful task.
There are initiatives that are looking at this. These range from the Impact-weighted Accounts Initiative, led by the Global Steering Group and the Impact Management Project, which aims to create supplementary information to financial statements, to reflect companies’ impact on the broader society; to the Value Balancing Alliance, a not-for-profit organisation supported by several international groups, which works with the big four accounting firms to create a set of environmental generally accepted accounting principles.
Institutional Asset Manager: Actively-managed ESG funds see fourth month of record inflows in July
Appetite for ESG funds continued to soar in July as inflows reached record levels for the fourth month running, leaving ESG as one of the only actively-managed fund types to see greater inflows than passive counterparts.
While numerous organizations performed admirably under extraordinarily arduous circumstances during the first half of 2020, there is growing recognition that the effort required to do so is not sustainable. That makes it imperative for CFOs to identify 2021 investments that will help the company operate more effectively and efficiently in the face of ongoing social, economic and environmental volatility over the long term.
In addition to addressing regulatory, financial and operational compliance, more companies also must assess how their environmental, social and governance (ESG) investments and activities measure up with organizational values and rapidly evolving stakeholder expectations.
ETF Trends: ESG On the List of CFOs’ Priorities for 2021
“Many companies recognize that investing in ESG is the right thing to do, but the real incentive comes from evolving stakeholder expectations,” a Forbes report said. “In 2021, customers, employees, suppliers, investors and the communities in which companies operate are likely to place even greater pressure on companies through their consumption choices, preferences regarding the organizations they want to work for and with, and calls for greater transparency on ESG.”
Keeping up with the growing popularity of ESG investing, State Street Corporation has launched SPDR S&P 500 ESG ETF EFIV. In this regard, according to the sources Sue Thompson, Head of SPDR Americas Distribution at State Street Global Advisors, said that “as ESG factor-based strategies pivot from check the box components to must have ingredients in every portfolio, State Street remains committed to providing a broader range of ESG solutions.”
EFIV aims at tracking the performance of the S&P 500 ESG Index. It is basically is designed to track S&P 500 firms meeting certain sustainability criteria (parameters related to environmental, social and governance factors) while keeping overall industry group weights similar to the S&P 500 Index.
Now, there is a fifth dimension of ESG: technology, such as artificial intelligence and deep learning algorithms. The true meaning and promise of the fifth dimension are the transformation of all four dimensions to achieve radical efficiency, faster results and quantum impact.
Money Marketing: Forget bitcoin, think blockchain in ESG investing
Blockchain technology is beginning to be accepted as a way of revolutionising the storing, management, and transfer of value between digital identities in financial services, and has recently made its way into the impact investment community.
While these are relatively early days, successful blockchain projects should inspire trust because they have been designed from the outset as collaborative projects with high levels of transparency and decentralised consensus-making processes.
In a comment letter on the Department of Labor’s (DOL) proposed rule on environmental, social and governance (ESG) factors in selecting plan investments, the American Retirement Association cautions that the proposal “could stifle investment selection, decrease participant savings rates and diminish portfiolio diversification.”
Driving the news: The Labor Department is planning to limit private retirement plan managers' leeway to invest based on ESG — environmental, social and governance — factors.
There's opposition among Democratic lawmakers, including Sen. Elizabeth Warren, who is influential on financial policy, and the chairman of the House Education and Labor Committee.
It's the latest example of how Trump administration policies, like bailing on the Paris Agreement, at times go beyond what even some powerful K Street players want.
The Labor Department is not typically seen as a climate policy battleground, but this tussle shows that policies across the government can be climate-related.
Financial Times: State Street Lashes Out at New ESG Rule
State Street Global Advisors, the world's third-largest asset manager, has lambasted a proposed US rules on the use of environmental, social and governance investing across pension portfolios, arguing it could jeopardise the retirement incomes of millions of people.
Oil & Gas 360: US continues to lag behind with ESG
The United States is the world’s largest and deepest market for investors, but when it comes to environmental, social and governance (ESG) investing, it lags behind Europe. According to a survey by the Global Sustainable Investment Alliance, America had global sustainable assets of $11.9 trillion in 2018 compared to $14 trillion in Europe. Sustainable investing now makes up about 25 per cent of assets under management, according to US SIF, the forum for sustainable and responsible investment.
While there has been increasing investor interest in ESG, the political and regulatory environment is another story. “You need three legs on a stool to bring about broad-based support for ESG,” says Scott Kalb, founder and director of the Responsible Asset Allocator Initiative at New America. There needs to be general government support, a favourable regulatory environment and leadership at the fund level, he notes. “In the United States, we basically have one out of three. Organisations have to be pretty brave to pursue ESG investing,” he says.
According to Senator Mark Warner, “[m]ost institutional investors find current company financial disclosures limited in their usefulness, and augment company disclosures through burdensome engagement with the company, purchasing third party compilation data, or initiating shareholder proposals. It is time for the SEC to establish a task force to establish a robust set of quantifiable and comparable ESG metrics that all public companies can adhere to.”
GAO found that most institutional investors wanted to use ESG information to understand and compare companies’ risks to protect long-term value, to monitor risk management and to inform voting and investment.
And, it should come as no surprise that investors cited as problematic “the variety of different metrics that companies used to report on the same topics, unclear calculations, or changing methods for calculating a metric.”
Companies and Industries:
Washington Post: Alphabet Sells Largest Corporate ESG Bond at Record Low Yields
Alphabet Inc. sold $5.75 billion of bonds with rock-bottom yields in the largest corporate bond sale dedicated to environmental, social and governance purposes.
The parent company of Google is looking to fund organizations that support Black entrepreneurs, small and medium businesses impacted by Covid-19, as well as affordable housing, among other eligible proceeds listed in bond documents seen by Bloomberg. The borrowings can also be used to finance clean energy projects and green buildings.
In a June panel discussion on stakeholder capitalism and ESG disclosure, Brian Moynihan, chairman and CEO of Bank of America, appealed to directors on the boards of public companies to have a carbon neutrality commitment in order.
In light of the COVID-19 crisis and its exacerbation of socioeconomic inequities, the discussion highlighted the need to align capital growth with an accelerated implementation of United Nations-formulated Sustainable Development Goals (SDGs) by developing and implementing an ESG matrix.
The evolution of the water midstream sector plays into the growth of socially conscious business operations or ESG – environment, social and governance – said McNair. Water midstream companies have the ability to plan beyond the next three to five years to as far out as 20 years, he said.
“We know our industry has never enjoyed a favorable opinion when it comes to the environment, but this needs to be done,” he said of improving water management and significantly reducing the use of groundwater and increasing the use and reuse of recycled produced water. “We really do get inside our own oil and gas bubble. Most people hear the anti-fossil chatter. There are leaders who want our industry to fail and go away.