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ESG Weekly News Update: December 9, 2020

Perito Moreno Glacier, Argentina

General ESG News

Financial Times: Business leaders see ESG as crucial to competitiveness

  • Brazilian businesses started to work on a movement to fight illegal deforestation, as CEOs are concerned about illegality.

  • As the mechanism of an international carbon market is likely to be addressed at COP26, Brazil sees a huge opportunity to avoid illegal deforestation and improve carbon sequestration, which will achieve both economic and environmental benefits.

  • Brazil has a very innovative public policy on low-carbon agriculture. On the financial side, there have been a lot of advances on the central bank side. Since 2008 it has been regulating on environmental and deforestation issues and now it has a very strategic agenda. Six Essential ESG Lessons for General Counsel From COVID-19

  • Respondents to a study of global corporate legal leaders named ESG among three top areas to consume their focus in 2020. ESG followed cybersecurity/data privacy and complex regulation—the first time ESG or similar terms had ever been mentioned in our benchmarks.

ESG Disclosures, Standards, Rankings, and Reporting

The Wall Street Journal: Companies Could Face Pressure to Disclose More ESG Data

  • Companies may be required to disclose more information on carbon emissions, diversity and other types of sustainability metrics in the coming years if the incoming Biden administration carries through on its election promise.

  • Exactly how the SEC could address the issue is unclear. Securities regulators could require companies to adopt an existing reporting framework, such as those from the nonprofit Sustainability Accounting Standards Board, investors and advisers said. Investors say they prefer the SASB benchmark because it is straightforward, and the board actively consulted investor groups in the development of the rules.

  • For some companies, the absence of ESG reporting rules can come at a cost. Companies are left to respond to a range of requests for sustainability reports and metrics from investors, ratings firms and community groups, which all have different interests.

MSCI: 2021 ESG Trends to Watch

  • Climate Reality Bites: In 2021, investors committed to aligning with the Paris Agreement face a steeper climb ahead: persuading companies to make radical changes or face a rapidly shrinking universe of qualifying investments.

  • ESG Investment Finds Its Footing: We see both hype and skepticism about ESG giving way to a more nuanced understanding of when and how ESG has shown pecuniary benefits — and when it hasn’t.

  • Investors Tackle the Biodiversity Crisis: Policymakers and investors will heed the alarm on biodiversity loss, adapting a playbook they had established for measuring and managing climate risk. A major UN conference on biodiversity in Kunming, China, could become an inflection point.

  • The ESG Data Deluge: Institutional investors may need to report on an array of new ESG metrics for their portfolio companies if the European Union’s Sustainable Finance Disclosure Regulation (SFDR) is finalized in its current form.

  • Social Inequalities Test Investors’ Creativity: We see investors taking steps toward more creative, systemic approaches to reduce inequalities. One possible solution is social bonds, where bond proceeds are used to fund projects with positive social outcomes.

Citywire Selector: Why ESG ratings are currently more patchwork than armour plating

  • Recent blow-ups at Boohoo and Wirecard suggest you can’t rely solely on ESG scores. As more ratings come on stream, investors flag up their limitations and how to supplement them.

  • The correlation between the MSCI’s and Sustainalytics’ view on a given company is pretty low. Yet both firms produce ESG ratings. Asset managers should use ESG ratings as a starting point, not the end point.

  • There are further problems too when it comes to future projections. Artisan Partners’ Brower said that ratings can be overly influenced by backward-looking factors that don’t fully reflect a company’s ongoing evolution.

Pensions & Investments: ICI calls for standardized ESG disclosure by companies

  • The Investment Company Institute wants companies to provide more standardized ESG disclosure, the organization said Monday.

  • That disclosure should be consistent with recommendations of the Task Force on Climate-Related Financial Disclosures and Sustainability Accounting Standards Board standards, said ICI, whose members manage more than $34 trillion in assets globally.

  • The call for consistent ESG disclosure through the widely accepted frameworks "will help improve the quality and, ideally, the quantity of comparable ESG data. Moving in this direction should also aid policymakers in the United States and abroad as they consider action on ESG-related issues," Eric J. Pan, ICI president and CEO, said in the same statement.

JDSUPRA: Mandating Standard ESG Risk Disclosures – Is The Tide Turning At The SEC?

  • While the Securities & Exchange Commission has acknowledged the shift in investor focus toward the analysis use of ESG risks, it has to date resisted calls for the adoption of standards governing issuers’ disclosure of ESG risks.

  • The SEC should work with market participants toward a disclosure regime specifically tailored to ensure that financial institutions produce standardized, comparable, and reliable disclosure of their exposure to climate risks.

  • On December 1, 2020, a subcommittee to the SEC Asset Management Advisory Committee tasked with assessing ESG disclosure issues released a series of “potential recommendations.” The ESG Subcommittee urged the SEC to utilize frameworks already adopted by standard setters, like the Financial Accounting Standards Board (FASB), to require the disclosure of ESG risks.

Investment Trends

FT Advisor: Meeting the demand for ESG

  • The three key drivers of evidence, demand and regulation will rapidly accelerate the investment industry’s adoption of sustainable practices in a post-Covid world. Developing responsible investment capabilities is no longer an option: it is a necessity.

  • For financial advisers, perhaps the most significant change is a proposed amendment to Article 25 of Mifid II. This will require companies to take sustainability risks and clients’ sustainability preferences into account.

  • For asset managers, proposed reforms to Ucits and alternative investment fund managers mean incorporating the consideration of sustainability risks into governance structures and operating models.

  • The Pensions Regulator has taken several actions for workplace pension schemes. These include telling trustees that weighing ESG risks is consistent with maximising financial returns, and requiring the trustees of local authority, defined benefit and defined contribution funds to disclose their approach to ESG factors.

The Business Times: The common factor between sustainability and finance

  • With six in 10 investors regarding ESG capabilities as increasingly important, financial institutions in South-east Asia may no longer hope to thrive without demonstrating impact.

  • These efforts have been supported by new regulations and guidelines from governments across South-east Asia. For example, the Monetary Authority of Singapore announced a range of new initiatives, including a US$2 billion Green Investment Programme and the recently announced Green and Sustainability-Linked Loan Grant Scheme to support green and sustainability-linked loans.

  • It is inevitable that sustainability will become embedded in finance, as societal awareness increases and technology enablers improve. However, A pertinent issue is that the "greenness" of a financial instrument is not obvious, as many companies do not report ESG data in the same way they report financial data. This can be attributed to the lack of a standardized framework to measuring and communicating sustainable financial performance.

  • To ensure that businesses are delivering on their promises of sustainability, the use of digital technologies will be paramount. For instance, a Sustainable Finance Marketplace can be built. This works similar to a mortgage aggregator site where companies can view offers across banks based on their sustainability and credit scores.

Financial Times: Next generation behind family offices’ ESG push

  • In the next few decades, trillions of dollars are expected to be transferred between generations in the US alone, placing wealth in the control of millennials, who are leading the charge for impact investments as well as those that meet environmental, social and governance (ESG) criteria.

  • According to the UBS 2020 global family office report, 39 percent of family offices intend their portfolios to be sustainable in five years’ time, but mainly through exclusionary policies. Exclusionary policies, where families reject investments that do not meet their values, are an alternative to the active selection of ESG funds or impact investment projects, which aim to produce a measurable social or environmental impact alongside a financial return.

Toronto Star: Socially responsible investing is more important than ever

  • In late November, eight of Canada’s largest pension funds issued a joint plea for Canadian companies to improve their environmental, social and governance (ESG) disclosure.

  • In many ways, the pandemic, along with transformative social justice movements like Black Lives Matter, have sharpened the focus on ESG for both businesses and investors. Over the past nine months, COVID-19 has laid bare the need for businesses to evolve to be able to survive major shocks to the system, and it has pushed investors — large and small — to seek investments that are more sustainable or align more closely with their social values.

  • For many in the investment community, the pandemic is seen as the 21st century’s first “sustainability crisis.” It has put pressure on businesses to take very practical measures to ensure they can survive this uncertainty. Ninety-six percent of the Canadian investors Edelman polled agreed that companies with a strong ESG performance will be more resilient during a crisis.

S&P: ESG-compliance seen costly near term, but paying dividends further out

  • As the world navigates out of the coronavirus pandemic and the associated humanitarian and fiscal fall-out, markets are waking up to the fact that investors are becoming increasingly ESG-savvy in approach. The need for renewable energy and low-carbon production methods -- including local supply chains -- are being thrust to the top of investors' agendas.

  • Talking to S&P Global Platts Dec. 8 Geordie Wilkes, head of research at Sucden Financial said, "in terms of becoming more ESG compliant, we believe the cost curve is likely to increase. However, the argument that becoming more environmentally friendly means lower returns is flawed, in my opinion. If done correctly there is substantial upside. Indeed, a company could incur significant costs in the long run from not factoring in ESG."

Companies and Industries

PaymentsJournal: ESG is Driving Change across Businesses and Industries

  • As ESG-minded business practices gain more traction, investment firms are also increasingly tracking their performance. Financial services giants like JPMorgan Chase, Wells Fargo, and Goldman Sachs highlight their ESG approaches to business and the impact on their bottom-lines.

  • While the “why” aspect of ESG is understandable, the aspect of “how” remains in question. Despite the fact that regulations oblige companies to issue ESG reports, there are no standards for sharing data. The ability to quantify and independently assess ESG data is the basis for objective analysis. This is where AI techniques could help.

  • Fintech companies have been around since the ESG term was coined. A great example of the synergy between ESG principles and the fintech industry is “Ant Financial Services”. In association with UNEP (UN Environment Program), Ant Financial Services has initiated the ‘Ant Forest’ in China, the world’s first large-scale pilot project to green public consumption patterns by using mobile payment platforms, big data, and social media.

JDSUPRA: 3 Reasons Why ESG Is Here To Stay In The Oil & Gas Industry

  • As the oil and gas industry emerges from the current downturn, here’s why ESG will be crucial to its success heading into 2021 and beyond:

  • Anticipated Legal Requirements: Governments have started taking further measures to combat climate change, including instituting additional financial reporting and disclosure requirements. It’s likely more U.S. states will implement timelines to achieve carbon neutrality like California.

  • Increased Access to Capital: Sustained low and volatile commodity pricing due to the ongoing pandemic and a global oversupply of hydrocarbons has limited access to capital for oil and gas companies. As a growing number of investors and capital providers become more sensitive to ESG issues, companies with strong ESG programs and reporting protocols will be best positioned to obtain debt and equity capital.

  • Future Industry Trends: The next decade and beyond will be a period of massive transition for the energy industry towards adopting and investing in renewable energy technologies like solar, wind power, battery storage, among other sources. Implementing a net carbon-reduction program now will not only maximize short-term success, but it will also drive long-term value creation.

ESGToday: Consumer Goods Coalition Announces Progress on Plastic Waste Reduction Initiative

  • The Plastic Waste Coalition of Action, a CEO-led coalition of 36 leading consumer goods and retail companies under the Consumer Goods Forum (CGF) announced the initial advances made by the initiative to reduce waste from plastic packaging.

  • According to the coalition, it has finalised the first two of a series of “Golden Design Rules” for the design of plastic packaging. The rules aim to accelerate progress towards using less and better plastic, including reducing the complexity of the recycling process for different types of materials, in order to increase recycling rates.

  • The coalition also announced that it has developed a framework for the development and implementation of extended producer responsibility (EPR) programs around the world. The coalition stated that it supports the development of EPR programmes as a way to help facilitate industry and government collaboration on improved waste management.

Government Policy

Financial Express: The ESG-audit edge: They boost firms’ competitive advantage

  • The Prime Minister of Idea, Narendra Modi, highlighted the increasing global focus of investors towards companies having a high Environmental, Social and Governance (ESG) score.

  • Last year, India released the National Guidelines on Responsible Business Conduct (NGRBC). The idea was to align the already existing National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business (NVGs) with the Sustainable Development Goals (SDGs), the United Nations Guiding Principles on Business & Human Rights (UNGPs) and other global sustainability standards.

  • Top 1,000 listed companies are mandated to publish the Business Responsibility and Sustainability Reporting (BRSR) report along with their annual report. The new BRSR framework is India’s response to the growing market and investor demands on ESG reporting and investing.

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