ESG Weekly News Update: October 14, 2020
General ESG News:
If 2020 was the year that upended personal lives, workplaces, and how we view health and safety, it may also be the year we reached another tipping point: in how we invest.
Between April and June, as the COVID-19 pandemic gained speed worldwide, funds that prioritize ESG investing—buying stock in companies with an environmental, social, and governance mission—saw global assets under management hit a record $1 trillion, according to Morningstar. That was on the back of net inflows of $7.1 billion in those three months alone.
There are people, some of them financial advisors, who believe that you cannot make money through sustainability, social justice and ESG investing. (ESG stands for environmental, social and governance investing.) To be accurate, people don’t say you can’t make any money on these investments, just not as much money as you would if you didn’t factor in those considerations when picking your investments. Let’s put this to rest right out of the gate. John Hale of the renown MorningStar investment research firm has said that’s not true. And Morgan Stanley’s Sustainable Reality: Analyzing Risk and Returns of Sustainable Funds survey came to the same conclusion.
It determined that the returns of sustainable funds were in line with comparable traditional funds by looking at the performance of nearly 11,000 mutual funds from 2004 to 2018. In fact, the report concluded that there were no statistically significant differences in total returns. An interesting kicker was that the sustainable funds may offer lower market risk. These funds experienced a 20% smaller downside deviation than traditional funds. If you’re like most investors, the downside is what you find scary, not the upside.
The Wall Street Journal: How to Tell if a ‘Sustainable’ Business Is ‘Greenwashing’
Experts in the financial sector, independent watchdog groups and academics who study such issues say that unsubstantiated and exaggerated claims about sustainability and other “green” credentials are increasing in advertising and marketing materials, and on product labels.
But while companies have learned that a favorable claim or rating, such as a seal of approval from a sustainability trade group or an ESG-standards-enforcing nonprofit, can attract investments and sales, they are also discovering that along with heightened interest comes heightened scrutiny. Indeed, misleading claims can backfire if they are called out as inaccurate or misleading. Investors are quick to punish companies for transgressions across the landscape of ESG issues.
Financial Executives FEI Daily: Board Oversight of ESG Issues
ESG concerns have landed on the agendas of boards across the country. For board directors, though, connecting the huge and growing list of ESG issues and priorities with operational objectives, business strategy, and assessments of organizational risk can pose a monumental challenge. One threshold challenge to enhancing board oversight of ESG issues is identifying the specific issues that a board should oversee. This is particularly daunting because there are no one-size-fits-all answers.
Publication of corporate ESG and sustainability reports is clearly on the rise. In 2020, DFIN found that nearly two-thirds (or 64 percent) of issuers responding to one of our surveys produced ESG reports, a significant increase over the 51 percent that reported publishing ESG reports in 2019.
Company executives and boards need to make sure that they understand and monitor ESG risks—even those that may appear to be only remote possibilities. Although they may be facing several new hurdles, boards that regularly update their charters, cultivate a mix of backgrounds and skills within their boardrooms, clearly articulate their ESG oversight activities, and actively monitor progress on ESG goals will be best positioned to handle whatever challenges lie ahead.
ESG Disclosures, Standards and Rankings:
Bloomberg announced today that MSCI ESG Ratings by MSCI ESG Research LLC is now available via the Bloomberg Terminal. Bloomberg Terminal users can access this MSCI data and use it alongside Bloomberg's broader functionality across the Terminal, complementing Bloomberg's existing ESG data sets.
"With the shifting regulatory landscape and the demand for long-term sustainable returns, investors need the full picture of ESG data available to make informed decisions," said Patricia Torres, Global Head of Sustainable Finance Solutions at Bloomberg. "That is why Bloomberg is expanding our ESG data coverage to include third-party data from providers like MSCI. We want our clients to have transparent and quality data that gives them a comprehensive view into the ESG landscape."
For the first time, the Big Four accounting firms will harness their collective muscle to create long-awaited consistency in how companies inform investors (and themselves) about their behavior in relation to ESG norms.
If investors have common benchmarks with which to measure companies, they can pile pressure on boards to clean up their act. Groups will then pay attention to issues such as the environment that were once called “externalities” because they sat outside traditional economic models and accounting frameworks.
It will also allow employees and customers to rank companies more consistently and judge whether they want to protest about what is going on. Indeed, if the new metrics combine with rising digital transparency, these trends will subject companies to a new level of oversight. This in turn could force the C-suite to uphold ESG values as much out of self-preservation (to avert investor, employee and consumer pressure) as anything else.
Business News Wales: It’s Time to Rethink Business for a Sustainable Recovery
In its new campaign, Rethinking business for a sustainable recovery, the Association of Chartered Certified Accountants (ACCA) champions the vital role professional accountants play in a world where sustainable businesses deliver financial returns, while also generating positive value for society and being environmentally responsible for the planet.
“Our aim is to support our members and future members with fresh thinking on how they in turn can support their organizations to recover sustainably. That’s because what professional accountants analyze, interpret and decide today, makes lasting changes for the future which we hope will build long term resilience. We believe that responsible, ethical, and re-imagined business can be the positive legacy of post-pandemic economic recovery.”
Citywire Selector: Why G is dominating the ESG debate among asset managers
Governance far outstrips environmental and social factors for asset management companies, albeit with only less than one quarter tying performance to ESG or climate factors.
According to a report led by Russell Investments, entitled ‘2020 annual ESG survey: turning up the volume’, which canvassed 400 asset managers globally, 82% of respondents said governance led their ESG-related decisions in 2020, while 13% said environmental and 5% said social.
‘Materiality of ESG elements differs by industries. For instance, environmental aspects might be more material to the industrial sectors like energy. Social elements like human capital management and data securities might be more material to technology or finance sectors than other industries. But the overall corporate governance applies to all companies, regardless of industries.’
Investors are increasingly looking at corporate environmental, social and governance plans due to growing awareness of racial inequities around the world, a panel at the Association of Corporate Counsel’s first virtual annual meeting said on Monday.
“We expect that the social part of [ESG] will be important through 2020 and into 2021,” Paul Davies, a partner at Latham & Watkins, said. “Climate change will again increase in importance. But we’re starting to see a better balance between the three than we ever have before.”
Campden FB: How climate change can impact investments
Because we know that there are multiple future scenarios of climate change, there are also multiple possible consequences on investments. Even if investors set reasonable expectations of the future climate, there is still the potential that it may play out differently than expected. This is climate risk. Climate risks are typically disaggregated into physical risk and transition risks.
Estimating climate risk is hard because of the uncertainty around the true distributions of climate risk. Unlike investment risk, investment uncertainty reflects the current and future unknowns. In keeping with the prior example, uncertainty would be tossing a die without even knowing the numbers that are painted on each side. In this example, an investor wouldn’t even know what the potential future outcomes are, or their probabilities. The further out we try to forecast climate factors, the more the risk as well as uncertainty.
Financial Advisor: Biden Election Victory Would Boost ESG Investing, Panelists Say
“If Trump is re-elected not much will change for ESG investing. If Biden is elected, it will reignite ESG discussions” and push investments even higher, Buffle said. Pictet is a Swiss-based multinational financial services company.
“We have seen excellent performance for ESG strategies during the Trump administration, despite his actions, such a pulling the United States out of the Paris Climate Accord,” added Cheryl Smith, an economist and portfolio manager at Trillium Asset Management. “At Trillium we have been focusing on companies that are working on ESG issues on their own. Under Biden, ESG investments should accelerate. But companies that do the right thing will grow under either administration.”
Companies and Industries:
These are the kinds of sustainability-focused initiatives that landed Tatung and Kering on The Wall Street Journal’s new ranking of the 100 most sustainably managed companies in the world, as well as among the top 10 in the business model and innovation sub-ranking. Tatung claimed the top spot in the sub-ranking and is ranked 75th overall. Kering landed at No. 2 in the business model and innovation sub-ranking and No. 26 overall.
Stakeholder pressure has prompted companies in these industries to get to the bottom of their supply chains. By collecting and disclosing data, they can deal with the environmental or social risks they might face, avoid controversies and work toward saving money and resources in their processes.
Corporate Secretary: How BlackRock connects the dots on ESG
Broadly speaking, our team is responsible for engaging with the companies we’re investing in, to have an ongoing dialogue to understand how they incorporate ESG into their decisions, so we can make informed voting decisions on behalf of our clients. Our integration with other teams at BlackRock has historically been very organic.
We share information across a uniform platform that allows portfolio managers to see engagement notes and our views on companies based on our analysis. There’s been more effort since January to integrate more seamlessly with our portfolio managers, ever since our CEO Larry Fink released his statement to other CEOs saying that climate risk is investment risk, and we need consistent and comparable data.
Nasdaq: Where Water & ESG Meet
Our weather systems are dependent on the oceans to fuel storms that provide fresh water to all living things. The effects of climate change have already impacted global water cycles resulting in longer and more severe droughts, and more frequent and extreme precipitation and flooding events1. These changes, paired with increasing global population, have put a strain on finite water resources that are used in both agriculture and industry.
Xylem, a company focused on developing water solutions through smart technology, was one of the many corporations to come to aid during this COVID-19 period. They used their resources to innovate as they recognized the need during this pandemic. In order to ensure the care of COVID-19 patients, the Civic Hospital of Partinico needed to create a new treatment plant to manage the volume of wastewater. The technology used by Xylem in the new hospital wastewater treatment plant helped protect the public and environmental health of the city in a time of dire need.
Many environmental, social and governance initiatives in mining require "much tougher policing," and the mandatory introduction of recognized standards, according to Eric Rasmussen, natural resources director of the European Bank for Reconstruction and Development.
To ensure a more consistent uptake of ESG, a certification standard such as CERA's Certification of Raw Materials system could be used, Rasmussen said. The EBRD supports this system, funded by European Institute of Innovation and Technology Raw Materials under the European Union's Horizon 2020 initiative, and which is also supported by various companies active in the mining sector.
Intelligent Insurer: A roadmap to the daunting world of ESG
“You can’t go a day without something ESG-related appearing in the press, it’s in the forefront of people’s minds. There’s been a significant shift over the last three or four years from re/insurance companies in relation to ESG,” said Mahesh Mistry, senior director, analytics, AM Best.
“For insurance companies, ESG touches every component of the business—it’s the overall corporate entity, it’s the asset side on the balance sheet, it’s the underwriting side. You need to be telling a similar story across those three things if you want to communicate what you’re doing externally.”