Emigrant Wilderness, California
General ESG News
With market size predicted to double in 2021, and the latest IPCC report insisting that current approaches are not enough to mitigate the effects of climate change, the question arises about whether or not ESG is sufficiently holding corporations accountable.
With ESG in investing, the hope is that aligning capital toward “climate friendly” investment will then drive meaningful climate action. Currently, about one third of all global assets are “sustainable,” but the planet is still in a precarious climate state.
It is worth noting that as regulation and definitions about ESG become more strict, the total amount of assets classified as “sustainable” will likely decrease.
Good ratings performance can only take a company so far in understanding and mitigating their ESG-related risks, and current metrics are still not adequate for understanding the full impact of a company on the ecosystem and society. Becoming “ESG-aligned” does not necessarily mean alignment with Paris Agreement goals for limiting global temperature increases.
Companies need to integrate their ESG impact into the broader debate, and we need to see asset managers track their performance against concrete targets with near-term, measurable horizons.
GreenBiz’s “30 Under 30” alumni reflect on how the COVID-19 pandemic has reshaped their focus on the social aspect of sustainability.
Responses included focusing on the intersectionality of ESG issues, hiring new officials in equity roles, building positive and inclusive working environments, accelerating diversity and accessibility initiatives, conducting internal audits, boosting employee wellness programs, forming dedicated working groups, and engaging in impactful partnerships.
Executives at Mayer Brown are publishing a series of articles dealing with ESG risks and opportunities in corporate, political, and economic agendas, especially as companies are increasingly being held accountable for the ESG performance and shortcomings of their supply chains.
The articles deal with topics related to security and resilience, jurisdictional exposure, litigation and regulatory risks, political and trade-related risks, market and operational risks, and more.
Evidence is arising that companies that proactively embrace ESG are starting to enjoy greater operational performance. The first step to addressing emerging supply chain risks is awareness of the impacts of the rapidly evolving regulatory frameworks.
Sustainable Brands: It’s Arrived: Our ‘Uh-Oh’ Moment on Climate Change
Key takeaways from the unnerving latest IPCC report include:
Human influence is unequivocally responsible for global warming.
Global temperatures have been skyrocketing since the Industrial Revolution
All five of the new emission scenarios predict at least 1.5 degrees Celsius of warming by 2040.
A rise of three degrees Celsius is a real possibility, and it would be catastrophic.
Limiting warming requires the planet to stick to a carbon budget.
Individual companies can use the following roadmap to improve their environmental footprint:
Create a climate strategy and communicate it.
Set science-based targets.
Commit to the TCFD.
Set a net-zero target (by 2030).
Become carbon negative.
A team of women professionals in sustainability, energy, and resilience have collaborated to form the Task Force for Equity in Climate-Related Financial Disclosures, (TECFD), and they plan to improve understanding of the connection between climate change and gender equity, highlight the risks facing net-zero commitments due to gender inequity, and identify opportunities that arise from addressing this inequity.
Later phases of the program will include a broader look at equity and develop a toolkit for use by businesses and governments.
The group is organized into teams aligned with the four pillars of the TCFD framework, and it aims to show that divestment can be counterproductive to net-zero commitments, and that equity can benefit both business and climate outcomes.
3BL Media: ESG Topics in the Age of Responsible Retail
The most material challenges emerging for retailers to address include changes in consumer behavior, packaging reduction, climate change impact, ESG integration in strategy, circular economy, reporting on ESG, and corporate responsibility for supply chain (especially human rights violation and environmental damage).
Consumers are looking for cleaner, healthier products, less packaging and plastic, and no harm done to people or animals.
As a result, retailers need to define what sustainable products are, identify the right labels, have data to support product sustainability, and disseminate this knowledge into the workforce down to point-of-sale employees.
Former Vanguard CEO William McNabb is attempting to redefine TSR, which traditionally refers to total shareholder return, as talent, strategy, and risk. This is meant to signal a shift in board and executive priorities toward a long-term strategy.
While some investor relations professionals don’t see a first-mover advantage for talent, strategy, and risk issues, but for large companies primarily owned by huge firms, the only way to affect performance is through governance and board management, engaging the management team specifically on “new TSR” issues.
Asset management firms have a clear responsibility to meet their shareholders’ expectations, and as investor focus shifts toward T, S, and R issues, so must the managers’.
The traditional board strategy of choosing the company’s CEO and “getting out of their way” is no longer (as possibly never was) sufficient to fulfill their duty to stakeholders.
CEO pay is growing at a rate that far outpaces workers’ pay, but this issue tends to be ignored as the world faces other pressing, salient issues like climate change.
One solution that addresses both issues is tying CEO compensation to carbon emissions reductions. Decarbonizing companies will attract more capital than companies failing to take action, further adding financial incentive for companies and CEOs to reduce their emissions.
Board may also want to consider additional rewards for decarbonization, such as for companies that are included in sustainability indexes (e.g., MSCI), companies that report their climate metrics, and companies making meaningful low-carbon transitions like shifting company fleets toward electric vehicles.
User abuses have undermined the social media business model, and until recently, platforms have made the argument that they are simply technology tools and are not responsible for user content.
The Center for Countering Digital Hate has been name-checking individuals responsible for circulating COVID-19 vaccine disinformation, but this action is far from comprehensive and it highlights the failure of social media platforms to detect even very obvious user abuse.
Yelp is an example of a platform with an effective system for detecting and penalizing businesses that solicit or post fake reviews and for removing offensive content (through both software and human moderation), and the company is also working to improve its efforts around COVID-19 “review bombing” with policy filters.
Alternatively, Facebook has taken the approach of shutting down an anti-vaccination network while simultaneously launching a “prayer post” feature.
The latest IPCC report warns of the dire nature of human-caused climate change, as seen in the increased frequency and intensity of extreme weather events like heat waves, storms, and droughts. The report also confirms that global sea levels are rising at an accelerated pace.
Despite the disastrous outlook, the report also insists that it is not too late to reduce emissions and mitigate the effects of global climate change, but it will require rapid and drastic change.
The report also notes that while climate change is a global issue solutions will be best enacted at the local and regional levels.
ESG Disclosures, Standards, Rankings, and Reporting
Continuity Central: ESG regulatory requirements grow as a source of risk: Gartner
Regulatory ESG risk has risen to the second overall position in Gartner’s Emerging Risks Monitor Report, which includes a survey of 153 senior executives. This reflects a “global inflection point” as ESG disclosures shift from voluntary to required.
However, unlike many other “high velocity” risks like cyber security, ESG is a “slower moving” risk, which ultimately allows proactive organizations to turn this area of risk into an opportunity.
Also covered in IT-Online: ESG regulatory requirements a growing source of risk and opportunity
Financial Advisor: Hartford Funds Launches Active, Factor-Based ESG ETF
The Hartford Schroders ESG US Equity ETF (HEET) is meant to track and provide a better ESG profile than the Russell 100 Index; it is an actively managed, factor-based fund.
The fund uses quantitative ESG scores and a qualitative analysis to assess ESG risks. SOme sectors (like controversial weapons) are excluded, while others like tobacco, thermal coal, and gambling may be included based on revenue thresholds.
The fund’s internal ESG scoring methodology is meant to identify companies that demonstrate solid ESG practices or marked improvement. The fund will also seek companies with favorable recent share price performance relative to their peers.
Financial Management: Getting to the heart of ESG: An investor’s perspective
Investors have been increasingly demanding ESG information from companies to help guide their investment decisions. A discussion with Matthew Hurn, OBE, FCMA, CGMA, and CEO for Disruptive Investments at Mubadala Investment, addresses:
How to make ESG issues authentic within a company
Why ESG shouldn’t be a box-ticking exercise
Why finance professionals are logical custodians of ESG data
Tips to embrace ESG within an organization
Private Equity Wire: ESG factors must play a far bigger role in M&A deal due diligence, says Accuracy
Businesses are becoming increasingly aware of how underperforming on ESG metrics can increase risks and negatively impact returns, and Accuracy notes that ESG analysis must not be an integral part of the deal-making due diligence process.
Depending on the industry, there can be a broad range of ESG factors companies need to take into account, including emissions, waste management, resource use, supply chain risks, product safety, DE&I, labor practices, fraud and corruption, fair trade, business ethics, transparency, and more.
Accuracy also notes that in addition to desk research and ESG analysis (especially benchmarking), businesses should consult industry experts, academics, and economists to fully comprehend the ESG risks associated with the M&A deal.
Activist hedge funds like Engine No. 1 and Bluebell Capital Partners are two examples of funds working to bring about change through voting, resolutions, and rallying shareholder support.
Historically, activist funds have focused on short-term returns, but are transitioning toward longer-term holdings to affect and maintain meaningful change.
The main problem is that the majority of investors are still focused on quarterly results, which means that companies making objectively “good” moves and working toward their long-term sustainability goals may see their share price drop. Even some ESG activist investors have limited patience.
Experts note that performing well on ESG metrics can only do so much for companies, and “you can’t be solving the problems of the people and planet without doing so profitably.”
Royal London plans to reduce the carbon intensity of its flagship passive equity funds’ “governed range” by more than 10%by introducing “tilts” to increase holdings of companies with good ESG practices at no extra charge to customers. Changes in the funds are not expected to drastically affect risk or returns.
The company has also committed to achieving net-zero operational emissions by 2030, and to “invest [its] customers’ money responsibly to make a positive difference to the planet.”
The Star: Banks ramp up green financing
Banks are helping to finance the sustainability transition while also increasing efforts to get clients to switch to more sustainable business practices. Multinational banks are increasing their offerings of “green” financing products and services, such as sustainability linked loans, competitive financing rates for energy efficient vehicles and solar panels, and financing projects related to renewable energy and waste management.
JPMorgan plans to add the ESG tag to derivatives to link sustainability to all forms of finance, replicating a cross-currency swap with Enel SpA that requires both companies to meet ESG targets or face additional costs.
Green and ESG bonds are already well established, but Wall Street’s embrace of sustainable finance in more exotic markets is showing that the field is becoming more mainstream.
Other unusual ESG products hitting the market this year include a green hedge fund created by Deutsche Bank for Continuum Energy Levanter Pte.
However, the proliferation of derivatives with an ESG label is raising concerns about their impact, and some corners of the market are being criticized for setting targets that are too easy to achieve.
Prudential Financial announced its new initiative to invest $200 million in early-stage private equity firms with diverse ownership. The new Prudential DEI Portfolio will direct private equity investment using DEI criteria, including diversity of fund management ownership, diversity of the portfolio management team, and impact of the investment strategy on diverse populations.
According to the company, this new initiative complements its investments in alternative asset firms owned and operated by women and minorities.
Companies and Industries
Moody’s plans to acquire RMS (a climate risk modeling provider), and it plans to expand the company’s modeling capabilities to a broader customer base.
As rating agencies race to boost their ESG data analytics and risk management capabilities, and as more clients demand such capabilities, Moody’s has accelerated its acquisition strategy. The company also plans to expand its commercial real estate data.
Microsoft is partnering with Volt Energy, a Black-owned business, to convert all of its energy usage to renewable sources by 2025. One result of the partnership is that a portion of the profits will be used to bring carbon-neutral electricity to underserved communities.
The partnership is an example of the growing focus on environmental leadership and the intersection between equity and environmental justice.
The Putnam Sustainable Leaders ETF (PLDR) invests in companies focusing on ESG beyond compliance, like Microsoft, to create-long term success for the company and the community.
HP’s latest Sustainable Impact Report includes information about the amount of sales revenue that is directly attributable to ESG considerations, which was over $1 billion in 2020 (for context, the company’s net revenue in 2020 was $56.6. billion).
HP attributes this achievement to the mindset of sustainability being integrated throughout the entire business through training and aligning everyday job responsibilities with sustainability goals.
HP is also taking an aggressive approach to diversity & inclusion, intentionally hiring under-represented groups. The company is also driving similar actions throughout its supply chain.
Currently, investors are having to weigh the energy industry’s high revenues and profitability from fossil fuels with the long-term prospects of decarbonization. The difficulty is predicting the supply and demand imbalances that will occur along the way.
Investors can see the impending transition toward renewable energy, but they are not buying into the urgency of the climate change narrative.
Unlike most other sectors, energy stocks remain below pre-pandemic levels, and this is following years of poor returns and criticism over their contribution to global warming. The International Energy Agency even cut its oil demand forecasts for the rest of the year.
The wave of investment in electric vehicles, renewable power, and clean energy initiatives will continue to cause problems for the oil and gas industry, but for the time being, energy stocks appear relatively well positioned.
The latest IPCC report insists that there is “unequivocal” evidence that the unprecedented extreme weather events are tied to human-caused carbon emissions. It also notes that climate change is largely the fault of the massive fossil fuel industry and its disinformation campaign.
The report highlights the problems with both carbon and methane emissions, and it attributes both to the fossil fuel industry. It also discusses the need to clean up outdated gas infrastructure, which the Biden Administration will likely attempt to do this year.
The report does not specifically address impacts or solutions, but it will publish these reports later.
The “Friedman doctrine” has underpinned much of the business world for the past several decades, but as companies begin to embrace more forms of social and environmental responsibility, they are simply providing what their stakeholders are demanding. Lenders are also now providing more favorable interest rates on business loans based on good ESG scores.
The influence of ESG is only going to grow, and ESG measures must make their way into auditable record systems like enterprise resource planning (ERP) software.
Commercial software is also now rapidly evolving to meet ESG demands, and important considerations for the industry should include:
To meet ESG goals, ERP software should be accompanied by sound organizational structure, processes, and communication.
Mitsubishi UFJ Finance Group (MUFG) has joined the Partnership for Carbon Accounting Financials (PCAF), which is a global partnership of more than 135 financial institutions with the mission to develop and implement an approach for assessing and disclosing the greenhouse gas emissions associated with loans and investments.
MUFG is one of the first Japan-based financial institutions to join, following Mizuho. According to the company, its participation supports its commitments to align with the Paris Agreement goals.
In addition to joining the PCAF, MUFG has also been named to the Steering Group of the Net Zero Banking Alliance (NZBA).
S&P Global Platts announced the launch of a new suite of low-carbon metals spreads and ratios, and it is aimed at bringing transparency to the value of producing and using low-carbon materials.
The new suite includes eight daily, weekly, and bi-weekly indicators, and the launch comes in response to demand for market participants to help assess the costs, risks, and opportunities for expanding global carbon reduction strategies.
ESG Today: PSEG Unloads Fossil Generating Assets
Public Service Enterprise Group (PSEG) announced its agreement to sell PSEG Fossil, its portfolio of fossil-based power generation assets to ArcLight Capital for $1.9 billion.
The portfolio consists of a series of gas plants across several states, and the transaction aligns with the company’s evolution toward a clean energy infrastructure-focused company.
The sale also follows PSEG’s announcement in July 2020 that it would start exploring strategic options for its non-nuclear generating fleet.
Hamilton Lane announces its plan to offset the carbon emissions from its business activities through participation in emissions reduction projects in partnership with ClimateCare.
Through this collaboration, Hamilton Lane will participate in initiatives like a wind power project in India and clean cooking projects in Bangladesh in Ghana. Beyond addressing climate change, benefits also include reducing fuel bills for families, reducing exposure to toxic fumes, and reducing deforestation and habitat reduction by cutting fuel requirements.
PNC has announced a new sustainable finance goal to facilitate $20 billion of environmental finance, supporting projects like green buildings, renewable energy, and clean transportation. The initiative will include loans for buildings that meet standards like LEED and ENERGY STAR, financing for wind, solar, hydro, and geothermal power projects, zero- or low-emissions vehicles, electric vehicle charging stations, and more.
This commitment marks the next step in PNC’s increasing focus on sustainable finance, which also includes establishing a dedicated practice and pledging to provide $88 billion in loans, investments, and other support to boost economic opportunities for minorities and low- and moderate-income families and communities.
Goldman Sachs announced that it has acquired Netherlands-based NN Investment Partners (NN IP), pointing to its ESG capabilities and product suite as the main reason for the transaction.
NN IP has more than $225 billion in its responsible investing range, including ESG-integrated strategies, embedding ESG data to improve risk-adjusted returns, sustainable investing strategies (focused on sustainability leaders), and impact investing strategies targeting companies making clear contributions to the UN SDGs.
The firm’s responsible investing approach is built around restriction and exclusion criteria. According to Goldman Sachs, the acquisition will help strengthen its fund management and distribution platform cross retail and industrial channels in Europe, and add new capabilities to its existing European footprint.
Plan Adviser: ESG and Shareholder Rights Rule Under White House Review
The Department of Labor has submitted a new regulation proposal to the Office of Management and Budget called “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights.”
Stakeholders have expressed concerns about the Trump Administration’s work to limit the use of ESG funds in retirement plans, as well as the proxy voting regulation implemented late last year. The new proposed regulation is expected to address both issues.
Some insiders are concerned that the Biden Administration’s proposal may not be different enough from the existing framework, specifically because it no longer refers to “ESG” explicitly as an investment theme.
The ISS Annual Benchmark Policy Survey and Climate Policy Survey both close on August 20th at 5pm EST, and ISS typically announces its proposed policy changes in October and adopts final changes in November.
Annual Survey (Global and North America Region) topics include:
Executive compensation: Non-financial ESG performance metrics in executive compensation, mid-cycle changes to long-term incentive programs, and long(er)-term perspective on CEO pay.
Diversity, virtual meetings, & corporate governance practices: Racial equity audits, virtual-only meetings, companies with pre-2015 problematic governance provisions -- multi-class stock, classified board, supermajority vote requirements, and recurring adverse director recommendations.
Special purpose acquisition corporations (SPAC): SPAC deal votes and proposals with conditional poor governance provisions.
Climate Policy Survey topics include:
Defining climate-related “material governance failures”
ISS specialty climate voting policy
The vague definition of Article 8 in the SFDR in the EU is leading to market concerns about greenwashing; to be labelled Article 8, a fund must “promote ESG characteristics.” This definition has been causing confusion in the asset management industry, as it has become a “catch-all category” for funds, highlighted by the wide divergence in the type of funds with this label.
Level two of the regulation has been delayed until July 2022, and it will include requirements for data that supports decisions to place funds in Article 6, 8, or 9.