ESG Weekly News Update: September 17, 2020
Arches National Park, Utah
General ESG News:
Financial Times: ESG surges as investors search for better corporate citizens
As of July 30, ESG-themed ETFs had pulled in a record-setting $38bn in new money for the year and topped $100bn in total assets for the first time, according to the most recent available data from ETFGI. This rapid growth mirrors the huge asset gains in sustainable mutual funds, and the trend is showing no signs of slowing.
But these funds are not without their limitations. One snag with sustainable indices is they rely on rating agencies like MSCI to grade companies on their ESG performance, and those scores are largely subjective.
Groups like the Global Reporting Initiative, the Sustainable Accounting Standards Board and the World Economic Forum all advocate greater standardization of ESG disclosures. However, even if companies all disclose the same information, there is still a problem in how that information is interpreted, said Michael John Lytle, chief executive of Tabula Investment Management.
To effectively mitigate ESG risks and reposition for organizational resilience, our landscape study on Understanding Corporate Stewardship, Governance and Sustainability established that corporate stewardship must be fostered in organizations in tandem with corporate sustainability and corporate governance practices.
While no company is 100% compliant in all aspects of ESG, it counts in an enterprise's favor if it is found compliant with the majority of the criteria involved. But with the workplace changing and the corporate world coping in various ways, will ESG continue to matter in the new normal?
Ben Maiden, editor in chief of IR Magazine, published an op-ed piece on April 24 of this year that cited Standard & Poor (S&P) Global Ratings's study on how the pandemic has actually pushed the importance of ESG into the spotlight.
Resilience and industrial flexibility — essentially a willingness to both do what is right for one's people (as opposed to mere profit) and what it takes to stay afloat and relevant — in the context of ESG are what can help companies weather uncertain times.
Benefits Canada: Why the ‘S’ in ESG should stay in spotlight post-pandemic
The coronavirus pandemic has highlighted many social and ethical considerations that aren’t typically factored into the broader analysis that institutional investors perform on environmental, social and governance issues, says Bonnie Lyn de Bartok, founder and chief executive officer of the S Factor, a Toronto-based data and analytics firm.
The firm’s index, which takes a deep dive into companies’ social factors at the operational and supply-chain levels, outperformed other ESG indexes during the height of the pandemic-driven market pandemonium, she says. The firm started tracking specific pandemic behaviors, with the analysis examining wide-ranging data points such as whether companies were price gouging and how well they managed communications with staff.
CityWire USA: Searching for the S in ESG
According to a recent paper called ‘Time to Rethink the S in ESG’ by Jonathan Neilan, Peter Reilly, and Glenn Fitzpatrick, the middle letter has, ‘for a variety of reasons, suffered from “middle child predicament,”’ as investors focus on environmental and governance rather than social criteria.
The report cites a 2019 survey by BNP Paribas that found that 46% of investors surveyed, across 347 institutions, said the ‘S’ in ESG was ‘the most difficult to analyze and embed in investment strategies.’
‘When it comes to social metrics, a lot of things, like human rights, are best measured on the country level, because it’s governments that are best positioned to protect those rights, not companies,’ she said.
ESG Disclosures, Standards and Rankings:
MSCI, one of the leading information and service providers for investors, announced today the launch of the MSCI SDG Alignment Tool, designed to help investors assess their exposure and alignment to the United Nations Sustainable Development Goals (UN SDGs).
Responsible Investor: ESG disclosure standards: The ‘alphabet soup’ wants to play scrabble
About a year ago, Hans Hoogervorst, Chair of the International Accounting Standards Board (IASB), stirred the ESG alphabet soup by suggesting a merger of some of the sustainability reporting bodies which form the Corporate Reporting Dialogue (CRD).
‘Positioning’ is the word that opens the game for SASB, GRI, CDSB, IIRC and CDP.
The U.S. securities markets have recently undergone (or are undergoing) three fundamental transitions: (1) institutionalization (with the result that institutional investors now dominate both trading and stock ownership); (2) extraordinary ownership concentration (with the consequence that the three largest U.S. institutional investors now hold 20% and vote 25% of the shares in S&P 500 companies. (3) the introduction of ESG disclosures (which process has been driven in the U.S. by pressure from large institutional investors).
This transition to a portfolio-wide perspective (both in voting and investment decisions) has significant implications but also is likely to provoke political controversy. As institutions shift to portfolio-wide decision making, the disclosure needs of individual investors and institutional investors diverge and serious conflicts can arise.
JD Supra: A Path to ESG Disclosure
For the 100 or so largest public companies, adding ESG disclosure to their current disclosure process generally is not a big deal. Many already publish reports consistent with GRI guidelines, and some publish reports that are even broader. For the 6,000 or so other public companies, it can be a tougher task and one that must be managed carefully to avoid becoming ineffective and costly.
The framework for the ESG discussion generally should be consistent with the June 2017 Recommendations of the Task Force on Climate-related Financial Disclosures, even though it is not as broad as ESG. But remember, to most constituencies that want ESG disclosure, their primary desire is environmental impact disclosure more than anything, if not everything, else, and the TFCD Recommendations focus on that.
We expect for each metric, a company would include a sentence describing what it covers, and provide a couple of years of historical data and a target for the future.
Alpha Week: ESG Investors Note Lack of Data on Diversity
Companies in the US are better than their European or Asian counterparts at compiling data on racial diversity for ESG investors, but remain reluctant to share the information, according to analysts.
While Europe is often a centre of ESG activism, certain European governments including France and Germany have prohibited the collection of ethnicity and racial data. Meanwhile in Asia, there was been a nascent acknowledgment of the relevance of social factors for investors.
Pensions & Investments: Massachusetts project seeks to improve ESG measurement
The $74.9 billion Boston-based Massachusetts Pension Reserves Investment Management Board has partnered with the state treasurer's office and MIT's Sloan School of Management to launch the Aggregate Confusion project, an initiative designed to improve how environmental, social and governance data in the investment and financial sectors are measured.
The Aggregate Confusion project seeks to expand upon the research from MIT Sloan's Sustainability Initiative "to improve the quality of ESG measurement," said a news release issued by state Treasurer and MassPRIM Chairwoman Deborah Goldberg.
ETF Trends: Biggest ESG Funds Are Outpacing the S&P 500
Environmental, social, and governance (ESG) investing was such a force in the second quarter that not even Covid-19 could stop the space from accelerating its growth and outperforming even the S&P 500. That performance was readily apparent in two of the biggest exchange-traded funds (ETFs) in the ESG category: iShares ESG Aware MSCI USA ETF (ESGU) and iShares MSCI KLD 400 Social ETF (DSI).
Chief Investment Officer: Increasing Body of Evidence Bolsters Case for ESG Investing
The latest research comes from Harvard Business School professor George Serafeim, who found that ESG not only outperforms over the long term, it also outperforms during market downturns.
Serafeim, with Northwestern University’s Aaron Yoon and Mozaffar Khan, a former colleague of Serafeim’s at Harvard, analyzed the performance of more than 2,000 US companies over 21 years. They found that the companies that improved on material ESG issues “significantly outperformed” their competitors. Serafeim emphasized that this is regarding material ESG issues, as he found that companies that outperformed on immaterial ESG issues actually underperformed their competitors, albeit slightly.
Investment News: ESG assets expected to top $53 trillion by 2022: Celent
The COVID-19 pandemic has spurred more interest in environmental, social and corporate governance investing as global assets are expected to surge to $53 trillion by 2022, according to a Celent analysis published last Thursday.
The potential growth in assets would be up from the $45 trillion that ESG investing is set to encapsulate by the end of this year, according to research from J.P. Morgan.
Pension & Investments: Moody’s hires global head of ESG solutions
Andrea Blackman, managing director at Moody’s Corp., was named global head of its new environmental, social and governance solutions group.
The ESG solutions group “brings together capabilities from across the company to help market participants advance strategic resilience, responsible capitalism, and the greening of the economy by identifying risks and opportunities and providing meaningful performance measurements and insights,” said Rob Fauber, Moody’s chief operating officer, in a news release.
The ESG Solutions Group develops tools and analytics that identify, quantify, and report on the impact of ESG-related risks and opportunities. Moody’s ESG capabilities expanded following its investments in Vigeo Eiris (VE), a global pioneer in ESG assessments, data and tools, and sustainable finance, and Four Twenty Seven, a leader in climate risk analysis, in 2019. ESG and climate risk considerations are already integrated into credit ratings and research offered by Moody’s Investors Service, and will be integrated into a range of Moody’s Analytics risk management solutions, research, data and analytics platforms.
FT Adviser: Five key areas for advisers’ ESG discussions
The complex nature of a client’s ESG choices, the sometimes contradictory and flawed rating systems and fears of ‘greenwashing’ have created a confusing and challenging maze for advisers. According to a new adviser guide from discretionary fund manager Brooks Macdonald, splitting the conversation into five key areas, using basic statements clients can agree or disagree with, can go some way to smoothing the process:
Knowledge, understanding and motives
Narrow vs broad preferences
Alignment to financial objectives
Responsible investment approaches
Proportion of assets
Bloomberg Law: ESG Faces Skeptical Trump, Biden Embrace: Wall Street Votes
While the Trump administration has attacked ESG investing by introducing proposals that would require those overseeing pensions and 401(k) plans to put economic interests above so-called non-pecuniary goals, a Biden victory may accelerate the movement in investing.
Global Environment Land and Resources: US Department of Labor Continues to Double Down on ESG Factors
On August 31, 2020, the US Department of Labor (DOL) issued proposed rules that could induce Employee Retirement Income Security Act (ERISA) plan fiduciaries to either abstain from voting on shareholder proposals related to environmental, social, and governance (ESG) matters or establish policies that would have plans default to voting in favor of management’s recommendations.
The proposal clearly articulates the DOL’s skepticism about the significance of ESG factors in driving investment performance, stating, “The Department’s concerns about plans’ voting costs sometimes exceeding attendant benefits has been amplified by the recent increase in the number of environmental and social shareholder proposals introduced. It is likely that many of these proposals have little bearing on share value or other relation to plan interests.”
JD Supra: The Regulatory Overlay On ESG Investing
In the United States, the increasing number of fund sponsors and other asset managers marketing themselves as ESG-oriented advisers is attracting heightened scrutiny from regulators notwithstanding the lack of formal regulatory guidance.
In Europe, the European Union has taken decisive top-down action to support the transition to a low-carbon, more resource-efficient and sustainable economy embodied by its Sustainable Action Plan 2018, the objective being to position the European Union in the vanguard of global endeavors to construct a financial system that supports sustainable growth.
The United Kingdom, no longer a member of the European Union, is forging its own top-down path with its “Green Finance Strategy – Transforming Finance for a Greener Future 2019,” but has nonetheless pledged that it will “match the ambition” of the EU’s Sustainable Action Plan.
In Hong Kong, while many ESG regulatory initiatives are still at the development stage, there has been an increasing regulatory focus on this topic.
In Singapore, ESG is not heavily regulated in the Singapore financial and capital markets sectors but is governed by a mixture of self-regulating and voluntary practices.
Companies and Industries:
Private Equity Wire: Private equity cannot afford to leave out ESG
Notwithstanding the recent progress, private equity ESG implementation remains skin-deep and discretionary. Investment firms should look at ESG policies, data, and practices as an aggregated layer of value that is embedded everywhere, from the company culture to the mathematical way money is allocated.
Private equity firms should be highly equipped to not only identify all types of risk exposures but to convert them into performance boosting opportunities. And all companies are exposed to some degree of risks of an ESG nature, from mild to dangerously high. Neglecting them is akin to toying with recklessness.
Globe Newswire: Fortuna launches new sustainability section on website
Fortuna Silver Mines Inc. is pleased to announce the launching of its new sustainability section on the Company´s website. The new section highlights Fortuna´s sustainability approach, as well as our environmental, social, and governance (ESG) management and performance.
Today, The RepTrak Company released data that demonstrates the link between company reputation, ESG scores and business performance. The results from the study of NYSE listed companies in the US show that a strong reputation and ESG perception improves the willingness to buy your products with as much as 37% compared to industry rivals. The results also show that men are twice as much influenced by Environmental, Social, and Governance perception in their buying decisions compared to women.