ESG Weekly News Update: December 16, 2020
Lake O'Hara, Yoho National Park
General ESG News
Project Syndicate: The Next Frontier of Responsible Business
There is a major shift underway in the corporate world, where many managers and investors are eager to adopt more sustainable and responsible practices and business models.
The task now is to ensure that this new mindset itself goes viral. The Global Reporting Initiative and the Sustainability Accounting Standards Board announced that they will work together to consolidate ESG reporting standards. Their goal is not to create a single standard, but rather to “help stakeholders better understand how the standards may be used concurrently.”
Clear ESG reporting is only one part of the puzzle. Businesses also will need to complement ESG-based risk disclosures with impact accounting, which will formally revognizes the value of decisions motivated by climate and biodiversity as well as building trust with customers, local communities, and all other stakeholders.
Companies are increasingly establishing executive positions to cultivate ESG strategies but recent data suggests they won’t stop there. Many of these firms will also be taking steps to tie or link executive pay with attaining ESG goals, according to a new survey from Willis Towers Watson.
Most companies—four in five or 78%—are planning to change the way that executive incentive plans incorporate ESG over the next three years; four in 10 companies plan to introduce ESG into long-term incentive plans over the next three years; and 37% of respondents plan to introduce ESG into annual incentive plans over the next three years.
In terms of diversity and inclusion, many companies have already started incorporating targets into compensation. 73% of survey respondents in North America have implemented at least one initiative to promote inclusion and diversity, and 43% have conducted an equity pay analysis.
Instability and unrest across all aspects of our lives have forced investors to realize that global systems are inextricably interconnected. Many have been and are responding to this idea by considering environmental, social, and governance issues (ESG) in their investment analysis.
Yet the compounding crises of 2020 show that ESG considerations are no longer enough. Investors must instead think bigger, consider the relationship of their investments to the broader systems within which they operate. Practically speaking, this means adopting investment practices that balance short-term profits with long-term value creation.
Sustainable Brands: Governance in the New Decade: The Rise and Rise of Boardroom ESG
ESG is moving from a focus on reducing risks to one of creating value — in the future, companies and their boards will need to think of ESG not just as a risk to the business but as a future source of value.
ESG governance is now an established imperative for boards, and this report sheds light on steps companies should pursue to ensure the long-term viability of their organizations.
There is a significant gap in board ESG competency, which can be addressed through the recruitment of directors with ESG expertise and routine board ESG education.
The Business Leaders for Justice Coalition is a new initiative that will bring together CEOs, senior executives, founders, board members, and justice experts who are committed to prioritizing justice and equity in their leadership roles.
Global Citizen launched the initiative digitally on Wednesday with Pathfinders, the Responsible Business Initiative for Justice, and the National Legal Aid & Defender Association.
The initiative aims to transform the private sector into an environment where justice systems solve and prevent the problems that matter most to people, rebuild trust and cohesion, and mitigate the intergenerational impacts of the COVID-19 pandemic.
The majority of the largest American corporations have prospered in the coronavirus economy, as millions of consumers spent more time and money online during government-mandated lockdowns.
In many industries, the giants devoured market share ceded by small businesses, who lacked the resources to keep stores open during unpredictable swings in customer demand. While the 50 largest companies averaged 2 percent revenue growth over the first nine months of 2020, small business revenue shrank 12 percent over the same period.
The Post contacted all 27 large firms that held layoffs this year. Many said the cuts were not related to the pandemic, but instead a necessary part of broader “restructuring” plans, where companies shift spending from declining lines of business to growing ones. In some cases, these plans were decided before the pandemic.
ESG Disclosures, Standards, Rankings, and Reporting
Reporting standards in the world of environmental, social and governance investing, long a thicket of competing frameworks, could converge within 12 to 24 months, said Janine Guillot, head of the Sustainability Accounting Standards Board.
As investor demand for ESG information continues to increase, a group of ESG experts believe pressure will build on issuers to seek third-party assurance for ESG disclosures in the near future.
Roughly 30 percent of companies get some form of assurance on at least some of their ESG information. Most often what gets reviewed is greenhouse gas (GHG) emissions, which can be done by an engineering firm.
Ray Cameron, head of investment stewardship at BlackRock, said that when it comes to GHG emissions, assurance is ‘required’, adding that he expects the conversation around assurance to evolve, and that external validation will become a norm.
The concept of CSR can be analysed and understood in its six dimensions. The first dimension is the global understanding of the CSR. There is a global understanding of social responsibility as defined under the international standard on social responsibility issued by the International standard organisation, as ISO 26000.
The second dimension is to evaluate with the lens of NGRBC. The National Guidelines on Responsible Business Conduct (NGRBC) released by the Union Ministry of Corporate Affairs, includes the community development under Principle 8.
The third dimension is to evaluate the principles of stakeholders accountability. The fourth dimension is to analyze an activity through the lens of ethics.The fifth dimension is analysing through the lens of vision, mission, goals, purpose and values set by the company. The sixth dimension which is being deliberated here is to look at from the perspective of compliance to the provision made in the company act in letter and spirit, differentiating between the donation and responsibility.
While perceived as extremely important, adoption and ESG practices may not be as mature as people would think, with just a small fraction of survey respondents actually having taken action that is reflective of their very positive sentiments towards ESG.
There are a number of challenges seen as inhibiting the progress towards ESG adoption in the insurance, reinsurance ILS and risk transfer markets. First, there is a lack of resources dedicated to ESG adoption at many firms, with no dedicated person and little investment to-date.
Secondly, a lack of clearly defined, measurable goals in ESG strategies is seen another stumbling block to embedding ESG practices at the operational level.
The third challenge faced related to transparency and disclosure in the risk transfer value chain. Transparency is lacking the further down the chain of risk transfer you go, with retrocessionaires often not having a clear view of the underlying insurance policies.
Eighty percent of companies now report on sustainability, compared with only 12 percent in 1993.
This shift is driven by new laws and regulations, as well as increasing recognition that environmental, social and governance (ESG) issues impact financial performance.
S&P Global Trucost announced today the launch of a new Paris Alignment dataset on its Market Intelligence platform, designed to enable investors to measure the alignment of their portfolios with global climate goals.
The dataset will also help investors better understand the transition required to meet net zero targets by 2050 or earlier. Trucost’s Paris Alignment covers 1,800 companies globally and offers a set of forward-looking analytical tools to quantify and track energy transition to a low carbon economy based on possible future scenarios.
The Global Reporting Initiative (GRI), one of the leading organizations promoting standardized ESG reporting, has issued a call recommending mandatory sustainability reporting by companies.
The GRI also stated that financial reporting itself must be strengthened to reflect the financial implications of sustainability issues on the reporting entity, and that enhanced financial reporting must exist alongside sustainability reporting.
Strategic economics consultancy Vivid Economic announce the launch of Planetrics, a new solution designed to enable financial institutions to quantify, report and manage climate-related risks and opportunities.
Planetrics is designed to enable users to build more climate-resilient portfolios for the long term, protect assets from the effects of climate change, engage with companies in exposed sectors, and identify new growth and investment opportunities.
Institutional Asset Manager: Greater diversity and inclusion can aid pension scheme effectiveness, says PLSA survey
In the survey of pension schemes, the vast majority made the claim with most believing it will also best represent members’ interests. Of those surveyed, 91 percent agreed it will improve decision-making and attract and retain talent while 89 percent agreed that diversity can improve the representation of members’ interests.
Currently, age, gender and social background are seen to be better represented, while disability and ethnicity are perceived to be least well represented, with many saying they are not at all well represented.
The PLSA aims to boost diversity – in its broadest sense – not only throughout the pensions industry but also by encouraging pension schemes to use their influence to draw good diversity practices up through the investment chain with their service providers.
This year has seen something of a growth spurt for green bonds with the market heading toward the $1 trillion milestone. As well as significant government bond launches, there has been increased issuance from the corporate sector and from a wider range of businesses and industries.
With economies hurting badly due to Covid-19 lockdowns, the policy response from governments has included green and social investment programmes. Germany issued green Bunds and we have had EU SURE social bonds, part of the Next Generation EU programme, which includes green investment initiatives. These policies have encouraged companies from Europe, and in-turn we have seen a meaningful increase in the size and liquidity of the market, creating something of a virtuous circle.
Data confirm there’s something to environmental stewardship in terms of returns. The S&P 500 ESG Index has outperformed the S&P 500 this year, rising 15.21% year-to-date, compared to 13.49% for the large-cap benchmark.
Regime change in the nation’s capitol also brings opportunity with ESG. Strategies focused on environmental, social, and governance factors are likely to be affected not just by short-term economic implications, but the longer-term policy goals of a Biden administration.
According to a recent TD Ameritrade survey, almost one-third of Americans have considered socially-responsible investments, Business Insider reports.
This has been a growing trend among the investment community. Global sustainable index mutual funds and ETFs saw assets under management double over the past three years, to $250 billion, according to a Morningstar report.
The aging millennial generation that experienced the financial crisis has also contributed to this new push as many come of age and begin investing in what they believe in.
Private Equity Wire: Full ESG integration on the horizon
This ESG awareness is going beyond investment strategies and homing in on operational practices, with Limited Partners (LPs) starting to scrutinise the partners they work with on an ESG dimension. This means General Partners (GPs) are now under more pressure to deliver in this regard.
Investors are asking more questions and demanding more transparency on ESG. This requires more resources on the GP side. GPs are also experiencing greater probing of their own internal procedures on an ESG dimension.
Investors on the other hand struggle with a lack of data and insufficient transparency from GPs. When it comes to due diligence questionnaires originating from LPs, there is no binding standard. However, this may change overtime. A standard way of reporting on these issues will emerge sooner rather than later, especially given the broader need for transparency and communication.
Once a transition to a low-carbon economy is embraced, early stage investments through venture capital and private equity will likely see increased interest, predicts Jon Hale, head of sustainability research for the Americas at Morningstar.
nvestments in funds focused on renewable energy will also likely increase, he said. Traditional energy funds have already been branching out to include more renewables, a trend that will likely continue.
One big question still looms when it comes to how much change Biden can get through with regard to clean energy – the outcome of the Senate races in Georgia. Those January runoff contests will determine which party controls that chamber, and in turn how easily Biden and the Democrats will be able to pass climate-related legislation.
Exchanges have increasingly been rolling out new ESG initiatives, including data products to help investors understand ESG risks; services aimed at helping corporations analyze ESG best practices, disclose their own practices, and attract capital; and ESG-focused benchmarks and derivatives.
Nasdaq expects ESG-related spending by U.S. companies to rise to $5 billion by 2025 from $500 million currently, and its executives said expanding ESG product offerings was a top business opportunity.
While Biden will likely advocate for a renewed focus on ESG, it is unclear how that will play out for the market, said Lynn Martin, ICE's president of fixed income and data services. More public companies backing carbon reduction and social and governance initiatives, has accelerated ESG's growth, along with things like the ESG data and hedging products ICE offers, she added.
ETF Trends: Can Active Management ESG Be More Comprehensive?
Actively managed funds are experiencing a renaissance of sorts, and with the industry looking for new frontiers that are conducive to this management, environmental, social and governance (ESG) investing stands out as a viable option.
Passive strategies are typically implemented by utilizing third-party ESG data that rely heavily on voluntary company disclosure, can be backward-looking and limited in scope. Because of the limitations in the quality, disclosure and other biases inherent with ESG data today, investors relying solely on data to make investment decisions are prone to missing a comprehensive risk-reward analysis.
Regulators and lawmakers are beginning to step up. The European Union will set up performance thresholds from 2021 onward. Minimum safeguards will investors and companies transition into a greener economy. Portfolio managers of ESG funds in Europe will be required to explain how and to what extent companies are following sustainable steps.
A global coalition of 30 leading asset managers, representing over $9 trillion of assets under management (AUM) announced the launch of the Net Zero Asset Managers initiative, committed to supporting the goal of net zero greenhouse gas emissions by 2050 or sooner.
The Net Zero Asset Managers initiative will be managed globally by six Founding Partner investor networks, including Asia Investor Group on Climate Change (AIGCC), CDP, Ceres, Investor Group on Climate Change (IGCC), Institutional Investors Group on Climate Change (IIGCC) and Principles for Responsible Investment (PRI).
Signatories make several commitments, including working in partnership with asset owner clients on decarbonisation goals, setting an interim target for the proportion of assets to be managed in line with the attainment of net zero emissions by 2050 or sooner, and reviewing the interim target every five years.
Global exchange and clearing house operator Intercontinental Exchange (ICE) announced today the launch of four new MSCI Index futures aimed at helping market participants better understand the opportunities and risks associated with climate change and transitioning to a low carbon economy.
ICE stated that the new carbon- and climate-focused index futures capture exposure to large and mid-cap securities across developed countries and allow investors to holistically integrate climate and carbon risk considerations into their investment process.
Companies and Industries
The Wall Street Journal: Unilever to Give Investors Advisory Vote on Climate-Change Plan
Unilever said it would become the first major company to voluntarily give shareholders a vote on its efforts to reduce carbon emissions, seeking greater engagement with investors on climate issues. However, the vote would be only advisory and doesn’t require Unilever to make changes.
The company would seek approval from investors every three years on its plan to mitigate its carbon impact and the risks of climate change on its business.
A Unilever spokeswoman said investor interest in managing the transition to net zero was growing and that the company wanted to send a signal that it was serious about meeting these targets.
Fitch Ratings: ESG, Climate Policy to Challenge Some US Energy Issuers
President-Elect Joe Biden, could further challenge the ability of some US high-yield exploration and development energy companies to access capital or sell assets to increase liquidity or refinance debt, says Fitch Ratings.
Asset buyers are increasingly selective due to numerous industry challenges, with a focus on valuation. ESG in particular could have greater influence on the financing decisions of banks over time due to social and regulatory pressures.
Some energy companies are making strategic and capital commitments to more closely align with increasing ESG investor sentiment and in response to state and federal government climate policy. Biden plans to make climate change and environmental policy a top priority, but his ability to fully implement a legislative agenda depends on control of the Senate and the outcome of the Georgia runoff election.
IBM announced that it has joined the Alliance to End Plastic Waste as a Supporting Member, and will collaborate with the organization to design Plastics Recovery Insight and Steering Model (PRISM), a new data platform hosted on IBM Cloud to help track plastic waste and recovery globally.
According to IBM, PRISM will be designed to allow stakeholders to convene and unite various data sets to collaborate and address the challenge of plastic waste through data. The platform will aim to serve as a single source of consistent actionable data helping inform how NGOs, value chain participants, communities, regulators and other organizations, improve waste management decisions and programs.
ETF Database: Big Tech Is Even Bigger on ESG
Large tech firms scoring highly based on environmental, social and governance (ESG) factors outperform those that score poorly, a new study has found.
An additional 6-8% of return is observed among a group of tech companies that have higher performance based on KPIs relevant to issues of community and charity, environmental transparency, pollution prevention, management ethics, which are related to investment performance.
During the COVID pandemic, the lower prices for oil and certain metals and reduced investment prospects translate into multiple risks, including a “race to the bottom” in terms of reduction of transparency and governance standards and social and environmental protections.
At the same time, pre-pandemic challenges have not gone away, but are further magnified with the onset of COVID-19. These include the urgent need to mitigate climate change through transitioning from fossil fuels to green energy; rising poverty levels; and persistent corruption and misgovernance in the extractive industries of oil, gas, and mining.
The core of the natural resource governance field—pushing for greater transparency and accountability, increased technical and oversight capacity, stronger anti-corruption initiatives, and more—will still be needed going forward.
The Corporate Electric Vehicle Alliance, a collaboration of 21 major global and U.S.-based companies, announced the release of a set of principles aimed at accelerating the electrification of US commercial vehicle fleets.
The new cross-sectoral fleet electrification principles represent the first ever to provide guidance on what auto and truck manufacturers, regulators, policymakers, and utilities can do to advance the commercial electric vehicle market. The 9 principles outline criteria that would support companies in electrifying their on-road transportation and logistics fleets and networks.
While President-Elect Biden begins to unravel some of the actions of his predecessor, he won’t need to do much to encourage continued growth in ESG investing. Most companies are already enlightened to the fact that being environmentally friendly and socially responsible is good not only for customers and stakeholders, but also for shareholders.
Biden’s cabinet choices already have ESG proponents cheering. John Kerry, a known ally of tree-huggers, is his choice as special presidential envoy for climate. The former chair of the Federal Reserve and founding member of the Climate Leadership Council, Janet Yellen has been nominated to serve as Treasury Secretary. Additionally, former BlackRock global head of sustainable investing Brian Deese has been tapped for director of the president-elect’s National Economic Council.
His choices for regulators also look to be ESG-friendly. Current SEC commissioner Allison Herren Lee, who made is being discussed as a likely candidate to serve as the acting chair of the commission under Biden. Lee has made ESG and climate change central to her agenda in her time in public service.
Altergymag: DOL Finalizes Second Anti-ESG Rule
The Department of Labor announced its final rule on Fiduciary Duties Regarding Proxy Voting and Shareholder Rights, which discourages proxy voting under Title 1 of the Employee Retirement Income Security Act (ERISA).
Following is a statement from Gregory Wetstone, President and CEO of the American Council on Renewable Energy (ACORE): “The Department of Labor continues to push its demonstrably false narrative that Environmental, Social and Governance (ESG) considerations are largely not relevant to financial performance. Without offering any evidence of harm, this new proxy voting rule will impose added costs on ERISA plan participants and beneficiaries, unless fiduciaries adopt the Department's preferred voting policies or abandon one of the most basic rights of stock ownership at the heart of fiduciary duty.”
The Federal Reserve Board announced today that it has joined the Network of Central Banks and Supervisors for Greening the Financial System (NGFS) as a member.
The NGFS was established in 2017, with the purpose of helping to strengthen the global response required to meet the goals of the Paris agreement.
The move marks a significant step forward in the US’s participation in global efforts to fight climate change. It also indicates the Fed’s acknowledgement of the risks to financial stability posed by climate change.