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ESG Monthly News Update: August 2023

General ESG News

  • With the death toll from the wildfires on the Hawaiian island of Maui approaching 100 and more than 2,000 structures destroyed, search and rescue efforts continue, and extreme weather continues to batter many parts of the world.

  • Hawaii Governor Josh Green stated that the fires are the worst natural disaster the state has ever experienced, and potentially faulty utility equipment is being focused on as a potential source of ignition. Fast-moving winds at the time the fires began made them a virtually unstoppable force.

  • One of the main concerns among the public and Hawaiian lawmakers alike is concern over what prevented alarm systems from alerting the people in Lahaina. With cell coverage and electricity coverage unavailable in some areas, tragically, many did not receive warning signals. Now, local authorities are beginning long-term recovery efforts.

  • Climate change is causing a global increase in temperatures, with record-breaking heat observed in various regions, leading to significant consequences.

  • Rising temperatures are affecting nuclear power plants in places like France, where warm water reduces their efficiency and threatens aquatic life, potentially impacting energy production.

  • Coral reefs, critical marine ecosystems, are experiencing mass bleaching due to high ocean temperatures, jeopardizing their biodiversity and economic value in places like the Florida Keys.

  • Climate-induced warming is also affecting ecosystems on land, such as the expansion of the southern pine beetle's range in the United States, impacting forests, and causing ecological imbalances.

  • India's wheat production is also being adversely affected by warmer springs, which could lead to food supply challenges.

  • Organizations today understand the need for ESG strategies and goals, but many are finding progress difficult without enterprise-wide engagement. A few ways to generate buy-in and create a sense of shared ESG responsibility across a business include:

    • Ensuring clear top-down guidance

    • Developing effective planning processes

    • Operationalizing technology.

  • The Net-Zero Insurance Alliance (NZIA) was formed two years ago as a UN-backed group of insurers committed to carbon emission reduction.

  • 23 Republican state attorneys-general signed a letter in May, stating that the setting of joint targets is an antitrust violation.

  • This political action has detracted from the mission of NZIA and caused insurers to quit the group, including 6 of 8 founding members.

  • While NZIA makes collective climate action possible, action at the global level attracts political reactions to framework expectations.

  • An increase in global temperature is likely to impact infrastructure, operations, and people, among other aspects of the economy.

  • Extreme heat can create transportation challenges, such as road damage, warped train tracks, or mandated load decrease of air travel. Preparing for potential delays with redundant storage methods is essential.

  • High heat disrupts power grids, and a backup power supply is crucial to protect critical operations.

  • Insurance plan considerations, such as self-insurance, are vital to reclaim losses due to heat-related damages.

  • Anticipating necessary design changes to materials (i.e., machinery lubricant) caused by increased heat can support company products to perform optimally in the future.

  • Lawsuits against companies for taking “woke” stances have sparked discussion as to whether companies should also be informing shareholders of the potential risks that diversity efforts and ESG policies may cause.

  • Companies including Target, Starbucks, Disney, JPMorgan Chase, and Anheuser Busch have experienced lawsuit accusations by conservative advocates, shareholders, etc.

  • As public and shareholder attitudes are in continuous flux, unpredictability is a key factor of risk and disclosure.

  • While some companies have chosen to add anti-ESG backlash warnings in their proxy filings, this effort likely will not reduce the number of politically motivated shareholders filing these accusations but decrease their chances of winning.

  • Disclosure advice cannot be universal as “stakeholder expectations regarding environmental, social, and governance matters continue to evolve and are not uniform.”

  • Over the past year, in light of current economic conditions, U.S. boardrooms have prioritized recruiting directors with financial expertise. Because of this, recruitment of minorities and directors from diverse backgrounds has slowed.

    • Of the 388 new directors added to boards of S&P 500 companies this year, 36% self-identified as Black, Hispanic, or other racial or ethnic minorities – this is down from 46% last year.

    • There is a desire for new directors to have CEO or CFO experience, and historically, there has not been much diversity in these categories, leaving a narrower pool for recruitment.

Investment Trends

  • Astanor Ventures is a company with a focus on impact measurement and is a global investor in agrifood technology startups. It has an impressive portfolio of companies with avoided emissions, as well as reduced water and land use.

  • Over the past four years, Astanor has been developing impact measurement metrics across six KPIs: GHG emissions, biodiversity, water, health, social, and “impact intelligence.”

  • When considering any potential deal, Astanor assesses the negative externalities, with careful attention to the fact that they do not wish to contribute to enabling one KPI at the expense of another.

    • From this, the company created the Impact Multiple on Investment (IMOI) methodology, which is a proprietary impact-calculation methodology that translates impact metrics into impact return on investment.

  • BlackRock and MSCI are being investigated by a congressional committee for their part in facilitating American investment in Chinese companies that the U.S. government has accused of violating human rights and bolstering China’s military.

  • The committee has bipartisan support for its initiatives, and a preliminary review revealed that even just a small portion of the firms’ legal activities are resulting in Americans funding more than 60 Chinese companies that the U.S. has flagged on the grounds of human rights or security.

  • Most active ETFs, which ‘passively’ follow a benchmark but are also actively managed, are concentrated in ESG investing and fixed income/bonds. These types of ETFs are popular in ESG investing, and a recent industry survey found that nearly 70% of ETF buyers said they use active ETFs to access ESG strategies.

  • ESG investing requires active management, as a manager must assess the relevant ESG metrics and screening points and ensure that the screenings create stock ideas that make financial sense.

    • The article’s author states an opinion that for investors who are interested in both ESG and ETFs, an active fund is “probably essential.”

ESG Ratings, Standards, and Reporting

  • ESG ratings were developed to provide a holistic evaluation of a company’s sustainability and social responsibility practices, meaning that the promise of these ratings extends beyond numerical scores to genuine impacts on the planet. However, a recent analysis from Scientific Beta has found a disconnect between ESG ratings and actual environmental impact.

    • It is suggested that ESG ratings measure relative progress, rather than absolute impact. This is why heavy-emitting companies and sectors can receive positive ESG ratings despite the fundamental nature of their business.

  • The issue is then that ESG investment often fails to lead to tangible reductions in emissions, for example, and companies can superficially endorse sustainable practices in their self-reported submissions to raters and rankers.

  • To remedy this paradox, leaders must accept that ESG scores cannot be the sole guide in responsible investment, and they must take a proactive approach in collaborating across sectors to define a more effective path toward sustainability.

  • The European Sustainability Reporting Standards (ESRS) were adopted in July and will standardize EU company climate change and ESG action reporting beginning January 2024.

  • After the drafting and review process, the standards are less stringent than the original and include voluntary disclosures.

  • The 12 ESRS fall into four categories: general, environmental, social, and governance.

    • Five standards focus on the environment in collaboration with the ISSB.

    • The four social category standards focus on company workforce, value chain workers, community impact, and consumers/end users. These standards demonstrate the difference between the EU's interpretation of social issues and that of the US.

    • The singular governance standard focuses on corporate practices and ethics.

  • Publicly traded and large privately held companies will be expected to adhere to the ESRS.

  • S&P Global has ceased assigning numerical scores to corporate borrowers on ESG (Environmental, Social, and Governance) criteria, opting for textual analysis instead.

  • The decision reverses the agency's practice since 2021, where it provided scores from one to five for a company's ESG risk exposure.

  • S&P's move contradicts Moody's, a rival debt rating agency, which continues to use a one to five scale for ESG ratings.

  • The decision comes amid increased scrutiny of ESG ratings, with critics, including Republican lawmakers, questioning their reliability and influence. However, it also reflects broader debates within the financial industry about the usefulness and standardization of ESG metrics.

  • The Taskforce on Nature Markets, at the Amazon Summit in Brazil this past month, released a report called "Making Nature Markets Work" advocating for the integration of nature's value into global economic systems.

  • This initiative emphasizes the need for a swift shift in the economy to address the unsustainable exploitation of nature, calling for robust governance frameworks to prevent greenwashing.

  • The seven recommendations include:

    • Align economic and financial architecture with an equitable, global nature economy,

    • Align policies of central banks and supervisors,

    • Align public finance with the needs of an equitable, global nature economy,

    • Make food commodity markets accountable,

    • Secure improved economic benefits for nature’s stewards,

    • Address the harmful impacts of nature crimes and,

    • Converge measures of the state of nature.

  • The Taskforce highlights the urgency of addressing the loss of biodiverse ecosystems and the role of governance in halting the treatment of nature as an unlimited resource, which has contributed to the climate crisis, inequality, financial instability, and food security concerns.

Companies and Industries

  • In 2021, Engine No. 1 took on ExxonMobil and won three seats on the board with the demand to take climate change more seriously. Now, the activist investor is shifting its strategy away from public proxy fights.

  • Moving forward, the firm appears to be focusing on private investments, and it has sold its ETF business to a larger asset manager.

  • The moves are atypical for investors, who, when they score big wins, often try to replicate that strategy and capitalize on the momentum. Instead, Engine No. 1 manages little outside capital and has lost several critical personnel recently.

    • The firm’s website still states that its focus is to “create value by helping companies transform their businesses to be sustainable – and voting is a key lever for which we push for best corporate governance practices...” but it has not conducted any activist campaigns at public companies since Exxon.

  • Office occupancy is gradually increasing as companies call employees back to work, leading to offices staying operational with lighting, IT, and air-conditioning activated.

  • Surprisingly, new data from real estate data management company Measurabl reveals that office energy usage in the U.S. is generally trending downward, despite rising office occupancy.

  • Energy intensity (median energy usage per square foot) in office buildings across six major U.S. cities is declining, indicating better energy management practices.

  • Building owners and managers are becoming more proactive in adjusting energy usage based on actual building occupancy and needs, driven by environmental concerns, energy efficiency regulations, and ESG standards.

  • However, the trend may not apply to all office buildings, especially those without proper energy tracking and management practices, potentially leading to wasted energy in underused spaces.

  • $59 billion in new EV investments have been announced in the U.S. since the IRA was passed last year, however, four prominent hurdles exist:

    1. United Auto Workers Negotiations are taking place to ensure that battery manufacturers are paid as much as existing union workers during standard car production.

    2. Political risk due to the potential impacts that EV development will have on American jobs, and efforts to defund the IRA by members of the Republican party.

    3. Recent consumer demand for EVs has given mixed signals, including a decreased growth rate from last year (50% from 65%).

    4. Private investor support is necessary for the U.S. to be more competitive in the EV industry against big players, such as China. While vehicle and plant investments are becoming more available, processing plants are more common outside the US.

  • Simultaneously increasing EV adoption and enabling an increase in clean job availability poses another problem to solve as the energy transition occurs.

Government Policy

  • The Government of Canada has unveiled proposed Clean Electricity Regulations aimed at advancing the decarbonization of the country's electricity grid and supporting its net-zero emissions climate goals.

  • Canada committed to achieving a net-zero electricity grid by 2035, and these regulations align with that commitment, following Prime Minister Justin Trudeau's pledge at the COP26 climate conference in 2021.

  • The regulations set stringent pollution standards for power generation without prescribing specific energy technologies, allowing flexibility for regional decision-makers to transition to a clean grid.

  • While environmental groups welcomed the regulations as a step toward zero-emissions electricity by 2035, they criticized the allowance for continued fossil fuel-based power generation, calling for improvements to ensure alignment with the 2035 target.

  • The article discusses the Inflation Reduction Act (IRA) and its potential for financial and greenhouse gas reduction benefits for companies that take advantage of its incentives.

  • Victoria Mills, managing director of corporate partnerships at the Environmental Defense Fund, offers advice for corporate sustainability professionals on how to kickstart their companies' engagement with the IRA in its second year.

  • Mills suggests two steps: visit to understand eligible incentives related to renewable energy, fleet decarbonization, clean industry, building energy efficiency, and advanced energy projects, and seek examples of how other companies are using these incentives.

  • Mills emphasizes the importance of advocacy for broader policy changes and suggests that even if the IRA achieves its goals, additional policies are needed to meet greenhouse gas reduction targets.

  • The U.S. Department of Energy (DOE) has selected two projects by Occidental (Oxy) and Climeworks to receive grants of up to $1.2 billion to develop direct air capture (DAC) facilities to capture and store millions of tons of carbon.

    • This is the largest-ever investment in engineered carbon removal.

  • The COE noted that supporting the development of these projects will also help “inform future public and private sector investments and jumpstart a new industry critical to addressing the climate crisis on a global scale.”


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