ESG Weekly News Update: April 23, 2021
Bukowe Berdo mountain range. Bieszczady National Park. Carpathians, Poland.
General ESG News
Compensation-related ESG policy is becoming more common as companies work to embed ESG into corporate culture; new global research suggests that four out of five companies are planning to change how they incorporate ESG measures in executive pay plans.
A favorable place to start is integrating ESG targets into existing goals and strategies and linking these targets to longer-term incentives.
One major challenge is the difficulty with quantifying many areas of ESG activity, which leads to the risk of companies oversimplifying their ESG reporting down to only what is easily reportable (rather than what matters most).
Better bottom line: Studies have found that companies that focus on ESG tend to significantly outperform companies with poor performance on ESG issues.
Incentivize institutional investors: In the past 15 years, the level of assets pledged toward ESG investing has grown exponentially, and if companies do not prioritize ESG, they risk having asset managers divest their shares.
Attract rising stars: The future of the workforce -- Millennials and Gen Z -- are generally unwilling to conform when it comes to ESG prioritization, and for companies to attract this talent going forward, they will need to accommodate these demands.
Environment + Energy Leader: Why Corporate ESG Goals are Now a Necessity: A Q&A with Kathy Alsegaf of Deloitte
The value of intangible, ESG-related assets is increasingly driving market valuations, including DEI, human rights, and environmental performance.
The core elements needed to move from ESG goals to action are transparency in reporting and effective governance to focus attention on the areas needing action. Then, companies can determine how to use its strengths to effect change.
According to Alsegaf, the biggest ESG issue facing organizations in the next 20 to 30 years will be the challenge of embedding ESG practices into all parts of companies’ overall business strategies.
ESG Channel: Yes, ESG Is Making Its Way into Executive Compensation
While this level of accountability is relatively new (but growing) in the U.S., many European countries already incorporate ESG metrics into their executive compensation plans.
Increasing ESG incentives could also have the effect of boosting ESG-focused ETFs.
Fitch Ratings: ESG in Credit -- Energy and Fuel Management Issues
This report (which is available for download) explains how issues in energy and fuel management can translate into credit risks, as well as the reality of costs of other forms of energy, such as wind and solar. The report anticipates markets evolving to link demand with resource availability, with green hydrogen attracting increased interest.
UK Health Alliance on Climate Change: Communicating About Climate Change: Think Audience & Messenger
The organization Climate Outreach believes that all audiences have the “right to know” about climate change, and despite international commitments, governments have been poor at communicating about climate change and managing misinformation.
Communicating the facts and figures will be ineffective -- successful communication means finding the right narrative that can be understood and trusted.
Messages need to be designed to align with the values of their audiences, and climate change cannot simply be viewed as an environmental issue; it has far-reaching impacts across health, safety, the economy, food security, landscape, jobs, etc.
The theme for Earth Day 2021 is “Restore our Earth,” and it coincided with several climate-related events like the Leaders’ Summit on Climate in the U.S. and an Exponential Climate Action Summit on Financing the Race to Zero Emissions.
The Leaders’ Summit on Climate convenes 40 world leaders and the Major Economies Forum on Energy and Climate to reaffirm Paris Agreement commitments and announce new Nationally Determined Contributions (NDCs).
The Exponential Climate Action Summit, a collaboration between We Don’t Have Time, The Exponential Roadmap Initiative, and Ericsson to focus on how to finance the race to zero carbon emissions by 2050.
ESG Disclosures, Standards, Rankings, and Reporting
Pressure for consistent disclosure is coming from shareholders, government emphasis, and public demand. Issues at the forefront of public consciousness include climate change, public health, and DEI.
Consistent, data-backed reporting can have both short-term and long-term business benefits.
The SEC plans to focus on material disclosure gaps in climate risk and other ESG issues as corporate leaders establish governance committees, conduct risk assessments, and report on their ESG strategies.
Ideally, sustainability measurement and reporting would lead to improved performance, creating a cycle of sustainable capitalism, but this is not necessarily the case.
Sustained change needs to involve systemic change in the rules of industry competition, as well as classifications in ESG investing.
Though there are those who disagree, it is also possible that the constant research and effort put into non-financial reporting can distract from the actual work of change.
“Measurement and reporting have become ends to themselves, instead of a means to improve environmental or social outcomes.”
JD Supra: The SEC Staff Takes on ESG Investing
The recent SEC risk alert identifies weaknesses in ESG reporting and actions, and it includes an examination of ESG investing priorities (though it does not include any formal rules or guidance).
The investing examination focuses on portfolio management practices, performance advertising and marketing, and compliance programs.
Observed weaknesses/deficiencies include disclosure issues, control issues, inconsistent proxy voting, misleading marketing claims, weak compliance programs, and ineffective compliance personnel.
Observed effective practices include clear disclosures, effective compliance programs, and knowledgeable compliance personnel.
Morningstar: Special Report: Earth Week 2021
The Morningstar report provides links to past articles and insights from specialists in the areas of climate risks, environmentally friendly investment ideas, and building sustainable portfolios.
Securities Finance Times: State Street to launch ESG securities lending collateral investment strategy
State Street will be providing pension plan clients with ESG scoring tools to measure companies’ performance as part of its cash collateral reinvestment strategy, with an anticipated launch in late May or early June.
Based on a client’s securities loan activity, cash will be reinvested using the new ESG-focused strategy.
Banking Exchange: Millennial Investors Prioritize Advisory Firms’ ESG Commitments
New JD Power research shows that millennial investors prioritize ESG in investing but doubt their advisory firms’ commitments to responsible investing.
Experts warn wealth managers that as the generation of millennials inherit wealth in the next decade and emerge as affluent investors, they will not simply evolve into the same investors as previous generations; the commitment to ESG is only accelerating.
Hedge Week: A risk-focused ESG approach is critical
There is increasing pressure for asset owners and managers to issue transparent reporting of ESG issues. RepRisk has built a consistent, rule-based methodology that offers granular ESG risk data for hedge funds.
The RepRisk ESG risk signals are considered a reliable predictor of reputational changes for a company that may become financially material. The company plans to map more major frameworks (in addition to SASB and the UN SDGs) onto its platform.
Jackie VanderBrug, Bank of America: There is increased interest in thematic opportunities, such as the low-carbon transition and DEI.
Jennifer Garcia, Wells Fargo: Most inquiries come from “next gen” clients wanting to understand ESG criteria, and the focus is on balancing an investment’s financial return with its overall impact.
Craig Pastolove, Morgan Stanley: Younger generations are eager to deploy capital to investments that have a positive impact, and most inquiries deal with various investing approaches among managers (i.e., excluding undesirable companies vs. including companies that are seeking to make a positive impact).
Companies and Industries
ESG considerations are not simply a matter of ethical behavior for large corporations, and they can have significant impact on ROI and long-term sustainability for small businesses (including employee retention).
Private equity firms are placing increasing emphasis on ESG, so for small/family businesses eventually looking to sell to a PE firm, it is important to pay attention to ESG.
“The perceived barrier between social value and market value is breaking down,” and both shareholders and the government are increasingly expecting companies to disclose ESG data and initiatives -- while most of the pressure is on public companies, stakeholders will naturally come to expect the same from private businesses.
Key elements involved in creating an ESG strategy (especially for a small/private business) include “360-degree” engagement, addressing all three ESG components, top-down education and commitment, effective asset allocation, disclosure and marketing, self-reflection, and futurecasting.
The financial industry coalitions under the Glasgow Financial Alliance for Net Zero (GFANZ) bring together more than 160 firms to accelerate the transition to net zero emissions by 2050.
GFANZ aims to mobilize trillions of dollars to deliver on the Paris Agreement goals, and the organization will provide a forum for coordination among institutional leaders.
SSGA joined the initiative, along with 13 other new signatories (making 87 total), to support the goal of achieving net zero emissions by 2050 at the latest.
Signatories agree to submitting disclosures that align with TCFD recommendations.
SSGA is also involved in other initiatives like a global Task Force of Asset Owners and Asset Managers, as well as Climate Action 100+, and an agreement with S&P Global to provide its clients with environmental data and analytics.
SSGA launched its ESG Risk Analytics on a platform that allows clients to measure their carbon footprint and intensity, and the new agreement combines this platform with Trucost’s analytic capabilities to enhance functionality, including TCFD reporting features and mapping client carbon footprints onto portfolios.
S&P Global’s SFDR Data Solution is meant to help investors meet the EU’s SFDR disclosure requirements, which mandate that companies report on how sustainability risks are integrated into their investment decisions.
The SFDR Data Solution datasets will enable investors to understand companies’ energy consumption, carbon emissions, and performance on a variety of ESG factors.
S&P Global launched the Sustainable1 group, which encompasses its full product suite of benchmarking, analytics, evaluations, and indices. It will serve as a single source for the ESG products.
S&P Global is also establishing the Sustainable1 Knowledge Hub, a site that brings together insights from all S&P Global divisions.
Sustainable1 will host its inaugural conference, “Accelerating the Transition to Sustainability: A Journey Across the Global Value Chain” next month.
As two of the top emitters in the world, and despite current political tensions, the two nations have pledged to continue to work together to achieve net-zero emissions, reiterating their support for the Paris Climate Agreement.
China has pledged to become carbon neutral by 2060, and Biden has campaigned to reach carbon neutrality in the U.S. by 2050.
ESOPs consistently outperform due to employees having a greater degree of accountability than non-ESOPs, and family-owned businesses with strong ESG credentials generally perform better than their non-family-owned counterparts.
The National Law Review: SEC Makes Moves to Step Up ESG Enforcement
Recent SEC enforcement actions, including the Climate and ESG Task Force and the recent risk alert, reflect an emphasis on public messaging.
The Biden administration is expected to encourage ESG investing to address climate change, and it has ordered a review of previous rules on the issue; a new legal framework can be expected.
Global Compliance News: United States: ESG investing faces changing regulatory landscape
Investors are increasingly funneling capital into sustainable investment strategies, and it is expected that the Biden Administration will increase its regulatory approach, especially in the areas of climate change and social issues.
The SEC Examination and Enforcement Staff are expected to focus efforts on identifying insufficiencies in disclosure and misconduct related to ESG investment products.
BBC News: Biden: This will be ‘decisive decade’ for tackling climate change
At the Leaders’ Summit on Climate, President Biden revealed the new U.S. pledge to cut carbon emissions by 50-52% by 2030 (from 2005 levels), essentially doubling the previous pledge
The leaders of India and China made no new commitments, despite being two of the world’s most significant carbon emitters.
As the new leader of the Financial Conduct Authority (FCA), Sadan will be responsible for developing the FCA’s sustainable finance approach and policy.
The newly created role highlights the FCA’s increasing ESG focus, as does its rule released in 2020 requiring UK premium listed companies to include a TCFD-aligned statement in their annual reporting.
Yellen outlined her vision of the Treasury’s role in the Biden Administration’s climate actions in a statement to the Institute of International Finance.
According to Yellen, the Treasury’s goal is to take Biden’s “whole-of-government” approach and turn it into a “whole-of-economy” approach to facilitate the transition to net-zero emissions.
Yellen identified the mobilization of capital from the private sector toward the public to finance the green transition as a key obstacle, as well as the lack of reliable and consistent disclosures for investors to compare climate-related risks.