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General ESG News
The new IPCC report is being called a “code red for humanity,” and the demand for ESG commitments and action is not slowing down. Companies and regulators alike are taking steps toward accountability and transparency, and momentum continues to grow toward ESG disclosure standardization.
NEI’s Monica Trauzzi has a conversation with experts about financial investment in climate, as well as other ESG issues.
Green digital finance includes things like big data, AI, blockchain, and the Internet of Things, and it can provide solutions for sustainable finance for a more efficient, accessible, and less vulnerable system.
Green digital finance covers things like environmental protection and clean energy conservation in the financial sector, including green bonds, green loans, green insurances, and more.
Experts believe green digital finance has the potential to accelerate compliance with the Paris Agreement and UN Sustainable Development Goals by automating processes, providing data on assets in real time, conserving materials, etc.
Human analysis of ESG reporting can lead to biases, and the shift toward tech comes as the line between financial performance and climate action becomes increasingly blurred, and as companies are providing more data to investors. However, it’s still important to have a human perspective on the objective information used in sustainable investing.
Aligning disclosure with action requires transparent, measurable data, and fintech is working to align investor profits with sustainable outcomes.
New technology helps with climate risk assessments, determining appropriate decarbonization rates, and measuring progress toward net zero goals.
It is now considered table stakes for companies to have improved their general corporate citizenship practices, but employees, customers, and other stakeholders are expecting more.
Companies are making the shift to meet stakeholder demands -- in 2019, the GRI reported that 93% of the world’s largest companies by revenue were already reporting on their ESG performance. However, environmental sustainability often overshadows social factors. Companies can develop their social impact strategies by:
Working with and engaging the board, staff, and other stakeholders
Seeking out partnerships with diverse groups
Not trying to be all things to all people
Yahoo! Finance: Words Matter: Making ESG Communications With Employees Count
Employee demand for corporate social responsibility and sustainability is up among all generations, and in a conversation with 3BL Media, there is a discussion about how to bring everyone at all levels on board with the ESG communications strategy, how to leverage employee resource groups and amplify employee voices, as well as how to promote a sense of shared responsibility within the company.
Executive leadership faces increasing pressure to continue to evolve sustainably and use ethical business practices to promote growth, and the transparency and oversight practices today helps to prevent the fraudulent activity that led to Enron’s downfall two decades ago.
Companies setting long-term sustainable growth strategies may face uneven short-term profitability but are creating long-term value and resiliency, and all pillars of ESG are important.
Lemonade, a home insurance startup that launched publicly in 2020 as a public benefit corporation (PBC), saw frenzied demand, which is evidence of how the sustainable investing landscape has changed. In the past year, several other PBCs have gone public, and they must have a specific social or environmental purpose incorporated into their corporate charter.
These companies have to show true progress, and the structure offers legal protection for their efforts to take a longer-term, sustainable business approach. Laws introducing alternative structures have actually been passing with bipartisan support across the U.S.
However, some worry that new structures create new legal risks, and some view them as a distraction from shifting mainstream business toward more sustainable practices.
The average check is growing -- people are willing to pay more for an eco-friendly product.
Costs are being reduced as recycling, waste management, and other processes become more efficient.
Talented professionals become more loyal -- the younger generation of professionals is looking for meaningful jobs that bring value to society.
Local officials take you more seriously as your business becomes more a part of the local ecosystem and invests in public infrastructure.
Insurance costs get lower and getting visas becomes easier as risks are mitigated.
Yahoo! Finance: ESG vs. CSR: Key Distinctions & What Businesses Need to Know
CSR involves the broad social, environmental, and economic concerns in a company’s policies, practices, and decision-making processes. Alternatively, ESG uses environmental, social, and governance factors to evaluate company sustainability. CSR enhances accountability while ESG enhances measurability.
CSR is best for giving context about sustainability agendas and corporate culture, and ESG builds on that context to promote action and measurable outcomes.
PinPoint Media: Why ESG in the future of marketing: a Gen Z perspective
The digital transition played a fundamental role in the upbringing of Gen Z, which has the effect of Gen Z hyper-rationalizing their purchase decisions, as well as being better informed about their purchase decisions than previous generations. This is why every business activity is considered a marketing touchpoint.
Successful marketing will lead to long-term loyalty from Gen Z consumers, but with so many business options and so much available information, Gen Z will likely be gone forever if a company makes mistakes.
Using ESG as a marketing framework means it is already aligned with Gen Z’s purchasing priorities, and it is intrinsically designed to examine businesses through the same lens Gen Z consumers are using.
The key to an ESG marketing strategy is to balance Gen Z’s general distaste for advertising with risk management and an in-depth understanding of where to intersect ESG topics with marketing touchpoints.
ESG Disclosures, Standards, Rankings, and Reporting
Wall Street Journal: How the WSJ Compared ESG Ratings
The WSJ collected nearly 13,000 ESG scores in May 2021 from MSCI, Refinitiv, and Sustainalytics. There are 1,469 companies rated by all three agencies.
The three companies use different rating systems, so the Journal used seven bins each 12 points wide to group the companies, converting scores to the proper numerical ranges.
For 527 companies, the three agencies’ scores were in agreement (differing by one point or less). The scores differed by two points for 487 companies, and for 455 companies, the scores differed by three points or more.
The U.S. still lacks a standardized ESG disclosure framework, but investors are using the available information to make decisions, and capital markets need quality information to succeed.
External auditors have the independence and expertise needed to provide assurance and reduce risk around ESG disclosure, which in turn will boost trust and confidence in the markets.
Ultimately, business decisions should not just be good for the company’s bottom line and its people, but also for society at large.
Conventional thinking insists that companies under duress are unable to prioritize ESG factors. However, distressed investors can use restructuring to drive sustainability and long-term value creation. Recent research supports this thinking.
Restructuring involves a corporate reset (for both governance and business planning), and bankruptcy offers a forum for discussing the negative external factors affecting a business.
Improving ESG performance can also reduce the cost of borrowing for companies under duress, and increasing ESG disclosure boosts investor sourcing of ESG ideas for distressed companies, especially as ESG data availability improves.
Using an ESG lens can help investors determine where there may be inflection points in issuers’ ESG progress.
The latest IPCC report should prompt investors to review their climate change actions and commitments. However, this will likely lead to money pouring into ESG investments, potentially undermining sustainability claims.
Experts note that the message to the finance industry front he IPCC report should be that tackling global warming requires a longer-term perspective while still moving faster in the short-term to invest in green debt that has real-world impacts.
The scientific consensus is now that the average global temperature is very likely to rise by at least 1.5 degrees Celsius by 2040, so investors need to pay more attention to limiting warming. Many strategies that chase ESG returns fail to take into account the economic impacts of climate change.
However, critics of implied temperature metrics argue that there’s still a lack of reliable emissions data to make the necessary computations, and the metrics still rely on assumptions.
Private Equity Wire: LPs see value creation as leading driver of ESG, say Manulife
Since the start of the global COVID-19 pandemic, the call for sustainable business practices has increased, and as consumer spending shifts toward companies operating sustainably, more private equity firms are committing to the UN’s Principles for Responsible Investment.
The effect is that private equity sponsors are increasingly favoring prospective portfolio companies focused on the changing societal norms, regulatory requirements, investor expectations, etc.
Despite being rated poorly by ESG rating agencies, the company is actually delivering on ESG (with examples in its portfolio like Berkshire Hathaway Energy, Apple, and Burlington Northern).
BlackRock voted against two Berkshire directors in the recent proxy season and singled out the company as being unresponsive and unwilling to change. Despite this, some ESG experts are hesitant to denounce the firm.
Experts who closely follow Berkshire believe that the company will eventually adopt ESG, but that it will be from a “business standpoint” (such as converting its utilities to renewable to meet consumer demand).
The next generation of Berkshire investors has a different set of values than the generation Buffet made wealthy, and this may be a factor in the decision about holding onto old shares being passed down.
Berkshire’s biggest ESG opportunities lie in its succession to a new CEO, Greg Abel, and its opportunity to reconstitute its board.
Buffet’s philosophy of viewing investment as ownership should prompt his company to want to be a leader on ESG issues, but experts expect Abel to continue the decentralized approach.
Gibson Dunn: ISS Releases Surveys for 2022 Policy Updates
The Annual Benchmark Policy Survey includes questions about topics for U.S. companies that will inform its 2022 policy changes, including:
Non-financial ESG performance metrics
Racial equity audits
Virtual-only shareholder meetings
CEO pay quantum and mid-cycle to long-term investment programs
Companies with pre-2015 poor governance provisions (multi-class stock, classified board, supermajority vote requirements)
Recurring adverse director vote recommendations (supermajority vote requirements)
SPAC deal votes
Proposals with conditional poor governance provisions
The Climate Policy Survey includes questions around topics like climate-related “material governance failures,” Say on Climate, high-impact companies, and net zero initiatives.
A U.S. Chamber of Commerce survey found that nearly 60% of companies have expanded their climate change risk reporting since 2010, and two-thirds of the companies in the Russell 1000 Index released sustainability reports in 2019.
Investor climate change proposals are increasing, and most focus on how companies plan to reduce their greenhouse gas emissions in like with the Paris Agreement.
Investors are also focused on DEI topics (especially board diversity), as well as board oversight and disclosure of direct and indirect corporate spending on lobbying and political contributions.
Financial Times: Bond investors need to step up on human rights
Institutional investors have made significant progress on climate change and environmental issues, and now must devote the same effort to human rights. A Financial Times investigation last month found that some fund firms with strong rhetoric around human rights were also lending money to regimes committing abuses.
Human rights activists are struggling to get some financial firms to even respond to their requests for help. This is partly exacerbated by the fact that some human rights situations can be incredibly complicated, and different global investors can have different social values.
Many fund managers focus on ESG risks, which can make investment firms appear virtuous, but can fail to address the underlying problem.
The world of sustainable investing is expected to become more “turbulent” in the second half of 2021 as stakeholders deal with the question of how to look at ESG performance. There is also the concern of ESG investors overlooking factors that could pose a significant financial risk to their portfolios.
In the short term, investors should work to understand and prepare for transition risks and risks driven by the evolving market conditions.
Refinitiv and Satrix have together launched the Refinitiv Satrix South Africa Inclusion and Diversity (I&D) Index to provide investors with exposure to companies on the Johannesburg Stock Exchange that lead on diversity and inclusion issues.
The Index was developed based on the idea that companies that rack, report, and act on D&I measures will outperform.
The lack of publicly available ESG data is prompting investors to turnt o new sources like employee reviews to help make investment decisions, according to new research from MBH Corporation.
Companies need to be in control of their reporting and to take care to ensure their ESG credentials are presented accurately.
Companies and Industries
The Edison Electric Institute (EEI) and the American Gas Association (AGA) developed the first ESG/Sustainability reporting template for disclosure in the industry. This aligns with the SEC Chairman’s announcement that the agency is developing a proposed rule this year for mandatory climate change risk disclosure.
The EEI and AGA are particularly concerned with creating an industry-specific approach, and their template is currently the only ESG industrial template currently in use.
One concern with reporting is that using a one-size-fits-all approach can inaccurately represent companies, and investors will benefit more from seeing company dynamics and engagement on critical issues.
Intercontinental Exchange (ICE) and risQ launched a new data service with scores that will be applied to the municipal bond market to help investors assess how investments in public works, schools, parks, libraries, etc. impact local populations.
The data solution’s scores leverage variables from multiple public data sources and are mapped to ICE’s U.S. municipal bond reference data to evaluate an investment or portfolio. Social inputs used in the scores include affluence, poverty, education, employment, housing costs, racial diversity, and health challenges.
ESG Clarity: Hedge funds are waking up to ESG (and hiring)
Growing market pressure has been a driving motivation for firms to get ahead of competition and establish meaningful risk/return strategies. The question for hedge funds is whether there is a belief that ESG will positively impact financial performance, or whether firms are simply trying to assuage investors.
Currently, there are very few impact investors leading in the hedge fund market. Most hedge funds are currently making their first ESG hires or are adding limited resources to lean team structures. Because of this, small teams are bearing the weight of business and market expectations.
New hires are typically selected from institutional players with a proven track record in sustainable investing, but hedge funds will likely need candidates who are ESG generalists. They will need to be able to operate in a highly visible role and have exceptional communication and conflict management skills.
Hedge funds tend to offer high compensation packages for ESG candidates, but if the role ends up being on the fringe of the business and/or appears superficial, candidates should be wary of taking the role.
Homeland Security: $3.46 Billion to Fund Hazard Mitigation to Reduce Effects of Climate Change
Biden approved the significant investment to enhance resilience across the 59 major disaster declarations issued due to the COVID-19 pandemic; the influx of funds will help communities prioritize mitigation needs, including using funds to promote equitable outcomes in underserved communities.
The FEMA Mitigation Action Portfolio can fund innovative mitigation projects, including those that reduce risks associated with climate change, address current residential vulnerabilities, and help critical facilities adapt to future conditions.
The one-time investment represents a 23% increase in the funding available for disasters since the program’s inception.
Biden signed an executive order mandating the development of long-term emissions standards and setting the new target for zero emissions vehicles to make up half of new vehicle sales in the U.S. by 2030.
The new announcements should put the U.S. on track to reduce greenhouse gas emissions from passenger vehicles by more than 60% in 2030 (compared to last year).
The new measures are also aimed at securing the U.S.’s position in the global supply chain for electric vehicles and batteries (which is being increasingly cornered by China).