General ESG News Ice Miller: Environmental, Social, and Governance Policies: How Stakeholder Ethics Can Shape Business
A recent study found that 83% of millennials want companies to align with their personal values, and 76% want corporate leaders to speak out on important issues. Stakeholders on all sides are pressing companies to take a stance on ESG issues and operationalize their values.
Consumers are making conscious purchasing decisions based on supply chains, and job seekers indicate that they care about potential employers’ environmental footprint and sustainability initiatives.
Organizations should be reflecting on the unique ways their operations impact employees and the broader community and environment, with ESG policies addressing:
Environmental ethics focused on preserving the planet and the natural world
Social ethics focused on human beings and community interdependencies
Governance considerations aimed at defining processes for ethical operations.
IR Magazine: ESG in the Boardroom report – available now
The new ‘ESG in the Boardroom’ report from Corporate Secretary is now available for download, and it represents data from a survey of in-house governance professionals. It provides insight into which part of the board is taking responsibility for ESG oversight and investors’ interest in oversight of ESG matters, among other things.
The report found that nearly half of respondents say their full board has primary oversight of ESG issues, 80% report an increase in main-board discussions of ESG issues (from two years ago), and 55% say that investors have asked about board governance and ESG processes in the past year.
The growing reliance on plastic and the subsequent accumulation of plastic waste in the environment, as well as the increasing awareness of hazardous chemicals used as additives in some packaging, has led to a heightened focus on sustainable packaging.
There has been limited regulatory action at the federal level, but many states are developing regulations to fill this gap. Some states are working to ban PFAS in consumer products, and others are setting recycling rates and extended producer responsibility (EPR) programs.
As requirements for producers tighten, some tools to help them meet these requirements include sustainable packaging guidance from FMI and recycling guidance from the Sustainable Packaging Coalition and the Association of Plastic Recyclers.
The best first step for any organization beginning its sustainable packaging journey is to understand its baseline in sustainable packaging, including materials used, percentages of each material, recyclability of each material, and other metrics.
Public companies are currently leading private companies in environmental sustainability, ‘people’ sustainability, and corporate social responsibility. However, a focus on sustainability has distinct benefits for all companies beyond box-checking.
First, sustainability attracts and retains talent, leading to competitive advantages and improved performance for companies with diverse and inclusive cultures and robust environmental sustainability programs.
Public companies are currently leading due to increasing regulation, public scrutiny, and stakeholder demands – pressures that private companies do not face or face to lesser degrees.
However, asset owners, general partners, and portfolio companies are beginning to address, specifically, imbalances in representation of allocators and recipients of capital. Because of this, all areas of diversity are correlated with better investment outcomes.
JD Supra: The Evolution of ESG in 2022
The ESG agenda is being driven by both community consciousness and the rapid development of laws and regulations at the state and federal level.
The SEC met on March 21, 2022, and a proposed rule was issued that would enhance and standardize the climate-related disclosures provided by public companies.
There has been litigation arising from ESG considerations called Greenwashing. Suits in this space may come from a variety of sources: consumer groups; consumer class actions; private actions; or even state or federal regulators.
Actively engaging your understanding of ESG has quickly become an essential element of operating in today’s rapidly changing business environment.
People who lead with purpose are key to ensuring genuine ESG priorities and effective ESG activities. ESG involves transforming an organization’s purpose into reality.
Knowing the organization’s original purpose and why some systems function helps to transform the systems to better suit the purpose.
Training is important to integrate purpose more into the organization, such as:
Training in how to know people as individuals and help them know themselves
Time and resources to learn the organization’s leadership identity and purpose
Training in how to create experiences that spark movements, so people put purpose to action.
Chief sustainability officer is the newest position being added to many C-suites. Companies are creating the sustainability role on the fly, so there is no standardization regarding education, training, or goals, but the environment remains a priority.
Over half of sustainability executives have a business degree and approximately 20% are engineers. Some have backgrounds in law, marketing, biology, or chemistry.
The Covid-19 pandemic has made the world less integrated and less global, but the pandemic has accelerated ESG development
As the pandemic reduced travel and the attached costs to an organization, companies must now evaluate whether such travel had a material impact or is necessary for business, especially since travel is a significant way to reduce carbon footprint.
Currently, investor relations individuals are very important and in high demand to adapt to change while maintaining the business.
BlackRock is proposing to switch to an ESG-focused index on three quality factor ETFs and a US-equity small cap ETF.
Based on increased shareholder demands, BlackRock proposes changes to maximize the exposure to dividend yield factor while minimizing carbon intensity and potential emissions of the strategies. The new indices will exclude certain business lines such as alcohol, tobacco, gambling, and others.
Shareholders will be voting at a general meeting on April 29th with changes planned for June 1st. BlackRock recently switched several ETFs to ESG indices, and it’s been seen as a more efficient method to meet client demands rather than launching ESG ETFs from scratch.
A serious commitment to a sustainable business model can be a significant advantage to recruiting talented employees, such as B Corp certification for “businesses that meet the highest standards of verified social and environmental performance, public transparency and legal accountability to balance profit and purpose.”
Gallup commented in its most recent State of the Global Workforce Report, “[Employees] are now driven more than ever by company mission and purpose and require a workplace culture that delivers it.”
For better recruitment and employee satisfaction, B Corp businesses are more successful with tangible evidence that shows business values align with personal ones.
As companies are prioritizing sustainability in their agendas, they are also extending sustainability expectations to their suppliers. Organizations are shifting from supplier competition to supplier collaboration to support decarbonization and other sustainability efforts.
ESG screens led to resilience during the pandemic-driven market turmoil, owing to the relationship between sustainability and attributes like corporate quality and financial health, supports the view that ESG risk is material.
The Morningstar Sustainability Atlas uses the constitutes of Morningstar country indexes to examine the sustainability profiles of 48 country-specific equity markets. The company-level scores are sourced from Sustainalytics. The follow is a few of the key findings about the ESG practices of countries around the world.
The Netherlands continues to have the world's most sustainable stock market.
U.S. companies like Apple, Microsoft, Berkshire Hathaway, and Nvidia are considered leaders from a sustainability point of view.
Western European markets and the US score well on the degree to which corporate value is at risk from the transition to low carbon economies. Pakistan has nearly 60% of its market cap in energy, utilities, and basic materials stocks, and has the world's highest Portfolio Carbon Risk Score.
Socially responsible investing now represents over 36% of global assets under management, projected to total to $53 trillion by 2025.
Study after study shows that purpose and ESG are not distractions, but key to long term performance. The top performers on ESG topics are rewarded with valuation multiples 3% to 19% higher than median performers.
The following are four principles to help understand authentic ESG and four steps to achieve authentic ESG.
It's the CEO's job.
Profitable is scalable.
If you're not uncomfortable, you're not doing it right.
Progress requires cooperation, not just competition.
Start with purpose.
Take a stand.
Embody the change.
Tell your story.
BlackRock CEO Larry Fink said, “the transition to greener energy isn't a straight line, in the past quarters lagging performance of environmental, social, and governance, or ESG, funds doesn't change his long-term outlook for this approach.”
“In all my letters, I said an energy transition isn't a straight line. It's a 30-to-50-year timeframe for us to move that forward. It isn't today. It isn't tomorrow,” said Fink.
ESG Disclosures, Standards, Rankings, and Reporting JD Supra: The SEC Warns Registrants – ESG is No Longer a Slogan on the Gym Wall
For the first time, SEC registrants will be required to formally disclose information on risks that climate change poses to business operations as well as specific environmental goals and detailed plans to reach them.
The proposed rule will now require SEC registrants to disclose:
Specific processes for identifying, assessing, and managing climate-related risks.
How any identified climate-related risks have had or are likely to affect the registrant’s business model, analytical choices, and projected financial outlook, and/or have a material impact on business and financial statements (i.e., severe weather events).
Direct GHG emissions (Scope 1) and indirect GHG emissions from purchased electricity and other forms of energy (Scope 2).
Indirect emissions from upstream/downstream activities in a registrant’s value chain (Scope 3), whether material or if the registrant has a set GHG emissions target.
The SEC cites the following climate-related risks that could materially impact (and with the proposed amendment, obscure) a company’s financial performance:
Severe and frequent natural disasters that damage assets, disrupt operations, and increase overall operational costs.
Internal transitions to lower carbon products and practices triggered by changes in regulations, consumer preferences, and technology.
Global commitments to transition to a carbon neutral economy to meet GHG goals could materially impact registrants.
Corporate Secretary: How companies are reporting on human capital management
After climate change, the ESG topic that has received the most attention in recent years is human capital management (HCM), and stakeholders are demanding both increased action and disclosure around issues like DE&I, health and safety, and employee engagement.
Business leaders are increasingly recognizing that their people are their most important assets. For U.S. companies, the most notable changes in HCM reporting have come in the form of SEC requirements to disclose descriptions of human capital resources and any related measures or objectives the company focuses on in managing the business.
Currently, much of the information provided on issues like DE&I and COVID-19 is qualitative, but this is slowly beginning to change. Additionally, companies are increasingly using a wider range of channels to disclose HCM information (including annual reports, sustainability reports, and employee business updates).
There is currently no obvious best practice for HCM reporting, and many federal guidelines on the topic are intentionally vague. To improve their approach, companies can craft robust, quantitative goals and metrics, and they can focus on accountability when making progress on these goals.
Despite the lack of universal reporting standards for ESG disclosures, the standards by the Sustainability Accounting Standards Board (SASB) and United Nations Sustainable Development Goals are most popular.
Some companies face the difficulty of translating qualitative data into quantitative data.
A company’s focus on ESG is not only meaningful to investors but also beneficial in attracting and retaining talent.
RepRisk is a leading ESG data science firm that combines machine learning and human intelligence to identify ESG risks. RepRisk recently announced that its ESG data will be available through Analytics Hub, Google Cloud’s data exchange. Businesses will be able to “seamlessly access and integrate RepRisk data through their systems and leverage Google BigQuery technology to generate meaningful data insights.”
Marketing professionals are critical to companies’ ESG reporting, but they must work with caution due to greenwashing risks.
The environmental and governance aspects of ESG can be evaluated with quantitative data, but the social component is more abstract and lacks empirical data. A sober assessment with realistic goals serves the company better than the reputational and shareholder price risks that may result from exaggerating the good and downplaying the bad.
Surveys or other means to create relevant data before reporting is a way to avoid greenwashing risk.
Written by 270 authors from 65 countries, the Intergovernmental Panel on Climate Change Working Group III took an impressive two weeks of negotiation to get signed off.
The sustainable finance expert acknowledged investment in mitigation and adaptation is not always straightforward and there are barriers private finance needs to overcome.
“We see commitments, we see all this momentum and many announcements from financial institutions. But not so much has happened when it comes to the flows. This is important period if we are serious about 1.5 degrees Celsius or 2-degree Celsius pathways, this means that much more needs to happen, much faster,” commented Silvie Kreibiehl.
Despite the barriers private finance faces, asserted investments need to be made at the same time as the rules are being made. Apart from the size and pace of the flows, the IPCC is also concerned about barriers to climate finance reaching developing countries. The report looked at how climate investment flows are dispersed across developed, developing, and least developed countries and found the widest gaps are for developing and least developed countries.
Diversity, Equity, and Inclusion The Marketing Insider: 3 Keys To Actualizing Your Organization’s DE&I Goals
There are numerous good intentions surrounding DE&I, but organizations need to make progress in measuring the impact and effectiveness of their efforts, and to hold people accountable.
Senior leaders need to lead their organizations’ DE&I efforts and not ‘take a backseat.’ There are also a few other important steps to take to make progress in 2022 and beyond:
Align DE&I efforts with marketing work and agency partnerships
Build strong and diverse teams
Be transparent about what you do (and don’t) know.
April is National Diversity Awareness Month. Here, listed are 10 benefits of diversity in the workplace:
Improved Public Perception
Greater Employee Engagement
Create More Innovation
Quicker, Better Problem-Solving
Improved Hiring Results
Increased Employee Retention
Data shows that companies are more successful with diverse perspectives and representation in equitable and inclusive workspaces.
Companies have been building their diversity, equity, and inclusion (DEI) efforts to improve recruitment, retention, and underrepresented talent engagement. However, now companies are urged to show how DEI efforts are impacting the companies instead of only talking about them.
Accountability processes, community-building, and transparency are all fundamental to DEI plans.
Alabama Media Group: 7 Best Practices for Diversity, Equity, & Inclusion in Healthcare
Diversity, equity, and inclusion are especially crucial in healthcare organizations to provide the best care for all. The following are best practices to promote DEI in healthcare:
Know what needs to change
Decide what are the most pressing issues
Track progress and success
Establish an ambassador team
Provide training on unconscious biases
Make DEI a regular part of conversations regarding care
Account for diversity in marketing and materials.
Less than 15% of corporations have a DE&I strategy. According to McKinsey & Company, business teams that are more diverse, whether that be racially, socioeconomically, or educationally, are 35% more profitable that organizations that are not.
“The business imperative for DE&I goes beyond increasing profits and avoiding hostile workplaces. Establishing and evolving these programs means staying competitive,” says TaChelle Lawson, founder and president of FIG Strategy and Consulting Firm.
Investment Trends FT Adviser: The market has turned decisively in favor of ESG
As ESG investing continues to grow in popularity and expand beyond the environmental aspect, holistic strategies that consider the whole of the supply chain are expected to be the most successful. For example, the global energy transition is giving exposure to things like metal and mineral extractors.
Waste management, recycling, renewable fuels, and carbon capture technologies are also expected to be areas where companies and investors choose to capitalize on growing decarbonization efforts.
According to a recent survey from Schroder’s, 74% of DC plan participants who lack ESG options in their current plan say they would or might increase their contributions if offered ESG options. Most participants – 87% -- say they want their contributions to align with their values, and of those who knew their plans offered ESG options, nine out of 10 participants invested in those options.
The impact areas respondents are most concerned about investing in include (in order of highest response rate):
Employee welfare/living wage
Biodiversity, deforestation, and clean water
Diversity and inclusion
Currently, many plan sponsors are holding off on offering ESG options due to regulatory uncertainty from the Department of Labor.
A survey of European venture capital firms found:
11% of companies surveyed currently measure their carbon footprint
7% have a policy and program in place to achieve net zero carbon
The average performance of early-stage startups on environmental metrics is almost 50% lower than social and governance metrics.
This research also found that venture-backed businesses adopt better ESG practices as they scale, with notable progress as they move through various funding rounds.
Andrew Noble adds: “Not only do we use it for an annual assessment of the portfolio, but it’s now part of our pre-investment diligence, setting a baseline ESG score and helping management teams drive the ESG agenda from day one.”
“Early-stage companies can feel overwhelmed by a plethora of frameworks, acronyms, and solutions. Companies are struggling to feel incentivized to invest the time and resources in getting to grips with ESG – particularly when a startup’s environmental footprint may feel less impactful than say a global conglomerate.”- Karen McCormick, chair of ESG_VC.
Columbia Energy Policy: ESG Investing and the US Oil and Gas Industry: An Analysis of Climate Disclosures
A recent report from Columbia University’s Center on Global Energy Policy analyzes how upstream oil and gas companies are disclosing GHG emissions and climate change risks, how their disclosures do or do not align with existing reporting standards, and investors’ views on the future of the industry and its role in the global energy transition.
The report found that U.S. oil and gas companies use different methodologies for their climate reporting, but nearly all of them aligned with the TCFD framework. Additionally, GHG emissions reduction targets use different baseline years and targets. This leads to uneven disclosures in the sector and increased difficulty for investors looking to compare the companies’ climate progress.
Investors desire a greater degree of transparency in oil and gas companies’ emissions calculations and reduction plans, and they seek emissions reductions targets that are linked to executive compensation.
Generally, investors prefer a strategy of engagement over divestment when it comes to driving change in the oil and gas sector, but they remain uncertain about the sector’s place in the global clean energy transition.
Bloomberg calculates that $41 trillion of financial assets under management will be labeled under ESG by the end of 2022 and projects it to rise to $53 trillion by 2025, which is one-third of all global assets under management.
Companies receive ESG scores from several rating agencies, and there is no standardization or regulation over the ratings. Currently, disclosures are typically marketing documents as there are no legal requirements for them to be assured by certified public accountants, like company financial reports. However, regulators around the world are working on establishing requirements.
There are three types of ESG funds: (1) the most ethical that have sustainable investment or carbon emissions reduction as their object, (2) those that exclude whole sectors such as tobacco or weapon manufacturers, and (3) funds relabeled as ESG.
There is a fundamental issue with what scores mean since rating agencies solely focus on assessing external ESG risks to a company’s ability to generate cash flow and profits in the future. Therefore, leading banks can receive higher ESG scores even if they are increasing investments in fossil fuel companies.
Middle Market Growth: How Public Scrutiny of ESG Impacts Private Equity’s Investment Strategy
An estimated amount of $40 trillion in total assets carry the ESG label, but ESG-washing is a concern because a good portion of ESG investments is not aligned with ESG principles of responsible business practices.
A Bloomberg analysis found that $8.3 billion of assets linked to ESG funds can be traced back to Russia, and in February, Morningstar Inc. researchers decided to remove the ESG label from about 20% of ESG funds after discovering that those funds do not integrate ESG factors into their investment selections. The U.S. Securities and Exchange Commission is prioritizing ESG and working on heightened scrutiny of the ESG label in public markets.
Private equity firms also have ESG on their agendas and are strengthening their overall due diligence practices, especially regarding the governance aspect of ESG.
As private equity firms increase risk mitigation efforts, the heightened public scrutiny of ESG could pull some private investors away. Conversely, the heightened scrutiny may encourage public firms to go private, creating new investment opportunities for private equity firms.
BNP Paribas asset management announced last week the launch of a new index fund tracking the performance of green, social, and sustainability bonds.
The new ETF replicates the JP Morgan ESG Green, Social, and Sustainability IG EUR Bond Index, consisting of euro-denominated bonds, with a focus on green bonds in line with the objectives of the Paris agreement.
Sustainable bonds have rapidly emerged as a major asset class, with issuance last year surging over 60% to nearly $1 trillion, according to a report by Moody's.
The European Sustainable Investment Forum (Eurosif) and the Principles for Responsible Investment (PRI) have sent letters to EU lawmakers urging that upcoming sustainability reporting rules include requirements for companies to disclose comprehensive information on their decarbonization plans to back up their net zero commitments.
The letters were sent to the European Commission, the European parliament, and the EU council. Euros if and the PR I call on the EU institutions to mandate robust disclosures around these investment issues in the upcoming Corporate Sustainable Reporting Directive (CSRD).
The letter adds “A CSRD that does not contain robust, granular requirements around net-zero commitments would be a missed opportunity for the EU to future proof its sustainability reporting framework.”
Companies and Industries Business Insider: Structured frameworks add standards and challenges to ESG reporting, says Rockwell Automation's SVP and chief people and legal officer
Rockwell focused on different structured frameworks that offer industry standards and benchmarks around ESG reporting. That included: a SASB (Sustainability Accounting Standards Board) report, GRI (Global Reporting Initiative) report and a TCFD (Task Force on Climate-Related Disclosures) report.
“The challenge around having so many standards, frameworks, and disclosure expectations is the diversity of approaches, as well as the fact that there is not one right way to measure” - Rebecca House.
Tracking, reporting, and understanding the data around ESG and turning it into meaningful results is a challenge.
Rebecca House notes: "We are all about making our customers more sustainable and productive, so even as we look at our product and service offerings, we look at how we can make our transparency efforts self-evident to our customers, as well as how our offerings help them achieve their sustainability goals, where is the energy reduction? How can we help them with their carbon footprint?"
Countries worldwide are increasingly focused on developing renewable energy sources based on stakeholder pressure and climate change dangers, so corporate boards have been prioritizing ESG reporting.
As of 2020, renewable energy accounted for 21.2% of the Philippine power generation mix, and with UN Sustainable Development Goal 7 in mind, the Department of Energy set a target of 35% renewable energy share by 2030 and more than 50% by 2040.
The Philippine Financial Reporting Standards (PFRSs) do not explicitly reference climate-related matters yet, but this may still impact oil and gas companies in several areas of accounting, such as general disclosure requirements, asset evaluation, measuring property, plant, and equipment (PP&E), and risk analysis.
BNP Paribas has joined the Partnership for Carbon Accounting Financials (PCAF) as its 250th signatory, committing to use the initiative’s standard to measure and disclosure the emissions impacts of its financing activities.
PCAF launched the Global GHG Accounting and Reporting Standard for the Financial Industry in late 2020, which provides a way for banks and asset managers and owners to measure and report the GHG emissions impacts of their loans and investment portfolios. The standard has recently been embedded into the TCFD recommendations.
Deloitte recently announced a $1 billion investment to expand its Sustainability & Climate practice capabilities, assets, and services to support clients. The firm will support its clients in redefining their strategies, embedding sustainability into their operations, meeting regulatory requirements, and accelerating the transformation of value chains.
Deloitte has also announced the launch of the Deloitte Center for Sustainable Progress (DCSP) to provide sustainability-focused leadership, data analytics, and accountability reporting, as well as the appointment of Jennifer Steinmann, who has been with the firm for more than 25 years, to the newly created Global Sustainability & Climate Leader position.
A group of six leading global financial institutions, including Bank of America, BNP Paribas, Citi, Credit Agricole CIB, Societe Generale, and Standard Charter, announced last week a new partnership with RMI's Center for Climate-Aligned Finance.
The aviation industry has come under scrutiny as a significant source of greenhouse gas emissions. Munawar Z. Noorani, Global Co-Head of Aviation at Citi, said “despite the numerous challenges facing the global economy, we must keep up the strong positive momentum in addressing climate risks, especially in hard-to-abate sectors such as aviation.”
The new working group aims to create a climate aligned finance framework to define common goals for action to decarbonize the aviation sector. The working group will be comprised of senior aviation focused team members from each institution, and will develop measurement methodologies, emission benchmarks, data pathways, reporting and governance structure of frameworks, helping to set global best practices on climate for aviation finance, and inviting other financial institutions to adopt the framework.
A new study released by PWC's global strategy consulting business Strategy& revealed that companies are increasingly turning to Chief Sustainability Officers (CSOs) to spearhead and manage the ESG aspects of their business.
The study empowered chief sustainability officers indicated that while the role of CSO is evolving and expanding many lack the necessary authority or scope of responsibilities to sufficiently influence their company’s sustainability strategy. Strategy let me start researched the role of the CSO at 1640 listed companies, focusing primarily on the largest companies by market capitalization, across 62 countries globally.
Approximately 80% of the company studied had some form of a CSO role, 28% of the 2021 C SO appointments were part of the C-Suite, compared to only 9% in 2016. The role of CSO will undoubtedly grow as organizations continue to put ESG at the heart of their business.
The Science Based Targets initiative (SBTi) announced Tuesday the publication of “Foundations for Science-Based Net-Zero Target Setting in the Financial Sector,” a new paper aimed at establishing standards for setting and assessing financial institutions’ net zero goals.
According to initiative, while net zero targets at financial institutions proliferate, the definitions and activities included under the commitments vary significantly, creating difficulty in assessing the goals, and in comparability and measurement of real-world impact.
Alberto Carrillo Pineda, Managing Director, and Co-Founder of the SBTi, said, “the SBTi recognizes the need to create a similar standard that leverages the unique role financial institutional play in global emission reductions.
Government Policy Forbes: Supply Chain Compliance Is About To Get A Whole Lot Tougher
The Germany Supply Chain Due Diligence Act will come into effect in January of 2023, and it will require businesses to monitor for human rights abuses and compliance with environmental standards throughout their supply chain. This regulation is expected to be broader and more impactful than any previous supply chain compliance legislation, which typically focused on a single, specific issue.
The act will focus on five main ESG dimensions:
Freedom of association
Child labor and modern slavery
Unsafe working conditions
The responsibilities of the regulation are heaviest for Tier 1 suppliers but permeate throughout the entirety of the supply chain. The act will initially apply to companies with a corporate or branch office in Germany or a German workforce of at least 3,000. In 2024, it will apply to companies with a workforce of at least 1,000.
The German legislation translates into concrete compliance provisions for due diligence obligations. This involves analyzing ESG risks, preventing and mitigating violations, setting up grievance mechanisms, and reporting on their activities. To comply, companies will need to establish clear policies and be able to prove to regulators that they have robust processes in place to enforce and measure the effectiveness of these policies.