ESG Weekly News Update: July 14, 2020
Canyonlands National Park, Utah
General ESG News:
BlackRock Inc. voted against dozens of management recommendations during the 2020 shareholder proxy season after finding that those companies were not making enough progress on climate issues.
In a report released July 14, the world's largest asset manager said it had identified 244 companies including Exxon Mobil Corp., TransDigm Group Inc. and Fortum Oyj that "are making insufficient progress integrating climate risk into their business models or disclosures."
Nearly 80% of those companies were placed "on watch," a classification that BlackRock uses to tell those management teams that they have 12 to 18 months to meet its climate expectations or risk facing voting action next year. For the remaining 53 companies, BlackRock took several material actions against management including siding with shareholders on their proposals, voting against board members and raising governance concerns.
The mass climate protests of 2019 and subsequent outpouring of major corporate climate commitments from the likes of Amazon, IKEA and Kering, among others, seemed to indicate that 2020 would be the year of the E in ESG — when corporate climate action hit critical mass.
In the long road trip of corporate sustainability, the S mostly has ridden in the backseat — with the E and G commandeering the wheel and Spotify playlist. That’s because social issues are tough to quantify. While calculating a carbon footprint is comparatively easy, how does one create science-based targets for worker welfare or racial injustice?
"With this sharp focus on how integral social issues are to our ability to achieve an equitable society and make environmental progress, we will collectively need to get a lot better at measuring and communicating the S, just as we have with environmental topics," said Aleksandra Dobkowski-Joy, executive director of ESG at The Estée Lauder Companies.
It turns out that the trend lines Gore has spent a lifetime either warning people about (carbon!) or trying to goose upward (green energy! access to health care!) are finally headed in the directions he was hoping for. The COVID-19 pandemic, he says, has accelerated the kinds of systemic changes he pushed for, first with legislation and then with investments.
Many investors and corporate leaders, along with elected officials and governments, clearly recognize their inherent responsibility to respond to these tumultuous times with solutions that foster change and help us to address some of the most pressing and urgent issues we face, ranging from climate change, human rights abuses, inequality, and social inclusion.
As a starting point, investors can begin by understanding the unintended outcomes from their current investments. But to have a real impact, they will need to set policies and targets to shape outcomes in line with the SDGs, including a focus on both increasing positive outcomes and decreasing negative ones.
PRI’s framework also encourages investors to collaborate with stakeholders such as businesses, governments, academia, NGOs, the media, and the broader public in order to achieve outcomes in line with the SDGs.
ESG Standards and Rankings:
For years, corporate reporters — those inside companies responsible for creating sustainability reports and reporting environmental, social and governance data to various other organizations — have been frustrated by what many refer to as an alphabet soup of standards and frameworks: CDP, GRI, IIRC, PRI, SASB, TCFD, UNGC and more.
Today, two of those organizations — GRI, formerly the Global Reporting Initiative, and the Sustainability Accounting Standards Board, better known as SASB — are announcing a collaborative effort to help ease that confusion and, not insignificantly, position their standards as the most consequential.
Financial Times: ISS urges companies to disclose ethnicity of directors
Action by proxy advisor comes as pressure builds to diversity US boardrooms.
One of the most influential shareholder advisers has called on US companies to disclose the ethnicities of their directors and senior executives.
Benefits Canada: What’s keeping ESG rankings so convoluted?
In a recent report, Morningstar sussed out some of the issues hindering ESG measurement tools. “Simply put, ESG disclosures from issuers are all too often inconsistent and non-comparable and material information is not always available.”
As well, the report highlighted that ESG disclosures need to keep up with financial disclosures as they trend toward machine-readability. Further, looking globally, fewer than 30 per cent of stock issuers use a comprehensive and consistent method of ESG disclosure.
“Morningstar, which recently completed the acquisition of ESG data analytics provider Sustainalytics, said there are gaps and inconsistencies in the reporting of ESG data, but there are steps that can be taken to improve the situation. Morningstar noted that it’s working with various policy makers to facilitate changes,” a Financial Advisor article noted.
“ESG disclosures often cover different time periods than financial disclosures, making it difficult for investors to easily connect these ESG disclosures to financial results,” the Morningstar report said.
For more clarity, Morningstar suggests that ESG reporting incorporates computer-readable forms for easier interpretation of data. However, the primary issue circles back to better disclosure by major players in the capital markets, such as stock issuers and private equity.
In a recent study, Morningstar researchers found that investors that focus on companies with positive ESG attributes generally do not sacrifice returns, although there may be a small ESG premium in the U.S.
In short, picking investments that score better on ESG metrics at the margin or as a tie-breaker could be a reasonable strategy for investors who want their investments to reflect their values. However, there is no guarantee that this relationship will continue in the future. Advisors have a responsibility to communicate this potential risk, as they would any risk.
National Association of Plan Advisors: READER POLL: What’s the Environment for ESG?
We asked readers their take on the suitability of ESG options on a defined contribution/401(k) plan menu. On that issue, 45% said “I think it makes sense as a consideration, but not a controlling consideration,” 20% “had their doubts,” 18% were “completely on board!” and 17% were “open to the idea, but not really committed.”
Guernsey Press: 88% of private equity investors ‘planning for ESG’
According to a new study by Intertrust, an overwhelming majority (88%) of private equity investors plan to step up their efforts to manage and measure environmental, social and governance performance in their portfolio companies over the next two years.
In Capgemini’s World Wealth Report 2020, more than a quarter (27%) of high net worth individuals (HNWIs) — those with investible assets of $1 million or more — said they were interested in sustainable products. That figure rose to 40% among ultra high net worth individuals (UHNWIs), those with $30 million or more to invest.
Wealthy investors said they plan to allocate 41% of their portfolio to businesses actively pursuing environmental, social and corporate governance (ESG) policies by the end of the year. By the end of 2021, that figure is set to rise to 46%.
“As awareness on environmental issues increases and more mature products with better financial returns become available, the appetite for ESG products has increased,” Tonomura told CNBC Make It.
The DOL proposal would not stop ESG strategies from being allocated to but would raise the bar in terms of justifying their presence in plans. It is also just a proposal at this stage and it seems likely to face a degree of opposition.
Scalia is right about one thing at least. ESG is certainly ‘unclear and often contradictory.’
Financial Times: SEC commissioner calls for better ESG labelling
SEC Commissioner says fund groups need to improve disclosure standards for sustainable investment products.
Link to Commissioner Elad L. Roisman remarks at Society for Corporate Governance National Conference
Some investment managers have differentiated themselves by promoting ESG as a value-added investment approach. BlackRockBLK CEO Larry Fink recently gained a lot of attention by marketing his commitment to advancing ESG measures, such as corporate purpose, stakeholder capitalism, and climate.
BlackRock drags a fee off the top, and thereby has an incentive to promote its ESG initiative that has nothing to do with creating value for portfolio companies, but instead will generate higher fees if funds under management increase.
Indeed, BlackRock’s initiative appears to have opened a Pandora’s box. Two Senators recently started inquiries into why BlackRock does not apply ESG principles internally. Citing BlackRock’s voting record in the annual meetings and its cooperation with relatively small activist investors, the Senators ask why BlackRock does not apply the same level of scrutiny, diligence and good citizenship to its investments in Chinese companies.
Microsoft Corp. made a bold promise earlier this year when the technology giant vowed to remove more carbon dioxide from the atmosphere than it emits within a decade. That climate commitment, however, doesn't extend to the company's retirement program, which has pumped hundreds of millions of dollars into the fossil fuel industry.
"It's just such an obvious blind spot in its aspirations to go carbon negative," said an engineer at Microsoft who asked to remain anonymous to avoid putting his job at risk. "The inconsistencies are brought into sharp relief by the legitimately impressive commitments to improving our carbon footprint."
Dominion Energy Inc. pointed to the growing importance of environmental, social and governance practices as one of the "key considerations" in weighing the sale of its midstream gas assets and narrowing its focus on cleaner energy resources.
"Our company continues to evolve, allowing us to focus even more on serving our customers and positioning us for a bright and increasingly sustainable future," Farrell said. "We believe that Dominion Energy offers one of the industry's most compelling profiles for ESG-focused investors and stakeholders."