ESG News Update: September 23, 2020
Canyonlands National Park, Utah
General ESG News:
The BRT is now advocating “new principles and policies to address climate change, including the use of a market-based strategy that includes a price on carbon where feasible and effective. Such a strategy would incentivize the development and deployment of breakthrough technologies needed to reduce greenhouse gas (GHG) emissions.”
To combat the worst impacts of climate change, Business Roundtable CEOs are calling on businesses and governments around the world to work together to limit global temperature rise this century to well below 2 degrees Celsius above pre-industrial levels, consistent with the goals of the Paris Agreement. In the United States, this means reducing net-greenhouse gas emissions by at least 80 percent by 2050 as compared to 2005 levels.
Eight in-10 (83%) executives today feel an urgency for business to be a critical part of driving solutions to some of today's most pressing issues, such as COVID-19, racial injustice, and economic resurgence, according to the 2020 Porter Novelli Executive Purpose Study.
Mirroring this mindset, the majority (85%) of business leaders today agree it is no longer acceptable for companies just to make money; companies must positively impact society as well. Further, executives are eschewing an investor-only focus – with more than nine-in-10 (91%) stating that business must benefit all stakeholders, not just shareholders.
“The whole idea of purpose, and what the purpose of a corporation is, is very much in debate and being thought about very deeply… I think it really is about looking more at how companies are taking a stakeholder-based approach to how they operate and how they make decisions,” Diana Propper de Callejon said. “And secondly, what is the intentionality of the company to produce meaningful and measurable social, environmental impact.”
With this shift toward impactful business and creating value for all comes the need for companies to be able to be transparent and build trust with their clients or consumers.
Milton Friedman’s epochal essay, “The Social Responsibility of Business Is To Increase Its Profits,” was published in the New York Times Magazine 50 years ago this month. The piece remains as polarizing today as it was five decades ago.
Commentators on Friedman are generally polarized between those who believe that businesses have a greater “social responsibility,” and those who feel the social mission of business is making profits, period, with other social goals best left to politics. But both sides would probably agree that the world has become a more complex place over the last 50 years, and businesses have become ever more complicated enterprises that need to balance many different priorities.
Board oversight and engagement with senior management is fundamental to creating internal and external trust and holistically managing an ever evolving new paradigm of business. Initially, as part of the board’s assessment, it should evaluate whether the members have the necessary experience and expertise to address ESG matters. Then, to effectively fulfill its oversight role of management’s ESG strategy, the board should imbed sustainable governing practices and protocols into the corporate structure or charter to position themselves to best understand, support and challenge management’s approach to ESG.
According to Sustainalytics, only 9% of FTSE All World companies link executive pay to ESG criteria. Health and safety has been the dominant ESG metric with achievement assessed in annual incentive plans. Diversity and inclusion goals are increasingly becoming the new metric linked to ESG.
ESG Disclosures, Standards and Rankings:
Version four of the Equator Principles (EP4), the international environmental and social baseline for project finance, will take effect on 1 October 2020 following a three-month COVID-related delay.
In addition to various changes that broaden the scope of its application, EP4 introduces three important new requirements – human rights impact assessment, climate change risk assessment and free, prior and informed consent of affected Indigenous peoples.
EP4 applies expressly to expansions or upgrades of existing projects. This has particular implications for human rights impact assessment and free, prior and informed consent of affected Indigenous peoples because while the requirements may be notionally limited to the expansion or upgrade, in practice stakeholders are likely to expect historical impacts to be taken into account, which may be challenging for projects not previously subject to such requirements.
The Sustainability Accounting Standards Board is moving beyond standards for environmental issues and further into the areas of social and governance reporting, with new projects on content governance in the internet media and services industry and human capital management.
The purpose of the content governance project involves evaluating technology companies’ management of user-generated content, advertisements and other third-party content to assess the implications for social capital. SASB is looking at how technology companies are grappling with how to moderate user-generated content, political ads and other third-party content that’s hosted on their platforms
As a way to better help the investment community standardize the environmental, social, and governance strategies, MSCI Inc. launched a tool to help investors assess exposure and their alignment to the United Nations Sustainable Development Goals.
“Five years on from the adoption of the UN SDGs, we are at a critical juncture. There is increasing demand from investors to channel capital to help deliver on these goals, but the fragmented data around the extent to which a company’s products and operations are aligned to a particular SDG remains an obstacle. Through this new tool, we are seeking to provide an additional layer of transparency for investors to better assess the merits of claims put forth by their portfolio companies. With the target deadline for achieving the SDGs only a decade away, the standardization of that assessment is critical,” Remy Briand, Head of ESG at MSCI, said.
S&P Global Market Intelligence announced today that it has added its Trucost carbon and environmental data covering over 15,000 companies to its platform. The addition enables users to incorporate climate and environmental analysis with existing financials, market, and asset level data for a holistic analysis in their business decisions.
ESG asset managers and their customers generally prefer a longer-term planning horizon than many of their traditional competitors whose reliance upon program trading or other methods result in more frequent turnover in holdings.
ESG asset managers, closely attuned to climate-related risks, recognized the receding value of first coal, and now, petroleum investments that are in the midst of an historic decline.
While there are frequent complaints about the lack of robust financial metrics to evaluate ESG investment opportunities, the fact is one of growing convergence around some critical reporting measures.
Responsible Investor: The unintended consequences of sovereign ESG benchmarks
The equity domain has seen a proliferation of ESG benchmarks for many years and more recently this has extended to corporate bond benchmarks. Sovereign or government bond index providers like Bloomberg Barclays, ICE BofA, JP Morgan and FTSE Citi have been waking up as well to create ESG, ESG-tilted, climate and green bond indices for both developed and emerging markets.
The implications for developed high-income countries where governments can borrow at near 0% interest rates are relatively nimble, but the implications for emerging – especially lower-income – countries to finance the public sector and development are more precarious.
2020 brought us a pandemic and a boiling point in protests over racial inequities – and investors took notice. It’s why the market has seen record flows into ESG – or, environmental, social, and governance – funds, which have benefited sectors that may be surprising to some. Could we see more funds going into traditional sectors? And what trends may gain momentum into 2021? Sara Mahaffy, RBC Capital Markets’ U.S. Equity Strategist, shares her findings on ESG performance.
The underlying theme in the DOL's proposal is that ESG funds trade off financial performance to pursue environment, social, and governance objectives. Because that idea is tough to support with data, proponents are crying foul on the DOL and the Trump administration -- arguing that the move is politically motivated to help out the oil and gas industry.
During the 30-day comment period, the DOL proposal generated 1,101 comments, plus petitions with thousands of individual signatures. According to an analysis by The Forum for Sustainable and Responsible Investment (USSIF), 95% of the comments and signatures opposed the rule. Notable opponents included members of the U.S. Senate, Fidelity, BlackRock, and the American Federation of Teachers.
On September 18, Governor Murphy signed into law S232 / A2212, which requires the New Jersey Department of Environmental Protection (NJDEP) to consider the cumulative impacts of locating new power plants or major manufacturing facilities in certain lower-income areas.
The Bill requires the NJDEP to evaluate the environmental and public health impacts of certain facilities on overburdened communities when reviewing certain permit applications. New Jersey is the first state in the nation to require mandatory permit denials if an environmental justice analysis determines a new facility will have a disproportionately negative impact on overburdened communities.
Financial Planning: BlackRock to double down on ESG despite new DoL proposal
By the end of this year, 100% of BlackRock portfolios will integrate ESG metrics, up from 70% at the end of April, CEO Larry Fink said. The asset manager will also produce data and analytics that underscore the investment value of taking into account climate change, according to Fink, who pointed to threats posed by natural disasters.
Although BlackRock is upping its commitment to sustainable investing, it says it will not exclude non-sustainable products or indices. Fink acknowledged that move has drawn criticism from environmentalists. Still, clients are taking to ESG investments, he said, noting that Blackrock had seen record inflows into sustainable products in the first six months of the year.
Resources for the Future: Climate Insights 2020: Climate Change and the American Voter
Event Thursday September 24, 11:30 am-1 pm ET
Less than a week before the first US presidential debate, this event will launch the latest report installment of a new survey by researchers at Stanford University, Resources for the Future (RFF), and ReconMR. The survey sheds light on US political dynamics, climate change, and American voters’ priorities—namely, whether climate change will be on their minds when they go to the polls in November.
Companies and Industries:
Morgan Stanley announced today the introduction of a new target to reach net-zero financed emissions by 2050. The company stated that it shares this goal with many of its clients, and has committed to providing financing, expertise and thought leadership to support the transition to a low-carbon world.
According to Morgan Stanley, one of the key challenges in reaching its new goal is the lack of standardized tools and methodologies around measuring and disclosing financed emissions. The company has recently emerged as a leader in developing these tools for the industry, and promoting the measurement by financials of the climate impact of their businesses, including the announcement earlier this summer that it had joined the Partnership for Carbon Accounting Financials (PCAF), as a steering committee member.
World Economic Forum: How sustainability will drive growth in the packaging industry
Today PET bottles are the most recycled plastic packaging in the world. This is set to increase as the world adopts a shared responsibility to end plastic waste. The coming decade will see collection of post-consumer beverage bottles reach close to 100%. Recycling is critical to our sustainable future as it delivers fewer greenhouse gases and less waste.
Brands are including more and more recycled content in their packaging to meet consumer demands.
The Global Plastic Action Partnership is bringing decision-makers together to forge collective solutions.
Interest in ESG issues has moved to the forefront in conversations with stakeholders in the past year, top executives said in the run-up to the Denver Gold Group’s Americas conference, a key annual event in the precious-metals world. Such talks come as investors snap up billions of dollars in stock offerings from once-shunned gold miners.
But unlike miners of copper or battery-metals, for instance, gold producers may face more skepticism from ESG-minded investors. That’s because gold, which is mainly used to produce jewelry and acts as a store of value in bars and coins – has less utility in advancing a green economy.
Gold miners nonetheless can reach the highest ESG standards, Mr Johnson said, and a company’s success should be “defined by your community relations, your safety at your mines, the things you do for your employees.”