ESG Weekly News Update: April 09, 2021
Mount Everest, Nepal
General ESG News
Financial Times: Stakeholder capitalism must find ways to hold management to account
The COVID-19 pandemic and other events in recent years have demonstrated that the doctrine of a corporation’s purpose being to make money for its shareholders is not appropriate for current conditions.
There is a shift away from viewing the owners/shareholders as the primary risk-takers in a corporation, and a realization that workers, consumers, patients, suppliers, etc. all face great risks, especially in the wake of the pandemic.
The issue with the shift from a shareholder- to stakeholder-focused model is the difficulty in holding management accountable; solutions will likely include incentive schemes tied to ESG metrics and initiatives to improve reporting
Tariq Fancy, former leader of Sustainable Investing at BlackRock, claims that sustainable investing is little more than “marketing hype” and “disingenuous promises.”
However, the problem likely has more to do with the fact that even if the companies accused of greenwashing wanted to make the necessary efforts, they lack the technology to do it, since ESG funds do not invest in the technologies needed to make real climate change progress.
Fitch Ratings’ new tool provides a view of the credit relevance of ESG issues across the global portfolio and shows the distribution of ESG Relevance Scores for more than 4,500 transactions, including year-over-year change in ESG issues.
The tool highlights trends like waste and hazardous materials management, and for property quality grades, it takes into account Green building certifications (e.g., LEED).
Companies representing about 70% of the world economy have set/are setting climate neutrality targets; however, atmospheric CO2 levels are still increasing, despite the 2020 COVID-19 lockdown.
Mitigating climate change depends on transitioning the power/energy systems that sustain modern life to clean/renewable sources, and this cannot be achieved fast enough by public sector actions, alone.
To mobilize the private sector, CO2 needs to be priced high enough to create the business case for decarbonization. Current progress is slow, but a new initiative -- Call on Carbon -- is asking governments to back their net-zero targets with carbon-pricing instruments.
With the upcoming COP26, this year is expected to be a climate change policy turning point, and more robust action is becoming inevitable.
World Finance: The rise of ESG and the importance of compliance
Shortcomings in policies and disclosures around all ESG topics are increasingly being identified and challenged (including with litigation), and proactive compliance measures will help prepare companies for increased scrutiny and legislation.
Human rights due diligence is critical throughout the supply chain, not just to satisfy regulations, but to meet evolving societal expectations for corporations.
Ultimately, these are board-level concerns and ensuring compliance at an early stage is crucial for resiliency and avoiding litigation and reputational risks.
ESG Disclosures, Standards, Rankings, and Reporting
Increased pressure for reporting/disclosure has meant increased scrutiny on business practices and increased legal risk and potential litigation costs.
For directors, as fiduciaries of their companies, there is a mindset shift to realize that ESG performance is inseparable from financial performance.
Other legal issues may arise from non-disclosure of ESG information, though the risks are likely to vary by industry. It is also worth noting that company policies/practices will become quantifiable under the “ESG-disclosure dictated regime,” meaning investors will be able to determine the impact of ESG disclosure omissions.
GreenBiz released a white paper (available for download) for companies explaining why investors care about ESG, 18 key ESG data points to track, and how to start an ESG program.
Biend’s plan, which includes clean-energy measures like funding for electric vehicles, expected to lead to further increase in sustainable investing.
Sectors expected to benefit from the plan include materials, utilities, and industrials, though it’s also expected that inflation may increase, as well.
The bill is expected to make it promising to invest in electric grid technologies, alternative energy, electric transportation, 5G technologies, automation and robotics, machine learning, and artificial intelligence.
It is worth noting that while thematic (i.e., ESG) investing can increase returns, it also adds more volatility to an investment portfolio.
Catastrophe bonds insure against natural disasters, and they are gaining traction in the sustainable investing world.
These bonds still only account for a fraction of the ethical debt market, but their presence is growing and entering mainstream ESG investing markets.
The market has been criticized for not diverting money fast enough to issues like Ebola and COVID-19, which will likely lead to further innovation in catastrophe bonds.
From March 2020 to March 2021, 19 of 26 selected ESG ETFs outperformed the S&P 500, and investors are increasingly funneling capital into these resilient, sustainability-focused funds.
The Parnassus Endeavor Fund saw the biggest change over the year (increasing 55%), despite being the worst performer of 17 ESG funds analyzed in a prior review.
The fund’s sudden rise stemmed from a number of factors, including leadership changes, increasing the number of companies in the fund’s portfolio, and continuing to focus on engaging with companies in the fund to improve their ESG performance.
According to a recent RBC Wealth Management client survey, respondents who identified as women were more than twice as likely than men to say it’s important to them to invest in companies that integrate ESG factors into their policies and decisions.
While women are leading the charge, more than half of male respondents still expressed interest in increasing their ESG portfolio.
In the survey, women rated all “E” and “S” elements higher than men, while “G” topics showed no difference by gender and ranked most important overall.
Institutional Investor: Here’s More Evidence That ESG Funds Outperformed During the Pandemic
While ESG investing is often criticized for failing to maximize returns, the latest S&P report shows that ESG ETFs largely outperformed the S&P 500 in the first year of the pandemic (March 2020 through March 2021).
A single year is not long enough to draw significant conclusions, but there is enough evidence to hypothesize that an ESG focus will continue to be a competitive advantage for funds.
Pensions & Investments: U.K. pension regulator warns plans on climate disclosures
The regulator plans to publish its Statement of Investment Principles with policies on financially material ESG issues and a description of how non-financial matters are considered in investment decisions.
Large asset owners are also being required to disclose certain information in line with the TCFD by 2022.
The regulator will also publish a “climate adaptation report” by November outlining its own plans for using TCFD recommendation to address climate risk.
The Global Renewable Power Fund III (GRP III) received commitments from more than 100 institutional investors, and with its final close, it has become the largest independent climate infrastructure fund in the world.
The GRP III aims to invest in a broad spectrum of projects, including energy storage and electrified transport while delivering risk-adjusted returns with positive environmental/social impact.
The interest rate for BlackRock’s new credit facility is tied to three sustainability KPI: the company’s Black, African American, Hispanic and Latino employment rate, its female leadership rate, and its sustainable investing AUM amount.
If BlackRock meets two of its three KPI objectives (without drastically underperforming on the third), it will receive a pricing benefit. If it underperforms on two of the three, a penalty will be assessed.
ESG Today: NN IP Launches New Sovereign Green Bond Fund
The product has a focus on treasury and government-related bonds that aim to have a positive environmental impact through the projects that they finance.
According to a recent report from NN Investment Partners (NN IP), the green bond market is expanding rapidly, and much of the growth is being driven by sovereign issuers.
Companies and Industries
A report from the Committee for Better Banks shows that Black and Latino employees have a less than 25% chance of being hired for executive positions in corporate banks compared to their white colleagues.
The study gave the banking industry an overall “C” grade for diversity, and the issue of diversity also permeates into lending practices and a general lack of trust in financial institutions by minorities.
Many banks have subsequently released statements promising diversity and to promote racial equity.
Wealth Professional: Why private-market investments are well suited for ESG impact
Lee Gardella, head of Investment Risk and Monitoring at Schroder Adveq. Argues that private markets are better than public markets for investors to apply sustainability goals, partially due to its broader and deeper pool of investment options.
Private markets also offer more access to ESG information from companies, and private companies also offer a long-term focus for their sustainability agendas. There is also the generally positive correlation between ESG performance and financial returns.
Companies’ commitments to the social side of ESG are becoming an increasingly important factor in investment decisions, and the COVID-19 pandemic has been a true test of crisis management and resiliency.
The Wall Street Journal: BlackRock Must Hit ESG Targets or Pay More to Borrow Money
BlackRock made a financing deal with a group of banks that links the lending costs to the firm’s ability to achieve its sustainability goals, including staff diversity targets.
The five-year loan offers funding for BlackRock to draw on in emergencies, and the firm is one of many institutions that are beginning to take sustainability-linked financing more seriously.
The framework allows Pacific Life to issue sustainable bonds to eligible projects that meet certain criteria (e.g., green buildings, renewable energy, wastewater management, clean transportation, biodiversity, access to essential services, etc.)
The lender said it is analyzing “multiple sustainability measures” from Arabesque S-Ray for clients to track the exposure of their holdings.
The Focus Series describes how ESG metrics are being proliferated by advocates, regulators, and raters, making it difficult for insurers to stay on top of all elements.
Conning researchers argue that even without strict disclosure requirements, insurance companies should be proactively disclosing their ESG efforts.
Bank of America aims to achieve $1.5 trillion in sustainable finance mobilization by 2030, including $1 trillion in its Environmental Business Initiative, which is dedicated to facilitating the low-carbon transition.
The bank’s sustainable finance efforts will focus on social inclusive development, scaling capital to advance community development, affordable housing, healthcare, education, and racial and gender equality.
Citi recently launched a major upgrade to the Velocity Clarity Data platform, including enhancements to the universe of available data, reporting capabilities, and API functionality.
The company also added new visualization tools for analyzing sustainability data through Arabesque S-Ray.
Bloomberg Green: Why the World Awaits Biden’s Pledge on Climate Change
When Barack Obama signed the Paris Agreement, he pledged a nationally determined contribution (NDC) of reducing U.S. emissions 26% to 28% below 2005 levels by 2025; experts argued that this initial commitment was not aggressive enough.
Most climate advocates are currently looking for the Biden Administration to set a reduction target of at least 50% by 2030.
There are no real penalties for failing to meet NDC targets. The EU increased its NDC target to a 55% reduction by 2030, and China is aiming for net-zero emissions by 2060.
Canada has begun implementing new measures on modern slavery, including the United States-Mexico-Canada Agreement (USMCA) prohibiting the importation fo goods produced in any part by forced/compulsory labor.
Canada also has a draft of the Modern Slavery Act, which is currently before the Senate, and has enacted China-specific human rights measures for companies sourcing directly or indirectly from China.
Further China-specific measures include sanctions under the Special Economic Measures Act that prohibit business dealings with a select number of individuals.
Canada has also committed to a National Strategy to Combat Human Trafficking (2019-2024) and to include human rights in its Code of Conduct for Procurement, as well as the Canadian Ombudsman for Responsible Enterprises (CORE) to investigate allegations of human rights abuses and resolve disputes.
Two main areas with developing regulation in the EU are ESG disclosure requirements and mandatory human rights, environmental, and governance due diligence. The Sustainable Finance Disclosure Regulation (SDFR) adopted by the European Parliament requires “financial market participants” and advisers to publish ESG information.
It is also expected that more detailed periodic disclosure requirements are also set to come into place, including obligations for products marketed as “ESG” or “sustainable” and how such claims have been assessed.
Mandatory SDFR obligations come with the risk of regulatory actions like investigation, fines, and even litigation.
The group is part of the state’s cross-government framework for addressing climate change, focusing on best practices in national and international climate risk disclosure.
The initiative aligns with forthcoming SEC guidance for public company obligations for climate risk disclosure, and it will be led by the Governor’s Office of Planning and Research.