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General ESG News
Sustainable Brands: The Purpose-Action Gap: The Business Imperative of ESG
In a recent Barkley consumer study, researchers found that brands acting sustainable are even more important to consumers now than they were before the pandemic, and consumers are willing to pay more for sustainable products and services.
Sustainability remains more of a priority among younger generations but is growing in older generations, and the study also found that beliefs in sustainability are stronger in non-white communities. Overall, ESG is growing in importance to all U.S. consumers.
Across all business sectors, the vast majority of leaders agree that ESG-related issues are much more important now than they were a year ago, but only a small percentage of leaders believe their companies are currently doing an excellent job addressing top issues like inequality and diversity and inclusion.
Ultimately, brands need to “behave like a whole brand across their value chain,” because consumers will do their research before they decide to buy.
As stakeholders increasingly demand that companies take meaningful steps toward sustainability, an ESG framework is becoming increasingly important. Steps to build a solid ESG framework include:
Build the introduction -- provide information about the particular industry and where it is going with sustainability.
Develop program goals and communicate them with stakeholders.
Define guiding principles/standards and incorporate them into business policies and practices.
Define how the company will measure progress.
Create program alignment, such as with the UN SDGs, Global Reporting Institute, Principles for Responsible Investment, etc.
Communicate the program, create related materials, and develop committees and trainings for information dissemination.
The banking industry in Europe is in a transition phase where ESG is being tied to remuneration, with the ultimate goal of “making it financially attractive to be good.”
HSBC, UniCredit, and La Banque Postale are just a few of the banks tying ESG ratings, carbon emissions, and even diversity-related factors to executive and senior management pay packages, in addition to financial performance.
The European Banking Authority also released updated remuneration guidelines that take effect at the end of the year, and they set clear expectations that firms will need to incorporate ESG into staff pay.
According to Yale Law School Professor Jonathan Macey, the growing ESG movement reflects a lack of confidence in the government to address and solve ESG issues -- ESG investing ignores entirely the role of government in solving societal problems -- thereby benefiting corporate managers aiming to avoid accountability.
Essentially, government unresponsiveness has created a vacuum that the ESG investing movement and reliance on the private sector are the response.
Additionally, the ESG focus on long-term management and sustainability takes the pressure off of management to focus on maximizing profits or share value, and the complexity of ESG concepts can be used and contorted to justify virtually any corporate action short of theft or property destruction.
In the midst of changing and growing ESG expectations, three key incentive structures remain the same: managers are still compensated based on share price performance, the threat of activist hedge funds and takeovers requires managers to keep share prices high, and only shareholders get to vote in corporate director elections.
Corporate Secretary: The board’s role in ESG oversight, according to Bill McNabb
Former Vanguard CEO Bill McNabb feels that currently, the level of preparedness boards of directors have for ESG oversight varies by company, with Fortune 500 companies being fairly well equipped.
McNabb also notes that for ESG to be effective, it needs to be incorporated into a company’s strategy, mission, and operations, which starts with the board.
Over the next 10 years, McNabb expects to see board evaluation and construction change, including some domain expertise instead of several former CEOs, as a means for diversifying skills and perspectives.
There may also be a shift toward shorter board tenure, which brings new changes and concerns. When considering new board members, it is helpful to bring investors together, remove names, and decide what profile of a candidate is needed most.
Boards will need to remain engaged in ESG issues in both the proxy season and the offseason to achieve real integration, and McNabb believes in the near future, there will be integration of ESG metrics and financials in proxy statements.
While the COVID-19 pandemic disrupted global supply chains, wildfires in the American West and Canada, flooding in China and Europe, and droughts in South America are already disrupting several vital supply chains from agriculture to tech.
Other climate change-related disruptions include intense hurricanes, crop yield declines, water shortages, and even political disruption due to forced migration.
Proactive and thorough supplier engagement are crucial for mitigating these effects. Experts also argue that companies need to focus on reducing their own carbon footprints, then engage their supply chain partners to cut emissions and lower risks.
Critics of ESG investing argue that ESG is a distraction from real policy reforms, as well as “posturing” and “greenwashing.” While some companies are making real, voluntary improvements, there are also a large number of companies actually making false or misleading claims and lobbying against ESG reforms. Additionally, ESG has become politicized, and those in the U.S. conservative mainstream view ESG as “virtue-signalling.”
The biggest reason for backlash may be the fact that business leaders who have spent years making claims about their environmental and social responsibilities have not made more tangible impacts. Public dissatisfaction is growing at the same pace as self-congratulation in boardrooms.
Increased transparency and data reliability will be key to combating criticism, as will getting ahead of the impending regulatory changes. Ultimately, executives will need to show that the ESG efforts they market are having material impacts.
ESG materiality is expected to change over time due to stakeholder activism, new regulations, and other unforeseen circumstances, leading to the concept of “dynamic materiality.” However, current reporting experts are not offering much guidance for determining which ESG issues could become material in the future.
BSR recommends taking a scenario-driven approach to dynamic materiality, which means stress-testing a materiality assessment against plausible future scenarios to figure out which ESG issues are likely to become more material and vice versa.
This type of approach transforms the materiality assessment from a static to a strategic exercise, it helps companies develop resilient business strategies, and it bolsters reporting efforts.
Green Building Laws Update: The S in ESG may be the Most Impactful
Social factors are the least measured but potentially most impactful in corporate sustainability. For example, human rights are one of the areas where actual laws exist in the world of ESG, and violations are rampant in the mining and production of Chinese solar panels.
The EU and UK lead the world in adopting legislation requiring human rights due diligence, as well as defining other ESG topics.
According to the author, there is no morally defensible reason for not doing everything in our power to end modern slavery and human trafficking. At a time when ESG is becoming synonymous with sustainability, stakeholders want to invest in businesses that protect both citizens and the environment.
Traditionally, company share prices are inversely related to employee wages and layoffs, but ideas surrounding human capital are shifting, and the treatment of workers, especially frontline and low-wage workers, is being viewed as financially material.
The shift is further reflected by SEC Chairman Gary Gensler’s announcement of recommendations that the agency consider a human capital disclosure.
Experts note that current disclosure requirements around worker conditions are too broad and need to be narrowed for true accountability and to help investors understand the treatment of workers.
The current labor market is leading to more companies taking action to retain employees, such as the GOod Jobs Institute’s Worker FInancial Wellness Initiative.
One key shift is for companies to develop worker skills and promote internally, especially within internal industries, instead of preparing workers to move onto other industries.
The momentum accelerated by the COVID-19 pandemic is expected to continue, and the return on investment for companies that attract and retain employees is being seen as increasingly valuable.
Auditors’ roles in vetting financial statements also gives them the power to push companies to align their numbers with Paris Agreement climate change goals. Climate change impacts are becoming increasingly material to business operations, but very few businesses are currently reporting on them.
Auditors also have the responsibility to lead and call out companies that fail to align with the net zero transition, partially because they do not need to receive permission from management or regulators.
ESG Clarity: No chance of net zero by 2050 unless we build faster
A recent Worley and Princeton report notes that “if we develop infrastructure the way we always have, we won’t get to net zero by 2050.” The change needed requires both government policy and a shift in thinking.
Even with a variety of pathways toward net zero outlined, all require faster building of clean energy infrastructure. Five shift that will be needed include:
A broadening in how value is defined to include environmental and social value
Keeping technology options open
Building as many things as possible from one design
Communicating and collaborating with governments
Using digital platforms to streamline and monitor progress.
ESG Disclosures, Standards, Rankings, and Reporting
Responsible Business: RMI and RCI Publish Revised Cobalt Refiner Supply Chain Due Diligence Standard
The Responsible Minerals Initiative and Responsible Cobalt Initiative announced the publication of their revised Cobalt Refiner Supply Chain Due Diligence Standard (originally released in August of 2018). Major updates include:
Clarified data points to be captured for all cobalt-bearing material received.
Clarified requirements for assessing the plausibility of material coming from declared sources.
Articulation of risk company risk management requirements.
The addition of Step 6: Community Participation
Cobalt is a key raw material in new energy batteries, and companies are feeling increasing pressure to mine and refine the product responsibly.
The revised standards were developed in line with the Chinese Due Diligence Guidelines for Responsible Mineral Supply Chains and the OECD Due Diligence Guidance for Responsible Mineral Supply Chains from Conflict-Affected and High-Risk Areas.
The standards encourage companies to source responsibly from Conflict-Affected and High-Risk Areas, and from small-scale mineral producers where relevant.
Matt DiGuiseppe, head of Diligent’s ESG Center of Excellence, notes that the large number and diversity of stakeholders combined with the lack of clarity on some ESG data can pull companies in multiple directions.
For companies in early stages of establishing their ESG strategies and frameworks, DiGuiseppe recommends starting with an established framework like SASB or WEF and approaching ESG like a business strategy, not simply an annual reporting exercise.
DiGuiseppe also recommends tracking trends and data closely to avoid reputational and regulatory risks, and to keep data clear, consistent, and comparable for investors. One major mistake is treating a spreadsheet as a data platform.
Nearly $1 of every $3 managed globally is seeking profit from ESG concerns ($35.3 trillion), more than two thirds of that sum is in a strategy called ESG “integration” or “consideration,” which means that managers are including ESG data in their financial models.
In theory, this means managers could be “aware of” ESG factors but not actually act on them when making investment decisions. Additionally, since many ESG factors lack clear and consistent definitions, taking them into account can mean different things to different managers.
One major risk is that finance is claiming to solve problems through ESG, meaning there is no need for government action, despite the fact that policy is needed to address some major issues.
Some regulators, especially in Europe, are trying to implement rules to help actively promote transparency and ESG goals.
There are still few insurance-linked securities (ILS) or catastrophe bonds that are fully ESG-aligned, though this is expected to increase, and these types of vehicles already have inherent ESG qualities, as they are meant for disaster risk and recovery financing.
As investor demand grows for ESG-related products, it is likely that these vehicles will share in the increased asset flow. The BlackRock ESG Capital Allocation trust, which is focused on equity and debt securities, contains event-linked bonds (including ILS and catastrophe bonds) in its prospectus.
The Trust aims to focus on bonds that are “ESG appropriate,” and it is the first ESG-focused fixed income/closed-end that specifically calls out catastrophe bonds as a potential option for employment.
As ILS and catastrophe bonds become more ESG appropriate, it is likely that we will see more interest in them from traditional asset managers.
BlackRock’s iShares has predicted that ESG investing will grow to $1 trillion by 2030, and it’s creating opportunities in the world of indexing.
The SEC is now looking into how index providers are defining ESG, since many are developing their own scoring systems, making it more difficult to regulate.
Data providers are able to share information with issuers to help them improve the performance of some of their indexes, as well as to help fill gaps specific to what some advisors and investors are looking for.
The federal focus on ESG issues is reflecting a momentum that will likely impact several corners of private markets, including:
Firms that want to go public
Private companies seeking to align with public companies as vendors/partners
Startup founders and venture funds
Private markets will not be subject to the same reporting regulations as public companies (at least not for a long time), but it is expected that private investors, funds, and companies may adapt to get ahead of ESG regulation and position themselves in a new “adjacent” regulatory environment.
This week, two major defense deals hit headlines -- Cobham agreed to buy Ultra Electronics, and TransDigm is acquiring Meggitt. Ultra and Meggitt are both British companies, raising concerns about whether the UK is doing enough to protect its defense sector from outside investors in the interest of national security.
The deals reflect a growing appetite for defense and aerospace assets, despite the fact that many PE firms are trying to improve their credentials as socially responsible investors.
Pfizer has launched a 10-year $1 billion sustainability bond, priced at 1.75%, with proceeds meant to fund R&D and capital expenditures for its COVID-19 vaccine manufacture and distribution. The company expects closure of the offering to happen this week, marking the second for Pfizer under its Sustainability Bond Framework (following a $1.25 billion, 2.625%, 10-year bond offered last year).
Companies and Industries
A recent review argues that Norges Bank Investment Management should receive a new mandate to properly reflect climate change risks and should pursue investment strategies in line with the Paris Agreement.
The report also singled out the financial industry as having significant climate risk exposure in its loan books. It also calls out the real estate and insurance sectors, and insists that Norway’s wealth fund should start requiring portfolio companies to participate in climate stress tests.
However, experts note that the fund should not stray from its ultimate goal of prioritizing financial returns, “given an acceptable risk.”
Infrastructure Intelligence: ESG has risen the risk agenda, but will projects suffer?
Since BlackRock CEO Larry Fink’s announcement that it would only be investing in companies with ESG risk compliance, infrastructure companies across the construction supply chain have been focused on ESG certifications, reporting, and ratings.
Most project managers are already applying enterprise risk management strategies to mega projects. Some of these strategies could bring commercial opportunities to the companies and contractors involved.
The role of risk managers in project delivery has evolved in recent years, and instead of viewing ESG performance as a risk, infrastructure companies can benefit from viewing it as an innovative opportunity and competitive differentiator.
Consumers are actively looking to engage with brands that align with their values. A recent Kearny survey found that one in four European consumers are likely to switch banks if their current bank is not adequately engaged in ESG issues. The survey also found that among Europeans, responsible investing was the most important ESG topic.
In the UK, one in five customers would likely switch banks, and the number reached nearly 30% in Poland, Romania, Spain, and Italy. Younger people are almost twice as likely to switch banks on ESG grounds compared to those aged 55 and older.
Global climate change and the ongoing COVID-19 pandemic have accelerated ESG-related programs in the construction and development industry, and many companies are choosing to partner with industry-related and other organizations for things like certifications and support for initiatives.
It is expected that common ESG metrics will emerge for the industry despite currently high levels of inconsistency and subjectivity.
The environmental pillar of ESG has become a key focus for the industry, with initiatives like LEED and the Investor Confidence Project (ICP) coming to the forefront and being included in project mandates.
The industry is also placing increased focus on sustainable materials sourcing and management, especially in mass timber construction and low-carbon concrete production.
Business Today: Axis Bank forms environmental, social and governance committee
Axis Bank has formed an ESG Committee to oversee macro-level ESG trends and developments, lender’s ESG strategy and roadmaps, ESG-related risks and opportunities, disclosure and communication, integration of ESG initiatives and, and performance monitoring.
Shamina Singh, EVP of Corporate Sustainability at Mastercard and Founder & President of the Center for Inclusive Growth (the philanthropic arm of Mastercard) insists that for smaller companies, ESG should be a core factor in how the company views its growth strategy and supports the community where it operates.
Singh recommends that companies play to their existing strengths, mobilize their network of partners, take a holistic approach to ESG, seek guidance where necessary, and be proactive in asset allocation.
Insurance companies are on the hook for an increasing number of claim payouts as wildfires and other extreme weather events wreak havoc on property, and experts note that the industry needs to do more to prepare for climate risks. The current payout rate is not sustainable.
There is also the risk of investments in fossil fuel companies and other industries that, amid the carbon transition, could become “stranded assets.”
While U.S. regulators don’t typically examine insurers’ reserve portfolios for climate risks, regulators in other countries and regions do, especially in Europe and Asia.
Markets are a powerful tool to drive the clean energy transition, but investors need the transparency of climate risk disclosure to make informed decisions.
Experts also note that it is becoming increasingly impossible to deny the effects of climate change, and the demand for additional information from companies is not going away.
JD Supra: ESG Strategy Development and Reporting in the Oil & Gas Industry: Enhancing Competitive Advantage and Reducing Liability Through Best Practice Reporting Grounded in Materiality, Data, and Transparency
The ESG reporting landscape in the U.S. lacks effective, mandatory standards for consistency and accuracy; however, companies in all industries are facing increased pressure to report, which can expose companies to risks and criticisms.
FTI Consulting provides a brief with helpful advice for oil and gas companies looking to develop their ESG strategies and expand their reporting capabilities while reducing risk and liability.
Kroll Bond Rating Agency (KBRA) has released research on its approach to incorporating ESG factors into its credit rating process for sovereigns.
A sovereign’s management of social risks stemming from stakeholder preferences can become important ratings drivers if its policies affect trade, investment, access to capital, economic growth, etc. Additionally, management of these risks can influence things like political stability.
Heavily concentrated economies may be more vulnerable to cybersecurity attacks on key industries; all sovereigns can be at risk, not just the less-wealthy or advanced economies.
ESG Clarity: The role of real estate in the race to net zero
It is estimated that 20% of the total greenhouse gas emission from countries like the U.S. and UK are generated by heating, cooling, and powering homes. Real change will come from making efficiency improvements in existing structures. Both government and private funding will be required to make the necessary adaptations.
Materials must be scrutinized, specifically with regard to sourcing. Additionally, construction and refurbishment projects need to be designed in a forward-looking, sustainable way. Then, once projects are complete, the carbon balance should still be studied, as well as other opportunities to capture and offset residual emissions.
FT Adviser: DWS hits back at greenwashing allegations
DWS’s former global head of sustainability has identified several problems with the firm’s 2020 annual report and its claims about ESG integration of assets, stating the claims were misleading. This prompted investigations from the German regulator BaFin.
DWS has addressed the allegations by saying it stands by its annual report disclosures and remains a steadfast proponent of ESG investing.
The company argues that it strives for market transparency and has incorporated ESG into its corporate strategy, and further clarified its definition of “ESG integration” for asset allocation. Despite its response, the company’s share price has fallen more than 13%.
In partnership with Sustainable Energy for All (SEforALL), Google announced its plans to launch teh 24/7 Carbon-free Energy (CFE) Compact, aiming to create a global coalition of companies, governments, and stakeholders working to decarbonize their energy consumption.
The new initiative aligns with a goal Google announced last year to run its entire business on carbon-free energy by 2030. The 24/7 CFE Compact will call on participants to work together to enact the policies needed to decarbonize electricity systems globally.
Comerica’s new ESG Platform highlights the bank’s ESG commitments/initiatives, organized into five categories: capital, workforce, education, climate, and products.
Key commitments include providing access to capital for women, minorities, small business, and underserved communities, providing a diverse and equitable workforce, investing in and providing financial information for underserved communities, addressing climate change, and enhancing ESG-related products and solutions.
The new ESG Platform was announced with the release of the company’s annual Corporate Responsibility Report, which highlights its ESG progress, such as green loan financing, volunteer hours, pandemic-related paycheck protection loans, and increasing diversity representation in executive officers.
The German legislator recently published the Supply Chain Act that applies to companies that are based in Germany or that have a branch with more than 3,000 employees in Germany.
Starting in 2023, the bill will require all applicable companies and their suppliers to follow human rights and environmental due diligence obligations in their supply chains. The act imposes fines on the legally required due diligence measures, and the obligations establish a duty of effort, meaning companies must be able to show they have implemented the required measures.
The new German law also entitles people whose “paramount legal position” has been violated to engage with NGOs to assert their litigation rights against companies in Germany.
In October of this year, the European Commission will also deliver a legislative proposal on supply chain due diligence to protect human rights and the environment.
SEC Chair Gary Gensler has outlined some of the information the expected framework could require from companies, including:
Qualitative and quantitative details about how the company is managing climate-related risks and opportunities
Financial impacts of climate change
Greenhouse gas emissions disclosures
Climate change scenario analyses
Forward-looking statements related to climate change
Industry-specific ESG metrics
However, some note that it is virtually impossible for the SEC to require all of the information listed above, and to attempt to do so would alienate a large number of issuers.
Additionally, these requirements could violate a critical SEC disclosure mandate principle: materiality. Materiality is meant to filter out irrelevant disclosures and help investors get to the most meaningful information.
Still, some ESG investors and climate change activists are pushing the SEC to make blanket assumptions that all ESG-related disclosures are material.
In response to criticism, SEC Commissioner Allison Herren Lee has noted that investors are the “arbiters of materiality,” and that they have been overwhelmingly clear in their views that ESG matters, especially climate risks, are material to their investment and voting decisions.
In July, the SEC Asset Management Advisory Committee adopted recommendations from the ESG Subcommittee for ESG disclosure by registered issuers. The recommendations provide guidance and best practices for how issuers should incorporate ESG disclosures in a way that will help investor decision making.
The Committee explained the rationale behind the recommendations in terms of the pressing need for the SEC to establish a process for improving the “quality, consistency, and comparability” of ESG disclosures. Specifically, the Committee recommended that the SEC should consider the value investors now ascribe to ESG topics.
SEC Chairman Gensler and Commissioner Caroline Crenshaw issued remarks in support of the recommendations, while Commissioner Hester Pierce reiterated concerns about implementing objective ESG reporting standards. Alternatively, Commissioner Allison Lee expressed concerns that the recommendations do not go far enough.
The UK announced its first-ever Hydrogen Strategy to promote the development and use of hydrogen as a significant energy source to fuel a decarbonized economy. The strategy forms a major part of the UK government’s “Green Industrial Revolution” launched last year. The included initiatives aim to help the UK reach its goal of achieving 5GW of low-carbon hydrogen capacity by 2030 (enough to power 3 million homes).
Hydrogen is likely to become a major part of many countries’ decarbonization plans. However, it must be extracted from other minerals, and the process often creates pollutants and greenhouse gas emissions.
The government also announced that it is consulting on the design of a 240 million euro Net Zero Hydrogen Fund to help support the commercial deployment of new low-carbon hydrogen production plants across the UK.