ESG Weekly News Update: December 21, 2021


General ESG News GreenBiz: Why the growth of climate and ESG inside boardrooms gives me hope

  • A recent report indicates that only four in 10 directors serving on a board ESG oversight committee were actually “ESG conscious,” and only 8% had a formal ESG or sustainability certificate indicating they received ESG training.

  • While this does not appear encouraging, it is a major step up from January of 2019, when most board members and executives surveyed did not even see climate or ESG as a board issue.

  • Optimism for 2022 stems from the fact that boards, asset managers, and proxy advisers are all leaning into ESG training and competency.

Morningstar: 5 ESG Themes For Next Year

  1. The Just Transition, and recognizing that humans are not separate from nature.

  2. Net Zero Stays, as a business model, not just a short-term carbon reduction strategy.

  3. Divestment and Engagement; both will be required to decarbonize investment portfolios.

  4. ESG Will Become Much More Normal, and with more standardized reporting.

  5. Critical Mass; as those who were previously skeptical of ESG investing join the asset flows, they may finally move the conversation toward helping portfolios address major issues.

Forbes: Socially Responsible Consumer Spending At A Record High

  • The ninth annual Conscious Consumer Spending Index found record-breaking socially responsible spending in 2021 (up 25% from 2020), after a record low in 2019. The Index score is based on a variety of factors, including the importance consumers places on purchasing from socially responsible companies, actions taken to support these products and services, and intent to increase spending.

  • This year, 64% of consumers reporting supporting socially responsible brands, and 36% plan to increase the amount they spend in this area in 2022.

  • Consumers also have increased expectations for company behavior and policies, with 83% stating that company treatment of employees during the pandemic is crucial in their purchasing decisions.

  • The findings also revealed that consumers have an increasingly pessimistic outlook, with 44% stating the world is getting worse, compared to 42% in 2021 and 36% in 2019.

  • When asked what companies or organizations first come to mind when they think of social responsibility, Amazon was number one for the third year in a row.

Forbes: Key Topics To Kick Off ESG-Centered Conversations With The C-Suite

  • 13 members Forbes Coaches Council spoke of these 13 aspects of ESG they would focus on to kick off and center a discussion on the subject of ESG among leadership team members.

  • The Role and Value of a Diverse and Inclusive Workforce:

  • Alignment Of ESG Goals with the Value System and Vision

  • The Commercial Relevance and Benefits Of ESG

  • The Organization’s Key ESG Objective

  • The Perceived Differences Between CSI And ESG

  • A Writing Assignment to Create a Collective Vision

  • Key Questions Regarding Current ESG Efforts

  • The Group’s Understanding and Definition Of ESG

  • The Leaders’ Future Legacy

  • An Exercise to Develop the Leaders’ Shared Vision

  • A Holistic Systems Approach

  • ESG’s Impact on the Decision-Making Process

  • ESG In Light of the Company’s Reputation

CPA: How Organizations Can Close the Expectation Gap Between Stakeholders and ESG Initiatives

  • Increased stakeholder demands for positive corporate impacts are a good development for both society and the planet, but companies have not been able to keep up with the engagement, time, effort, and communication needed to meet these demands. Because of this, corporate actions have been largely reactive instead of strategic and targeted.

  • There are a few critical steps companies can take to close the gap between what stakeholders want and what the organization is actually able to do:

  • Taking accurate stock of current and proposed efforts

  • Establishing clear goals and priorities

  • Formalizing efforts, especially through leadership appointments

  • Demonstrating progress and communicating it with transparency.

The Business Journal: Integrating supply chain with corporate ESG strategy — Why it’s important

  • Increasing supply chain risks globally are putting company’s overall ESG strategy at risk.

  • It is critical for companies to measure what matters – and what matters now are ESG criteria for the supply chain

  • Traceability: mapping can allow companies to identify weak points in their value chain and become more efficient

  • Transparency: includes identifying and tracking to a set of milestones – an internal approach to materiality for ESG

  • As part of Environment, companies will have to work through their Scope 3 emissions — their supply chain — to drive to net zero. As part of Social, understanding the impact of a business on people and communities will be a key aspect of ESG benchmarking. And lastly for Governance, developing effective governance structures to comply with ESG criteria makes companies significantly more attractive to investors.

Bloomberg: Morningstar ESG Chief Asks Herself: What Do Those Trillions Do?

  • Hortense Bioy, the global head of sustainability research at Morningstar Inc., says she’s struck by the persistent lack of clarity around investing strategies marketed as ways to protect the planet. Even with a bumper year of ESG flows, no one knows what it means for the environment, social justice and good governance.

  • She says investment managers are “going to be held accountable” as regulations introduced this year give investors “all the tools they need to determine if these were empty promises. But at the same time, she believes that “Asset managers are working with what’s available.”

  • No amount of skepticism is denting the flow of cash. Morningstar data show that at the end of the third quarter, European assets under management classified as sustainable were up 134% from the end of last year.

  • By some estimates, the entire ESG market is worth more than $35 trillion, though Morningstar and others say the actual figure may be a fraction of that.

ESG Disclosures, Standards, Rankings, and Reporting

Bloomberg: How to Get an ESG Rating Upgrade

  • An in-depth analysis of the “ESG system” reveals that it is actually the opposite of what most would believe to be sustainable investing – instead of measuring the risks large companies pose to the world, ESG ratings measure the risk the world poses to companies’ bottom lines.

  • Based on thousands of pages of MSCI reports, Bloomberg lists 25 things companies can do to improve their ESG ratings, including:

  • Adopting policies for business ethics, anti-corruption, recycling, etc.

  • Offer diversity training and/or programs

  • Create a board-level ESG committee

  • Protect customer data

  • Conduct an annual employee satisfaction survey

  • Set an emissions reduction target (for at least Scopes 1 and 2).

Business Daily: ESG guidelines the much-needed fuel for sustainability

  • GRI and the Nairobi Securities Exchange (NSE) have partnered to issue ESG guidelines for listed firms, including requirements for annual integrated or separate sustainability reporting.

  • It is expected that listed firms in Kenya that embrace the ESG guidelines will be better positioned to attract local and international investments, as well as to enhance their corporate performance.

JD Supra: CFA Institute Published First Global ESG Disclosure Standards

  • The new voluntary Global ESG Disclosures Standards for Investment Products are ethical requirements based on the principles of fair representation and full disclosure.

  • The standards do not address corporate ESG reporting, firm-level ESG disclosures, naming and labeling, or ratings of investment products.

  • The CFA Institute outlines 10 fundamental compliance areas for ESG disclosure statements and nine disclosure requirements – the full list can be found on the CFA Institute website.

  • Next, the CFA Institute will publish a handbook on the explanation of provisions and guidance for interpretation, assurance procedures, and an optional ESG disclosure statement template all before May of 2022.

Nasdaq: Quantifying Climate Change Risk: The Need for a Global Standards Framework

  • Nasdaq’s James Lay, Commercial Director for the Catastrophe Risk Modelling business spoke about climate risk modeling. Some key takeways:

  • There is an opportunity to engage with the community that is building these catastrophe models to look at standard ways of approaching the challenges of applying modelling to climate risk

  • Open modelling platforms such as Oasis and the Nasdaq Risk Modelling for Catastrophe’s platform provide the ability to select models across different regions and hazards. Open-source projects will continue to evolve.

  • Consistent ways to quantify and monitor physical risk, both present and future, are essential.

  • Nasdaq is currently contributing to a report highlighting best practices for climate conditioned catastrophe models. With input from a broad industry and stakeholder groups, the whitepaper will describe different methods for climate conditioning catastrophe models as well as their strengths and weaknesses of each.

ESG Today: SASB Launches Initiative to Set Reporting Standards for Diversity & Inclusion

  • SASB launched the Diversity, Equity, and Inclusion (DEI) and Greenhouse Gas Emissions (GHG) and Air Quality in the Marine Transportation Standard projects.

  • The DEI project, part of the SASB Human Capital Project, will evaluate the addition or revision of disclosure topics and metrics across industry standards to assess the impact of DEI on enterprise value. Then, it will develop a scope of disclosure topics and a general issue category map.

  • The GHG and Air Quality topics in the Marine Transportation Standard was motivated by feedback from companies, investors, and experts in the Marine Transportation industry.

ESG Today: Canada Moves Toward Mandatory Climate Disclosures

  • Prime Minister Justin Trudeau has directed the Canadian government’s cabinet ministers to move toward mandatory climate-related financial disclosures, aiming to enable the country to achieve its goal of becoming net zero by 2050 (with the interim goal of cutting emissions from 40-45% by 2030).

  • Other jurisdictions are making similar moves, with the UK announcing plans to enact mandatory climate-related disclosure legislation, and the U.S. SEC planning to propose similar rules in 2022.

  • Other Canadian climate reporting mandates will include mandating that 50% of light-duty vehicle sales by zero emission vehicles by 2030.

Investment Trends

CNA: With sustainable investing on the rise, experts warn of greenwashing risks

  • Recent polls found that around 90% of investors in Singapore were interested in learning more about sustainable investing and wanted their investments to align with their values, and 13% had already made sustainable investments.

  • Interest in ESG investing is being driven by several factors, including the prolonged COVID-19 pandemic, the increasingly visible effects of climate change, and the realization that ESG is directly related to business-critical issues and can impact returns.

  • Recent studies have also found that a surprising number of funds with ESG labels have fallen short of helping meeting Paris Agreement targets, and investors may not be able to determine is funds are actually what they claim to be amidst the lack of transparency and consistency in ESG terminology.

  • The development of standardized labeling and regulations for funds would help ensure that investors are better informed, and actions toward this standardization are already being taken.

Morningstar: Does Your Company Face Water-Related Investment Risk?

  • When assessing water-related risks, investors should first determine how reliant a company is on water to operate. A useful metric for this is water intensity, which measures how many cubic meters of water a company must withdraw to generate one dollar of revenue. Higher water intensity equals higher risks related to water supply disruptions.

  • The most water-intensive industries are electric utilities, paper and pulp, diversified chemicals, metals and mining, and agriculture. Medical services, automotive retail, and travel are also water-intensive industries.

  • Location-specific water conditions are also an often-overlooked water-related risk. For example, emerging economies face regulatory risks, and other regions may face reputational risks as water often holds cultural importance to local populations.

  • Investors should work to integrate water risks into their due diligence processes, and they should be conscious of risk in all its forms.

Worth: Here’s The Difference Between ESG And Impact Investing, According to Experts

  • ESG is focused on the environmental, social, and governance factors that will have a material impact on a company. It is rooted in the financial impacts of the company, which may or may not translate to investor expectations.

  • Impact investing, conversely, is about “driving measurable positive change.” It focuses on positive social and environmental outcomes, not financial returns.

  • There are some opportunities where commercial solutions can deliver above-market-rate returns and have positive impacts, such as in the areas of climate, health, and education. However, in some areas, there may be higher risks or delayed returns in order to really solve the major challenges that impact investing focuses on.

Roll Call: Stronger shareholder action, more robust ESG rules expected in 2022

  • Thanks to pressure from BlackRock and other major institutional investors, activist shareholders now have the upper hand in holding companies accountable for their environmental and social impacts.

  • Recent SEC guidance will also likely boost activist investors’ chances of getting companies to focus more on public policy issues and shaking up boards, building on successes from last season. The SEC said it will be more likely to require companies to hold shareholder votes on issues like the environment and worker arbitration in the coming years than it did under the Trump administration.

  • In the 2021 proxy season, the total number of proposals submitted at companies increased by 11%, with environmental and social proposals seeing the biggest increase. However, less than one-fifth of proposals received a majority vote, though environmental and social proposals did see increased investor support.

Proactive Investors: Retail investors still keen on ESG funds, research finds

  • Recent research indicates that 15% of UK retail investors are planning to increase their allocation to ESG-related funds, and 45% more are considering it. The investors surveyed also indicated that they are more likely to invest if they feel they are getting social and emotional benefits from their investments, alongside the financial ones.

  • The research also reveals that ESG plays an important role for investors, with 7% saying they place greater focus on ESG credentials than fees when reviewing potential investments, and 38% say they place equal importance on both.

GreenBiz: In a booming ESG market, the SEC has some questions

  • As demands for ESG investments offering continue to grow, federal regulators have found major deficiencies in how ESG strategies are advertised in investors’ portfolios. The SEC established the Task Force on Climate and ESG issues to help address this concern and investigate potentially misleading disclosures.

  • A recent report finds that more than 70% of ESG-labeled funds are misaligned with Paris Agreement goals, but in fairness, the ESG label does not explicitly promise this alignment.

  • SEC Chair Gary Gensler promotes a “truth in advertising” approach to ESG funds to help investors determine funds’ underlying ESG substance.

  • Recently proposed SEC rulemaking would require funds to disclose their proxy voting records, including those related to climate change and other ESG issues. No matter what SEC rules take shape, it is clear that investment products without robust strategies to back up their ESG labels are living on “borrowed time.”

Mint: ‘Understanding a company’s ESG risk profile can help against downside risks’

  • In an interview with Mint, Jaspreet Duhra, managing director and global head of ESG Indices at S&P Dow Jones Indices (S&P DJI) said that some investors will have their holdings scrutinized and if there are problematic companies from an ESG perspective they are open to reputational issues and potentially negative press.

  • On asked of covid-19's impact on ESG, she reiterates how ESG investing has been sustained during the pandemic and perhaps aided it as more questions are being asked of companies, particularly around social issues.

  • Data collection still a problem, especially in India, organizations such as S&P DJI are trying to gather info but there are notable data gaps. Companies are also tackling data gaps, such as S&P Trucost developed modeling techniques to fill in gaps where data from companies may be lacking.

  • Investors have different appetites and objectives when it comes to ESG. Some investors are looking for core benchmarks with an ESG overlay that seek to maintain a low tracking error vs. the parent index while some may be willing to accept potentially higher tracking errors but want to see heightened attention to ESG considerations.

Benefits Pro: ESG and employee mental health: Worker well-being becomes investor concern

  • Study shows that investors are increasingly realizing worker well-being is still an important factor in company performance.

  • There is growing importance of mental health in conversations around ESG, why boards and investors are pushing businesses to take into account the wellbeing of their employees – and take-aways for HR leaders to prepare for this new reality in the post-pandemic world.

Reuters Analysis: How 2021 became the year of ESG investing

  • ESG funds now account for 10% of worldwide fund assets. A record $649 billion poured into ESG-focused funds worldwide through Nov. 30.

  • The MSCI World ESG Leaders' index has risen 22% so far this year, compared with the MSCI World Index's gain of 15%.

  • Regulators have responded to the new pressure by making ESG disclosures a priority.

  • Of the $6.1 trillion in ESG funds, 59% of the money is held in Europe, Middle East and Africa, however inflows in European ESG funds dropped in 2021, but this was more than offset by rising flows into U.S. and Asian ESG funds.

  • Some ESG investors also suffered blows in 2021. Major funds believe that companies must have appropriate risk oversight of environmental and social issues, and that they try to be transparent about their views.

ESG Today: Leonardo Ties Terms on €600 Million Loan Facility to Climate, Social Goals

  • Leonardo’s new ESG-linked loan facility include sustainability objectives like reduction CO2 emissions and promoting the employment of women in STEM. Under this loan facility, a margin adjustment will be activated in specific achievements are made in these areas.

Companies and Industries

Forbes: ESG Strategies Can Benefit Open-Air Shopping Center Owners, Tenants and Shareholders

  • Retail landlords typically focus on two main goals: ensuring they have reliable rental income, and ensuring their tenants are profitable. ESG standards can help contribute to these goals.

  • Socially, open-air shopping centers are at the center of U.S. communities and play a significant role in daily life. Additionally, these centers have direct control over their environmental footprints (as a significant portion of carbon emissions in the U.S. come from buildings).

  • By implementing energy conservation measures, shopping centers can address both environmental and financial risks, and lower tenants’ energy costs. For outdoor shopping centers with multiple disconnected spaces, WiFi and the Internet of Things will be crucial to monitoring and managing energy usage.

Banking Journal: Overlapping Social and Climate Issues Shape Banks’ ESG Efforts

  • U.S. financial institutions have signaled big moves in the area of “green” finance, but they are currently dealing with uncertainty around ESG regulation, corporate reporting, and compliance. Experts currently agree that the best strategy is for banks to be proactive about their ESG-related issues and reporting, to get ahead of compliance, litigation, and operational risks. Banks are also warned against overpromising.

  • Regulators are increasingly focusing on the current impacts of climate change (rather than just those that will affect future generations), and these concerns can affect banks’ abilities to comply with existing goals in areas like real estate development, flood insurance, natural disasters, etc.

  • Social issues can overlap environmental concerns for banks – environmental justice and stewardship are major concerns and can impact things like fair-lending programs.

  • Banks are tasked with analyzing the problems that exist in each market to help target a solution, as well as sharing their findings to help their ESG partners understand the actions that need to be taken.

S&P Global: ESG REITake: Commitments to ESG and net-zero goals grew in 2021

  • As per a report by CBRE Group Inc., ESG to play a larger role in U.S. real estate in 2022. The industry is under increasing pressure from stakeholders to embrace ESG values, a trend that is expected to drive more REITs to invest in green properties.

  • Green bond offerings represent an increasing share of U.S. real estate investment trusts' debt capital raises as property owners move to earmark proceeds to environmentally sustainable projects.

  • Additionally, ESG will lead to more demand for efficient buildings and retrofits, and property portfolios will play an important role in meeting ESG targets in the coming years.

  • U.S. equity real estate investment trusts showed an overall improvement in ESG efforts during 2021, according to 2021 Global Real Estate Sustainability Benchmark scores.

  • Commercial real estate companies in the U.S. and Canada are increasingly joining the race to net-zero carbon emissions amid mounting pressure from various stakeholders.

ESG Today: Morgan Stanley Launches Initiative to Advance Career Opportunities for Underrepresented Groups

  • Morgan Stanley recently launched its Institute for Inclusion’s Equity in Education and Career Consortium, which aims to support high school and college students from underrepresented groups to achieve better career and financial outcomes.

  • The initiative will focus on serving low-to-moderate income students in the U.S., and its partner organizations include A Better Chance, America Needs You, Braven, Hispanic Federation, iMentor, and SEO.

  • The consortium will focus on broadening students’ skills and networks, offer mentorship and coaching, create a support system, and expose them to career paths that may not be visible in their communities.

Government Policy

GlobeNewswire: UN General Assembly reaffirms Global Compact mandate

  • Last week, UN member states reaffirmed their support of the UNGC mandate to engage the private sector in advancing the SDGs, with a new resolution adopted by the UN General Assembly.

  • The new resolution involves a principle-based approach to enhanced global cooperation between the UN and all relevant partners. UN member states recognize the importance of the private sector, multi-stakeholder engagement, policy, and partnerships for achieving the 2030 Agenda for Sustainable Development.

ESG Today: DOE Launches Office to Support Clean Energy Technology Development, Backed by $20 Billion from Infrastructure Law

  • The U.S. DOE has announced the launch of the Office of Clean Energy Demonstrations aimed at supporting clean energy technology demonstration projects like clean hydrogen, carbon capture, small modular reactors, grid-scale energy storage, etc.

  • The announcement follows President Biden signing into law the Bipartisan Infrastructure Law, which earmarks more than $20 billion for clean energy demonstrations.

  • The office’s programs also include investing billions in demonstration projects in rural areas and economically hard-hit communities (part of President Biden’s Justice40 initiative, which aims to deliver 40% of clean energy investment benefits to disadvantage communities).

ESG Today: U.S. Raises Ambition on Vehicle Emissions Reduction Requirements

  • The U.S. EPA has released its finalized standards for GHG emissions for passenger cars and light trucks for model years 2023-2026, and it has significantly raised emissions reductions requirements compared to prior standards.

  • These standards aim to unlock $190 billion in net benefits to American, including reducing pollution and improving public health. Additional, fuel savings over the lifespan of an individual 2026 vehicle are expected to exceed the initial increase in vehicle costs by more than $1,000.

  • The new rules envision combined fleet-wide emissions falling to 161 CO2 grams per mile in 2026, which is more than 28% lower than the prior 2026 target of 208 grams per mile. The EPA projects that these standards can be met with sales of 17% electric vehicles by 2026.