ESG Weekly News Update: April 30, 2021
Half Dome, Yosemite National Park California
General ESG News
1) Demand for corporate data is on the rise (from all angles); 2) Stakeholders are preferring in-house alternatives to standardized ESG scores; 3) ESG data is becoming more collaborative; 4) Future ESG disclosure will likely be a system of methodologies; 5) The future of ESG data lies in tech; 6) Storytelling and purpose are paramount; 7) The ‘S’ pillar will come to the forefront; 8) There’s room for emerging markets and forward-looking data to grow; 9) Progress will take time.
To date, sustainability standards setters like SASB have focused on public equities, with an equity bias toward intangible assets, but these are less material to other asset classes like fixed income.
Double materiality and dynamic materiality also have an equities bias and focus on intangibles.
Fixed income investing is more focused on mitigating risks, as well as actively doing good in regard to the ‘E’ and ‘S’ pillars, and materiality for fixed income investing is shown to vary across market cycles, increasing the need for guidelines on investing by asset class.
World Economic Forum: Ensuring supply chains are deforestation-free is still a priority. This is why.
Real progress has been made with deforestation in agricultural and forestry commodities, and buyers’ expectations are high.
The next challenge is to continue to make progress as new commitments are made. One solution is to use existing accountability systems and monitoring tools.
Decreasing deforestation is intrinsic to companies reaching their net-zero emissions target (especially companies with significant land footprints), and the infrastructure to support no-deforestation goals will also support a variety of other sustainability initiatives.
With the rise of ESG-focused investing, there are new technologies and tools emerging for monitoring companies’ ESG performance, and stakeholders are calling for more guidance on ESG standards from regulators.
Companies that can quantify ESG data in their disclosures and comprehensively cover ESG risks and opportunities have been found to have better overall financial performance.
New technologies are also helping to turn an abundance of ESG data into actionable insights, benchmarks, and strategic plans.
Sustainability-linked bonds and loans are on the rise, and they aren’t depending on spending proceeds on defined sustainability projects (though they do need to be linked to sustainability performance targets), which makes them more accessible to issuers.
Key challenges in this new asset class include proceed restrictions, inconsistent metrics, performance reliability, and financial penalties for failure to meet targets.
The Sustainability Linked Loan/Bond Principles are key to effective disclosure. Sustainability Performance Targets (SPT) are typically specific ESG KPIs, and pricing adjustments vary depending on progress toward SPTs.
The first sustainability linked loan was issued in 2017, and cumulative issues surpassed $300 billion in 2020, with the most growth happening in the EU. The same is true for the growth of sustainability linked bonds, though both instruments are also taking off in emerging market economies.
Methane has a higher heat-trapping potential than CO2, which means that cutting methane emissions can have more immediate climate impact. According to a new U.N. report, currently available measures could reduce methane emissions by 45%, avoiding nearly 0.3 degrees Celsius of global warming potential by the 2040s.
The fossil fuel sector has the highest potential to cut methane emissions, though the agricultural sector is a bigger emitter.
This year, the U.S. will be unveiling new regulations for tackling methane emissions.
ESG Disclosures, Standards, Rankings, and Reporting
Accountancy Daily: CFOs need to embrace ESG reporting, says Gartner
By improving ESG performance, companies tend to have reduced compliance burden, higher employee satisfaction, and fewer risks from shareholder activism.
Gartner found that only one in 10 investors find the ESG information they are looking for in company disclosures, and banks, credit rating agencies, and fixed income investors are all monitoring ESG reporting, as well.
The new solution is designed to facilitate financial market participant compliance with EU SFDR regulations, including disclosing the principal adverse impacts investment decisions have on sustainability factors.
The solution covers more than 7,000 corporate issuers globally (and up to 25,000 issuers for specific climate and social indicators).
401(k) Specialist: Ubiquity Introduces ESG Funds to Small Biz 401(k)s
Demand for ESG investments is growing, and DC plan sponsors now have the opportunity to incorporate ESG investments into their retirement investment portfolios with the new offerings from Ubiquity.
According to a recent Morningstar survey, nearly three-quarters of professional investors are incorporating ESG into their investment decisions.
According to Tariq Fancy, ESG investment criteria "creates a giant societal placebo where we think that we’re making progress even though we’re not," arguing that government is the only way to achieve scalable solutions. He disagrees with Larry Fink’s view that the free markets will correct the climate crisis.
Skepticism around ESG products is high in part because the existing tools and standards are not all being used effectively.
Fancy argues that stakeholder capitalism is mostly “hollow marketing,” and the ESG data he worked with did not work in most investment strategies. There are also few incentives to real progress (i.e., short CEO tenure and high pay despite long-term goals) and ineffective divestment.
Fancy further argues that ESG data needs to be “managed in a way that changes the underlying incentives of the system, correcting the market failure that is at the heart of our climate crisis.”
Institutional Asset Manager: BlackRock launches new World Environmental, Social and Governance (ESG) Insight Equity Fund
The fund is underpinned by BlackRock’s proprietary SEG assessment framework, which aims for a 50% carbon intensity reduction compared to the FTSE Developed Index and aggregates data into 15 sustainable descriptors that encompass ESG issues.
The fund will include regular, detailed reporting aligned with the UN SDGs and the Paris Agreement.
Companies and Industries
Terence Martin, a director of Conning’s Research Group, issued a report (available for download) that examines the state of ESG for insurers.
Bank of America led the way, but now, most major banks are now financing ESG projects (about $1 trillion each), and this comes with the benefit of significant corporate tax breaks.
Biden’s infrastructure plan calls for further tax breaks for things like low-income housing, renewable energy, and energy efficiency.
Many of the banks had existing pledges for investing in “green” initiatives, but they have significantly expanded these pledges in the past month.
Business Travel News: What’s the Deal with Carbon Offsetting?
Companies are increasingly realizing that carbon offsets need to be treated as supplementary to a true carbon reduction program (for “residual” carbon), as opposed to the main component.
“Quality” carbon offsets need to be expensive enough to have an impact, verified through reputable standards, and have additional benefits to the local community. These programs are becoming more available for travel managers looking to offset business travel emissions.
Corporations are also working to “green” the travel industry by investing in sustainable airline fuel and carbon sequestration technologies.
The new solution aims to improve risk management, annual reporting, and board oversight by regularly scanning corporate disclosure environments and monitoring more than 400 risk factors.
S&P has entered into a $1.5 billion sustainability-linked banking facility -- it is linked to the company’s GHG emission reduction goals, which include a 25% reduction by 2025. JPMorgan acted as the Sustainability Structuring Agent and Administrative Agents for the new banking facility.
The New York Times: Biden and World Leaders Focus on Innovation for ‘Clean Energy Future’
President Biden announced that the U.S. will revive its participation (along with dozens of other nations and investors) in Mission Innovation to increase government budgets for renewable energy.
Achieving the new goals will require substantial overhaul of current U.S. domestic policies and overcoming a mindset that is “resistant to change,” as the data does not currently match the rhetoric.
Much of Biden’s plans to halve emissions by 2050 are incorporated into his infrastructure plan. In June, he will meet with the UK and NATO to further discuss the advancement of policy priorities.
Using the Congressional Review Act, the Senate voted to reinstate 2016 methane regulations (which Trump had previously overturned).
According to a study published in Environmental Research Letters, cutting methane emissions could “slow the rate of Earth’s warming as much as 30%.”
Bulletin of the Atomic Scientists: Climate change: What has Biden promised to do? And is it enough?
Biden’s central promise is to reduce emissions by 50-52% by 2030, as well as to double U.S. financial aid for developing countries struggling with climate impacts.
Despite these targets (and the fact that the U.S. target is one of the most ambitious among developed countries), experts warn that they may not be enough, and the cuts needed to avoid disastrous global warming are “precipitously steep.”
Halving emissions in the next decade will have other impacts for Americans -- new jobs in wind and solar, shifting to electric cars, revamped farming practices, the decline of the fossil fuel industry, and the rapid refitting of old buildings are just a few.
New legislation will be required for Biden to set new pollution standards and shut off new oil and gas drilling on public lands.