ESG News Update: July 22, 2020
General ESG News:
"Sustainability was always around people, planet and profit. I just think for the longest time we've forgotten about the people," said Mikkel Larsen, chief sustainability officer at Singapore-based DBS Group Holdings Ltd., in an interview for the latest episode of "ESG Insider," an S&P Global podcast. In the coronavirus pandemic, Larsen said, "We've been reminded that you can't have one without the two others."
Larsen said the pandemic has brought social issues to the forefront as companies grapple with the way they treat their employees, customers and those in their supply chains. "What we now see under COVID-19 is that companies who don't take [care] of their employees will not have a sustainable company to run," he said in the interview.
Triple Pundit: Elevating Racial Equality Requires a Holistic ESG Approach
It has always been a best practice that ESG be approached in an interdisciplinary manner and reflect the mission and core values of the company. But as we see the silos of ESG break down even further, companies need to look at ESG through an integrated and holistic lens.
For example, recent anti-racism protests have put environmental justice in the spotlight, as activists reconnect the social justice movement with the disproportionate number of people of color and the poor who live and work in places with degraded environmental quality (both an “E” and an “S” issue). “The lack of corporate board diversity and management (generally a “G” issue) limits benefits realized from diverse points of view, but it has also played a large role in socio-economic disparities across the country,” Jane says. “Furthermore, sustainability leaders need to own past discrimination and integrate anti-racism into the discipline. They can no longer look at the E, S or G as stand-alone issues.”
ESG Standards and Rankings:
A desire for standardization of ESG data may be folly, according to Bruno Bertocci, head of sustainable equities at UBS Wealth Management.
Many believe this relies on standardizing ESG-related data, through entities such as SASB and ISO, to attain full transparency of how companies operate, which sectors present the highest risks and so on. However, just as there has always been huge variance in the way in which financial data is analyzed, it is unlikely that standardization would be possible when it comes to ESG performance.
Governance—which covers board structure, board composition and more—has largely outperformed the other factors in the past, research shows. A series of studies presented by MSCI found that governance consistently showed more financial significance in short-term periods compared with the long-term horizon.
Yet, as recent issues in climate change, and a push for more diversity and inclusion efforts, shine a new light on ESG, more companies are focusing their long-term efforts on advancing environmental and social factors. The MSCI data found that while many companies focus on “G” factors for their success in a short-term period, “E” and “S” factors are more likely to thrive in the longer period.
Early on, some investors mistakenly believed that ESG was just an extension of the more values-based SRI and ignored the new field. The global financial crisis further challenged the adoption of ESG in the US as other issues were prioritized in a turbulent market, though the framework had seen earlier uptake in Europe that continued through the GFC.
Over the last decade, ESG has gained more attention in the US as investors have come to recognize the materiality of risks that lie beyond the typical financial statement analysis.
Morningstar: Time to Take ESG Seriously
There are increasing numbers of examples out there when people are actually putting two and two together and seeing that ESG doesn't just mean buying kind of green energy stocks. It's a much bigger more fundamental sort of set of inputs to think about. So, I do think the actual old-fashioned kind of urban myth really that sustainable or ESG type investing impacts returns is something we have to challenge.
BlackRock’s warning rings true for other asset managers as well. With the pandemic and social unrest bringing these issues front and center, companies need to begin reaching out to institutional investors and other stakeholders on ESG issues or risk some potentially bruising battles next year.
Think Advisor: Sustainable Investing Doesn’t Mean Sacrificing Returns
In the first quarter of 2020, 70% of sustainable equity funds finished in the top halves of their Morningstar categories, and 24 of 26 ESG-tilted index funds outperformed their closest conventional counterparts. BlackRock found that 94% of sustainable indexes outperformed during that time. Findings from MSCI and S&P found similar results.
ESG research and data leverages machine learning and natural language processing to measure these intangibles: consumer sentiment, reputation and brand value. We can also use this research to identify which companies are innovating in areas like climate solutions, water and waste technologies, and access to affordable housing and health care. Today, this data is essential to comprehensively evaluate companies.
Morningstar: 7 Questions for Assessing ESG Expertise
Selecting an ESG investment requires an extra layer of due diligence because of the range of approaches applied across asset classes and across active and passive strategies. Strong sustainable strategies share common features that can be unpacked by analyzing three key dimensions: investment process, ESG resources, and parent company philosophy. While each dimension plays a part, the process is the key differentiator, and a comprehensive engagement strategy is a critical enhancement to this process.
The proposed rule would only allow the factors that promote public policy or social good to serve as a “tie-breaker” when deciding between several investment options that are economically indistinguishable.
Plan fiduciaries may certainly include an ESG fund as part of the menu of plan investment options as long as all of the economic factors listed in the proposed rule were properly considered. However, the proposed rule would not permit an ESG-themed investment option to serve as a plan’s qualified default investment alternative (“QDIA”) under any circumstances, including if the investment option was selected entirely based on objective pecuniary criteria.
In its current version, this guidance is very likely to steer plan fiduciaries away from ESG-oriented investments.
National Association of Plan Advisors: Citing Racial Justice, Senate Dems Push DOL to Withdraw ESG Proposal
A group of Senate Democrats is calling on the Labor Department to withdraw its proposal clarifying the investment duties of ERISA plan fiduciaries in relation to environmental, social and governance (ESG) criteria, saying the proposal would discourage financial advisors from supporting racial justice.
Applying environmental, social and governance (ESG) principles to investing is consistent with a manager’s fiduciary responsibility, and a U.S. Department of Labor proposal will “accelerate” interest in ESG investing, BlackRock CEO Larry Fink said in an interview after the world’s largest money manager reported second-quarter earnings.
In light of the impact that trade agreements can have on their operations, companies and investors should set up a task force to monitor trade agreement negotiations and periodically evaluate their ESG risks and opportunities. In the current political atmosphere, there may be rapid changes to business requirements to achieve ESG goals. As such, companies that maintain a strong ESG profile and awareness will be best prepared for future changes in the global trade environment. In particular, ESG-related risks in the EU-UK and U.S.-UK negotiations could set new parameters for ESG requirements.
The EU’s boldness in addressing a host of environmental problems head-on is unmatched. In December, it unveiled the European Green Deal (EGD), a 1 trillion euro ($1.13 trillion) investment program to use the free market to accelerate the green transition. If the 1 trillion euros did not provide enough of a signal to the market, the EU’s Covid-19 recovery program, Next Generation EU, created a special bonds program to make a further 750 billion euros ($846 billion) available to companies to make Europe’s economy more sustainable.
The hard part will be ensuring this capital — whether public or through private financial institutions — goes to the companies and projects that have the greatest impact. And the hardest part will be collecting and using data to ensure those investments have lasting effects for combating climate change and even for return on investment.
If you really want to do sustainability well in a company, you need to know your business well," Soubeiran said. For a food company, that means knowing how and where you source your ingredients, what your customers want, and understanding the provenance of your direct and indirect carbon emissions.
The strained food production system is begging for reform, argued Soubeiran. "It is very clear in Danone's vision that the food system is broken," he reflected. The practices ensconced in the "green revolution" of the 1970s, he said, have "intensified agriculture practices to a point where we have created a situation where food has become a commodity. And by definition, a commodity has no value or very limited value. That's why [as an industry] we are focused on volume, not quality, and how we have reached a point where we accept the fact that 30 percent of all food produced globally is wasted."
The Morning Call: Going ‘deep green,’ office buildings give back to the planet
For a couple of decades, many in the real estate industry have been trying to make buildings “green,” replacing conventionally made materials with sustainable ones and installing energy-efficient systems. Buildings have a heavy environmental footprint, so the upshot of all this tinkering has been structures that are less harmful to the planet. Now some developers are going further with “deep green” buildings that are actually good for it.
Recent events may well bolster such development, with the coronavirus pandemic spurring interest in the sorts of healthy interiors that are found in deep-green buildings and the protests against racial injustice prompting real estate investors to double down on assets that advance the greater good.
500 Startups, a leading global venture fund and seed accelerator, surveyed its founder community to get a sense of how current events are influencing inclusive, sustainable, and equitable business practices at startups.
According to the survey results, 66% of founders revealed that recent events (namely the Black Lives Matter movement) made them want to implement policies, practices, and metrics involving ESG issues such as diversity and inclusion. 90% responded that they think implementing ESG policies and practices is important due to COVID-19 (53% think it is extremely important and 37% think it is somewhat important). Furthermore, 69% responded that they think ESG will increase sales, and an overwhelming majority (91%) responded that ESG will help their company attract and retain talent.