ESG Weekly News Update: December 10, 2021
General ESG News
Forbes: ESG: As Easy As 1-2-3
While creating and implementing a robust ESG strategy will involve substantial work, the basic concepts can be broken down into three main steps:
Deciding on material issues – interviewing stakeholders to refine the most critical issues and determining relevant importance.
Developing strategic themes – grouping the material issues around a few core themes, then applying target audiences, objectives, and KPIs to each theme.
Reporting publicly – through and ESG or Sustainability Report, or even by posting information on a website and/or social media to increase transparency.
Corporate Compliance Insights: Top ESG Articles of 2021
CCI editors provide their rundown of the top ESG articles of 2021:
We Asked the SEC and Others About the Impact of Standardized ESG Reporting. The Answers Were Complicated. (Henry Kronk)
Should CCOs Take Responsibility for the “New” ESG Function? (Michael Volkov)
US Customs Clampdown on Xinjiang Forced-Labor Exports Multiplies Supply Chain Compliance Challenges Across Industries (Doreen M. Edelman and Andrew Bisbas)
Why We Need to Add Health to ESG (John Godfrey)
Biden’s Inauguration Heralds a New Era in Financial Regulation (Bijaya Das and Nishanth Neeli)
The Messy Business of ESG: Why Short-Term Thinking Can’t Fix Fundamental Flaws (Michael Volkov)
Washington Post: John Kerry is counting on the private sector to help solve climate change
Some climate experts are criticizing climate envoy John Kerry for suggesting that the private sector is the key to solving the climate crisis. He argues that no government in the world has enough money to fund the necessary investment in clean energy to sufficiently limit global warming.
Kerry added that private sector funding can also support technological breakthroughs in areas like battery storage, green hydrogen, and direct carbon capture, which would be crucial for reaching net-zero emissions.
The Build Back Better Act aims to get the private sector moving in the right direction, but critics note that we could be potentially relying too heavily on voluntary corporate actions with minimal oversight. Kerry importantly clarifies that both governments and the private sector must accelerate climate action together.
GreenBiz: From joke to hoax, a short history of ESG
Author CJ Clouse chooses “greenwashing” as the 2021 ESG word of the year. Originally coined in 1986, greenwashing didn’t become commonly used until
Even just five years ago, ESG was viewed through a lens of skepticism and perhaps even a bit of mockery. This attitude has persisted even after a decent number of ESG funds built up healthy track records.
In the past year, the narrative has shifted from “ESG doesn’t drag down performance” to “ESG outperforms but only because of other unrelated things or because managers are lying about what’s in it.” Despite the apparent problems with ESG, it is important to remember that if there were no demand for ESG, there would be no greenwashing, and if investors weren’t actively trying to integrate ESG into their investment choices, they wouldn’t care about metrics or transparency.
GreenBiz: ‘Just transition’ is the new ‘net zero’
“Just transition” is expected to soon become table stakes for companies, and the term will be used, overused, and potentially abused in the coming years. We can expect it to follow a similar trajectory to “net zero” -- activists will start to hold companies accountable for their commitments, and the professionals will try to standardize the concept.
Just transition started in the labor movement but has jumped to a global stage, with governments and financial institutions making commitments and investors making demands. Now, just transition is a business imperative.
To create conditions conducive to success, and to ensure the global energy and economic transition is just for all, we will first need to speak the same language and hold one another accountable.
GreenBiz: Sorry, carbon offsets still aren’t settled
Negotiators at COP26 were finally able to agree on guidelines meant to help define the carbon offset market. In the coming years, a UN supervisory body will determine specific regulations for countries under the Article 6 carbon offset agreement and the Council for Voluntary Carbon Markets will be setting rules for VCMs.
VCMs are where any private sector, non-government-mandated participation takes place. Guidance on company claims in this area are crucial, because they are not covered under Article 6.
Guidance will include the assurance that emissions reductions from a project would not have otherwise taken place and the elimination of double counting. Unsettled matters exist around corresponding adjustments in the voluntary market, which guarantee that credits will only be used once.
Ars Technica: How a carbon tax can fight inequality and climate change
Carbon taxes face significant criticism – some groups hate taxes and are indifferent to climate change, and others worry that a carbon tax could hurt lower-income people by costing them more money. However, new research shows that it is possible to implement a carbon tax that redistributes wealth to people with lower socioeconomic status.
A carbon tax can promote equality by taking the funds raised and redistributing them to lower-income individuals. Some regions have already implemented this successfully. The research found that if countries adopt carbon taxes at a high enough level, the world can limit global warming to two degrees Celsius, which also helps protect vulnerable populations around the world.
Though some countries lack the administrative capacity to implement progressive carbon taxes, the research also notes that the positive impacts of such a tax can be seen even if some money is lost to administrative costs and other government programs.
C-suite leadership and board composition are two of the main ways companies will be judged on their ESG strategy. Stakeholders, especially employees, are pushing hard on CEOs who are lagging. Additionally, the heightened awareness of environmental and social issues is meaning higher scrutiny on governance.
With the growing push for standardized ESG measures, board members have increasing responsibility to set high standards and ambitious commitments for their company. However, standardization of ESG is made difficult by the fact that each company’s relationship with the environment and society differs depending on its industry, geography, size, whether it's public or private, and many other factors.
There are new demands for companies to move beyond net-zero targets and start to think about net-positive social and environmental measures. Companies are also increasingly being pressed to account for the actions and impacts of their supply chains.
Boards need to cultivate CEOs that are courageous leaders and provide them with the support and resources needed to make real change.
ESG Clarity: Countries winning and losing the race to ace green energy
In terms of green energy exports, Germany has been at the top for decades, China is on the rise, the U.S. has fallen a bit, and Australia is a laggard.
Australia has potential but currently lacks the domestic production capabilities. The UK is well-positioned for the production of certain clean energy components, and it is also a leading green spender. China is in a particularly strong situation, with an increasing role in the wind and solar landscape; China also produces the majority of many crucial metals and rare earth minerals.
Italy and Spain have also been doing well in recent years and are showing potential in the wind and solar industry. Switzerland is well poised to play a strong role in green finance, but it has not placed much of a focus on the green market.
ESG Disclosures, Standards, Rankings, and Reporting
MSCI is the most influential company when it comes to ESG investing, but the company’s “better world” rating methodology measures the potential impact of the world on a company and its shareholders, not the other way around. MSCI is looking at whether environmental issues, for example, have the potential to harm the company, and mitigation of risks to the planet are essentially incidental.
One of the most striking features of MSCI’s rating system is how a company’s climate change performance can have a negligible impact on its ESG rating, because climate change poses “no risks or opportunities to the company’s bottom line.”
MSCI has been recalculating scores and issuing upgrades for factors like adopting policies that ban things that are already crimes, as well as adopting data protection policies, board practices, and employee surveys.
Bloomberg analyzed a large number of the recent MSCI score upgrades to determine what factors influenced them. Governance was the most influential factor category, followed by social, then environment. The upgrades all followed the “good for the company” rule, making environmental factors potentially misleading. Some were even upgraded simply due to changes in rating methodologies within their relative industries.
This explains why almost every company in a representative sample of U.S. companies meet the “sustainable” criteria, and therefore why MSCI’s share price has increased fourfold since 2019 in a highly competitive ESG data sales market.
Each ESG rater uses its own proprietary system and methodology, most of which are not transparent, and all of which are unregulated, leading to wild ratings discrepancies despite attempts to appear “standardized,” which only serve to confuse even sophisticated investors.
Sustainable Brands: Natural Resources: Brands Partnering with Indigenous Communities on Forest Conservation.
A third of our greenhouse gas emissions are from food production and a quarter of those emissions come from agriculture and land use change/deforestation.
The Organization for Economic Co-operation and Development knows that forests help stabilize the climate, store carbon, provide food, wood and medicine and they recognize the impacts of lost habitat one being increasing the risk of viruses such as COVID-19 spreading from animals to humans.
There is a great call for more private sector investment into supporting indigenous people to be forest protectors as this is the highest priority in terms of forest conservation priorities. Planting trees is a nice but it takes hundreds of years for those trees to mature to a point where they can make the kind of impact virgin forests are already providing.
Bloomberg: Is Privacy an ESG Win? SEC Filing Trend Says Yes
Companies are increasingly categorizing compliance with data privacy standards/regulations as an ESG matter in their SEC filings. Given the current rate of filings, a record number of companies will be classifying data privacy actions as ESG matters by 2022.
This trend highlights the role that data privacy plays in boosting corporate reputation (which is also a key driver of ESG disclosure).
The SEC will also shape the future of this trend, since the agency is currently developing more ESG-related guidance and disclosure rules.
CFO Dive: Elevating ESG and Human Capital Reporting to the next level
Given the “when-not-if" nature of SEC ESG disclosure requirements, many CFOs are working to transform their human capital reporting data into relevant and meaningful metrics. This work involves: o Refining the data collection process o Optimizing the use of existing historical data o Educating producers and providers of ESG and Human Capital data on the need for more rigorous controls
Planning for resource shortages
Getting to an audit-ready state.
MIT Management Sloan School: Why sustainable business needs better ESG ratings
As the financial community embraces ESG investing, it is important to note that ESG ratings are measured differently across agencies and can be inconsistent measures of performance, and some experts are skeptical that ESG scores have any direct correlation to more sustainable business.
However, consumers still demand products from companies that align with their values, and investors are enthusiastic about ESG investing, so what is needed are ways to boost ESG confidence with data quality and disclosure audits and assurances that can then help improve rating quality.
The MIT Sloan Sustainability Initiative has launched the Aggregate Confusion Project to help improve the quality of and disambiguate ESG measurements. Additionally, recent research suggests that ESG ratings have a higher impact on stock returns than previously anticipated, which is why it is crucial to make sure they accurately depict a company’s sustainability performance.
All Street CEO: There is plenty of ESG data
According to All Street CEO Emanuela Vartolomei, there is enough data to compile ESG reports but it is not being used correctly. She argues that the data needs more natural language processing (NLP) tools and peer group analysis to boost understanding and interpretation.
All Street’s new ESG ratings platform Sevva uses NLP to assess public ESG disclosures and convert as much content as possible into usable data points. The Sevva ratings also provide users with the ability to click through a rating and see the original text that led to the score.
The Sevva ratings also distinguish what a company does and says they do from what others say about the company, and does not include the latter. The ratings also do not exclude companies in carbon-intensive sectors or those at risk of stranded assets, because some of them are making real contributions to the UN SDGs.
ESG Today: CDP to Collaborate with GRI in Updated Biodiversity Reporting Standard
GRI recently announced that CDP will participate in the process of updating the GRI Biodiversity Standard. CDP has also stated that it will use the updated standard to inform its own disclosure system.
GRI has also accepted an invitation to join the Task Force on Nature-Related Financial Disclosures (TNFD) and become a TNFD Knowledge Hub partner.
According to GRI, more than 2,000 organizations use the Biodiversity Standard, and it aims to use the revised standard to reach more organizations and help meet stakeholder expectations.
CDP has released its 2021 company scores with more than 13,000 companies reporting (37% more than last year). Despite the increase in reporting, the number of companies achieving a top “A” rating in at least one category decreased from 313 to 272 this year, as CDP raised the bar for climate leadership. The number of companies achieving an A in Climate declined from 280 to 200.
14 companies achieved an A score across all three categories, including Danone, Firmenich, HP, L’Oreal, Unilever, and more.
Investment Trends
Institutional Investor: It's Time for Private Companies to Come Clean on ESG
Private markets could become a haven for dirty assets so regulators and investors are pushing for transparency on environmental and governance matters.
To address the transparency gap between private and public companies MSCI created an ESG analytic tool that is focused specifically an analyzing on private assets carbon footprint.
According to the sample group in a report by the Boston Consulting Group private equity owned companies have been generally wiling to increase their quantitative GHG (greenhouse gas) emissions disclosures.
Private businesses are also able to act more quickly than their public counterparts when it comes to disclosing ESG data. Vinay Shandal, managing director and partner at BCG thinks this is due to private companies being generally smaller, leaner and less bureaucratic than large public companies.
NASDAQ: Institutional investors’ ESG Priorities Have Changed
State Street Global Advisors asked over 300 institutional investors their thoughts on ESG going forward. o 20% have clearly defined decarbonization targets, over three-quarters of asset owners. o 77% reported that they were taking “deliberate action” to reduce their portfolios' carbon footprints. o 44% of investors are aligning their investment policies due to feeling responsible to help push economic change and work towards resolving the climate change crisis.
Campden FB: The Russell investments ESG manager survey 2021: The red flag is raised on climate risk.
Regions were asked If they have explicit ESG factor assessments in the investment process, in 2019,2020 and 2021. The U.S.A has the lowest percentage of “YES” responses each of the three years. The highest percentage change in “Yes” responses from 2019-2021 among these regions was the UK (24%) and Canada (23%) with the lowest being Japan at (0%) followed by Australia & New Zealand at (9%).
What is the biggest ESG issue you hear the most from your client base?
Climate Risk (39%)
Environmental Issues in General (21%)
Diversity and Inclusion (15%)
Others (11%)
Not applicable (8%)
Social Issues in General (5%)
Investment Week: Climate and pandemic risks among MSCI’s top ESG trends to watch in 2022
MSCI’s head of ESG research notes that only 10% of the world’s companies are on track to reach net zero by 2050, which means the climate commitments made during COP26 are “very ambitious.” additionally, despite these new climate pledges, new coal plants are still being constructed around the world. MSCI’s ESG report calls on governments to invest in climate adaptation.
While greenwashing is expected to recede as a major concern as “common ESG language emerges,” the lack of understanding around ESG ratings highlights the need for clarity, regulation, and placing ESG ratings in the right perspective.
When it comes to large systemic risks like mass migration, there are still uncertainties about how institutional finance can be part of the solution.
National News: Why ESG investing is not at risk of becoming a bubble
Concerns about ESG investing becoming a bubble often make the mistake of combining two different ESG strategies – ESG investing (i.e., integrating ESG factors into due diligence and analysis) and investing in sustainability themes (i.e., investing in companies/projects that specifically target sustainability).
In contrast to sustainability trends that can lead to bubble-like situations, ESG is not a trend; it is an evolution of investment strategy. However, investing in sustainability themes can temporarily reach a bubble.
ESG investing should not become a bubble because it involves a shift in focus and weighting of investment considerations. Incorporating ESG factors can provide a boost to returns and risk-adjusted performance, and asset managers who ignore these issues can find themselves less able to attract capital.
Washington Post: ESG Defies Wall Street’s Efforts to Package It Neatly
Demand for ESG is surging, and companies and fund managers are rushing to meet this demand. However, at its core, ESG investing is just a variation on the “game” fund managers have always played – picking stocks and bonds and charging hefty fees for them. The premise of this process is that investors can make more money by investing in companies with ESG attributes.
Now, ESG is straying from the path of a well-define investment strategy, making it very difficult to deliver in a fund.
A main challenge is that ESG factors are multiplying, sometimes with minimal evidence about their impact on companies’ performance. There is also disagreement about how to measure ESG factors.
Another problem is the fact that ESG may no longer be interested in making money – investors are aligning their portfolios with their values, regardless of the financial impact. Using portfolios as an expression of individual values may mean that each investor needs a custom portfolio – direct indexing, which may be where ESG is headed. Still, some funds and managers are approaching ESG as an “unapologetic attempt to make money.”
Institutional Investor: ESG Investing Poses No ‘Significant’ Cost to Investors
Recent research from Arizona State University finds that even as interest grows for ESG mandates, ESG strategies have little to no impact on investment returns. ESG screening was also found to have little effect on a portfolio’s Sharpe ratio, which helps investors understand returns compared to relative risk.
The research team arrived at these conclusions by constructing a sample portfolio and applying ESG screens and strategies using data from multiple providers.
However, if ESG scoring becomes standardized, returns from ESG-tilted portfolios could surge due to the fact that prices of “bad” ESG stocks would fall and prices of “good” ESG stocks would rise. Since there is currently no universal standard for what constitutes a good/bad ESG stock, this is not yet the case.
JD Supra: As ESG Investments Continue to Rise, Whistleblowers are Critical to Uncovering Fraud
ESG investing increased by $288 billion globally in 2020, and ESG assets are expected to account for more than a third of the projected total assets under management by 2025. Issues arising from this unprecedented surge include the lack of standardized definitions for ESG qualification.
For any new disclosure requirements established by the SEC, whistleblowers are expected to play a key role in ensuring companies’ statements are not misleading. Giving whistleblowers the opportunity to report violations to the SEC will make sure they have access to protections under the Dodd-Frank Act.
ETF Trends: Rating Muni Bonds on ESG and Impact
Just like businesses, some municipal bond issuers and issues are sustainable, and some are not. Across muni bond sectors, there are about 200 data-driven metrics and five million data points to measure performance, and by using this data to evaluate the bonds, some are found to have negative impacts, such as fossil fuel-burning electric utilities.
ESG Today: BofA Issues $2B Sustainability Bond Targeting Equality, Economic Opportunity, Green Investments
Bank of America’s new $2 billion “Equality Progress Sustainability Bond,” which aims to target investments making advancements in racial and gender equality, economic opportunity, and environmental sustainability. This new bond brings the company’s current offerings to five green bonds, two social bonds, and two sustainability bonds totaling nearly $12 billion since 2013.
BofA assigned six minority- or women-owned broker dealers to serve as joint lead managers on the bond.
Companies and Industries
Business Standard: Unilever’s sustainable brands growing 2X faster than other brands:COO
“Brands with purpose have been growing at 175% faster than brands which haven’t embedded this purpose”, “diversity drives many benefits like innovation and growth”, says Nitin Paranjpe, COO at Unilever, “but diversity only works in the presence of inclusive culture”.
Unilever is a sustainability pioneer in many ways and recently committed to providing a fair wage by 2030 to everyone who provides them goods and services.
Yahoo! Finance: Sustainable shopping: Millennials and Boomers are strongly influenced by Gen Z
Recent research shows that the shopping habits of Boomers and Gen X are now directly impacted by the sustainability values of Gen Z. The report from First Insight also reveals that three quarters of Gen Z put sustainability ahead of brand names when making purchasing decisions.
The question that remains is what “sustainability” means to each generation -- older generations tend to associate sustainability with recycled materials, while Gen Z equates sustainability with manufacturing processes.
Journal of Accountancy: What auditors need to know about ESG issues
Auditors need to be aware of their current need to improve their ability to identify the risk of material misstatements, especially with SEC disclosure regulations forthcoming.
Auditors need to know about management policies related to capturing information about climate-related matters than can affect financial statements and assessing the risk of material misstatement of the financial statements resulting from these matters.
Situations in which financial reporting requirements may apply to ESG issues can vary based on factors like the company’s geographic footprint, the industry, the nature of the business, and the significance of the risk to the business. Additionally, companies may report ESG information in a variety of places and in alignment with one or more of the existing frameworks.
Although ESG concerns can bring new considerations to audits, the requirements auditors must follow to address them are already in existing standards, and the best advice is to be proactive in understanding the current and involving impact of ESG issues.
ESG Today: SimCorp Launches SFDR Reporting and ESG Framework Solutions for Asset Managers
SimCorp has launched two new sustainability solutions to help investment managers comply with SFDR reporting requirements. One solution is a dedicated ESG framework for investing and ESG integration. The SFDR solution aims to provide relevant KPIs at the position, product, and enterprise level and simplify SFDR-related data to aid alignment with new requirements.
ESG Today: Walmart, HSBC, CDP Collaborate on Financing Program Incentivizing Climate Action in Supply Chain
Walmart, HSBC, and CDP have launched a supply chain finance program to help suppliers set science-based emissions reductions targets (validated by the Science Based Targets initiative) to help Walmart address its Scope 3 emissions footprint, part of its Project Gigaton initiative.
To date, more than 3,100 suppliers have signed onto the initiative, with the cumulative avoidance of 416 million metric tons of carbon dioxide equivalent.
The new program aims to help Walmart’s private brand suppliers introduce enhanced standards and build the capacity to align their operations with sustainability objectives, focusing primarily on small and medium-sized businesses.
Citigroup CEO Jane Frasier stated that the bank will be expecting its clients to measure and communicate their emissions and may make choices about which clients to serve based on climate impacts. Fraser was appointed as CEO in March of 2021 and committed the bank to a 2050 net zero GHG financing target during her first day on the job.
Government Policy
Ballotpedia News: Economy and Society: SEC preps businesses for new ESG disclosure
SEC Commissioner Caroline Crenshaw has provided companies with insight into the agency’s upcoming proposal for disclosure standards and how they can start planning to meet the new expectations. Specifically, the SEC will likely redefine “materiality.”
The SEC urges management to establish and maintain an effective system of accounting controls to help guard against risk.
The agency is also interested in how public companies are assessing whether and how climate change risks affect revenues and expenses. Crenshaw notes that regardless of where public companies arrive on these topics, the agency wants to understand the underlying controls that guide the decision-making process.
Canada has committed to providing up to $200 million over the next five years to fund projects focused on nature-based climate solutions and protecting biodiversity. These investments will contribute to the country’s commitment to achieving net zero emissions by 2050.
The funding will be made through the Nature Smart Climate Solutions Fund, with projects focusing on restoring degraded ecosystems, conserving carbon-risk areas, and improving land management practices.