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ESG Weekly News Update: October 21, 2020

General ESG News:

World Economic Forum: It's time we added a letter to ESG. Here's why

  • While the recognition of all things ESG is finally happening, there is no time to waste to add a 'T' for technology – making ESGT – to include the vast and growing array of technology and digital issues, risks and opportunities.

  • So, why add 'technology' – another layer of issues, risks and opportunities that are not directly, or just barely, addressed) – to the still-evolving ESG discussion? It’s simple: technology issues – the good, the bad and the ugly – suffuse everything we do, every minute and hour of every day.

  • Even though we have been living with worsening cyber insecurity for many years, COVID-19 has turbocharged the bad actors (criminals, nation states and other malcontents) to continue to open Pandora’s box of cyber uglies.

  • Despite much of the national and international political (or governance) dysfunction we have witnessed so far this year, technology is helping to turbocharge solutions to this unprecedented global challenge.

Accounting Today: Audit committees and corporate ESG commitment: ‘Prove it’

  • Social washing — statements that make companies appear more socially responsible than they actually are — might seem like just a viral PR risk. Yet, increasingly, investors, customers and employees are demanding that companies adopt more strategic, impactful and measurable environmental, social and corporate governance policies, and the stakes are real.

  • Audit committees — independent bodies that oversee the financial reporting by public and private companies — have an important role to play in meeting the demands of all these stakeholders. In short, audit committees need to effectively answer, "Did they prove it?"

Portland Communications: Corporate reputation: Why businesses must demystify ESG to become better corporate citizens

  • The unique combination of circumstances we’ve recently experienced has made business re-evaluate wider societal initiatives, which will hopefully result in a sustainable and more equitable society. Throughout this period of change, it has become clear to many observers that badging all these acts of “good corporate citizenship” under the banner of ESG isn’t quite fit for purpose anymore.

  • There is a tendency for CEOs to use the ESG acronym, which first was popularized 15 years ago in very different times, as a catch-all term for anything that is not propping up the bottom line. It renders the concept of ESG redundant for progressive corporations, which are forced to talk about their social responsibility credentials through a single prism.

  • Forward-thinking companies already take a more holistic approach, which looks at their contributions to the economy and society as a whole. These types of frameworks allow them to assess how their positive impact is perceived by external stakeholders, which can help guide them on corporate communications.

CFO Dive: ESG to transform CFO role

  • "The role of the CFO in rolling out of ESG going forward will be critical," said Leeor Groen, an investment banker who has been a worldwide ESG advocate and is principal at Zurich-based BV Ventures. "The CFO is the reporting data gatekeeper in the corporate organization," he points out, adding that CFOs' role will be transformed as they become responsible for reporting on far more than just financials.

  • Despite the standards-setting advancement, the way forward on ESG metrics and measurement will likely be time-consuming and messy for CFOs, Bill Stone founder of ESG fund creator Stance Capital, said.

  • But, eventually, "reporting platforms will emerge to make it easier for corporate CFOs to aggregate and report" on ESG matters. As the CFO's reporting mandate broadens with ESG, the role will transform, he says.

ESG Disclosures, Standards and Rankings:

Forbes: Fearless Forecasts On ESG From SASB Co-Vice Chair Bob Hirth—Part 1

  • While it is easy to say that ESG is here to stay, I am now pretty convinced that ESG reporting is going to become an ongoing, baked-in part of the corporate reporting landscape even if there is no specific regulation requiring it. The EU, though, may likely continue to develop regulation and the IASB [International Accounting Standards Board] and IFRS [International Financial Reporting Standards] might come up with something, but investors will not let up. Ultimately, I believe third party assurance of ESG information will become commonplace, consistent with the assurance process we see for financial reporting.

  • By “baked in,” I mean every company that is publicly held, aspires to go public, and/or receives external funding via private equity, third party financing or government financial support will ultimately be expected to produce some form of sustainability reporting, not just those who elect to do so.

Responsible Investor: Moody's ESG overhaul won't have any actual effect on credit ratings.

  • Does the global financial system need robust credit ratings that incorporate rigorous assessment of all material credit considerations, including ESG factors? Should credit ratings cover a useful time horizon, rather than just a few years? Should credit rating companies activate processes to overhaul all credit rating methodologies for all sectors around the world as soon as possible?

  • NO, NO, and NO, says credit rating agency Moody’s Investors Service. According to its recent request for feedback on a proposed methodology update for ESG risks, what the world really needs now is for Moody’s to (1) leave credit rating analysis alone; and (2) festoon bond issuers and structured finance deals with four new stand-alone ESG scores.

Columbia University: Defining and Measuring Sustainability

  • A major problem with sustainability management and measurement, recognized by all concerned, is the different definitions assigned to the concept and the wildly different metrics utilized when measuring it. Central to the conceptual fuzziness has been the effort to create an index or ranking system that combines indicators of environmental sustainability with measures of a company’s work to promote equity and positive community impacts.

  • A second problem with sustainability measurement today is that dozens of non-governmental organizations depend on the revenue they generate by analyzing and scoring corporate sustainability. This leads to an inherent conflict of interest in the current system of measurement.

ESG Today: Boardroom Alpha Announces Launch of ESG Analytics Platform

  • Performance ratings and analytics provider Boardroom Alpha announced today the launch of its new performance-based ESG analytics platform. The new platform aims to provide assessments of public company directors, officers, and corporate governance, focusing on the actual results delivered by individual board members and executives.

  • According to Boardroom Alpha, the platform generates an objective, data-driven assessment of each individual’s ability to create value across a number of critical performance areas including returns and financial performance.

Investment Trends:

Financial Times: ESG funds forecast to outnumber conventional funds by 2025

  • Assets in sustainable investment products in Europe are forecast to reach €7.6tn over the next five years, outnumbering conventional funds, as investors’ growing focus on risks including climate change and social inequality pushes these strategies into the mainstream.

  • Environmental, social and governance investing, which aims to look beyond traditional financial metrics when picking stocks, previously represented a niche area of fund management.

  • But according to research by PwC, in a best-case scenario, ESG funds will experience a more than threefold jump in assets by 2025, increasing their share of the European fund sector from 15 per cent to 57 per cent.

Bloomberg Green: Almost 60% of Mutual Fund Assets Will Be ESG by 2025, PwC Says

  • ESG investing is the most significant development in money management since the creation of the exchange-traded fund two decades ago and it will reshape finance just as passive funds have.

  • That’s the finding of a new report from PwC that forecasts as much as 57% of mutual fund assets in Europe will be held in funds that consider environmental, social and governance factors by 2025, or 7.6 trillion euros ($8.9 trillion), up from 15.1% at the end of last year. In addition, 77% of institutional investors surveyed by PwC said they plan to stop buying non-ESG products within the next two years.

  • “ESG is nothing less than an all-encompassing shift in the investment landscape; placing financial and non-financial performance criteria on a level playing field,” PwC said in the report published Monday.

PR Newswire: Private Equity Firms That Are 'ESG Strong' Are Likely to Be the Winners, as Businesses Reset Following the Shocks of 2020, a New Survey by ERM Shows

  • A new survey of leading private equity (PE) firms by ERM, a world-leading sustainability consultancy, has found that companies that have embraced environmental, social and governance (ESG) issues are now having a distinct advantage in value creation.

  • This survey, which follows a similar exercise carried out by ERM in 2016, found there was a significant belief that considering ESG at the heart of investment will generate strong returns. The 'mainstreaming of ESG' in investment processes is well underway, with 93% believing a focus on ESG will generate good investment opportunities. However, there is still a certain reluctance from some to fully embrace the opportunity where a strategic outlook and systematic approach is needed to realize ESG premium at exit. As an example, only 25% of firms have a thematic ESG fund or strategy and take a reactive, opportunistic approach to ESG investment.

Bloomberg: Climate, not elections, will move markets soon, says ESG pioneer

  • The next frontier is standardized reporting to shareholders integrated into quarterly and annually regulated reporting, comparable to the financial reporting that exists today. Companies need to report on the impact their operations are having on people and the planet in a manner that is quantifiable and relevant. With this information, investors will make better, more informed choices.

  • At some point this crazy market has to wake up. I personally don’t think that it’s going to be the election that causes that. A purely devastating series of climate events is more likely to. One fire in upstate California last year, a four-day event, bankrupted a utility. If you have 10 of those events in a year, a trillion dollars here and a trillion dollars there, pretty soon you’re talking about something that really devastates the economy. It could be two to three years before we see that. I think this is a clear and present danger and more likely than the election to affect the stock market.

Forbes: The Best And Worst Offenders Of Sustainable Investing

  • In a new survey, 65% of U.S. investors adopted ESG considerations when managing their money, compared with 94% of those in Europe, 89% in Canada and 72% in Asia.

  • With the largest money markets in the world, the U.S. is key to ESG making a difference to the world. News that U.S. investors have got cold feet presents a major step back in the sustainable investing movement.

  • But wealthy and finance people in the U.S. believe ESG investing isn't up to scratch. Just a quarter agreed that "ESG portfolios will outperform non-ESG portfolios" in RBC's study, compared with over half of those polled in the rest of the world.

Victoria Advocate: ESG Investing: Its Complicated

  • It should be obvious that ESG investing is anything but straight forward. It is a very personal and customized decision. There are numerous conflicting goals and issues when you weave morality, ethics, religion and politics into your investment decisions.

  • There are several rating firms that assign ESG assessments. Unfortunately, they cannot decide what ESG should look like either. Of the six large rating firms, they only agree on about 60% of their ESG conclusions. As such, ESG investing sounds good in theory but remains very hard to implement. It means different things to different people.

ETF Express: State Street Global Advisors launches two core ESG Fixed Income ETFs

  • State Street Global Advisors (SSGA), the asset management business of State Street Corporation (NYSE: STT), has launched the SPDR Bloomberg SASB Euro Corporate ESG UCITS ETF (SPPR GY). The SPDR Bloomberg SASB US Corporate ESG UCITS ETF (SPPU GY) will also launch on Monday 26 October.

  • Together, the two new ETFs will provide access to European and US Investment Grade corporate bonds transparently and efficiently, tracking proprietary index methodologies developed by Bloomberg Indices in collaboration with the Sustainability Accounting Standards Board (SASB).

ESG Today: State Street Global Advisors Launches New Fixed Income ESG ETFs

  • Developed by Bloomberg Indices in collaboration with the Sustainability Accounting Standards Board (SASB), and based on  the Bloomberg Barclays Euro and US Corporate Indices, the ESG Ex-Controversies Select Indices select securities eligible for their respective indices and weight them using an optimization process, while controlling for active total risk. The indices exclude issuers that are tagged with extreme event controversies, controversial weapons, UNGC violations, civilian firearms, thermal coal extraction, and tobacco companies.

Government Policy:

ETF Trends: The Election Could Affect How the Country Adopts ESG Investments

  • Beyond the obvious point that a Joe Biden administration would likely take a negative stance on fossil fuel and a positive outlook on sustainable investments, a Democratic-led administration could also follow more standardized rules around ESG investing and corporate disclosures.

  • Under the Donald Trump administration, a type of transatlantic split in ESG investing has occurred, with diverging policies between the U.S. and European countries.

  • “We have largely seen the regulatory momentum taking place in Europe,” Kristen Sullivan, partner and Americas region sustainability services leader at Deloitte, told CNBC. “I do think that U.S. companies, absent regulation, are not waiting. And I think companies certainly see that there are broader global trends, there’s opportunity, this is not going to be just a compliance exercise,” she added.

ASPPA: DOL Submits Final ESG Rule to OMB

  • Following a 30-day comment window that ended July 30 and more than 8,000 comment letters, the DOL on Oct. 14 submitted a final rule, entitled “Financial Factors in Selecting Plan Investments,” to the White House’s Office of Management and Budget for review.

  • The proposed rule seeks to add new regulatory text codifying the Department’s longstanding position that ERISA requires plan fiduciaries to select investments and investment courses of action based on financial considerations relevant to the risk-adjusted economic value of a particular investment or investment course of action.

  • The proposed rule also took the position that ESG is not suitable as a qualified default investment.

  • One wild card that remains is that, even if the rule is made final in the next few weeks, it still potentially could be challenged under the Administrative Procedures Act (APA) and the Congressional Review Act (CRA). In this case, the likelihood of using the CRA process would be highly dependent on the outcome of the elections.

Fitch Ratings: Corporates' ESG Risk Driven by Policy, not Physical Changes

  • Corporates' credit profiles are far more vulnerable to sudden changes in ESG-related policies and regulation than to the actual physical effects of climate change, Fitch Ratings says. Corporate entities can mitigate physical risks by sufficient investments or relocation of productive capacity. However, societal and regulatory pressures could completely eliminate sectors exposed to policy-driven changes.

  • Carbon-intensive sub-sectors are much more vulnerable to evolving policies and regulations than to the physical risks of climate change.

  • The long-term vulnerabilities of corporate entities related to natural gas sub-sectors are more nuanced.

  • Water risks are an example where physical climate risks have the potential to massively complicate operations.

Companies and Industries:

ESG Today: ABA Calls on Banks to Promote Financial Inclusion Through Bank On-Certified Accounts

  • Bank On-certified accounts aim to expand access to banking services and reduce the number of unbanked and underbanked Americans.

  • ABA President and CEO Rob Nichols said: “Despite a strong and intensely competitive financial services industry, we know that millions of Americans – and families of color in particular – remain outside the mainstream banking system and are missing the economic opportunities that come from having a bank account. By offering Bank On-certified accounts with the help of their core providers, America’s banks can open doors of opportunity to new and returning customers, demonstrating the banking industry’s commitment to financial inclusion.”

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