General ESG News Forbes: It’s Not Just An Obligation: ESG Compliance Should Be Good For The Bottom Line
Compliance costs have been increasing, but ESG compliance should lead to positive business outcomes. Proper ESG compliance can identify places where the company can make easy gains and where they are investing in projects that aren’t yielding results. Beyond this, ESG compliance helps avoid litigation costs.
Currently, companies are “flying blind” as they await regulation and standardization. Additionally, using compliance processes to drive business improvements will require the collection and analysis of investment-grade data for measuring the success of ESG initiatives.
A results-oriented approach to regulatory compliance will force companies to account for the types and amounts of data they collect and disseminate. Investment-grade data should drive numerous positive business outcomes like leaner operations, carbon-reductive incentives, improved workplace safety, and more.
In a survey of 225 executives, 56% of respondents said their company does not measure its carbon footprint.
Initially, when a company sets emission reduction targets, it can find a few easy wins. However, if carbon reduction goals are significant, companies will face tradeoffs as lowering emissions requires greater and greater costs.
Supply chain planning (SCP) solutions and companies are increasingly adding carbon optimization capabilities.
The financial community wants to make sure the sustainability progress companies are reporting is real – audits of financial results and third-party certifications are becoming increasingly useful.
JD Supra provides the 2021 Popular ESG Reads suggestions. These are the most well-read updates focused on environmental, social, and governance (ESG) issues
Responsible Investor: The next decade of business and human rights: the importance of the new UNGP roadmap
In June of 2021, the UN Working Group on Business and Human Rights took on a project to assess the first decade of its implementation, and the results highlighted that the UNGPs have led to significant progress. The UNGPs have spurred public corporate human rights commitments and increased transparency.
However, the assessment also revealed several remaining challenges, such as ensuring better protection and prevention of adverse human rights impacts, especially to marginalized groups.
The UNGP Roadmap calls for new and existing human rights efforts to be scaled further and translated into practice, including meaningful stakeholder engagement practices.
The CSR Journal: Global ESG trends for 2022
The focus on social issues is expected to increase in 2022, along with the intersection of environmental and social issues as ESG integration becomes more sophisticated. Key issues that are expected to come into greater focus in 2022 include:
Financing a just transition to a low-carbon economy
Resilience, responsibility, and risk management in supply chains
ESG disclosures entering into operational phases
Greater focus on technology and unforeseen issues in access, affordability, privacy, and discrimination.
Geopolitical pressures on supply chains
Climate and mandatory ESG reporting will be on ballots in state elections in 2022 in efforts to thwart the transition to a low-carbon economy. Decarbonizing the economy will require some regulation and oversight, but it will also create jobs, foster innovation, and leverage capital market forces.
The main problem is the “messaging machine” that turned environmentalism into a divisive factor. This comes at an unfortunate time when some GOP members are recognizing the devastating nature of the climate crisis and becoming clean energy champions, while skeptics are prepping for midterm primary battles.
The new term “Critical Energy Theory” has been manufactured to leverage the same outrage as “Critical Race Theory,” and forward-thinking banks, investors, and energy companies may find themselves in opposition to the radical right. Even “regular companies” -- those who have simply pledged to cut out fossil fuels – wonder if they may be penalized for “unfairly discriminating against fossil fuel companies.”
It is no longer safe for companies’ government affairs teams to remain silent on sustainability topics, as criticism can come from all directions and there may eventually be real penalties for inaction.
Economic Times: Confronting risks: What should CEOs keep in mind
In India, specifically, CEOs are confronting operational, regulatory, and reputational risks, and they are taking the following actions to mitigate them:
Improving flexibility to overcome operational risks
Developing a stable policy regime to understand and avert regulatory risks
Maintaining open communication
A recent Accenture report found that 62% of participants attach a higher value to purpose-led brands. However, it can be argued that some displays of social responsibility have been for publicity, which makes an authentic ESG strategy even more valuable.
ESG is good for business – ESG risk translates to investment risk, and better ESG performance and ratings means attracting more customers, better employees, increased access to capital, and improved investor relations.
It is also crucial to select the right tools for success, starting with an ESG framework that aligns with the business’s targets and objectives. Beyond this, companies must analyze the existing landscape to benchmark against leading companies, measure success, and come to the forefront of innovation.
A regenerative leadership mindset calls for a move from extractive business models to “embracing the abilities of all living beings and ecosystems to regenerate, replenish, and create the conditions for more life.” The five principles that characterize a regenerative approach include:
Focusing on the how, not just the what
Starting with potential, not the problem
Caring for the operating context
Valuing history and lived experience
Radically embracing a participatory approach
According to a new survey outcome from BlackRock that draws on a survey of 175 clients in Europe, the Middle East, and Africa, analysts “see no evidence of a sustainability 'bubble'” and that sustainable assets have room to run as markets reprice climate risks.
BlackRock UK chief investment strategist believes that repricing assets to include climate risks is a phenomenon that markets have woken up to in the last couple of years and that the majority of that repricing is yet to occur.
Further believes in a possibility of "tectonic shift" in capital being allocated to combat climate change while other analysts believe despite the two shortcomings of ESG - measuring sustainability profiles and measuring the impact of sustainability on risk and return – the demand for sustainable assets will not slow down.
A project call Earth’s Black Box is installing a 33 feet long vault in Tasmania, Australia, to record the Earth’s warming weather patterns and other information which will serve as information tool in case humanity was doomed or destroyed due to climate change.
The box’s creators say it will record leaders’ actions (or inaction) by scraping the internet for keywords relating to climate change from newspapers, social media and peer-reviewed journals. It will collect daily metrics, including average oceanic and land temperatures, atmospheric carbon dioxide concentration and biodiversity loss.
The box construction will be completed by early 2022.
Fear of ESG becoming a box-ticking activity, at its worst, just a status quo because it is being implemented without behavioral change to back it up.
But all is not lost, corporates need to go beyond ESG in Building social value is what counts. That’s what can move an organization from having a license to operate to winning a license to grow.
Putting social value back at the heart of business decision-making is going to be key in addition to partnerships to amplify impact – between public and private, national and local, corporates and suppliers, customers and employees, investors and investees.
Demand increase for raw materials is growing and so is the attention on the risks associated with the extractive industries, as well as their environmental impacts. To help companies navigate this, the Responsible Minerals Initiative (RMI) and TDi Sustainability announced on Dec. 8 the launch of the Material Insights Platform.
Working to solve the problem of data gap, this online solution will provide data on key ESG potential negative impacts relevant to each material, with reports linking the material to ESG risk factors, a series of grades to measure the severity and credibility of allegations in the reports, and an overall salience score for the material in each ESG risk category.
The product will further assist users in identifying risks to the security of supply for each material via production data, supply chain resilience data, and country governance.
IFRS has appointed former Danone CEO and Chairman Emmanuel Faber as the first chair of the ISSB, effective January 1, 2022.
The ISSB aims to develop global baseline disclosure standards that can be used on a standalone basis or incorporated into broader reporting frameworks.
ESG Disclosures, Standards, Rankings, and Reporting
ESG and the associated ratings agencies really started to gain traction in 2013 when studies showed a positive correlation between sustainability performance and financial performance. Currently, it is estimated that $1 of every $3 in global stock funds are invested in ESG-related funds.
After more than a decade of use, there are now concerns that ESG ratings are flawed, not useful, and potentially misleading. ESG ratings are meant to quantify the risks that a company’s stock price will fall due to ESG issues, but rating agencies are often secretive about their metrics and there is little consensus between agencies about what to measure and how.
ESG ratings are also inconsistent – the correlation between major raters is about 0.61, which is very low when compared to the correlation of 0.92 between Moody’s and S&P’s credit ratings. New studies reveal even more patterns of inconsistency and subjectivity in ESG ratings, including uneven weighting of the E, S, and G pillars.
ESG alignment is being increasingly demanded by investors, so public companies have no choice but to comply; the information encoded in ESG ratings should not be a substitute for investor due diligence.
Businesses are changing how they manage their finances, as they look at both the economic impacts of their moves as well as possible impacts to society or the environment. Failure to do so can result in real financial consequences.
The main impacts on traditional finance can be separated into three categories: accounting for ESG issues, shaping business decisions, and communicating financial information.
Corporations are being urged to consider their positive impacts to society, and they are also being pressured to be aware of and address the negative ones.
Financial Management: What’s ahead for ESG strategy and reporting after COP26?
For many accountants, the most important news to come out of COP26 was the announcement of the new International Sustainability Standards Board (ISSB) to develop a global baseline of high-quality sustainability disclosure standards.
The IFRS Foundation will also consolidate the Climate Disclosure Standards Board and the Value Reporting Foundation, which includes the Integrated Reporting Framework and the Sustainability Accounting Standards Board (SASB).
Another important result of COP26 are the pledges and commitments – auditors will need to take these into account when auditing judgments and related disclosures.
Many companies are already well along their ESG reporting journeys (while it is still voluntary). Stakeholders are asking about ESG reporting issues; it will require board engagement on issues like metrics and data assurance to develop long-term strategies.
The IFRS Foundation, which oversees accounting standards in more than 140 nations, mostly in Europe and Asia, announced the creation of the International Sustainability Standards Board (ISSB) at COP26 to push for more standardized ESG reporting metrics worldwide.
ISSB expects to release two reporting protocols on disclosures in the second half of 2022.
U.S., financial regulators are now taking the lead as well. A draft rule is expected next year and expected to follow standards crafted by its own private entity, the Financial Accounting Standards Board (FASB).
In Switzerland, as counter of the Responsible Business Initiative, on December 3, 2021, the Federal Council published the ordinance on the specification of the new due diligence requirements in the areas of child labor as well as minerals and metals from conflict zones ("conflict minerals"), as part of the legislative amendments. This will go into force on Jan 1.
The amendments to the Code of Obligations (CO) adopted as an indirect counter-proposal to the Responsible Business Initiative are intended to require Swiss companies to better protect humans and the environment at home and abroad.
It has two main aspects: new reporting requirements on "nonfinancial matters", in particular in the areas of environment, social responsibility and human rights, which are based on the existing EU Directive (Non-Financial Reporting Directive); and new due diligence and reporting obligations with respect to conflict minerals and to prevent child labor throughout the supply chain.
The Ordinance also contains a number of details on the specific content of the due diligence and reporting obligations in the area of conflict minerals and child labor.
Energy+Environment Leader: CFA Institute Study Shows Investors Want More Clarity Around ESG Standards
CFA Institute recently announced the results of a new, global member survey on environmental, social, and governance (ESG) issue which found that investors want customers and their investment managers should decide on ESG integration, not regulators and regulators should not mandate ESG integration.
Additionally, they believe financial materiality should be the primary focus of investment managers who do integrate ESG issues into their investment performance and greenwashing should be addressed with clear and consistent rules on marketing and measuring adherence to ESG product claims.
On public company reporting on ESG matters, most respondents think that formal, government-backed standards for public company reporting on ESG should be established while mandatory public company reporting on ESG should be delayed until after formal reporting standards are enacted.
Also, they are seeking for alignment in ESG reporting which has baseline of globally consistent standards for ESG reporting is preferred to many regional approaches.
Also covered in ESG Today: CFA Institute Survey Finds Strong Support for ESG Investment Product Disclosure to Address Greenwashing
CDP is joining with the Partnership for Carbon Accounting Financials (PCAF) to enhance financial institutions’ capacity to measure and disclose their financed emissions. According to CDP, financing activities account for the greatest aspect of financial institutions’ climate impact.
Under the new collaboration, CDP and PCAF will combine their networks and resources to promote the PCAF standard and increase disclosure of finances emissions globally. CDP will also enhance its annual quality reviewed GHG model emissions dataset to provide a data quality score in line with PCAF’s Data Quality Scoring system.
Investment Trends Forbes: Asset Owners Need To Take Responsibility For System-Level Risks
There is currently a concern that companies are inhibiting investors’ abilities to produce sustainable, long-term returns. However, this fails to account for the role of asset managers, who are at the top of the “capital markets value chain.”
Two major trends identified by experts are the fact that lower interest rates have caused investors to move into higher risk asset classes, as well as the consolidation of capital flows.
It is currently unclear if workers and other beneficiaries of portfolio companies have received their proportionate share of the value created. As companies work to optimize their capital structures, this may come at the cost of “good jobs” and investment in quality and innovation.
The system-level risks of climate change and inequality are related – climate change will have the most significant impacts on those who can’t afford it. Additionally, the economy is becoming increasingly depending on low interest rates and reliance on higher risk leverage. This creates a cycle that perpetuates the drive toward higher risk and debt in the system.
Four main themes for asset managers to focus on include:
Improving internal governance practices
Accounting for externalities
Considering regenerative investment structures
Engaging in policy making and field building.
US Securities and Exchange Commission (SEC) launched a formal investigation into ESG (environmental, social and governance) investment products offered by DWS Group, Deutsche Bank AG’s asset management division.
There is an increasing scrutiny around ESG funds. SEC recently established the Task Force on Climate and ESG Issues — the group responsible for spearheading the DWS investigation — with an explicit mandate to combat greenwashing amid record levels of capital flows into ESG investments.
Investor and advocacy communities are closely monitoring the SEC’s review of climate-related public disclosure requirements, a process happening in parallel to the SEC’s consideration of recommendations around fund managers’ disclosure of ESG criteria and underlying data.
Last month, corporate secretaries and investor relations professionals gathered to discuss the future of stakeholder engagement and sustainability reporting.
Attendees agreed that there is growing pressure for companies to be more sustainable, but there is a gap between pledges/commitments and current actions.
The attendees also discussed the surge in ESG investing, the competition among asset managers to be the most sustainable platform, and impending regulations. Companies are also concerned with targeting the “best fit” ESG investors.
Speakers and attendees also noted that releasing an ESG report should not be viewed as the main objective for companies, but the result of the process of making real progress.
A new PwC survey reveals that just one-third of investors think they are seeing high-quality ESG reporting, and an even smaller portion believe current reporting adequately considers how ESG performance will impact a business’s bottom line.
A majority of investors say they do not trust the information they receive through ESG ratings and scoring systems, and they do not like the fact that there are many ESG rating schemes using different metrics and frameworks.
Amid the growing net-zero movement, there is a risk of carbon “tunnel vision” -- two-thirds of investors cited greenhouse gas emissions as the priority ESG issue, while just under half of investors cited worker health and safety.
Also covered in ESG Today: PwC Survey: Investors Want Exec Pay Tied to ESG Goals, Give Low Grades to Current Company ESG Reporting
The new Bloomberg U.S. Municipal Impact Index aims to track the market of U.S. Green, Social, and Sustainability-categorized municipal bonds. It is the first standardized measure of the U.S. municipal tax-exempt investment grade impact bond market. The new benchmark tracks more than 2,800 securities.
Companies and Industries
Key ESG highlights in the retail and apparel industry include:
ESG gaining momentum across a larger portion of society
ESG actions, regulations, and programs becoming more common worldwide
Technology trends like artificial intelligence, the Internet of things, refrigeration efficiency, and transportation
Macroeconomic trends in retail including alternative energy, the COVID-19 pandemic, ethical consumerism, generation Hashtag, and mergers & acquisitions.
Corporate Compliance Insights: How Banks Are Using ESG Data to Price Green Financing
Financial services industry is changing and almost all financial services firms are focusing on enhancing environmental, social and governance initiatives.
Green financing is leading the transformation with the issuance of green or sustainability linked loans and bonds.
There is talk about incorporating “climate risk” into the enterprise risk frameworks.
The Real Deal: Real estate is drunk on ESG. But what’s in the cocktail?
One of the most carbon intensive industries – real estate – are getting deep into ESG. Decarbonization has become part of the rhetoric at every major firm, and an entire day of the United Nations climate change conference was set aside to the built environment.
Growing questions around ESG rating methodologies of bigger names questions the ESG benchmarks for the real estate industry.
Real estate industry is taking substantial steps toward reckoning with its climate footprint, from beginning to invest in new climate tech to assessing its use of construction materials to setting ambitious goals for carbon and energy emissions and the ESG ratings may or may not reflect that.
Business Insider: Green taxonomy could bring more rigor to fintech ESG assessments
The Green Digital Finance Alliance (GDFA) and Swiss Green Fintech Network launch a draft taxonomy to help investors, policy makers, and tech providers assess fintech’s environmental impacts consistently.
The taxonomy breaks green fintechs into several categories and maps out datasets for each category. The taxonomy aims to align financial institutions with green objectives and help inform the push for standardization and regulation in sustainability.
HSBC’s new policy to phase out coal-fired power and thermal coal mining includes a target for EU and OECD markets by 2030 and worldwide by 2040.
Thermal coal is currently the highest carbon-emitting source of energy in the global fuel mix, but it makes up almost 40% of the world’s energy supply.
As part of its new policy. HSBC will expect impacted clients to publish transition plans by the end of 2023, and it will assess the plans annually.
A group of senators and the ASA have issued letters stating that the newly proposed DOL rule weakens protections for retirement plan investors and sponsors. The current rule emphasizes that retirement plan fiduciaries should only use “pecuniary” factors when assessing any type of investments.
Another rule, proposed in October, emphasizes that climate change and other ESG factors can be financially material, and considering these elements can lead to better long-term, risk-adjusted returns.
Senators argue that the new rule would mandate the consideration of climate change and ESG factors in all investment and proxy voting decisions, which could harm Americans’ retirement savings by allowing fiduciaries to promote non-pecuniary objectives like reducing carbon emissions. The ASA expresses that the proposed rules would not be “neutral” on ESG investing.
Compliance Week: SEC 2022 rulemaking preview: Clarity to come on ESG, crypto?
Forthcoming SEC disclosures will be put to public comment – the agency is planning to propose mandatory climate risk disclosure rules, including the disclosure of greenhouse gas emissions.
Also expected are disclosure regulations around board diversity, human capital management, and cybersecurity risk governance.
Cryptocurrency is a main area of concern for the SEC, which has pledged to increase scrutiny. The Commodity Futures Trading Commission and the Treasury Department are also interested in increased regulation of digital currency.