ESG Weekly News Update: April 16, 2021
Perito moreno Glacier, Argentina
General ESG News
Installation, preventative maintenance, and repair: Properly installing and maintaining all facility equipment and infrastructure is critical to eliminating fugitive emissions.
Optical gas imaging, light detection, and ranging techniques: Monitoring for leaks with specialized cameras and lasers can help with early detection (and subsequent repair) to help meet regulatory requirements and reduce product losses.
Vapor removal technologies: Vapor Recovery Units are designed to remove harmful vapors/fluid contaminants from crude oil and distillation tanks, helping to meet pollution requirements and improve product purity.
Financial Times: Hasty, imperfect ESG is not the path for business
The ESG agenda has the potential to put companies on the defensive, and it is difficult to meet the challenges of climate change and social discord when there are inconsistent metrics/standards but increasing pressure to act on aggressive timelines.
ESG is often viewed from the western narrow and wealthy economic perspective, but to be truly sustainable, ESG needs to provide global, scalable solutions.
To succeed, business leaders must push back against agendas that want imperfect changes at any cost and instead respect the balanced trade-off of implementation speed versus the depth of change needed.
Utility Dive: Putting the ‘E’ back in ESG: Lessons from the field
Unlike the Paris Agreement, ESG investments have no consistent framework for measurement and reporting; the degree to which environmental investments will actually reduce CO2 emissions is not built into climate-related investing decisions.
Bottom-up approach: It could be useful to incorporate mechanisms from the renewable energy and energy efficiency industries -- which have an established history of accounting for energy savings -- into mainstream ESG standards and investments.
Top-down approach: The SEC and IFRS are increasingly regulating ESG disclosure and reporting, but they need to make sure that they prioritize investments with the greatest CO2 reduction per dollar invested, that climate-related ESG investments report on ongoing emissions using established protocols, and that environmental performance is built into financing.
Fitch Ratings: ESG in Credit -- GHG and Air Quality Issues
This downloadable report from Fitch Ratings provides insights on the credit relevance of sector-specific ESG issues, as well as guidance on investor approaches to evaluating ESG risk factors, with specific focus on GHG emissions and air quality.
The report also addresses the challenges of climate considerations throughout the value chain, since many companies find that the bulk of their emissions profile comes from outside of their direct operations.
2020 was meant to be the “super year” for forest efforts, despite the fact that more than 40% of the most influential companies in the global forest risk supply chains do not have forest commitments in place.
A new WWF report suggests that agriculture is the biggest cause of deforestation, not business, though businesses still play a significant role. The report also includes a map for companies to help prioritize where to focus supply chain efforts.
Deforestation cannot be solved on a voluntary basis; businesses need to incentivize their suppliers to engage in best practices while also advocating for stronger environmental regulation and enforcement.
When ESG emerged, it was typically initiated in the context of employee engagement, but companies are now expanding their ESG strategies to include more executives.
Emphasis on the ‘S’ and ‘G’ has also increased in the past few years due to current events and investor pressure, and many shareholders now desire executive compensation to be linked to ESG performance.
C-level ESG leaders need to be able to define ESG in the context of their organization, design a plan of execution, and communicate progress accurately to all relevant stakeholders. One main issue with hiring individuals specifically for this type of role is the constantly evolving nature of ESG definitions, taxonomies, and frameworks.
ESG Disclosures, Standards, Rankings, and Reporting
In the last 12 months, quantifiable ESG goals and strategies have gone from “nice to have” to “absolutely table stakes,” according to Sonny Kalsi, CEO of BentallGreenOak.
Europe currently leads the U.S. in ESG efforts, with new regulations leaving “literally no negotiating room,” requiring measurable targets, timelines, and accountability.
It is expected that U.S. investors are going to soon catch up to their European and Asian counterparts, and firms need to prepare for permanent change.
As regulatory bodies work toward establishing common ESG reporting standards, SEC Commissioner Hester Pierce suggests taking a step back to consider that overly prescriptive and “homogenized” reporting could result in less useful and nuanced ESG information.
Pierce takes specific issue with the concept of “double materiality” standards, which would require issuers to disclose information about how sustainability issues affect their companiesand how their companies affect society and the environment.
A recent white paper by Dimensional provides evidence suggesting that investors can use current prices and reliable proxies for expected future cash flows and differences in expected returns.
There is growing evidence that prices across a variety of markets incorporate climate risk information, and that this information is likely to affect both discount rates and cash flows (e.g., a carbon tax could increase discount rates for firms vulnerable to the tax while lowering cash flows for emissions-intensive firms).
The paper ultimately notes that a diversified investment approach remains the most reliable way for investors to receive the highest expected returns.
Financial Advisor: Wall Street Math Shows ESG Funds Can Ride the Value Stock Boom
ESG funds have outperformed partially because they are overweight tech and growth stocks and are underweights in industries like energy, utilities, and consumer services. It is expected that this will evolve and ESG funds will increase exposure in non-tech industries.
Still, the largest ESG products have substantial stakes in tech companies, and for those that rely heavily on tech, they will be sensitive to long-term interest rates.
Financial Advisor: BlackRock Scores Biggest-Ever ETF Launch With New ESG Fund
In its first day of trading, the BlackRock U.S. Carbon Transition Readiness ETF (LCTU) earned about $1.25 billion in investments.
The fund will focus on investment in shares of Russell 1000 companies deemed “best positioned” for the energy transition.
ESG ETF assets have reached a record $74.8 billion this year, up from $10 billion two years ago.
Yahoo! Finance: Masters of $1.3 Trillion Fund See ESG Dominating for Decades
Norway recently rolled out new guidelines for it’s sovereign wealth fund (the largest in the world) with the goal of increasing competence related to climate risk and the transition to a low-carbon future.
The country plans to use this fund’s “clout” to force companies to act more responsibly, as around 25% of the companies in the fund’s portfolio could be cut.
Reducing the number of companies in the portfolio is not expected to affect returns, but it can help manage risk and complexity and improve responsible management.
A Cerulli study found that “lack of investor demand” was the most significant factor holding advisors back from adopting ESG strategies in client portfolios, while more than 40% of surveyed investors expressed interest in ESG investing.
Advisors also typically say that ESG interest is limited to high-net worth clients, while more than 50% of surveyed investing households with “modest” assets said they would prefer to invest in companies with positive social or economic impact.
One key takeaway for advisors is to not mistake a lack of proactive questions for a lack of interest.
Sustainability funds doubled in 2020 and are set to double again in Asia this year due to the fact that regulators are requiring public companies to disclose ESG data and that pension and endowment funds are requiring asset managers to consider ESG factors when investing.
JPMorgan predicts that the ‘E’ pillar will gain importance, which will create a shift in the way China uses energy (i.e., away from reliance on coal).
Chief Investment Officer: SEC Finds Potentially Misleading, Unproven Claims by ESG Funds
The SEC has issued a “risk alert” to make investors aware of potentially misleading claims found in companies offering ESG products and services; specifically, the SEC found a “lack of policies and procedures related to ESG investing” and “policies and procedures that did not appear to be reasonably designed to prevent violations of law.”
The SEC also found weaknesses in documentation, controls, governing implementation, directive monitoring, compliance programs, and proxy voting inconsistencies.
Despite these findings, the SEC also found positive and accurate examples of fund disclosures and marketing materials with reasonable ESG practices.
The recent SEC Risk Alert identifies concerns in companies’ ESG claims like a lack of adherence to global ESG frameworks, inconsistent proxy voting, weak policies and documentation, inadequate controls and compliance programs, etc.
The SEC also provided guidance for investing companies, urging simple and clear disclosures, explanations of ESG investing decisions, comprehensive investment policies, and knowledgeable compliance personnel.
The author identifies six “mega” trends: Cloud computing, resource efficiency, vehicle electrification and autonomous driving, clean water, access to finance, and health-care transformation, and lists specific stocks for each trend that align with each investment theme.
Five key business metrics to help funds outperform include strong (and improving) return on invested capital, solid free cash-flow generation, appropriate use of leverage, a sustainable business model, and good management incentives.
The two firms launched Decarbonization Partners, which aims to invest in companies providing technologies/solutions to accelerate the transition to a net-zero economy by 2050. The partners committed to investing an initial $600 million to launch the fund, with a $1 billion fundraising target.
Decarbonization Partners will launch a series of late-stage venture capital/private enquiry investment funds, with a focus on renewable and mobility technology, emerging fuel sources, grid solutions, battery storage, electric vehicles, etc.
Companies and Industries
My Central Oregon: Citi adds environmental, social and governance scores to its data platform
The scores, provided through Arabesque S-Ray and added to the Citi Velocity Clarity platform, will allow clients to analyze the sustainability exposure of their investments.
As ESG indexes outperform counterparts, interest in sustainable investment grows, as does demand for transparency from asset managers and owners.
Business Insurance: Insurers looking closely at energy buyers’ ESG credentials: Willis
Insurers are withdrawing from writing coal and oil sands risks, and fossil fuel companies are seeing significant rate increases.
Premium increases from October 2020 to February 2021 were 25% to 40%, but for programs without adequate risk profiles, increases have been more than 50%.
Due to the price increases and coverage restrains, some major energy buyers have chosen to self-insure their programs.
The governance element can often be silent/overlooked in ESG discussions until something has gone wrong, so exporters need to remain vigilant with issues like human rights, forced labor, anti-corruption, and environmental considerations.
Many Export Credit Agencies (ECAs) are embracing mandatory reporting initiatives like the EU taxonomy and SFDR, as well as voluntary frameworks like the TCFD.
Social and governance risks are high in ECA export markets, and there is an opportunity for ECAs to help with governance issues in these high-risk countries.
BlackRock amended its $4.4 billion credit facility to link sustainability performance to interest the firm pays on the debt.
The three associated metrics (which align with BlackRock’s existing sustainability goals) are the Black, African American, Hispanic and Latino Employment Rate, the Female Leadership Rate, and the Sustainable Investing AUM Amount.
Penalty pricing will be enacted if BlackRock significantly underperforms on at least two of the three objectives.
ESG Today: Apple Calls for Mandatory Climate Reporting
Apple has called on the SEC to require consistent, audited emissions reporting, arguing that disclosure is an important tool in the fight against climate change. Sustainability-focused organizations like Ceres have supported Apple’s message.
The SEC has already announced that it will review its guidance for public company disclosure obligations, while other countries have also increased ESG reporting requirements.
After achieving carbon neutrality in its own operations, Apple announced in 2020 that it plans to achieve carbon neutrality across its supply chain and product life cycle by 2030.
The bank’s target is currently the largest among its Wall Street peers, earmarking $1 trillion for green initiatives that support climate action and the transition to a low-carbon economy.
Other focus areas include socioeconomic development financing in developing countries and advancing economic inclusion (i.e., small businesses, affordable housing, education, and health care).
Last week, Bank of America pledged to achieve $1.5 trillion in sustainable finance mobilization, and JPMorgan just set a $2.5 trillion target.
Citi’s new target includes deploying $500 billion to environmental finance, including renewable energy, water conservation, and sustainable transportation.
The bank has also earmarked $500 million for areas like education, affordable housing, health care, community finance, DEI efforts, and other social issues.
Principles for Responsible Investment (PRI) launches its new three-year strategic plan with the theme of “building a bridge between financial risk, opportunities, and real-world outcomes.”
The strategy is built on three key drives: big tent (the PRI is open to signatories of all types), accountability, and scalability.
The We Mean Business coalition and Ceres issued an open letter representing more than 310 businesses and investors urging the administration to adopt an emissions reduction target of 50% by 2030 (from a 2005 baseline).
The letter comes as the Biden Administration plans to unveil its Nationally Determined Contribution (NDC) with interim climate goals, and the campaign follows similar initiatives taken by coalitions in other countries.